Is an employer's reimbursement of my moving expenses taxable New Mexico income, and can the state charge interest even though it missed my error for years?

Plain-English summary

David Hawkinson moved from Tennessee to New Mexico in 1990 for a new job and was a New Mexico resident throughout 1991. His employer reimbursed $23,628 of his moving expenses in 1991 and reported that amount as compensation on his W-2 — but in a separate box ("other") from "state wages." Because it was broken out separately, Hawkinson believed the reimbursement wasn't New Mexico income, so on his 1991 state return he subtracted the full $23,628 from the federal taxable-income figure and wrote a note on the form saying it was "federal only." The Department's usual practice is to have a supervisor review such notations and reject invalid adjustments, but that didn't happen here. Years later a computer "tape match" caught the mismatch between his federal and state returns, and in September 1995 the Department assessed $1,436 of additional 1991 income tax plus penalty and interest.

By the hearing, Hawkinson conceded most of the reimbursement was taxable but still challenged the $9,396 that partially repaid the $14,400 commission paid to a Tennessee realtor for selling his old home — arguing it was paid to someone out of state for out-of-state work. The Hearing Officer (with the penalty already abated by the Department) denied the protest on the tax and interest:

• Reimbursed moving expenses are taxable "compensation." New Mexico defines compensation to include "any other form of remuneration paid to employees for personal services" (§ 7-2-2(C)). The employer paid these costs as part of Hawkinson's pay, so they're compensation — and all compensation received while a New Mexico resident is allocated to New Mexico, "whether or not such compensation is earned from employment in this state" (Regulation IT 11:6). Where the underlying expense (the Tennessee realtor commission) was incurred is irrelevant.
• New Mexico allows no moving-expense deduction. The state taxes "net income" starting from federal adjusted gross income (§§ 7-2-3, 7-2-2). Federal law permits a moving-expense deduction (26 U.S.C. § 217(a)); New Mexico does not add one. If Hawkinson took the deduction federally, that amount was already removed before the numbers carried to the state return — he can't deduct it a second time. If he didn't take it federally, there's no state provision letting him deduct it at all.
• The 1995 assessment was timely. The Department has three years from the end of the year a tax is due to assess (§ 7-1-18(A)). The 1991 return was due in 1992, so the Department had until December 31, 1995 — its September 1995 assessment was in time.
• The Department wasn't estopped by missing his note. Statutory estoppel (§ 7-1-60) requires reliance on a regulation or a ruling addressed to the taxpayer — not present here. Equitable estoppel is applied against the state only rarely, especially on taxes (Bien Mur), and requires a false representation and detrimental reliance. The Department's failure to catch his flagged error was unfortunate but wasn't a misrepresentation, and Hawkinson didn't rely on it in making the original mistake.
• Interest is mandatory and can't be abated. Section 7-1-67 requires 15%-per-year interest on unpaid tax; "shall" is mandatory (State v. Lujan; § 12-2-2(I)). Interest compensates the state for the time-value of money it didn't have, not a punishment — so even a good-faith taxpayer who flagged the issue owes it, and neither the Department nor the Hearing Officer can reduce the rate. (The doctrine of equitable recoupment didn't apply either, since the same income wasn't being taxed twice under inconsistent theories.)

What this means for you

Employer moving-expense reimbursements are New Mexico income if you're a resident

If your employer pays or reimburses your relocation costs, that money is generally taxable compensation in New Mexico when you receive it as a resident — even if it's reported in a separate W-2 box and even if the expenses (like a realtor's commission) were incurred in another state. Being "broken out" from wages on the W-2 doesn't make it non-taxable.

New Mexico doesn't have its own moving-expense deduction

Any relief for moving costs comes through the federal deduction, which then flows into the New Mexico return because the state starts from your federal income. New Mexico adds no separate moving-expense deduction. So if you didn't (or couldn't) deduct the cost federally, you can't subtract it on your state return — and you certainly can't deduct it twice.

Don't "self-adjust" your state return with a handwritten note

Hawkinson honestly flagged his subtraction on the form, but that didn't make the adjustment valid, and it didn't stop the tax or interest. If you think income is nontaxable, the answer is to report it correctly and, if unsure, get the treatment confirmed — not to reduce the state figure yourself and annotate it. Writing a note doesn't shift the legal burden to the Department.

