Neff v. State Through Taxation and Revenue Dept.

• Decision Date: 08 September 1993
• Docket Number: No. 13531,13531
• Parties: , 17 Employee Benefits Cas. 1709 George H. NEFF, Phyllis D. Neff, Robert E. Hepplewhite, and Elizabeth A. Hepplewhite, On Behalf of Themselves and All Others Similarly Situated, Plaintiffs-Appellants, v. STATE of New Mexico, Through Its Agency, the TAXATION AND REVENUE DEPARTMENT, Defendant-Appellee.
• Court: Court of Appeals of New Mexico

Page 281

861 P.2d 281

116 N.M. 240, 17 Employee Benefits Cas. 1709

George H. NEFF, Phyllis D. Neff, Robert E. Hepplewhite, and Elizabeth A. Hepplewhite, On Behalf of Themselves and All Others Similarly Situated, Plaintiffs-Appellants, v. STATE of New Mexico, Through Its Agency, the TAXATION AND REVENUE DEPARTMENT, Defendant-Appellee.

No. 13531.

Court of Appeals of New Mexico.

Sept. 8, 1993.

[116 N.M. 241] Joseph P. Kennedy, Albuquerque, for plaintiffs-appellants George H. Neff and Phyllis D. Neff.

William F. Riordan, Albuquerque, for plaintiffs-appellants Robert E. Hepplewhite and Elizabeth A. Hepplewhite.

Tom Udall, Atty. Gen., Frank D. Katz, Sp. Asst. Atty. Gen., Taxation and Revenue Dept., Santa Fe, for defendant-appellee.

OPINION

BIVINS, Judge.

From an order dismissing their complaint as not timely filed under NMSA 1978, Section 7-1-26 (Repl.Pamp.1990), Plaintiffs appeal, raising three issues: (1) denial of due process in failing to give the Hepplewhites notice of hearing and an opportunity to be heard (applicable only to the Hepplewhites); (2) error in dismissing Plaintiffs' action under Section 7-1-26; and (3) error in dismissing Plaintiffs' action because Plaintiffs stated a claim for relief under the New Mexico and Federal Constitutions. We hold that the district court erred in proceeding with a motions hearing without giving notice to the Hepplewhites and, therefore, the case must be reversed as to those Plaintiffs. With respect to Plaintiffs Neffs, we hold that the district court correctly determined that it lacked jurisdiction because of the failure to timely appeal as required by Section 7-1-26. In light of these holdings, we do not reach the third issue. Accordingly, we reverse as to the Hepplewhites and remand for a hearing as to those Plaintiffs on proper notice, and we affirm dismissal of the Neffs' complaint.

This is a tax case which requires interpretation of certain provisions of the Tax Administration Act, NMSA 1978, Sections 7-1-1 to -82 (Repl.Pamp.1990). Unless otherwise indicated, Plaintiffs Neffs and Hepplewhites will be referred to as "the Taxpayers." Defendant, the Taxation and Revenue Department, will be referred to as "the Department."

After paying their respective state income taxes on their private retirement benefits for the years of 1986, 1987, 1988, and 1989, the Taxpayers filed claims for refund. See Sec. 7-1-26 (setting forth procedure for claim for refund). The Department denied the Hepplewhites' claim for 1986 on August 22, 1990, their claims for 1987 and 1989 on August 23, 1990, and their claim for 1988 on August 13, 1990. The Department denied the Neffs' claim for 1986 on September 5, 1990, and their claim for 1988 on September 27, 1990. We understand that the Department initially granted the Neffs' 1987 claim, but now asserts that action was erroneous and that the 1987 claim likewise should have been denied.

The Taxpayers based their claim for refund on the ground that they were treated differently than recipients of state retirement income, who were exempted from payment of income tax during the years 1986 through 1989. See NMSA 1978, Sec. 10-11-135 (Repl.Pamp.1987). The exemption challenged by the Taxpayers was repealed in 1990. 1990 N.M.Laws, ch. 49, Sec. 14.

After denial of their claims for refund, instead of proceeding in the manner and within the time prescribed by Section 7-1-26, the Taxpayers initiated this action in the district court of Santa Fe County for declaratory and injunctive relief, accounting, damages, and refund. The Department moved to dismiss on jurisdictional grounds, claiming that the district court lacked subject matter jurisdiction because the Taxpayers failed to proceed in a timely manner as required under Section 7-1-26. The Department also made a motion for summary judgment addressing the constitutional issues raised in the Taxpayers' complaint. The Taxpayers also filed a joint motion for summary judgment on the constitutional questions. Following a hearing, the district court dismissed solely on the jurisdictional question, holding that "it lacks jurisdiction over the subject matter of Plaintiffs' Complaint because [it] was not timely filed within the period required by Section 7-1-26 NMSA 1978." This appeal followed.

1. Denial of Due Process (Hepplewhites)

Initially, the Taxpayers were represented by one attorney. Later, separate counsel took over representation of the Hepplewhites and entered his appearance. The district court failed to give notice to the Hepplewhites' new attorney of the hearing on the motion to dismiss and motions for summary judgment. As a result, the Hepplewhites were not represented at that hearing. The hearing resulted in a dismissal of their complaint.

