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Latest MeF Information:

Sept. 28, 2016
New Mexico’s MeF programs to leverage FTA’s Secure Exchange System for access to development resources for TY2016.

Orders are written statements to implement a decision after a Department administrative hearing. 

A taxpayer may file an appeal with the New Mexico Court of Appeals within 30 days after the date of the decision. Appeals are decided based on the evidence and arguments presented at the administrative hearing. 



11/30/2016

16-56

US Field Service Inc. 

On June 16, 2010, the Department assessed the Taxpayer for gross receipts tax and interest for the CRS reporting periods from December 31, 2004 through December 31, 2006.  On August 6, 2010, the Taxpayer filed a protest to the assessment.  During the period at issue, the Taxpayer was engaged in business doing construction, maintenance and equipment rental.  The Taxpayer was hired to do work in New Mexico by a wind power company, who was a subcontractor to the project manager.  The Taxpayer provided a crane and a crane operator to the wind power company and assisted in the construction of several windmills.  The Taxpayer invoiced the wind power company for the services it provided and included gross receipts tax on its invoice.  The wind power company executed a nontaxable transaction certificate (NTTC), a Type used for construction, to the Taxpayer.  The Taxpayer accepted payment from the project manager on behalf of the wind power company and, due to relying to the NTTC, did not collect gross receipts tax.  The Taxpayer filed its gross receipts tax return, and deducted the receipts related to this situation because of the NTTC.  Several years later, the Department issued a notice of audit to the Taxpayer and issued a letter informing the Taxpayer that it had 60 days to obtain any NTTCs to support its deductions.   The Taxpayer responded to the audit and provided documentation, including the NTTC, invoice and payment information.  The Taxpayer paid the assessed tax, but does not believe it was owed.  The Taxpayer only protested the assessed interest.  The Taxpayer argued that it should not have to pay interest because it relied on the NTTC in good faith.  The Department argued that the reliance on the NTTC was not reasonable because it was not the correct type to use for leasing, and that the Taxpayer conceded the tax was owed by paying it and therefore interest is due as well.  The Department also argued that the NTTC could not be used to deduct receipts from the wind power company because the project manager made the payment.  The hearing officer found that the Taxpayer reasonably relied on the NTTC and accepted it in good faith.  The interest was ordered to be abated.  The Taxpayer’s protest was granted.


11/30/2016

16-55

ATC Healthcare Services Inc. 

On August 16, 2012, the Department assessed the Taxpayer for gross receipts tax, penalty and interest for the CRS reporting periods from January 31, 2004 through August 31, 2010.  On November 13, 2012, after having been granted an extension to protest, the Taxpayer filed a protest of the assessment.  The Taxpayer is a Georgia corporation with its principal place of business in New York.  In 1998, the Taxpayer entered into a franchise agreement with a New Mexico company.  Under the agreement, the New Mexico company operated a franchise in New Mexico that offered and sold temporary medical healthcare personnel services, programs, products and activities in accordance with the Taxpayer’s developed style, system and technique of business operations.  The Taxpayer terminated the franchise agreement on May 12, 2009.  The Taxpayer was the legal employer of the New Mexico company’s temporary employees and processed payroll and issued tax forms, but the company was responsible for recruitment, training, testing and selection of employees, hiring and firing them, determining salary and benefits, and setting rates for their customers to pay the healthcare workers.  Beginning on October 8, 2010, the Department conducted an audit of the Taxpayer for the reporting periods from January 1, 2004 through August 31, 2010.  As a result of the audit, the Department issued the assessment to the Taxpayer.  There were five issues involved in the protest.  First, is money the Taxpayer received from the company’s clients received in a disclosed agency capacity and not subject to gross receipts tax? Second, is money the Taxpayer received from the company for the granting of a franchise and license to use a trademark before June 27, 2007 subject to gross receipts tax?  Third, is money received after June 27, 2007 for the same purpose not subject to gross receipts tax under the definition of “property” in Section 7-9-3(J)?  Fourth, is money the Taxpayer received from Indian Health Services deductible under Section 7-9-93 NMSA 1978?  Fifth, if the Taxpayer is liable for the assessed tax, is it entitled to an abatement of penalty for non-negligence under Section 7-1-69 NMSA 1978?  As to the first issue, the hearing officer found that the Taxpayer failed to establish that it collected receipts as a disclosed agent.  Regarding the second and third issues, the hearing  officer found that the franchise royalties prior to June 27, 2007 were not subject to tax, but subject to gross receipts tax after that time.  The Taxpayer’s receipts from providing temporary employees to Indian Health Service facilities were found to be deductible, as was already indicated in the audit narrative.  On the last issue, the hearing officer concluded that the Taxpayer was not subject to penalty as it established that it made a mistake of law, in good faith and on reasonable grounds.  The hearing officer ordered assessed tax related to the pre-June 27, 2007 franchise fees and royalties, as well as all assessed penalty to be abated.  The Taxpayer was ordered to pay all remaining assessed tax and interest.  The Taxpayer’s protest was granted in part and denied in part.