Interest is mandatory even when the delay wasn't your fault

The Department's own slip let the error sit for years, and Hawkinson had pointed the issue out — yet the 15% statutory interest still applied in full. Interest isn't a penalty and isn't waivable for good faith or agency delay. The practical lesson: if there's any chance you underpaid, resolving it sooner limits the interest, because it keeps running until the tax is paid.

Common questions

Q: My employer reimbursed my moving costs and put it in a separate box on my W-2. Is it taxable in New Mexico?
A: Yes. It's compensation for your services, and all compensation you receive as a New Mexico resident is allocated to New Mexico regardless of the W-2 box or where the expense was incurred.

Q: Part of the reimbursement covered a realtor's commission for selling my home in another state. Isn't that out-of-state income?
A: No. It's still compensation paid to you by your employer. New Mexico taxes it based on your residency when you received it, not on where the realtor worked.

Q: The state took years to catch my error and never rejected my return. Can it still assess me?
A: Yes, as long as it assesses within three years of the end of the year the tax was due. The Department's failure to catch a flagged adjustment doesn't estop it from assessing the correct tax.

Q: I acted in good faith and even flagged the issue. Why do I owe interest?
A: Because interest is mandatory under § 7-1-67 and compensates the state for not having the money on time — it isn't a penalty. It can't be waived for good faith or for the Department's delay, though the penalty here was abated.

Citations and references

Statutes and regulations:

• § 7-2-2(C) NMSA 1978 — "compensation" includes wages, salaries, commissions, and any other remuneration for personal services; Regulation IT 11:6 — all compensation received while a New Mexico resident is allocated to New Mexico
• § 7-2-3 NMSA 1978 — income tax on residents' net income; § 7-2-2(A),(B)(2) NMSA 1978 — base income equals federal adjusted gross income; § 7-2-2(N) NMSA 1978 — net income is base income as adjusted; 26 U.S.C. § 217(a) — federal moving-expense deduction (not allowed by New Mexico)
• § 7-1-18(A) NMSA 1978 — three-year window to assess; § 7-2-12 NMSA 1978 — income tax return due date; § 7-1-60 NMSA 1978 — statutory estoppel where a taxpayer relies on a regulation or a personally addressed ruling
• § 7-1-67 NMSA 1978 — mandatory interest at 15% per year on unpaid tax; § 12-2-2(I) NMSA 1978 — "shall" and "must" are mandatory unless contrary intent is clear

Cases cited:

• State v. Lujan, 90 N.M. 103, 560 P.2d 167 (1977) — "shall" is mandatory unless a contrary legislative intent is clear
• Gonzales v. Public Employees Retirement Board, 114 N.M. 420, 839 P.2d 630 (Ct. App. 1992) — elements of equitable estoppel against the state
• Taxation and Revenue Department v. Bien Mur Indian Market Center, 108 N.M. 228, 770 P.2d 873 (1989) — the state is estopped only rarely, especially where taxes are at issue
• Vivigen, Inc. v. Minzner, 117 N.M. 224, 870 P.2d 1382 (Ct. App. 1994) — doctrine of equitable recoupment (inapplicable where income is not taxed twice under inconsistent theories)

Source

• Listing: New Mexico Decisions & Orders
• Decision post: David Hawkinson
• Decision PDF: D&O 97-09

Original ruling text

BEFORE THE HEARING OFFICER
OF THE TAXATION AND REVENUE DEPARTMENT
OF THE STATE OF NEW MEXICO

IN THE MATTER OF THE PROTEST OF
DAVID HAWKINSON No. 97-09
PROTEST TO ASSESSMENT NO. 640185

DECISION AND ORDER

This matter came on for hearing on February 11, 1997, before Ellen Pinnes, Hearing

Officer. David Hawkinson ("the Taxpayer") appeared on his own behalf. The Taxation and

Revenue Department ("the Department") was represented by Gail MacQuesten, Special Assistant

Attorney General.

Based upon the evidence and arguments presented, IT IS HEREBY DECIDED AND

ORDERED AS FOLLOWS:

FINDINGS OF FACT
1) The Taxpayer moved to New Mexico from Tennessee in 1990 to take a new job in

New Mexico. The Taxpayer became a resident of New Mexico in 1990 and was a New Mexico

resident throughout 1991.

