Can a New Mexico worker claim a full refund of income tax by arguing that wages aren't taxable 'income' and the federal income tax is unconstitutional?

Plain-English summary

Mark Smith worked as an equipment technician for Intel Corporation at its Rio Rancho plant, earning about $37,020 in wages in 1995 and similar pay in 1996. He then filed New Mexico personal income tax returns (an amended 1995 return and an original 1996 return) reporting zero income and demanding refunds of everything withheld — $1,435 for 1995 and $1,593.29 for 1996. The Department denied both refund claims, and he protested.

Smith raised a familiar set of "tax protester" arguments: that he never earned "wages" as defined in the Internal Revenue Code (claiming the definition of "employee" covers only government workers and corporate officers); that under the Public Salary Tax Act only government pay is taxed; that the Sixteenth Amendment didn't validly authorize the income tax; and a "natural rights" theory that the government can't tax his right to exist and support himself by his labor.

The Hearing Officer rejected every argument and denied the refunds. New Mexico calculates income tax starting from federal adjusted gross income (§ 7-2-2(B)), and the Code defines "gross income" as "all income from whatever source derived," expressly including "compensation for services" (26 U.S.C. § 61). So Smith's Intel pay was income whether called wages, salary, or compensation. The "employee" definitions he cited come from the withholding provisions and are written inclusively — they don't exclude ordinary workers, and income tax is imposed separately from withholding. The Sixteenth Amendment and Brushaber v. Union Pacific confirm Congress's power to tax income; the Hale v. Henkel quotation he offered was misquoted and out of context (it's a Fifth Amendment grand-jury case). Courts have "soundly rejected" these theories (Lovell, Coleman, Sloan).

The Hearing Officer went further, warning Smith that New Mexico imposes a 50% civil fraud penalty (§ 7-1-69(B)) and makes filing false returns or evading tax a felony (§§ 7-1-72, 7-1-73), and that continuing to file this way — now that he had been told the law — could expose him to those penalties and even prison. He urged Smith to file corrected amended returns.

What this means for you

Wage earners and anyone hearing "wages aren't income" claims

They are wrong, and this decision explains why in detail. Wages, salary, and other compensation for services are income under 26 U.S.C. § 61, and New Mexico taxes them because it builds its income tax on your federal adjusted gross income. Filing a "zero income" return to reclaim your withholding does not work and can be dangerous.

Anyone tempted by tax-protester refund strategies

Beyond simply losing, acting on these theories can carry real penalties. New Mexico can impose a 50% civil fraud penalty and can prosecute false returns and evasion as felonies; the federal system has sent many "tax protesters" to prison. The Hearing Officer's opinion is essentially a warning that the arguments are frivolous and that persisting after being told the law is especially risky.

Accountants and tax professionals

This is a thorough, citation-rich rejection of the standard tax-protester canon — useful to hand a client who has encountered these arguments. It walks through the wages-are-income point (§ 61 vs. the § 3401 withholding definitions), the Sixteenth Amendment history (Pollock, Flint, Brushaber), the misuse of Hale v. Henkel and Redfield v. Fisher, and the practical consequences under §§ 7-1-69(B), 7-1-72, and 7-1-73.

Common questions

Q: Are wages really taxable income?
A: Yes. "Gross income" under 26 U.S.C. § 61 is "all income from whatever source derived," and it expressly includes "compensation for services." New Mexico starts its income tax from federal adjusted gross income, so wages earned in New Mexico are subject to state income tax.

Q: Doesn't the definition of "employee" limit the tax to government workers?
A: No. The definitions Smith cited come from the withholding rules and are written inclusively — they add government employees and corporate officers to, not substitute them for, common-law employees. And income tax is imposed separately from the withholding provisions.

Q: Is the federal income tax unconstitutional?
A: No. The Sixteenth Amendment removed any apportionment requirement, and Brushaber v. Union Pacific upheld the income tax as within Congress's broad Article I, § 8 taxing power. The cases Smith cited either predate the Sixteenth Amendment or, like Hale v. Henkel, were misquoted and are about unrelated issues.

