Can a New Mexico couple claim full income-tax refunds by arguing wages aren't taxable, the Sixteenth Amendment wasn't ratified, and the graduated income tax violates the state constitution?

Plain-English summary

Douglas and Brenda Ratliff, New Mexico residents, earned ordinary wages in 1992–1994 (Mr. Ratliff, for example, was paid $24,300 in 1992 and $27,000 in 1994 by Hope Enterprises Field Service). They then filed amended New Mexico income tax returns reporting zero income and demanded refunds of everything withheld — $1,054 for 1992 and $1,165 for 1994 (plus $889 for 1993, which the Department mistakenly refunded and then re-assessed; the Ratliffs never protested that assessment, so the 1993 year wasn't before the Hearing Officer). The Department denied the 1992 and 1994 refund claims, and the Ratliffs protested.

The Hearing Officer rejected every argument and denied the refunds:

• "The right to labor is a fundamental right that can't be taxed." Even if labor is a fundamental right, none of the authorities cited bar an income tax on what that labor earns. The Ratliffs' cites were misused — they pointed to 26 U.S.C. § 128 (which was actually about interest on certain savings certificates and had been repealed in 1990) and to Yakus v. United States (a separation-of-powers case that says nothing of the sort). Taxing the results of labor is not the same as prohibiting the labor.
• "The Department must prove the Sixteenth Amendment was ratified." No — the burden is on the refund claimants. And it was ratified: the Secretary of State certified on February 25, 1913 that 40 of the then-48 states had ratified it (only 36 were needed).
• "New Mexico's graduated income tax violates the state uniformity clause" (N.M. Const. art. VIII, § 1). No. That clause requires equal and uniform taxation only within the same class, permits different classes (e.g., higher vs. lower incomes), and — under Sunset Package Store v. City of Carlsbad — applies only to property taxes, not the income tax.

Because wages are income under 26 U.S.C. § 61, and New Mexico starts from federal adjusted gross income, the Ratliffs' earnings were fully taxable. Quoting Coleman v. Commissioner, the Hearing Officer called these "tired arguments," warned that New Mexico imposes a 50% civil fraud penalty (§ 7-1-69(B)) and treats false returns and evasion as felonies (§§ 7-1-72, 7-1-73), and urged the couple to file corrected returns.

What this means for you

Wage earners

Wages are taxable income in New Mexico. The state builds its income tax on your federal adjusted gross income, and "gross income" under 26 U.S.C. § 61 expressly includes compensation for services. Filing a "zero income" return to reclaim your withholding does not work.

Anyone drawn to tax-protester theories

Every argument here — the right-to-labor theory, the "Sixteenth Amendment wasn't ratified" theory, and the state-constitution uniformity theory — has been squarely rejected. Beyond losing the refund, acting on these theories can bring a 50% civil fraud penalty and felony charges under New Mexico law, and the federal system has imprisoned many "tax protesters." The Hearing Officer's warning is explicit.

Accountants and tax professionals

A useful, citation-rich rejection of the standard tax-protester canon, including a state-specific point: the New Mexico uniformity clause (art. VIII, § 1) applies to property taxes and permits classification, per Sunset Package Store v. City of Carlsbad, so it does not invalidate the graduated income tax. Note too that the refund claimant bears the burden of proof, including on a frivolous ratification challenge.

Common questions

Q: Are wages taxable in New Mexico?
A: Yes. "Gross income" under 26 U.S.C. § 61 includes compensation for services, and New Mexico calculates its income tax starting from federal adjusted gross income. Wages earned in New Mexico are subject to state income tax.

Q: Wasn't it the Department's job to prove the Sixteenth Amendment was ratified?
A: No. The Ratliffs, as the parties claiming refunds, bore the burden of proof. In any event, the Sixteenth Amendment was ratified — certified in 1913 as approved by 40 of the 48 states, well above the 36 required.

Q: Doesn't a graduated income tax violate New Mexico's requirement of equal and uniform taxation?
A: No. That clause (art. VIII, § 1) requires uniformity only within the same class, allows the legislature to create different income classes, and under Sunset Package Store v. City of Carlsbad applies only to property taxes — not the income tax.

Q: Does this decision apply to my situation?
A: Not directly. A Decision and Order resolves one taxpayer's protest on its specific facts and the law in effect at the time. It illustrates how New Mexico rejects tax-protester refund claims, but your facts may differ.