2) As part of his employment agreement with his new employer, the Taxpayer was
reimbursed by the employer for certain moving expenses incurred in connection with relocation

to New Mexico. The Taxpayer received reimbursement for moving expenses in 1991; this

payment was reported by the employer as compensation to the Taxpayer on the Form W-2 for

that year. (See Ex. 4.)
3) The moving expense reimbursement was included in the figure for total

compensation shown in block 10 of the W-2. When the total was broken out, the relocation
reimbursement was reported in block 18 of the W-2 ("other"), separately from the amount shown

in block 25 as "state wages". Because the moving expense reimbursement was reported

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separately from "state wages", the Taxpayer believed that the reimbursement was not taxable

income for New Mexico state tax purposes.

4) In reporting his 1991 income to New Mexico, the Taxpayer carried over the figure for

taxable income shown on line 37 of his federal tax return, as directed by the instructions for

line 8 of the state personal income tax form. However, he deducted from that amount the

$23,628.00 reimbursement for moving expenses, and entered the resulting figure of $34,752.00

in line 8 of the state return. The Taxpayer included a handwritten notation on the face of the

PIT-1 income tax form filed with the Department, explaining that he had deducted this amount

from the taxable income figure shown on his federal return, and noting that this amount was

"fed[eral] only". (See Ex.3.)

5) The Department's usual practice when a tax return is filed with an added notation is for

the person processing the form to bring the return and notation to the attention of a supervisor.

If the supervisor determines that the change made by the taxpayer is not a valid adjustment, the

return is sent back to the taxpayer with notice that the adjustment is incorrect and is being

rejected. For unknown reasons, this procedure was not followed with regard to the Taxpayer's

1991 income tax return.

6) Pursuant to a tape match (a computer check in which it is determined whether line 8 of

a taxpayer's state income tax return matches the taxable income amount shown on the taxpayer's

federal return), the Department later became aware that the amount of income

reported by the Taxpayer for federal tax purposes in 1991 differed from that reported to the

Department for state tax purposes.

7) New Mexico's income tax reporting system "piggybacks" on the federal reporting

system. Thus, a taxpayer takes the figures calculated for adjusted gross income and taxable

income on his federal return and transfers them to his state return in order to begin the process of

determining the amount of state income tax owed. The state forms then provide for deduction of

amounts that may be deducted under state law but not on the federal return. This allows for

calculation of the amount of state taxable income on which state income tax is computed. (See

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Ex. 3.)

8) Because the New Mexico system piggybacks on the federal return, the amount shown

on the lines for federal taxable income on the federal return and the state return should be

identical. In this case, they were not identical, as the Taxpayer had deducted the amount of the

moving expense reimbursement from the amount shown as taxable income on the federal return,

because he believed that it was subject to federal income tax but not to New Mexico state income

tax.

9) After the discrepancy between the Taxpayer's federal and state returns was discovered,

the Department recomputed the Taxpayer's 1991 state income tax and on September 29, 1995,

issued assessment No. 640185 for $1,436.00 in income tax owed for 1991, plus penalty and

interest.

10) The Taxpayer filed a timely protest of the assessment by his letter dated October 24,

1995.

11) At the commencement of the hearing, the Department announced that the penalty

would be abated. Accordingly, this matter involves the propriety of the assessment only insofar

as it concerns income tax and interest.

12) The total amount of the payment for moving expenses that the Taxpayer received

from his employer was $23,628.00. Part of this sum was paid to the Taxpayer to reimburse him

for expenses incurred, while part of it was paid directly to vendors providing services to the

Taxpayer in connection with the move. The employer's payment covered such expenses as

moving of household goods and personal effects, meals and lodging while en route from

Tennessee to New Mexico and before the Taxpayer found a permanent home in Albuquerque,

and charges associated with sale of the Taxpayer's Tennessee residence and acquisition of a

residence in New Mexico.

13) The Taxpayer originally deducted the full $23,628 from the amount reported as

federal taxable income, in filing his 1991 state tax return. He now concedes that most of this

amount is properly subject to state tax in New Mexico. He continues to challenge inclusion in

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his New Mexico taxable income of that portion of the payment that reimbursed him for a portion

of the commission paid to the realtor in Tennessee who handled the sale of the Taxpayer's

Tennessee residence.