While the Department does not deny the above, it contends that it was the responsibility of the Hepplewhites' substituted counsel to review the file and appear at a previously scheduled pre-trial conference. Had he done so, according to the Department, he would have learned that the August 23, 1991, date for the pre-trial conference had been canceled and would have learned of the continuance. We disagree. The Hepplewhites' substituted counsel entered his appearance on April 30, 1991. He was entitled to notice of all hearings from that date forward. Notice of the hearing on the motion to dismiss and motions for summary judgment were not given to the Hepplewhites' counsel. This constituted a denial of due process. "It is fundamental to say that due process requires notice and hearing so that those who are to be bound or affected by a judgment may have their day in court." City of Albuquerque v. Reynolds, 71 N.M. 428, 434, 379 P.2d 73, 77 (1962). We, therefore, set aside the order of dismissal as to the Hepplewhites and remand so that they may be given proper notice and an opportunity to be heard.

2. Dismissal Under Section 7-1-26 (Neffs)

In dismissing the Taxpayers' complaint with prejudice, the district court relied on Section 7-1-26. In pertinent part, this section provides, with respect to claims for refund, that if a claim is not granted in full, the person claiming a refund may within thirty days after the mailing of the denial, either send to the Secretary of Taxation and Revenue a written protest, or file a civil complaint in the district court of Santa Fe County setting forth specific allegations. It is undisputed that the Taxpayers failed to follow this section either as to the time constraints or as to the manner in which they asserted their claim. Instead, as noted above, the Taxpayers filed an independent action for declaratory, injunctive, and other relief. The question we must answer is whether it was mandatory that the Taxpayers follow the administrative procedures of Section 7-1-26 before questioning in court the constitutionality of the tax at issue. We hold that it was and affirm on that ground as to Neffs.

It is generally held that one must exhaust administrative remedies before invoking the jurisdiction of the courts. See State Racing Comm'n v. McManus, 82 N.M. 108, 111-12 476 P.2d 767, 770-71 (1970); see also Grand Lodge of Masons v. Taxation & Revenue Dep't, 106 N.M. 179, 181, 740 P.2d 1163, 1165 (Ct.App.) (district court has no jurisdiction over declaratory judgment action until administrative remedies exhausted), cert. denied, 106 N.M. 174, 740 P.2d 1158 (1987); Tenneco Oil Co. v. New Mexico Water Quality Control Comm'n, 105 N.M. 708, 710, 736 P.2d 986, 988 (Ct.App.1986) (party should apply for stay from agency before applying for stay from a court). This principle has been expressly written into the Tax Administration Act. Section 7-1-22 provides:

No court of this state has jurisdiction to entertain any proceeding by a taxpayer in which he calls into question his liability for any tax or the application to him of any provision of the Tax Administration Act [this article], except as a consequence of the appeal by him to the court of appeals from the action and order of the director, all as specified in Section 7-1-24 NMSA 1978, or except as a consequence of a claim for refund as specified in Section 7-1-26 NMSA 1978.

While recognizing this rule, the Neffs strongly argue that exceptions apply which allow them to invoke the jurisdiction of the courts outside the framework of the Tax Administration Act. We examine the claimed exceptions to determine if any apply.

Relying on Felder v. Casey, 487 U.S. 131, 152, 108 S.Ct. 2302, 2314, 101 L.Ed.2d 123 (1988), the Neffs first argue that the Supremacy Clause of the Federal Constitution precludes state law from interfering with a federally protected right. Since the Taxpayers are seeking exemptions from taxes under a claimed federal right, they contend that the federal right cannot be defeated by the forms of local practice. See id. at 138.

The rule relied on by the Neffs has been held not to apply when state tax procedures are involved. In Fair Assessment in Real Estate Ass'n v. McNary, 454 U.S. 100, 105, 102 S.Ct. 177, 180, 70 L.Ed.2d 271 (1981), the Supreme Court decided that the Federal Civil Rights Act, 42 U.S.C. Section 1983 (1988), cannot be used to attack the constitutionality of state taxes if the state provides a fair remedy for challenging the constitutionality. See also Nutbrown v. Munn, 311 Or. 328, 811 P.2d 131, 137-40 (1991), cert. denied, --- U.S. ----, 112 S.Ct. 867, 116 L.Ed.2d 773 (1992); Hogan v. Musolf, 163 Wis.2d 1, 471 N.W.2d 216 (1991), cert. denied, --- U.S. ----, 112 S.Ct. 867, 116 L.Ed.2d 773 (1992). But see Bohn v. Waddell, 164 Ariz. 74, 83, 790 P.2d 772, 781 (Tax.Ct.1990) (holding that taxpayers, under Felder, need not exhaust administrative remedies before invoking jurisdiction of court), vacated on other grounds, 174 Ariz. 239, 848 P.2d 324 (1993). The Neffs urge us to follow Bohn as the "better-reasoned" decision. We decline. Bohn did not consider McNary, as did Hogan and Nutbrown. We find the latter decisions more persuasive. Thus, we hold that...