Q: What penalties can these returns trigger?
A: New Mexico imposes a 50% civil penalty for fraudulent failure to pay (§ 7-1-69(B)) and treats filing false returns or evading tax as felonies (§§ 7-1-72, 7-1-73). The Hearing Officer warned Smith that continuing to file "zero income" returns after being told the law could lead to those penalties or criminal charges.

Citations and references

New Mexico statutes:

• § 7-2-2(B) NMSA 1978 — "base income" is federal adjusted gross income (with certain adjustments)
• § 7-2-2(N), § 7-2-3 NMSA 1978 — "net income" and the imposition of New Mexico income tax
• § 7-1-69(B) NMSA 1978 — 50% civil penalty for fraudulent failure to pay tax
• §§ 7-1-72, 7-1-73 NMSA 1978 — felony offenses for false returns and tax evasion

Federal law:

• 26 U.S.C. § 61 — gross income means all income from whatever source derived, including compensation for services
• 26 U.S.C. § 62 — adjusted gross income; 26 U.S.C. § 3401(a), (c) — "wages" and "employee" for withholding
• U.S. Const. amend. XVI; art. I, § 8 — congressional power to tax income without apportionment
• 4 U.S.C. § 111 (Public Salary Tax Act) — waives federal immunity from nondiscriminatory state taxation of federal pay; does not limit the income tax to government workers

Case law cited:

• Brushaber v. Union Pacific R.R., 240 U.S. 1 (1916) — upholds the federal income tax
• Central Illinois Public Service Co. v. United States, 435 U.S. 21 (1978) — income and wages are not the same concept
• Pollock v. Farmers' Loan & Trust Co., 157 U.S. 429 (1895); Flint v. Stone Tracy Co., 220 U.S. 107 (1911) — pre-Sixteenth Amendment tax history
• Hale v. Henkel, 201 U.S. 43 (1906) — a Fifth Amendment grand-jury case Smith misquoted
• Redfield v. Fisher, 292 P. 813 (Or. 1930) — Oregon intangible-property tax case cited for "natural rights" dicta
• Lovell v. United States, 755 F.2d 517 (7th Cir. 1984); Coleman v. Commissioner, 791 F.2d 68 (7th Cir. 1986); United States v. Sloan, 939 F.2d 499 (7th Cir. 1991) — rejecting tax-protester arguments

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Mark Smith
• Decision PDF: D&O 98-04

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
MARK A. SMITH NO. 98-04
PROTEST TO DENIAL OF CLAIM FOR REFUND

DECISION AND ORDER

This matter came on for formal hearing on January 12, 1998, before Gerald B.

Richardson, Hearing Officer. Mr. Mark A. Smith, hereinafter, “Mr. Smith”, represented

himself at the hearing. The Taxation and Revenue Department, hereinafter,

“Department”, was represented by Frank D. Katz, Chief Counsel. Based upon the

evidence and the arguments presented, IT IS DECIDED AND ORDERED AS

FOLLOWS:

FINDINGS OF FACT

1. In 1995 and 1996 Mr. Smith was employed by Intel Corporation at its Rio

Rancho facility as an equipment technician. His job duties as an equipment technician

involved making repairs to testing equipment that tests the speed of computer chips

manufactured at the Intel facility.

2. During 1995 and 1996 Mr. Smith received compensation in the form of

wages or salary for the work he performed for Intel Corporation.

3. In 1995 and 1996 Mr. Smith resided in Albuquerque, New Mexico.
4. On January 14, 1997 Mr. Smith filed an amended 1995 New Mexico

Personal Income Tax (PIT) return, reporting zero federal adjusted gross income, and zero

New Mexico base income. The amended return requested a refund in the amount of

$1,435, representing income taxes withheld or previously paid by Mr. Smith.

5. Mr. Smith’s W-2 form from Intel Corporation reflects that in 1995 he

received $37,020 in wages, tips or other compensation from Intel Corporation.

6. On January 31, 1997 Mr. Smith filed an original 1996 New Mexico PIT

return, reporting zero federal adjusted gross income, and zero New Mexico base income.