14) Of the $23,628.00 moving expense reimbursement, $9,396.00 was a partial

reimbursement of the $14,400.00 commission paid to the Tennessee realtor for services in

connection with sale of the home in Tennessee. These services were performed in Tennessee

beginning in 1990 and continuing through the time the sale was finalized in 1991. The

Taxpayer was not reimbursed for the full amount of the commission because his total moving

expenses exceeded the cap on expenses reimbursable by the employer.

15) It is not clear whether the Taxpayer deducted the expense reimbursement at issue here

for federal tax purposes. No copy of the Taxpayer's federal tax return was produced at the

hearing. The Taxpayer testified that he reported moving expenses of $16,833.00 on the

Schedule A (itemized deductions) on his 1991 federal tax return.

DISCUSSION
The Taxpayer challenges the Department's assessment on two grounds:

1) that no New Mexico income tax should be due on monies received by the Taxpayer to

reimburse him for moving expense, including a real estate commission paid to a person outside
New Mexico, for services performed outside New Mexico, and

2) that is was unfair to assess taxes in 1995, and impose interest thereon, when he had
clearly identified for the Department the adjustment made on his 1991 tax return, so that any

error could have been detected and corrected earlier.
Assessment of tax on reimbursement for relocation expenses

The Taxpayer originally deducted from state taxable income the entire $23,628.00 paid
by his employer for moving expenses incurred in connection with relocating from Tennessee to

New Mexico for his new job. This was based on his belief that the reimbursement, which was

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separated out from "state wages" on the W-2 provided to the Taxpayer by his employer, was not

subject to New Mexico tax.

At the hearing, the Taxpayer conceded that the majority of this amount was taxable by

New Mexico. However, he argued that the $9,396.36 paid by his employer as partial

reimbursement of the commission paid to the real estate agent who handled the sale of his

Tennessee home should not be taxable in New Mexico because it was paid to a person outside

this state, for work done entirely in another state, and beginning well before the tax year in

question.

The New Mexico Income Tax Act defines "compensation" to include "wages, salaries,

commissions and any other form of remuneration paid to employees for personal services".

§7-2-2(C) NMSA 1978, emphasis added. Here, the Taxpayer's employer paid for the Taxpayer's

expenses in relocating from Tennessee to New Mexico as part of the compensation paid to him in

connection with his work for the employer. The moving expense reimbursement therefore falls

within the Income Tax Act's definition of compensation, and was so reported on the W-2 form

issued to the Taxpayer by his employer for 1991.

Because the Taxpayer was a New Mexico resident in 1991, the compensation was

properly allocated to New Mexico for tax purposes. TRD Regulation IT 11:6 ("[a]ll

compensation received while a resident of New Mexico shall be allocated to this state whether or

not such compensation is earned from employment in this state"). The fact that the expense

being reimbursed was incurred in Tennessee is irrelevant.

New Mexico income tax is imposed upon the "net income" of New Mexico residents.

§7-2-3 NMSA 1978. The starting point for determining net income is a taxpayer's "base

income", which is defined as the amount of "adjusted gross income" determined under the federal

Internal Revenue Code. §7-2-2(A),(B)(2). Net income is a taxpayer's base income, adjusted as

provided in the Income Tax Act. §7-2-2(N). Those adjustments include amounts allowed as

deductions to a taxpayer under the Internal Revenue Code.

This state statutory scheme is reflected in the New Mexico personal income tax forms,

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which "piggyback" on the federal return by directing taxpayers to transfer figures for adjusted

gross income and taxable income directly from the federal form. (See Ex. 3.) Any deductions

from income properly allowed at the federal level thus already will have been taken and will be

reflected in the taxable income shown on the New Mexico return.

New Mexico does not allow a deduction for moving expenses incurred in connection with

relocation to a new job. Such a deduction is permitted under federal law. 26 U.S.C. §217(a).

If a taxpayer takes the deduction at the federal level, the income figures transferred to the state

return for computation of state taxes will be those calculated after the deduction, and no state tax

is imposed on the amount deducted.

