Did a federal waiver of estimated-tax penalties excuse Centex's late New Mexico corporate estimated payments, and could the state offset a refund before issuing an assessment?

Subject

Centex Corporation (D&O 98-30)

Plain-English summary

Centex American Gypsum, doing business as Centex Corporation, expected to use a large net operating loss and therefore did not anticipate owing at least $5,000 of New Mexico corporate income tax for its April 1993-March 1994 fiscal year. It properly made no June 1993 estimated payment on that expectation.

Congress changed the result on August 10, 1993. The Revenue Reconciliation Act retroactively changed the treatment of certain Federal Savings and Loan Insurance Corporation assistance, which meant Centex could no longer use the expected loss. Centex then knew it would owe more than $5,000 in New Mexico but still did not make the September 15 or December 15 estimated payments. On March 15, 1994, it paid $131,000, including $32,598.75 for each missed installment.

The federal Act waived federal IRC Section 6655 penalties caused by its changes for periods before March 16, 1994. Centex argued that the waiver also prevented New Mexico penalty and interest. Hearing Officer Margaret B. Alcock disagreed. Federal income-tax administration did not govern state taxes, and New Mexico used federal taxable income only as the starting figure for its own calculation. Section 7-2A-9.1(C) expressly subjected late state estimated payments to New Mexico penalty and interest.

The Department's non-negligence regulation did not help. No federal penalty had first been assessed and then abated after reviewing Centex's facts; Congress had legislatively barred a federal penalty regardless of the reason for lateness. The regulation also addressed penalties connected with income-tax returns, while Centex's penalty arose from missed estimated payments. With no other evidence explaining the missed installments, Centex's mistaken belief that federal policy controlled state law qualified as negligence.

Centex also challenged the Department's use of $8,882.74 from a later $128,946 refund to pay the penalty and interest before a formal assessment number had been issued. The decision upheld the offset. Under Sections 7-1-13(A) and 7-2A-9.1(C), liability arose when each payment became due and penalty and interest began accruing; an assessment merely demanded payment of an existing liability. Section 7-1-29(C) allowed the Secretary to offset a refund against any tax for which the recipient was liable. The protest was DENIED.

What this means for you

• A federal tax waiver did not automatically carry into New Mexico law. The state corporate-income-tax system did not incorporate every federal penalty rule.
• A retroactive federal change can create a state estimated-payment obligation. Once Centex knew the net operating loss was unavailable, it had to adjust later state installments.
• Legislative waiver is different from case-specific penalty abatement. The Department's regulation contemplated an IRS penalty assessed and later abated for the same or similar reason, which did not happen here.
• Mistaken reliance on federal policy can be negligence. Centex produced no evidence that the late state installments resulted from anything other than its erroneous legal belief.
• A tax debt can exist before assessment. The Department could offset the later refund because the statutory due dates created the liability; the assessment was only a collection demand.

Key questions answered

Why was the June 1993 nonpayment acceptable but the later ones were not?
Before the federal law changed, Centex reasonably expected no New Mexico liability over $5,000. After August 10, it knew the loss deduction was gone and the threshold would be exceeded.

Why didn't Congress's waiver protect Centex in New Mexico?
It waived federal penalties under IRC Section 6655. New Mexico's own statutes separately imposed penalty and interest on late state estimated payments.

Did the IRS-abatement regulation apply?
No. The IRS had not assessed and then abated a penalty based on Centex's circumstances, and the state penalty involved estimated payments rather than an income-tax return.

Could the Department offset a refund without an existing assessment number?
Yes. The liability already existed by statute. The decision treated an assessment as a demand for payment, not as the event creating the debt.

Verbatim citations

The state rule for late estimated payments:

any taxpayer who fails to pay estimated tax when due "shall be subject to the interest and penalty provisions of Sections 7-1-67 and 7-1-69 NMSA 1978 on the underpayment."

The decision on federal and state law:

The provision in Section 3001(d) of the Revenue Reconciliation Act waiving federal penalties under IRC Section 6655 has no effect on Centex's liability for penalty and interest under New Mexico law.