The return requested a refund in the amount of $1,593.29, representing income taxes

withheld from Mr. Smith.

7. On February 6, 1997 the Department denied Mr. Smith’s claim for refund

for the 1995 tax year.

8. On April 11, 1997 the Department denied Mr. Smith’s claim for refund for

the 1996 tax year.

9. On February 23, 1997 Mr. Smith filed a written protest to the

Department’s denial of its claim for refund for the 1995 tax year.

10. April 21, 1997 Mr. Smith filed a written protest to the Department’s

denial of its claim for refund for the 1996 tax year.

DISCUSSION

The issue to be determined herein is whether the Department properly denied Mr.

Smith’s claims for refund. The underlying legal issue upon which the foregoing

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determination depends is whether the compensation Mr. Smith received from his

employment by Intel Corporation in New Mexico is subject to income taxation by the

State of New Mexico. Mr. Smith has raised a number of legal arguments as to why his

wages are not subject to income taxation which will be addressed individually. Prior to

such discussion, however, New Mexico's personal income tax system will be explained.

New Mexico imposes its income tax upon the net income of "every resident

individual". New Mexico is among the majority of states which "piggy-back" or use the

federal income tax system as the basis for calculating state income taxes. The calculation of

personal income taxes in New Mexico begins with a determination of "base income" which

is defined to be the taxpayer's "adjusted gross income" as defined in Section 62 of the

Internal Revenue Code, plus certain net operating loss deductions which can be deducted

for federal purposes in arriving at federal adjusted gross income but which New Mexico

does not allow to be deducted in the same manner. See, NMSA 1978, § 7-2-2(B). New

Mexico then allows certain deductions, such as the federal standard or itemized deductions

and deductions for income from federal obligations, to arrive at "net income" upon which

income tax is imposed. See, NMSA 1978, § 7-2-2(N) and § 7-2-3. Because Mr. Smith’s

arguments are, in essence, directed at the legality of the federal income tax, and provisions

of the Internal Revenue Code, which provide the basis for calculating New Mexico's

income tax, the Internal Revenue Code, and the federal authority interpreting it and the

United States Constitution will be consulted to determine Mr. Smith’s protest.

First, Mr. Smith argues that he has never earned “wages” as that term is defined in

the Internal Revenue Code (the “Code”). Specifically, Mr. Smith relies upon the

definition of “wages” found at Section 3401(a) of the Code which defines wages to mean,

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“all remuneration...for services performed by and employee for his employer....” Mr.

Smith then relies upon a definition of an “employee” purportedly found in a 1943 edition

of the Federal Register which defines “employee” as follows:

The term “employee” specifically includes officers and
employees, whether elected or appointed of the United
States, a State, territory, or political subdivision thereof or
the District of Columbia or any agency or instrumentality of
any more(sic) or more of the foregoing. (emphasis supplied
by Mr. Smith.)

Mr. Smith also relies upon the definition of “employee” found at Section 3401(c) of the

Code which is substantially identical to the above quoted definition, with the addition of a

reference to “employee” also including an officer of a corporation. Mr. Smith then

argues that since he in not an officer or employee of the United States, a state, territory or

political subdivision thereof, nor is he a corporate officer, that he is not an employee. Not

being an employee, he argues that he could not have wages from employment.

The problems with this argument are numerous. In the first place, the definition

of employee is written inclusively, to specifically include government employees and

corporate officers. It contains no language excluding persons understood under the

common law to be employees. Thus, the provisions cited fail to establish that Mr. Smith

did not receive wages from employment. Additionally, Mr. Smith acknowledged at the

hearing that he received a salary for his work at Intel Corporation. Further, Intel

Corporation issues him a W-2 form and classified his remuneration as “wages, tips [or]

other compensation” and lists him as an employee and itself as “employer” on that form.

These strongly suggest that Mr. Smith does receive wages from employment.