The record here does not establish whether the Taxpayer availed himself of the full

deduction possible under federal law. The Taxpayer testified that he included $16,833.00 of

moving expenses in itemized deductions on his federal tax return for 1991. If the income at

issue here was deducted on the federal return, no state tax was imposed on it, because that

amount had already been removed from his taxable income. It cannot be deducted a second

time.

Whether the Taxpayer actually took the deduction on his federal tax return is irrelevant to

the issue presented here. New Mexico income tax is imposed on the Taxpayer's net income after

deduction of amounts allowed under federal law. See §7-2-2(N). If the Taxpayer did not take

the deduction when he computed taxable income at the federal level, there is no provision for

him to do so at the state level.

The Department thus properly assessed the Taxpayer for New Mexico income tax on the

moving expense reimbursement amount improperly deducted on the 1991 state tax return.

Assessment of taxes for 1991 pursuant to a 1995 tape match

The Taxpayer clearly noted on the face of his 1991 New Mexico state tax return that the

reimbursement received from his employer for moving expenses was being subtracted from the

federal taxable income figure for state tax purposes. In accordance with its usual practice, the

Department should have reviewed the notation and, if it disagreed with the exclusion, sent the

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return back to the Taxpayer for correction. Had this practice been followed here, the Taxpayer

could have corrected the error promptly, and little or no interest would have accrued. Because

the Department did not follow this procedure, the error was not detected until it was picked up on

a tape match some years later, and the Taxpayer was assessed interest on underpaid tax at the

statutory rate of 15% per year.

Under the New Mexico Tax Administration Act, the Department has three years from the

end of the calendar year in which a tax is due to issue an assessment for the tax. §7-1-18(A)
NMSA 1978.1 The Taxpayer's personal income tax return for 1991 was

due in 1992, §7-2-12 NMSA 1978, and the Department therefore had

until December 31, 1995 to issue an assessment. The Department's

September 1995 assessment for underpayment of the tax was therefore

timely under the statute. Because the assessment of tax was proper,

interest on the deficiency was also proper. (See discussion below.)

The Taxpayer (who is not a lawyer) has not specifically argued

for estoppel. However, his assertion of unfairness can be read to

raise such an issue. Accordingly, it is discussed here.

The Tax Administration Act expressly provides for estoppel

against the Department where a taxpayer acted in accordance with

regulations or with a departmental ruling addressed personally to
the taxpayer. §7-1-60 NMSA 1978. The Taxpayer here makes no claim

that he acted in accordance with applicable regulations or any ruling.
Statutory estoppel therefore does not apply.

Although the Department's assessment here is not barred by
statutory estoppel, the Department may be estopped on equitable

1
This limitation period is extended in certain circumstances. Because the assessment in this case is
within the three-year period provided in subsection A of §7-1-18, whether those circumstances exist is not at
issue here.

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principles. Equitable estoppel will be applied against the state

when right and justice demand it. See Gonzales v. Public Employees

Retirement Board, 114 N.M. 420, 427, 839 P.2d 630 (Ct.App. 1992),

cert. den. 8/14/92. However, the state will be held to be estopped

only rarely, especially where taxes are at issue. Taxation and

Revenue Department v. Bien Mur Indian Market Center, 108 N.M. 228,

231, 770 P.2d 873 (1989).

In order to establish an estoppel, the following elements must

be shown as to the party to be estopped: 1) conduct amounting to

a false representation or concealment of facts, 2) actual or

constructive knowledge of the true facts, and 3) an intention or

expectation that the other party will act on the representation.

The party asserting an estoppel must show: 1) lack of knowledge

of the true facts, 2) reasonable reliance on the representations,

and 3) detriment if the party to be estopped is allowed to assert

the true facts. Gonzales, supra, 114 N.M. at 427.

Here, the Department failed to catch the Taxpayer's error in

reporting his taxable income for state tax purposes, despite the

fact that he expressly called the Department's attention to the manner
in which he calculated that income. While this was unfortunate,

it does not rise to the level of conduct amounting to a false
representation or concealment of facts, and thus fails to satisfy

the first element of estoppel.
Moreover, the Taxpayer has not shown detrimental reliance on

any conduct of the Department. He does not argue that his original
error in reporting his income was made in reliance on any action

or inaction of the Department, nor has he shown that the Department

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in any way prevented him from discovering the error. Based on the

facts presented here, the Department is not estopped to assess the

underpaid tax, plus applicable interest.