The refund-offset authority:

In the discretion of the secretary, any amount of tax due to be refunded may be offset against any amount of tax for the payment of which the person due to receive the refund is liable.

The effect of an assessment:

An assessment does not create a tax liability—it merely serves as a demand for payment of the liability.

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Centex Corporation
• Decision PDF: D&O 98-30

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 CENTEX AMERICAN GYPSUM
D/B/A CENTEX CORPORATION 98-30
ID. NO. 01-192519-001
PROTEST OF REFUND OFFSET

DECISION AND ORDER

This matter came on for formal hearing on May 18, 1998, before Margaret B. Alcock,

Hearing Officer. Centex Corporation ("Centex") was represented by Janet Erickson, CPA, the

taxpayer's Senior Tax Accountant. The Taxation and Revenue Department ("Department"), was

represented by Monica M. Ontiveros, Special Assistant Attorney General. Prior to the hearing, the

parties entered into a Stipulation of Facts providing certain background information. Based on the

stipulation and the additional evidence and legal arguments presented at the hearing, IT IS

DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. Centex Corporation is a corporation doing business in New Mexico.

2. In December 1995, Centex filed a New Mexico consolidated corporate income tax

return for tax year April 1, 1994 through March 31, 1995 showing a refund due in the amount of

$128,946.00. The Department approved the refund.

3. Before issuing the refund payment to Centex, the Department determined that

Centex had outstanding liabilities for penalty and interest on the late payment of estimated

corporate income tax payments for prior tax years.

4. The Department reduced Centex's $128,946.00 refund for the April 1, 1994

through March 31, 1995 tax year by the amount of penalty and interest the Department

determined to be due for prior years. On May 15, 1996, the Department mailed Centex the

balance of the refund. The Department also provided Centex with a document entitled

"Disposition of Credit Worksheet" showing the offset that had been made, together with a copy

of "Taxpayer Remedies" explaining how Centex could protest the Department's action.

5. On May 28, 1996, Centex mailed a letter to the Department "to protest the

assessment of penalties and interest" on the late payment of estimated taxes and the Department's

offset of Centex's refund against that assessment.

6. Prior to the hearing on this matter, the parties stipulated that the amount still in

controversy is $8,882.74, representing penalty and interest on the late payment of estimated

income tax payments due in September 1993 and December 1993.

7. During fiscal year April 1, 1993 through March 31, 1994, Centex was required to

make any estimated income tax payments due to New Mexico under Section 7-2A-9.1 NMSA

1978 (1993 Repl. Pamp.) on June 15, 1993, September 15, 1993, December 15, 1993 and March

15, 1994.

8. Estimated tax payments were due if Centex "reasonably" expected its tax liability

for the year to be $5,000 or more.

9. Centex did not make an estimated payment on June 15, 1993 because Centex

anticipated being able to deduct a large net operating loss and did not reasonably expect to have

any New Mexico income tax liability for fiscal year April 1, 1993 through March 31, 1994.

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10. On August 10, 1993, the Omnibus Reconciliation Act of 1993 ("Revenue

Reconciliation Act"), Pub. L. No 103-66, Section 13224, 107 Stat. 312, 485-486 (1993) was

enacted by Congress and signed into law.

11. Section 13224 of the Revenue Reconciliation Act required assistance received

from the Federal Savings and Loan Insurance Corporation with respect to certain losses to be

treated as compensation. As a result of this provision, which was made effective March 4, 1991,

Centex could no longer claim an income tax deduction for its net operating losses.

12. Section 13001(d) of the Revenue Reconciliation Act waived penalties under

Section 6655 of the Internal Revenue Code for any period prior to March 16, 1994 when those

penalties were attributable to underpayments created or increased by any provision of the Act.

13. After the Revenue Reconciliation Act was enacted on August 10, 1993, Centex

knew it would be unable to carry forward its net operating losses and would have a New Mexico

income tax liability for fiscal year April 1, 1993 through March 31, 1994 in excess of $5,000.

14. Centex did not make an estimated payment of New Mexico corporate income tax

in September 1993 or in December 1993.