11/29/2016

16-54

Joseph D. & Rebecca A. Chwirka 

On August 10, 2016, the Department assessed the Taxpayer an underpayment penalty for Personal Income Tax for the tax year ending December 31, 2015.  On August 23, 2016, Ms. Chwirka filed a protest of the assessment.  The Taxpayer’s were married for 36 years.  Until his illness and death, Mr. Chwirka had always prepared the Taxpayers’ income tax returns.  The Taxpayer were never required to make estimated payments in previous tax years as their annual payments were always accomplished through withholdings.  In March 2015, Mr. Chwirka was diagnosed with cancer.  He maintained employment as long as he could, which was until October 2015.  He received disability income for October, November and December 2015.  There were no withholdings from this disability income.  Mr. Chwirka passed away in January 2016.  Ms. Chwirka sought assistance in preparing the Taxpayers’ 2015 personal income tax returns.  When the New Mexico return was prepared, the total payments and credits through withholding were significantly less that the Taxpayers’ liability.  The tax due was paid on March 29, 2016, prior to the due date.  The Department assessed the underpayment penalty because the required annual payment requirement is 90 percent of the tax liability for 2015, or 100 percent of the tax liability for 2014.  The Taxpayer does not protest the income tax due for 2015, and the Department did not assess interest.  The only issue at hearing was the Taxpayer’s request that penalty be abated because of the circumstances.  The hearing officer found that the Department correctly assessed the Taxpayer’s as a result of their annual underpayment.  However, the hearing officer also found that one of the indicators of non-negligence listed in Regulation 3.1.11.10 NMAC, which allows abatement of penalty for non-negligence, was applicable in this situation.  One of the factors listed for finding a taxpayer non-negligent is for a taxpayer who is disabled because of injury or prolonged illness, and who demonstrates inability to prepare a return and make payment and is unable to procure the services of another because of this injury or illness.  Due to this, the hearing officer ordered the penalty to be abated. The Taxpayer’s protest was granted.


11/18/2016

16-53

Good Karma Art & Design

On June 15, 2016, the Department assessed the Taxpayer for gross receipts tax, penalty and interest for the tax periods from January 1, 2011 through December 31, 2013.  On June 28, 2016, the Taxpayer filed a protest.  The Taxpayer was providing services during the periods in question and was issued 1099s for that work.  The Taxpayer conceded that it owed tax, penalty and interest, but disputed the amount owed.  The Taxpayer argued that some of the assessment was beyond the statute of limitations and that some of the services were performed outside of New Mexico.  The Taxpayer provided additional documentation to show that its services were for work done entirely outside of New Mexico.  The Department conceded that part of the assessment was beyond the statute of limitations, and also accepted the documentation showing that some of the work was done outside of New Mexico.  The Department abated a portion of the assessment accordingly.   The remainder of the assessment was correct and owed by the Taxpayer.  The Taxpayer’s protest was granted in part and denied in part.