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It is also noteworthy that the statutory definitions quoted are from the provisions

of the Code requiring the withholding of taxes by employers from wages, which is what

Intel Corporation apparently did. While the obligation to withhold taxes from wages is

imposed under these provisions of the code, the imposition of income tax is separate and

apart from these provisions. The distinction between taxable income and wages subject

to withholding was discussed by the U.S. Supreme Court in Central Illinois Public

Service Company v. United States, 435 U.S. 21 at 25 (1978), where the Court noted:

The two concepts--income and wages--obviously are not
necessarily the same. Wages usually are income, but many
items qualify as income and yet clearly are not wages.

Thus, while the income tax is imposed upon taxable income, which may include wages,

the obligation to withhold taxes is specifically confined to wages. This distinction leads

us to the most significant error in Mr. Smith’s argument, which is his assumption that in

order for the imposition of tax upon his income to be legal, that it must be established that

he had wages from employment. The imposition of the federal personal income tax is not

so narrowly confined. As noted in the Findings of Fact, above, Mr. Smith has filed

returns which declare that he has zero federal adjusted gross income for purposes of

calculating his New Mexico taxable income. The Internal Revenue Code defines adjusted

gross income for purposes of the imposition of income tax to be gross income, less certain

deductions which are listed in Section 62 of the Code. Gross income is defined in Section

61 of the Code as follows:

Except as otherwise provided in this subtitle, gross income
means all income from whatever source derived, including
(but not limited to) the following items:

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(1) Compensation for services, including fees, commissions,
fringe benefits and similar items;
(2) Gross income derived from business;
(3) Gains derived from dealings in property;
(4) Interest;
(5) Rents;
(6) Royalties;
(7) Dividends;
(8) Alimony and separate maintenance payments;
(9) Annuities;
(10) Income from life insurance and endowments contracts;
(11) Pensions;
(12) Income from discharge of indebtedness;
(13) Distributive share of partnership gross income;
(14) Income in respect of a decedent; and
(15) Income from an interest in an estate or trust.

26 U.S.C. § 61 (1997). This definition is quite broad and inclusive, and is certainly broad

enough to include under the first listed category, “compensation for services”, the

remuneration Mr. Smith receives from Intel Corporation for the services he performs for

them as an equipment technician, whether that remuneration is characterized as wages,

salary or simply compensation. In this regard, Mr. Smith also cites to the Public Salary Tax

Act of 1939 for the proposition that only the compensation for personal services as an

officer or employee of a governmental entity is included in the definition of gross income.

A reading of the plain language of the definition of “gross income”, above, belies any such

narrow construction because it contains no such limiting language. Furthermore, the Public

Salary Tax Act, 4 U.S.C. Section 111 also belies such a construction. That Act was enacted

to waive the immunity of the federal government from the state taxation with respect to the

imposition of state or local taxes upon the pay or compensation of federal officers and

employees, so long as the state or local tax does not discriminate because of the federal

source of such pay or compensation. Nothing in the language of the act limits the

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imposition of either a federal income tax under the provisions of the Internal Revenue Code

or a state income tax to only federal officers or employees.

Mr. Smith also cited to the U.S. Supreme Court decision, Brushaber v. Union

Pacific Railroad Company, 240 U.S. 1 (1916) as supporting his argument that the sixteenth

amendment to the Constitution did not alter the Constitution so as to correct the infirmities

in the federal income tax. In order to better understand this issue, a review of the provisions

of the Constitution relating to the power to impose taxes and of the federal caselaw with

respect to income taxes is necessary.

Article 1, §8 provides the general authority for Congress to enact laws to impose

taxes. It provides as follows:

The Congress shall have Power To lay and collect Taxes,
Duties, Imposts and excises, to pay the debts and provide for
the common Defense and General Welfare of the United
States; but all Duties, Imposts and Excises shall be uniform
throughout the United States;...(capitalization in the original.)

