Holt v. DEPARTMENT OF TAXATION & REVENUE

• Decision Date: 13 November 2002
• Docket Number: No. 27,445.,27,445.
• Parties: James A. HOLT and Terri L. Holt, Plaintiffs-Petitioners, v. NEW MEXICO DEPARTMENT OF TAXATION & REVENUE, Defendant-Respondent.
• Court: New Mexico Supreme Court

59 P.3d 491

133 N.M. 11

2002 NMSC 34

James A. HOLT and Terri L. Holt, Plaintiffs-Petitioners, v. NEW MEXICO DEPARTMENT OF TAXATION & REVENUE, Defendant-Respondent.

No. 27,445.

Supreme Court of New Mexico.

November 13, 2002.

Monica Ontiveros, Santa Fe, NM, for Defendant-Respondent.

James A. Holt, Terri L. Holt, Flora Vista, NM, Pro Se.

OPINION

SERNA, Chief Justice.

{1} This Court granted the petition of James A. Holt and Terri L. Holt (taxpayers) for writ of certiorari to the Court of Appeals following its affirmance of the New Mexico Department of Taxation and Revenue (Department) hearing officer's denial of their protest and request for a refund. Holt v. N.M. Dep't of Taxation & Revenue, NMCA 22,622, slip op. at 1 (Mar. 5, 2002), cert. granted, 132 N.M. 193, 46 P.3d 100 (2002). The taxpayers argue that they are not liable for state income tax on wages earned by their employment within New Mexico. We hold that employment wages are income for purposes of taxation. We also hold that the Department has the authority to examine information or evidence in order to determine or establish an individual's tax liability. Thus, we affirm.

I. Facts and Background

{2} The taxpayers reported zero as the amount for their federal adjusted gross income on their federal tax return. They reported zero as their New Mexico taxable income. The taxpayers reported that $2009 had been withheld by the State, and they requested a refund. The taxpayers' W-2 forms for the tax year at issue showed that James Holt earned $47,561.03 in wages from his employment with the Public Service Company of New Mexico and that Terri Holt earned $15,281.28 in wages from her employment with BGK Asset Management Corporation. The Department established that their taxes were $2449 based on these W-2 forms and thus determined that they owed $440 in state income tax. The hearing officer denied the taxpayers' protest and request for a refund.

{3} The hearing officer issued a complete decision that thoroughly addressed the taxpayers' arguments. The Court of Appeals decided this appeal on the summary calendar, see Rule 12-210(D) NMRA 2002, and affirmed by memorandum opinion, see Rule 12-405(B) NMRA 2002, perhaps on the basis that the issues raised were "manifestly without merit." Rule 12-405(B)(5). While we agree that these issues are manifestly without merit, we granted certiorari and now resolve the issues by opinion because the appeal appears to present an issue of first impression and arguments that are likely to arise again, causing unnecessary expenditure of public resources. See NMSA 1978, § 34-5-14(B)(4) (1972) (providing that the Supreme Court has jurisdiction to review a decision of the Court of Appeals by writ of certiorari for issues of substantial public interest).

II. Discussion

A. Standard of Review

{4} An appellate court may set aside a decision by the Taxation and Revenue Department hearing officer only if it is arbitrary, capricious, or an abuse of discretion, if it is not supported by substantial evidence in the record, or if it is otherwise not in accordance with the law. NMSA 1978, § 7-1-25(C) (1989); Siemens Energy & Automation, Inc. v. N.M. Taxation & Revenue Dep't, 119 N.M. 316, 317-18, 889 P.2d 1238, 1239-40 (Ct.App.1994). It is the taxpayers' burden to demonstrate the existence of one of these bases for vacating the hearing officer's decision. "Any assessment of taxes or demand for payment made by the department is presumed to be correct." NMSA 1978, § 7-1-17(C) (1992). "The burden is on the taxpayer protesting an assessment by the [Department] to overcome the presumption that the [Department's] assessment is correct." Hawthorne v. Dir. of Revenue Div. Taxation & Revenue Dep't, 94 N.M. 480, 481, 612 P.2d 710, 711 (Ct.App.1980). The taxpayers fail to carry their burden; to the contrary, the decision of the hearing officer is particularly thorough and comprehensively addresses the arguments made by the taxpayers and the authority relied upon by them. On the other hand, the taxpayers do not address the overwhelming authority discussed in the hearing officer's decision that answers their claim.