15. On March 15, 1994, Centex made its first estimated payment for fiscal year April

1, 1993 through March 31, 1994 in the amount of $131,000.00. This payment included the

estimated payment of $32,598.75 due September 15, 1993 and the estimated payment of

$32,598.75 due December 15, 1993.

16. The amount at issue in this protest represents the following amounts of penalty

and interest on the late payment of estimated tax due in September and December 1993:

September 1993 Payment: $3,259.88 penalty + $2,444.88 interest = $5,704.76
December 1993 Payment: $1,955.93 penalty + $1,222.44 interest = $3,178.37

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$8,882.74

DISCUSSION

The issue in dispute is whether Centex is liable for penalty and interest on the late

payment of estimated income tax payments due September 15, 1993 and December 15, 1993.

Centex argues that Section 3001(d) of the Revenue Reconciliation Act, in conjunction with

Department Regulations TA 69:3 (now 3 NMAC 1.11.10) and TA 69:4 (now 3 NMAC 1.11.11)

exempted Centex from imposition of penalty and interest on any underpayment of estimated tax

due prior to March 16, 1994. Centex also questions whether it was proper for the Department to

offset the refund from Centex's 1995 corporate income tax return against tax liabilities that had

not been previously assessed.

I. Waiver of Penalties Under Section 3001(d).

The parties agree that Centex was not required to make an estimated payment on June 15,

1993 because, at that time, Centex reasonably believed its income tax liability to New Mexico for

fiscal year April 1, 1993 through March 31, 1994 would not exceed $5,000. After the enactment

of the Revenue Reconciliation Act on August 10, 1993, Centex knew it would be unable to carry

forward its net operating losses and would have a New Mexico income tax liability in excess of

$5,000. Centex nonetheless failed to make estimated payments due to New Mexico on

September 15, 1993 and December 15, 1993.

Centex argues that the waiver of penalties provision in Section 3001(d) of the Revenue

Reconciliation Act prohibits the Department from assessing penalty and interest on Centex's late

payments. Section 3001(d) states:

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(d) WAIVER OF ESTIMATED TAX PENALTIES. No addition to tax
shall be made under section 6654 or 6655 of the Internal Revenue Code of
1986 for any period before April 16, 1994 (March 16, 1994, in the case of
a corporation), with respect to any underpayment to the extent such
underpayment was created or increased by any provision of this chapter.

Section 6654 of the Internal Revenue Code ("IRC") deals with additions to tax for failure by an

individual to pay estimated federal income tax. Section 6655 deals with additions to tax for

failure by a corporation to pay estimated federal income tax. Neither of these sections has any

bearing on penalty and interest imposed for failure to make timely estimated tax payments under

state law.

The administration and enforcement of state taxes is not governed by federal law. In El

Centro Villa Nursing Center v. Taxation and Revenue Department, 108 N.M. 795, 797, 779 P.2d

982, 984 (Ct. App. 1989) , the New Mexico Court of Appeals refused to apply the standard of

negligence used to impose penalty under the IRC, finding that the provisions of the federal statute

were inconsistent with the provisions of Section 7-1-69(A) NMSA 1978. See also, State v. Long,

121 NM 333, 911 P.2d 227 (Ct. App.), cert. denied, 121 N.M. 119, 908 P.2d 1387 (1995) (in tax

cases, New Mexico courts follow federal law only to the extent they find that law persuasive).

New Mexico has also rejected the argument that the state's use of information contained

in a taxpayer's federal income tax return for purposes of calculating state income tax binds the

state to the provisions of federal income tax law. In In re Rates & Charges of Mountain States

Telephone & Telegraph Co., 104 N.M. 36, 43, 715 P.2d 1332, 1339 (1986), the New Mexico

Supreme Court found that New Mexico's Corporate Income Tax Act does not incorporate or

adopt the Internal Revenue Code and Treasury Regulations, noting:

New Mexico taxpayers are not instructed to prepare their state returns by
following the provisions of the Internal Revenue Code, inserting the words

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"New Mexico" or "state" at appropriate points, but simply are required to
use the single figure calculated to be their federal taxable income as the
starting point for calculating state income tax.