Article 1, §2, Cl. 3 of the United States Constitution provides that:

Representatives and direct taxes shall be apportioned among the
several States which may be included in this Union,....
(emphasis added)

Additionally, Article 1, §9, Cl.4 provides that:

No Capitation or other direct, Tax shall be laid, unless in
Proportion to the Census or Enumeration herein before
directed to be taken. (emphasis added, capitalization in
original)

These two latter clauses became the basis of the Supreme Court determination that the

Income Tax Act of 1894 was unconstitutional. The Court held that the income tax was

unconstitutional because it imposed a tax on income from real estate. The Court ruled that

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this was the equivalent of a direct tax on the real estate itself, and since the tax was not

apportioned, it violated these clauses of the Constitution. Pollock v. Farmers Loan and

Trust Co., 157 U.S. 429 (1895). The ruling in this case effectively thwarted the imposition

of an income tax in this country for some years thereafter. In 1909, Congress passed a law

imposing an excise tax on corporations of 1% of net income. This tax was challenged on

the same grounds as the 1894 income tax. In Flint, v. Stone Tracy Company, 220 U.S. 107

(1911), however, the Supreme Court upheld that tax, ruling that the tax was an "excise tax"

and therefore not a direct tax which would be unconstitutional because it was not

apportioned. Thus, the determination of whether a tax was an "excise tax" or a "direct tax"

became crucial to the constitutionality of a tax. This concern was eliminated, however, by

the passage of the sixteenth amendment to the Constitution. It provides as follows:

The Congress shall have power to lay and collect taxes on
incomes, from whatever source derived, without
apportionment among the several States, and without regard
to any census or enumeration.

The first case to be decided by the Supreme Court following the passage of the sixteenth

amendment which challenged the constitutionality of the income tax was the Brushaber

case. In that case a stockholder of the Union Pacific brought an action to restrain the

company from paying income tax on the grounds of the unconstitutionality of the income

tax provisions of the Tariff Act of 1913. The Court ruled the income tax to be

constitutional. In doing so, the Court reiterated the inherent power of Congress to impose

an income tax under Article 1, §8, and found that the sixteenth amendment had merely

removed the requirement that such taxes be apportioned among the states. Of particular

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interest in the Court's decision is its discussion of the power of Congress to tax under

Article 1, §8:

That the authority conferred upon Congress by §8 of article 1
"to lay and collect taxes, duties, imposts and excises" is
exhaustive and embraces every conceivable power of
taxation has never been questioned, or, if it has, has been so
often authoritatively declared as to render it necessary only to
state the doctrine. And it has also never been questioned
from the foundation, without stopping presently to determine
under which of the separate headings the power was properly
to be classed, that there was authority given, as the part was
included in the whole, to lay and collect income taxes.

240 U.S. at 12-13. Thus, rather than supporting Mr. Smith’s arguments that the federal

income tax is somehow unconstitutional or illegal, Brushaber upholds the constitutionality

of the federal income tax, based upon Congress' inherent and "exhaustive" authority to

impose taxes, including income taxes.

Finally, Mr. Smith advances an argument, which I will refer to as the “natural

rights” argument, that posits that as a citizen, he has the natural right to exist and support

himself by his labors. This argument posits that the government may not tax his ability to

exist and support himself by his labors. In support of this argument, Mr. Smith offered

the following purported quotation from the U.S. Supreme Court decision in Hale v.

Henkel, 240 U.S. 43 at 74 (1906):

An individual may stand upon his constitutional rights as a
citizen. He owes no duty to the state since he receives
nothing therefrom beyond the protection of his life and his
property. His rights are such as existed by the laws of the
land long antecedent to the origination of the state. They
can only be taken from him by due process of the law and
in accordance with the Constitution. He owes nothing to
the public so long as he does not trespass upon their rights.

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I have researched the case and found it to be a case about the powers of the

government to compel testimony before a grand jury given the right against self-

incrimination under the 5th Amendment of the Constitution rather than a case about the

right of an individual to exist without taxation by the government. Furthermore, the

context of the quotation is to draw a distinction between the right of an individual to

assert a 5th Amendment privilege, as opposed to a fictitious “person” in the form of a

corporation. Finally, the quote offered by Mr. Smith is not an accurate rendition of the

actual language of the Court, as will be shown below. To provide an accurate context for

the language relied upon by Mr. Smith, and to demonstrate the inaccuracy of the language

provided, the entire and accurate quotation is provided below, with the omitted language

emphasized.