Interest

Section 7-1-67 NMSA 1978 provides for the imposition of interest

on tax deficiencies:
A. If any tax imposed is not paid on or before the day on which
it becomes due, interest shall be paid to the state on
such amount from the first day following the day on which
the tax becomes due ... until it is paid ... .
B. Interest due to the state under Subsection A ... shall be
at the rate of fifteen percent a year ... . (Emphasis
added.)

It is a well settled rule of statutory construction that the

word "shall" is mandatory rather than discretionary, unless a

contrary legislative intent is clearly demonstrated. State v.

Lujan, 90 N.M. 103, 560 P.2d 167 (1977). The New Mexico Legislature

has expressly reiterated this general rule in §12-2-2(I) NMSA 1978

(in construing statutory provisions, the words "shall" and "must"

are to be construed as mandatory unless this would be inconsistent

with manifest legislative intent or repugnant to the context of the

statute).

Section 7-1-67 requires that interest, at the rate of 15% per

year, be imposed on the amount of any unpaid taxes. No exceptions

to this rule are provided for. Interest is intended to compensate

the state for the time-value of money which was not paid when it

was due. It may be unpleasant to pay interest on monies owed,

particularly where the taxpayer is for some time unaware of the

existence of the debt, as was the case here. However, interest is

not a penalty for late payment. It is, rather, a means of making

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a creditor whole through reimbursement for not having had the use

of the money during the time it remained unpaid. While the interest

rate imposed here may seem high, that rate has been set by the

Legislature in the statute, and both the Department and the hearing

officer lack the authority to reduce it.

The Taxpayer here acted in good faith. He believed that he

was acting in compliance with the requirements of the Income Tax

Act, and he did his best to alert the Department to the basis for

his actions so that any error could be promptly corrected. It is

unfortunate that the Department did not notice the Taxpayer's

notation on his tax return so as to allow for a more timely correction.

However, the interest assessed is mandated by statute and cannot

be abated.

Doctrine of equitable recoupment

The Taxpayer did not raise an issue of equitable recoupment

at the hearing. However, the Department noted that counsel

representing the Taxpayer in an earlier stage of the proceedings

had argued that the assessment at issue was barred by this doctrine.

Accordingly, it is briefly addressed here.
The doctrine of equitable recoupment states that where a single

taxable event is subjected to tax on inconsistent legal theories,
the amount mistakenly paid on the original theory must be credited

against the amount ultimately determined to be due, even if the time
for seeking a refund of the earlier payment has passed. That is,

if a taxpayer has paid tax on a transaction under one view of the
facts and law, the government cannot impose tax on the same

transaction under a different view without giving the taxpayer credit

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for the initial amount paid. Vivigen, Inc. v. Minzner, 117 N.M.

224, 220-30, 870 P.2d 1382 (Ct.App. 1994).

The doctrine does not apply here. The Department is not taxing

the Taxpayer's 1991 income twice under varying legal theories.

Rather, the assessment here is based on inclusion of additional income

on which tax was not paid earlier. There is no change in the legal

theory on which the Department is imposing the tax, and the amount

originally paid by the taxpayer for 1991 has been credited toward

his total tax bill for that year. The assessment here is for the

balance due above the amount already paid.

CONCLUSIONS OF LAW

1) The Taxpayer filed a timely protest of Assessment No. 640185.

Jurisdiction thus lies over the parties and the subject matter of

this protest.

2) The Department has abated the penalty assessed against the

Taxpayer. The validity of the penalty therefore is not before the

hearing officer for decision.

3) The Taxpayer improperly deducted the relocation expense
reimbursement received from his employer from his taxable income

for state income tax purposes, and the Department's assessment for
tax due based on this additional income is proper.

4) Because the Taxpayer did not pay the tax owed at the time
it was due, interest was properly imposed on the deficiency at the

statutory rate.
5) The Department is not estopped to collect either the underpaid

tax or interest thereon.

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6) The assessment is not barred by the doctrine of equitable

recoupment.

For the foregoing reasons, the Taxpayer's protest IS HEREBY

DENIED.

DONE, this 13th day of March, 1997.

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