The court of appeals reached a similar conclusion in Sutin, Thayer & Browne v. Revenue

Division of the Taxation and Revenue Department, 104 N.M. 633, 635, 725 P.2d 833, 835, (Ct.

App. 1984), cert. denied, 102 N.M. 293, 694 P.2d 1358 (1985), upholding the Department's

denial of a request for refund based on a federal income tax credit not recognized under state law.

With regard to Centex's estimated corporate income tax payments for fiscal year April 1,

1993 through March 31, 1994, New Mexico law specifically provides that any taxpayer who fails

to pay estimated tax when due "shall be subject to the interest and penalty provisions of Sections

7-1-67 and 7-1-69 NMSA 1978 on the underpayment." Section 7-2A-9.1(C) NMSA 1978 (1993

Repl. Pamp.). The provision in Section 3001(d) of the Revenue Reconciliation Act waiving

federal penalties under IRC Section 6655 has no effect on Centex's liability for penalty and

interest under New Mexico law.

II Regulation TA 69:4

Centex relies on the indications of non-negligence set out in Department Regulation TA

69:4 (now 3 NMAC 1.11.11) to argue that Centex should not be liable for the penalty imposed

under Section 7-1-69 NMSA 1978 (1993 Repl. Pamp.).1 Specifically, Centex relies on the sixth

item listed under TA 69:4:

The following situations may indicate that a taxpayer has not been
negligent or in disregard of rules and regulations and the Secretary will
consider these circumstances in deciding whether to assess civil penalty as

1
Regulation TA 69:4 addresses the imposition of penalty and has no application to interest due on late payments
under Section 7-1-67, NMSA 1978 (1993 Repl. Pamp.).

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provided by Section 7-1-69, or whether to abate civil penalty as provided
in Section 7-1-28:
....

6 with regard to income tax returns only, the Internal Revenue Service
abates federal penalty originally assessed for the same or similar reason as
the New Mexico penalty....

Centex acknowledges that no federal penalty was assessed or abated in connection with Centex's

failure to pay estimated federal income taxes due September 15 and December 15, 1993. Centex

nonetheless argues that Section 3001(d) of the Revenue Reconciliation Act should be treated as a

preemptive abatement of penalties otherwise due to the federal government.

There is clearly a difference between a situation where the IRS imposes a penalty for late

payment that is subsequently abated upon further investigation of the facts and a situation where

Congress prohibits the IRS from imposing penalty without regard to the reason for the late

payment. In the first situation, the abatement is based on the IRS' determination that the taxpayer

was not liable for penalty in the first place. In the second situation, Congress has exercised its

legislative authority to suspend the enforcement of a penalty for which taxpayers otherwise

would be liable. Only the first scenario supports a finding of non-negligence under item 6 in TA

69:4. The second scenario simply illustrates an exercise of federal policy that the state of New

Mexico has not chosen to follow.

It should also be noted that this case does not involve penalties imposed in connection

with an income tax return as required by TA 69:4. Under Section 7-1-69(A), a penalty may be

imposed for a failure "to pay when due any amount of tax required to be paid...or to file by the

date required a return...." (emphasis added). Here, penalties were imposed for the failure to make

timely estimated income tax payments, not for the failure to file a corporate income tax return.

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Regulation TA 69:4 applies when the IRS abates a penalty previously assessed in connection

with an income tax return. It does not apply when Congress legislatively prohibits the imposition

of penalty in connection with estimated income tax payments.

III Regulation TA 69:3

Centex argues that, regardless of the applicability of TA 69:4, Centex's actions do not

come within the following definition of "negligence" set out in Regulation TA 69:3 (now 3

NMAC 1.11.10):

1) failure to exercise that degree of ordinary business care and
prudence which reasonable taxpayers would exercise under
like circumstances;

2) inaction by taxpayers where action is required;

3) inadvertence, indifference, thoughtlessness, carelessness,
erroneous belief or inattention.