If, whenever an officer or employee of a corporation were
summoned before a grand jury as a witness he could refuse
to produce the books and documents of such corporation,
upon the ground that they would incriminate the
corporation itself, it would result in the failure of a large
number of cases where the illegal combination was
determinable only upon the examination of such papers.
Conceding that the witness was an officer of the
corporation under investigation, and that he was entitled to
assert the rights of the corporation with respect to the
production of its books and papers, we are of the opinion
that there is a clear distinction in this particular between
and individual and a corporation, and that the latter has no
right to refuse to submit its books and papers for an
examination at the suit of the state. The individual may
stand upon his constitutional rights as a citizen. He is
entitled to carry on his private business in his own way.
His power to contract is unlimited. He owes no duty to the
state or to his neighbors to divulge his business, or to open
his doors to an investigation, so far as it may tend to
criminate him. He owes no such duty to the state, since he
receives nothing therefrom, beyond the protection of his life
and property. His rights are such as existed by the law of

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the land long antecedent to the organization of the state,
and can only be taken from him by due process of law, and
in accordance with the Constitution. Among his rights are
a refusal to incriminate himself, and the immunity of
himself and his property from arrest or seizure except
under a warrant of the law. He owes nothing to the public
so long as he does not trespass upon their rights. (emphasis
added.)

As a review of the full and accurate quotation makes clear, this case does not support Mr.

Smith’s contention that the government may not tax an individual for the privilege of

existing.

It is also preposterous to argue that the income tax is a tax on an individual’s right

to exist. It is a tax on the income one earns. Many individuals exist without earning any

taxable income and those individuals are not taxed under the income tax.

Mr. Smith also cited to Redfield v. Fisher, 292 P. 813 (Or. 1930), in support of his

“natural rights” argument. The case is a 1930 Oregon Supreme Court decision which had

struck down an Oregon tax on intangible property owned by individuals. The court struck

down the tax as violative of the provision of the Oregon Constitution which requires

taxation to be uniform on the same class of subjects. Because the same intangible property

would not have been taxed when owned by corporations, the court ruled the tax

unconstitutional. Mr. Smith cited to dicta in the court's opinion which stated that an

individual, unlike a corporation, cannot be taxed for the mere privileges of existing and

owning property, which are natural rights. This "natural rights" theory apparently derives

from a line of thought embraced by the tax protester movement by which they claim that

they are not citizens of the United States, but are "freeborn, natural individuals", and as such

are the master or sovereign, and are not a servant to the government. This theory has been

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soundly rejected by the federal courts which have upheld the imposition of the federal

income tax. As stated in Lovell, v. U.S., 755 F.2d 517 (7th Cir., 1984):

All individuals, natural or unnatural, must pay federal
income tax on their wages, regardless of whether they
received any "privileges" from the government.

Id. at 519. See, also, U.S. v. Sloan, 939 F. 2d 499, 500-501 (7th Cir. 1991).

Mr. Smith’s protest and other written materials he submitted in support of his

claim that his earnings are not subject to taxation are rife with examples of citations

which do not establish the proposition or arguments they are cited for. I have seen these

authorities and quotations before, as they are propounded by a movement called the tax

protester or tax resister movement. The arguments propounded are often elaborately

structured and rely upon quotations either misconstrued, taken out of context, or from cases

which are no longer current law, such as cases decided prior to the adoption of the sixteenth

amendment. Clearly, someone has taken great pains to construct such arguments and to

research archaic law. Yet, my review of the law challenging the Federal income tax reveals

numerous cases which directly address the many arguments propounded by the tax resister

movement and reject them soundly. I am left to conclude that Mr. Smith and the other

members of the movement have not really thoroughly researched the law which they so

ardently state to support their view that they are not subject to taxation. Instead, these

individuals appear to be motivated solely by their own selfishness and greed in their

singleminded pursuit to pay no taxes. Surely, these individuals must wonder why the vast

majority of their fellow citizens agree to report and pay taxes if they really don’t need to do

so.