Citations and references

New Mexico law:

• § 7-2-2(B) NMSA 1978 — "base income" is federal adjusted gross income (with 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
• N.M. Const. art. VIII, § 1 — equal and uniform taxation within a class (applies to property taxes)

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
• U.S. Const. amend. XVI — congressional power to tax income without apportionment; art. V — ratification of constitutional amendments

Case law cited:

• Sunset Package Store, Inc. v. City of Carlsbad, 79 N.M. 260, 442 P.2d 572 (1968) — the state uniformity clause applies to property taxes
• Coleman v. Commissioner, 791 F.2d 68 (7th Cir. 1986) — rejecting tax-protester wage arguments; source of the "tired arguments" admonition
• Yakus v. United States, 321 U.S. 414 (1944) — a separation-of-powers case the Ratliffs misquoted

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Douglas & Brenda Ratliff
• Decision PDF: D&O 98-08

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
DOUGLAS AND BRENDA RATLIFF NO. 98-08
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. Douglas and Brenda Ratliff, hereinafter, “the Ratliffs”,

were represented by Brenda Ratliff. The Taxation and Revenue Department, hereinafter,

“the Department”, was represented by Frank D. Katz, Chief Counsel. At the close of the

hearing, the Ratliffs were given an additional two weeks time to submit additional

argument, which was received on January 26, 1998 and the matter was considered

submitted for decision at that time. Based upon the evidence and the arguments

presented, IT IS DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. The Ratliffs are residents of New Mexico and were so during tax years

1992, 1993 and 1994.

2. On April 15, 1996, the Ratliffs filed amended New Mexico personal

income tax returns for the 1992 and 1994 tax years, and concurrently filed amended

federal personal income tax returns for those same years. The Ratliffs had previously

reported $37,581 in federal adjusted gross income for the 1992 tax year and $41,181 in
federal adjusted gross income for the 1994 tax year on both their New Mexico and

Federal returns. The amended returns adjusted the amount reported as federal adjusted

gross income for both their New Mexico and federal returns to zero for both tax years.

3. As a result of amending their federal adjusted gross income on their 1992

and 1994 New Mexico personal income tax returns, the Ratliffs requested a refund in the

amount of $1,054 for the 1992 tax year and $1,165 for the 1994 tax year.

4. The Department denied the Ratliffs’ claims for refund for the 1992 and

1994 tax years.

5. The Ratliffs filed timely, written protests to the Department’s denials of

their claims for refund for the 1992 and 1994 tax years.

6. During tax year 1992, Mr. Ratliff was paid $24,300 in wages by his

employer, Hope Enterprises Field Service. During that same year, Mrs. Ratliff was paid

$415.88 in wages by Owens Backhoe and $13,956.14 in wages by Hope Enterprises Field

Service.

7. During tax year 1994, Mr. Ratliff was paid $27,000 in wages by Hope

Enterprises Field Service. During that same year, Mrs. Ratliff was paid $1,404 in wages

by Hope enterprises Field Service and $160 in wages by Eddy County.

8. On January 15, 1997, the Ratliffs filed an amended New Mexico personal

income tax return for tax year 1993, which amended their previously reported federal

adjusted gross income to zero and requested a refund in the amount of $889.

9. On January 30, 1997, the Department issued a refund check to the Ratliffs

for the 1993 tax year in the amount of $889.

2

10. On May 27, 1997, the Department issued Assessment No. 704493 to the

Ratliffs, assessing $889 in personal income tax for tax year 1993, plus penalty and

interest.

11. There has been no protest to Assessment No. 704493 by the Ratliffs.

DISCUSSION

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

Ratliffs’ claims for refund1. The underlying legal issue upon which the foregoing

determination depends is whether the compensation the Ratliffs received from their

employment in New Mexico during the tax years in issue is subject to income taxation

by the State of New Mexico. The Ratliffs have raised a number of legal arguments as to

why their 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

1
At the hearing it was agreed that the parties would also investigate the status of the Department’s
assessment for the 1993 tax year, because the same legal issues are involved in determining whether the
Department’s assessment was proper. Because the Ratliffs never filed a protest to the Department’s
assessment, and because the time for filing such a protest has expired, there is no jurisdiction in this forum
to address the propriety of the assessment for the 1993 taxes.

3
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 the Ratliffs’

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 their protest.

The first argument made by the Ratliffs is that the right to labor or the right to earn a

living is a fundamental right which cannot be taxed. The Ratliffs cited to a number of old

federal decisions which discussed rights considered essential to the orderly pursuit of

happiness which generally included concepts such as the right to labor or to pursue one’s

occupation. The problem with the Ratliffs’ argument is that even if the right to labor is a

fundamental right, none of the authorities cited prohibit the government from imposing an

income tax on the income earned from the exercise of such a right. The authorities do not

even begin to support this proposition. For instance, the Ratliffs cite to Section 128 of the

Internal Revenue Code, 26 U.S.C.§ 128 for the proposition that “gross income earned in the

exercise of an unalienable right is exempted by fundamental law and is free from tax”. An

examination of the section cited, however, reveals that this section provided that “gross

income does not include any amount received by any individual during the taxable year as

interest on a depository institution tax exempt savings certificate”. Not only does this

provision state nothing resembling that for which it was cited, this section was repealed by

4
act of Congress on November 5, 1990, 104 Stat. 1388-520. The Ratliffs also cited to the

U.S. Supreme Court decision in Yakus v. U.S., 321 U.S. 414, 468 (1944) for the same

proposition that the government may not tax the exercise of a fundamental or inalienable

right. A reading of this case, and the page cited, however, reveals that the case was about

the separation of powers between the federal courts and Congress, and contains no

statement to the effect for which it was cited. In addition to failing to cite to authority which

accurately supports their argument on this point, the Ratliffs’ argument fails to recognize

the difference between a law which taxes the results of one’s labor and a law which

would prohibit the exercise of the right altogether. While the latter might be prohibited,

there is ample authority, which will be cited below, upholding the power of Congress to

enact laws which impose an income tax on wages, such as those earned by the Ratliffs.