At the hearing, Centex was represented by Janet Erickson, its senior tax accountant. Ms.

Erickson testified that she was not employed by Centex during 1993 and does not know what

discussions took place concerning Centex's liability for New Mexico estimated income tax

payments. Ms. Erickson did not present any evidence to indicate that Centex's failure to make

estimated payments in September and December 1993 was attributable to anything other than its

erroneous belief that Section 3001(d) of the Revenue Reconciliation Act applied to estimated

payments required under state as well as federal law. This erroneous belief comes within the

definition of negligence set out in TA 69:3.

IV. Offset of 1995 Refund Against Unassessed Liabilities.

At the time the Department applied Centex's refund to its liability for penalty and interest

on the late payment of estimated income tax payments, there was no outstanding assessment

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against Centex. Although the computer-generated information (referred to as a "Return Inquiry")

provided to the taxpayer indicated the existence of an assessment, the assessment number and

assessment date were shown as zeros. Gay Romero, an auditor in the Department's protest

office, explained that by the time the information was entered into the Department's computer

records, the accrued penalty and interest had already been paid by the refund offset and so no

assessment number was assigned to the liability. It was not until October 1996 that the

Department assigned Assessment No. 2075722 to Centex's refund offset. Centex questions the

Department's authority to apply Centex's tax refund for one period to an unassessed liability for a

prior period.

Centex's claim for refund of taxes overpaid during the tax year April 1, 1994 through

April 1, 1995 was made under Subsection G of Section 7-1-26 NMSA 1978 (1995 Repl. Pamp.),

which provides that the filing of a fully completed original corporate income tax return that

shows a balance due the taxpayer constitutes the filing of a claim for refund. With regard to the

payment of refunds, Subsection C of Section 7-1-29 NMSA 1978 (1995 Repl. Pamp.) provides:

In the discretion of the secretary, any amount of tax due to be refunded
may be offset against any amount of tax for the payment of which the
person due to receive the refund is liable.

Section 7-1-13(A) NMSA 1978 (1995 Repl. Pamp.) states:

Taxpayers are liable for tax at the time of and after the transaction or
incident giving rise to the tax until payment is made. Taxes are due on and
after the date on which their payment is required until payment is made.

In this case, Centex became liable for payment of estimated corporate income taxes on

September 15 and December 15, 1993. On the day following each due date, Centex also became

liable for interest and penalty for late payment. Section 7-2A-9.1(C) NMSA (1993 Repl. Pamp.)

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(any taxpayer that fails to pay estimated tax when due "shall be subject to the interest and penalty

provisions of Sections 7-1-67 and 7-1-69 NMSA 1978 on the underpayment.")

In March 1994, Centex made the tax payments originally due in September and

December 1993. Centex remained liable for accrued penalty and interest on the late payment. It

was not necessary for the Department to issue an assessment for the liability to exist. An

assessment does not create a tax liability—it merely serves as a demand for payment of the

liability. See, Section 7-1-17(A) NMSA 1978 (1995 Repl. Pamp.). Based on the authority

granted to the secretary in Subsection C of Section 7-1-29 NMSA 1978 (1995 Repl. Pamp.),

there was nothing improper in the Department's offset of Centex's refund against an unassessed

tax liability.

CONCLUSIONS OF LAW

1. Centex filed a timely, written protest to the action taken by the Department to offset

Centex's refund against penalty and interest for which Centex was liable, and jurisdiction lies over

the parties and the subject matter of this protest.

2. The provisions of Section 3001(d) of the Revenue Reconciliation Act waiving

penalties under IRC Section 6655 for failure to make estimated income tax payments due under

federal law does not excuse Centex from payment of penalty and interest imposed for late payment

of estimated income tax payments due under New Mexico law.

3. Centex was negligent in failing to make estimated tax payments due to New Mexico

in September and December 1993 and penalty was properly imposed under Section 7-1-69 NMSA

1978 (1993 Repl. Pamp.).

For the foregoing reasons, the Taxpayer's protest IS DENIED.

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DONE, this 26th day of May 1998.

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