11/14/2016

16-52

Emily W. Metzloff 

On July 29, 2016, the Department assessed the Taxpayer for gross receipts tax, penalty and interest for the tax periods from January 1, 2012 through December 31, 2013.  This assessment came about after the Department detected a mismatch between income reported by the Taxpayer on her federal Schedule C and her not having filed gross receipts tax.  By correspondence dates August 16, 2016, the Taxpayer’s CPA requested on behalf of the Taxpayer that the Department waive the assessed penalty.  The Department accepted this correspondence as a formal protest.  During the period at issue, the Taxpayer worked as an independent contractor, editing text for clients for publication on the internet.  The Taxpayer did not protest the assessment of principal or interest, only the assessment of penalty.  The Taxpayer resided in New Mexico during the periods at issue, and used a CPA in New York to prepare her income taxes.  In response to the assessment, the CPA wrote in his correspondence that because they were not aware of the gross receipts tax, they could not properly advise the client and he asked that the penalty be waived.  The Taxpayer never consulted with a tax professional based in New Mexico.  Penalty may only be abated when a Taxpayer is able to show that he or she was not negligent in failing to file.  Pursuant to the definition of negligence in Regulation 3.1.11.10 NMAC, the Taxpayer was negligent in failing to report and pay gross receipts tax.  Regulation 3.1.11.11 NMAC provides other grounds for abatement of penalty in certain circumstances, but again the Taxpayer was unable to show non-negligence.  The Taxpayer’s protest was denied.


10/28/2016

16-51

James R. Hellerman

On February 3, 2015, the Department assessed the Taxpayer for personal income tax, penalty and interest for the 2011, 2012 and 2013 tax years.  On February 11, 2015, the Taxpayer filed a protest to the assessment.  The Taxpayer admitted that he and his wife were residents of New Mexico from 2000 until 2008.  The Taxpayer and his wife jointly purchased a home in Lamy, New Mexico in 2005.  The relationship between the Taxpayer and his wife became strained, and they chose not to divorce or legally separate, but to live separately and remain married.  In 2008, the Taxpayer and his wife jointly purchased a second home in Tennessee.  The Taxpayer renovated that home to his specifications and the intention was for the Taxpayer to live at the Tennessee home while his wife remained in the Lamy home.  In 2008, the Taxpayer executed a last will and testament which was signed, executed and witnessed in New Mexico, and listed his wife as his sole heir.  In 2009, the Taxpayer obtained a Tennessee driver’s license.  The Taxpayer continued to register his vehicles in New Mexico until late 2013.  Throughout 2012 and 2013, the Taxpayer was living and working full-time in Tanzania, where he leased an apartment, bought a car, and obtained a driver’s license.  The Taxpayer was rarely in the United States.  When he did visit the United States, most of his time was spent with his wife, who also visited him in Tanzania.   In 2012, the Taxpayer’s wife died.  During the tax years in question, the majority of the Taxpayer’s mail was sent to the Lamy address and collected by his wife, and later a neighbor.  After his wife’s death, the Taxpayer continued to travel to New Mexico to deal with the estate and the sale of the Lamy home.  For several months after his wife’s death, the Taxpayer continued to house vehicles in New Mexico, and renewed the registrations in New Mexico in early 2013.  The Taxpayer conceded that he was liable for New Mexico personal income tax for 2011, so the issue to be decided at hearing was whether the Taxpayer was also liable for personal income tax, penalty and interest for the 2012 and 2013 tax years.  The Taxpayer argued that he intended to establish Tennessee as his home by moving there in 2008, doing substantial home renovations, and moving his prized African art collection there.  The Department argues that the Taxpayer’s intent was not sufficient.  He was an admitted resident of New Mexico for several years and continued to spend the majority of his time here while working abroad. The Department argues that the Taxpayer continued to treat New Mexico as his residence in a number of ways.  Regulation 3.3.1.9 NMAC uses a number of criteria to determine domicile, and in this case the hearing officer found that the majority of those indicated that the Taxpayer was domiciled in New Mexico for the tax years in question.  The Taxpayer’s protest was denied.