The next argument raised by the Ratliffs has to do with the Sixteenth Amendment

to the United States Constitution. The Department argued that the Sixteenth Amendment

authorized Congress to impose income taxes, and a reading of it supports this conclusion,

because it provides:

The Congress shall have the 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. (emphasis added).

The Ratliffs argue that it is incumbent upon the Department to prove that the Sixteenth

Amendment was ratified and is in force. This argument misapplies the burden of proof in

this proceeding. It is the Ratliffs who bear the burden of proving their entitlement to the

refund they have requested, and thus, if they believe that the Sixteenth Amendment was

not properly ratified, it was incumbent upon them to prove it. In spite of this failure, I

5
have researched this matter and the Sixteenth Amendment was certified by the Secretary

of State on February 25, 1913 as having been ratified by the legislatures of forty states.

Article V of the United States Constitution requires ratification by three quarters of the

states for any amendment to the Constitution. Because at the time, there were forty-eight

states, the approval of thirty-six states was required for ratification. Thus, there is no

merit to the Ratliffs’ argument that the amendment was not ratified.

The Ratliffs also argue that New Mexico’s income tax violates Article VIII,

Section 1 of the New Mexico Constitution because they believe that a graduated income

tax, such as New Mexico’s, violates the requirement of equal and uniform taxation found

in that constitutional provision. Article VIII, Section 1 provides as follows:

Taxes levied upon tangible property shall be in proportion
to the value thereof, and taxes shall be equal and uniform
upon subjects of taxation of the same class. Different
methods may be provided by law to determine value of
different kinds of property, but the percentage of value
against which tax rates are assessed shall not exceed thirty-
three and one-third percent.

As a reading of the full language of the provision makes clear, the requirement of equal

and uniform taxation applies to “subjects of taxation of the same class”. This allows the

legislature to set up different classes which can be taxed differently. Thus, it can

determine that those subjects of taxation who earn higher incomes to be a different class

than those who earn less, and those groups can be taxed differently, or at different rates.

Additionally, the New Mexico Supreme Court construed this section of the Constitution

to apply only to property taxes. Sunset Package Store, Inc. v. City of Carlsbad, 79 N.M.

260, 442 P.2d 572 (1968). Because the income tax is not a tax on property, New

Mexico’s graduated income tax could not violate this provision.

6
As noted above, New Mexico uses federal adjusted gross income as its starting

point for calculating New Mexico personal income taxes. The Internal Revenue Code

defines adjusted gross income 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:
(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 of compensation for services the wages or

salaries earned by Mr. and Mrs. Ratliff from their employment in New Mexico during the

relevant tax years.

The Ratliffs’ protest, arguments and other written materials submitted in support

of their claim that their 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

7
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 the Ratliffs 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 self interest

in their desire to avoid paying taxes which support the very governmental system which

they claim to believe in.

Just in case the Ratliffs have truly made an effort to fully understand the law in this

area and have simply failed to find authority opposing their views, I would direct them 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 them 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,

8
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

the Ratliffs’ income from wages is income for federal tax purposes, and 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. and Mrs. Ratliff with the following admonition from the court
decision in the Coleman case, supra:

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).

Id. at 69. 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

9
50% of tax civil penalty for the fraudulent failure to pay any tax required to be paid. NMSA

1978 § 7-1-69(B). Mr. and Mrs. Ratliff may be faced with such consequences if they

should continue to file returns in the same manner as they filed their 1992, 1993 and 1994

state and federal returns. This is especially so now that they have been informed of the law.

They have the opportunity to rectify their error by filing amended returns with both New

Mexico and the Internal Revenue Service. I would urge them to act on this opportunity.

CONCLUSIONS OF LAW

1. The Ratliffs filed timely, written protests to the Department's denial of their

claims for refund for the 1994 and 1992 tax years and jurisdiction lies over both the parties

and the subject matter of this protest.

2. The Ratliffs’ wages are included in both "gross income" and "adjusted gross

income" as those terms are defined in the Internal Revenue Code.

3. The Ratliffs’ wages are 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. The Ratliffs are not entitled to a refund of the taxes previously paid or

withheld from their earnings in New Mexico during 1992 or 1994 because those earnings

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

For the foregoing reasons, the Ratliffs’ protest IS HEREBY DENIED.

DONE, this 12th day of February, 1998.

10