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Thomas v. New Mexico Taxation and Revenue Department

Court of Appeals of New Mexico

May 1, 2017

THOMAS and LESLIE HAMMACK, Protestants-Appellants,
v.
NEW MEXICO TAXATION AND REVENUE DEPARTMENT, Respondent-Appellee.

         APPEAL FROM TAXATION AND REVENUE DEPARTMENT Monica Ontiveros, Hearing Officer

          Betzer, Roybal & Eisenberg, P.C. Gary D. Eisenberg Albuquerque, NM for Appellants

          Hector H. Balderas, Attorney General Elena Romero Morgan, Special Assistant Attorney General Santa Fe, NM for Appellee

          OPINION

          M. MONICA ZAMORA, Judge.

         {1} Thomas and Leslie Hammack (collectively, Taxpayers) appeal from the decision and order of the hearing officer affirming the New Mexico Taxation and Revenue Department's (the Department) assessment of unpaid personal income tax and interest for tax years 2009-2010, and unpaid personal income tax, penalties, and interest for tax years 2011-2012. The sole issue on appeal is whether the hearing officer correctly determined that Mr. Hammack's service in the United States Public Health Service (USPHS) was not active duty service in the armed forces of the United States (armed forces), within the meaning of NMSA 1978, Section 7-2-5.11 (2007). See § 7-2-5.11 ("A salary paid by the United States to a taxpayer for active duty service in the armed forces of the United States is exempt from state income taxation."). Having considered Taxpayers' arguments raised on appeal and concluding that the hearing officer's decision and order is supported by substantial evidence, we affirm.

         BACKGROUND

         {2} For the tax years 2009-2012, Mr. Hammack was employed as an active duty commissioned officer for USPHS. During that period of time Mr. Hammack was a New Mexico resident and his regular place of employment for USPHS was in Arizona. For tax years 2009-2012, Taxpayers filed New Mexico personal income tax returns. Taxpayers were married and filed jointly for those tax years. On their joint returns, Taxpayers claimed an exemption for Mr. Hammack's wages and omitted his wages from their joint returns.

         {3} On January 3, 2014, the Department issued two notices of assessment for unpaid personal income tax and interest for tax years 2010 and 2011. On January 10, 2014, the Department issued two notices of assessment for unpaid personal income tax, penalties, and interest for tax years 2011 and 2012. On May 7, 2014, the Department issued one notice of assessment for unpaid personal income tax, penalties, and interest for tax year 2009.

         {4} Taxpayers timely filed a written protest to the assessments, asserting that Mr. Hammack's wages were exempt from New Mexico income tax under the armed forces salaries exemption. Taxpayers claimed that when Mr. Hammack contacted the Department in 2009 a Department employee confirmed that his wages were exempt. Taxpayers' protest was heard by a Department hearing officer on December 10, 2014.

         {5} After the hearing, the hearing officer entered a decision and order concluding that Mr. Hammack was not in the armed forces for tax years 2009-2012, and therefore did not qualify for the armed forces salaries exemption. The hearing officer reversed the Department's penalty assessment for tax year 2009 since the Department mistakenly issued a refund for that year allowing the exemption. The Department's remaining assessments of unpaid personal income tax and interest for tax years 2009-2010, and unpaid personal income tax, penalties, and interest for tax years 2011-2012, were affirmed. This appeal followed.

         DISCUSSION

         {6} On appeal, this Court shall set aside a decision and order of the hearing officer only if it is "(1) arbitrary, capricious, or an abuse of discretion; (2) not supported by substantial evidence in the record; or (3) otherwise not in accordance with the law." NMSA 1978, § 7-1-25(C) (2015); Holt v. N.M. Dep't of Taxation & Revenue, 2002-NMSC-034, ¶ 4, 133 N.M. 11, 59 P.3d 491.

         {7} To determine whether Mr. Hammack's wages from the USPHS were exempt from state income taxes, pursuant to Section 7-2-5.11, we must interpret the relevant statute, which is a question of law that we review de novo. See Schuster v. N.M. Dep't of Taxation & Revenue, 2012-NMSC-025, ¶ 9, 283 P.3d 288. "Where an exemption or deduction from tax is claimed, the statute must be construed strictly in favor of the taxing authority, the right to the exemption or deduction must be clearly and unambiguously expressed in the statute, and the right must be clearly established by the taxpayer." Sec. Escrow Corp. v. N.M. Taxation & Revenue Dep't, 1988-NMCA-068, ¶ 8, 107 N.M. 540, 760 P.2d 1306; see also Reed v. Jones, 1970-NMCA-050, ¶ 9, 81 N.M. 481, 468 P.2d 882 (noting that taxpayer did not clearly establish a right to the deduction because, if the statute clearly and unambiguously authorized the deduction, the court would not have had to construe the phrase, "initial use"). "Thus, taxation is the rule and the claimant[s] for an exemption must show that [their] demand is within the letter as well as the spirit of the law." Sec. Escrow Corp., 1988-NMCA-069, ¶ 10.

         {8} Section 7-2-5.11 exempts salaries "paid by the United States to a taxpayer for active duty service in the armed forces of the United States . . . from state income taxation." Taxpayers argue that they are eligible for the exemption because Mr. Hammack's service, as a commissioned officer of the USPHS, is considered active ...


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