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Just in case Mr. Smith really has made an effort to fully understand the law in this

area and he simply has failed to find authority opposing his views, I would direct him to one

case in particular, which addresses the standard tax resister arguments and cites to numerous

federal cases upholding federal income taxes in the face of these arguments, and I would

urge him to read it and the other cases cited therein. In Coleman v. Commissioner of

Internal Revenue, 791 F.2d 68, the Seventh Circuit Court of Appeals addressed the

consolidated cases of Mr. Norman Coleman and Mr. Gary Holder. Both of these

individuals had argued that their wages were not subject to federal income taxation. The

court had this to say about those arguments:

Coleman says that wages may not be taxed because they
come from his person, a depreciating asset. The personal
depreciation offsets the wage, leaving no net income.
Coleman thinks that only net income may be taxed under the
Sixteenth Amendment--net income as Coleman defines it,
not as Congress does. Holder, who styles himself a "private
citizen," insists that wages may not be taxed because the
Sixteenth Amendment authorizes only excise taxes, and in
Holder's world excises may be imposed only on "government
granted privileges." Because Holder believes that he is
exercising no special privileges, he thinks he may not be
taxed. These are tired arguments. The code imposes a tax
on all income. See, 26 U.S.C. § 61. Wages are income,
and the tax on wages is constitutional. See, among
hundreds of other cases, United States v. Thomas, 788 F.2d
1250, 1253 (7th Cir. 1986); Lovell v. United States, 755 F.2d
517 (7th Cir. 1984); Granzow v. CIR, 739 F.2d 265, 267 (7th
Cir. 1984); United States v. Koliboski, 732 F.2d 1328, 1329
& n. 1 (7th Cir. 1984). See also Brushaber v. Union Pacific
R.R., 240 U.S. 1, 12, 24-15, 36 S.Ct. 236, 239, 244-45, 60
L.Ed. 2d 493 (1916).

Id. at 70. As this case and the cases cited therein indicate, there is really no question that

Mr. Smith’s income from his work in New Mexico is income for federal tax purposes, and

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as such, would be included in federal adjusted gross income for federal purposes, and by

inference, for purposes of calculating New Mexico personal income taxes.

I would leave Mr. Smith with the following admonition:

Some people believe with great fervor preposterous things
that just happen to coincide with their self-interest. "Tax
protesters" have convinced themselves that wages are not
income, that only gold is money, that the Sixteenth
Amendment is unconstitutional, and so on. These beliefs all
lead--so tax protesters think--to the elimination of their
obligation to pay taxes. The government may not prohibit
the holding of these beliefs, but it may penalize people who
act on them. (emphasis added).

The federal caselaw contains hundreds of cases where tax protesters have been sent to

prison for tax evasion or fined substantially for filing frivolous returns based upon the

theories espoused by the tax protester movement. New Mexico also makes it a felony to

file false returns or to evade taxes, see, NMSA 1978, §§ 7-1-72 and 7-1-73, and it imposes a

50% of tax civil penalty for the fraudulent failure to pay any tax required to be paid. NMSA

1978 § 7-1-69(B). Mr. Smith may be faced with such consequences if he should continue

to file returns in the same manner as he filed his 1995 and 1996 state and federal returns.

This is especially so now that he has been informed of the law. He has the opportunity to

rectify his error by filing amended returns with both New Mexico and the Internal Revenue

Service. I would urge his to act on this opportunity.

CONCLUSIONS OF LAW

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1. Mr. Smith filed timely, written protests to the Department's denial of his

claims for refund and jurisdiction lies over both the parties and the subject matter of this

protest.

2. Mr. Smith’s compensation from Intel Corporation is included in both "gross

income" and "adjusted gross income" as those terms are defined in the Internal Revenue

Code.

3. Mr. Smith’s compensation from Intel Corporation is included in both "base

income" and "net income" as those terms are defined in the Income Tax Act, Chapter 7,

Article 2, NMSA 1978.

4. Mr. Smith is not entitled to a refund of the taxes previously paid or withheld

from his earnings in New Mexico during 1995 or 1996 because those earnings were

properly subject to the imposition of New Mexico's income tax.

For the foregoing reasons, Mr. Smith’s protest IS HEREBY DENIED.

DONE, this 26th day of January, 1998.

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