B. Employment Wages are Taxable Income

{5} The taxpayers argue that the wages they earned from their employment in New Mexico are not subject to either state or federal income tax, based on their reading of the federal tax statutes, cases, and regulations. They claim, based on their view of federal law, that they correctly completed a federal return, reporting zero as the amount of their adjusted gross income. The taxpayers assert that they must use this amount, zero, as their adjusted gross income for purposes of our state income tax, in accordance with state statutes, NMSA 1978, § 7-2-21.1 (1981) ("A taxpayer shall use the same accounting methods for reporting income for New Mexico income tax purposes as are used in reporting income for federal income tax purposes."), and the rules and instructions in their state tax booklet. As discussed below, we reject these arguments.¹

{6} As a general matter, the State of New Mexico has the authority to assess and collect taxes without federal supervision. See Dep't of Revenue v. Arthur, 153 Ariz. 1, 734 P.2d 98, 100 (Ariz.Ct.App.1986) ("The State of Arizona's power to tax is independent of the Constitution of the United States."). As noted by both the hearing officer and the Court of Appeals, the United States Supreme Court expressed:

We have had frequent occasion to consider questions of state taxation in the light of the Federal Constitution, and the scope and limits of National interference are well settled. There is no general supervision on the part of the Nation over state taxation, and in respect to the latter the state has, speaking generally, the freedom of a sovereign both as to objects and methods.

Mich. Cent. R.R. Co. v. Powers, 201 U.S. 245, 292-93, 26 S.Ct. 459, 50 L.Ed. 744 (1906); accord Weed v. Comm'r of Revenue, 489 N.W.2d 525, 529 (Minn.Ct.App.1992) (relying on Powers, and holding, "The state need not rely on a constitutional amendment for the power to tax. The states possess the powers of a sovereign.").

{7} Under NMSA 1978, § 7-2-3 (1981), "[a] tax is imposed at the rates specified in the Income Tax Act upon the net income of every resident individual and upon the net income of every nonresident employed or engaged in the transaction of business in, into or from this state, or deriving any income from any property or employment within this state." As discussed below, we conclude that the taxpayers' employment wages clearly falls within the term "net income."

{8} The Legislature has set out the method for determining an individual's taxable income. NMSA 1978, § 7-2-2(N) (1993) states that "`net income'" is "base income" adjusted to exclude specific amounts which are not taxed, such as the standard deduction allowed by the federal government. See § 7-2-2(N)(1). In relation to the taxpayers, "`base income'" is defined by Section 7-2-2(B) as their "adjusted gross income," adding or subtracting particular types of interest and deductions. Section 7-2-2(A) states that "`adjusted gross income' means adjusted gross income as defined in Section 62 of the Internal Revenue Code."

{9} Thus, Section 7-2-2(A) incorporates by reference the definition from the Internal Revenue Code.² "[A] state has the power to gauge its income tax by reference to the income on which the taxpayer is required to pay a tax to the United States." Champion Int'l Corp. v. Bureau of Revenue, 88 N.M. 411, 416, 540 P.2d 1300, 1305 (Ct. App.1975). Section 62 defines adjusted gross income as gross income minus specific deductions. Pursuant to I.R.C. § 61(a), "gross income means all income from whatever source derived, including (but not limited to)... [c]ompensation for services, including fees, commissions, fringe benefits, and similar items...."

{10} The Sixteenth Amendment to the United States Constitution states that "[t]he 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 starting point in the determination of the scope of `gross income' is the cardinal principle that Congress in creating the income tax intended `to use the full measure of its taxing power.'" Comm'r v. Kowalski, 434 U.S. 77, 82, 98 S.Ct. 315, 54 L.Ed.2d 252 (1977) (quoting Helvering v. Clifford, 309 U.S. 331, 334, 60 S.Ct. 554, 84 L.Ed. 788 (1940) and holding that payments for a meal-allowance are income within the definition of gross income). "`Exercising this power, Congress has defined income as including compensation for services. [Section] 61(a)(1).'" Hyslep v. United States, 765 F.2d 1083, 1084 (11th Cir.1985) (quoting Lonsdale v. Comm'r, 661 F.2d 71, 72 (5th Cir. Nov.1981)). "In sum, the sixteenth amendment authorizes the imposition of a tax upon income without apportionment among the states, and under the statute, the term `income' includes the compensation a taxpayer receives in return for services rendered." Funk v. Comm'r, 687 F.2d 264, 265 (8th Cir.1982). We conclude that the wages the taxpayers earned from their New Mexico employers is compensation for services under Section 61 and is thus part of the taxpayers' gross income for purposes of New Mexico income tax. See, e.g., Combs v. Dep't of Revenue, 331 Or. 245, 14 P.3d 584, 586 (2000) (en banc) ("Section 61(a)(1) of the Internal Revenue Code defines `gross income' to include `[c]ompensation for services.'").

{11} The taxpayers argued to the hearing officer that the fact that the definition of "gross income" in the 1939 version of the statute included the terms "salaries" and "wages" but these terms were not included in the 1954 version supports their claim that Congress did not intend to include wages within the meaning of "gross income." See Internal Revenue Code of 1939, ch. 1, § 21, 53 Stat. 1, 9 (repealed 1954). The...