10/27/2016

16-50

S.J. Tile

On February 23, 2016, the Department assessed the Taxpayer for gross receipts tax, penalty and interest for the tax period from January 1, 2012 through December 31, 2012.  The Taxpayer filed a protest to the assessment on May 20, 2016.  On March 21, 2016, the Department assessed the Taxpayer for gross receipts tax, penalty and interest for the tax periods from January 1, 2010 through December 31, 2011.  The Taxpayer filed a protest to that assessment on June 16, 2016.  On July 29, 2016, a telephonic scheduling hearing occurred and the Taxpayer’s protests were consolidated.  The Taxpayer was in business from 1987 through 2012, and was a one-person operation in the business of tile setting.  Beginning in 2008, the Taxpayer only worked for construction contractors and did not collect or pay gross receipts tax.   The Taxpayer did not produce any nontaxable transaction certificates (NTTCs) from the construction contractors that he provided services to during the periods at issue.  The Taxpayer argued that he did not collect gross receipts tax and that the contractors he worked for paid the taxes.  The Taxpayer has been diabetic for the past twenty-two years.  He also became disabled and no longer works.  The Taxpayer suffers from kidney failure and blindness.  The issue to be determined is whether the Department properly assessed the Taxpayer for gross receipts tax, penalty and interest for the periods at issue.  New Mexico has a self-reporting tax system and it is the obligation of the Taxpayer to obtain and retain the necessary NTTCs, as well as file any necessary gross receipts taxes.  Because the Taxpayer failed to obtain the necessary NTTCs necessary to claim a deduction, the gross receipts tax, along with the mandatory interest, were found to be properly assessed.    In spite of his health problems, the Taxpayer was not able to prove that he was non-negligent in not filing gross receipts taxes, so the penalty was deemed to have been properly assessed as well.  The Taxpayer’s protest was denied.


10/17/2016

16-49

A & W Restaurants, Inc.

On September 27, 2013, the Department assessed the Taxpayer for gross receipts tax and interest for the periods from June 30, 2007 to December 31, 2011.  The Taxpayer filed a protest of the assessment on December 23, 2013.  The Taxpayer entered into franchise agreements with New Mexico businesses.  Section 1 of this agreement, entitled “Grant of License” grants a franchisee a limited license to use specific trademarks identified in the appendix to the agreement.  The authority to use the trademarks is limited exclusively to use in connection with sales from a single restaurant established under the agreement.  The agreement also sets the amounts that a franchisee is to pay the Taxpayer.  Some of these are one-time fees, while others are paid on a monthly basis and are calculated based on the prior month’s gross sales.  The Department audited the Taxpayer for gross receipts tax for the periods from January 1, 2006 through December 31, 2011.  The Department concluded that the continuing royalty fee was subject to gross receipts tax because the payments by franchisees to the Taxpayer represented receipts from granting a right to use a franchise employed in New Mexico.  The Taxpayer argues that the continuing royalty fee is consideration for the Taxpayer’s granting of a limited license to utilize its trademarks, which it claims is then exempt from gross receipts tax under the definition of “property” as provided in Section 7-9-3(J) NMSA 1978, which excludes trademarks.  The Department asserts that the royalty fees paid are taxable as gross receipts because they are receipts from granting a right to use a franchise employed in New Mexico, which is subject to gross receipts tax under Section 7-9-3.5(A)(1) NMSA 1978.  While the Taxpayer held that the trademarks must be unbundled from the other receipts, the hearing officer found that, based on prior case law, a franchise is to be treated as a compound or bundled form of property, which includes a license to use trademarks.  The Taxpayer is obligated to pay gross receipts tax on the total receipts received from granting a right to use a franchise employed in New Mexico.  The Taxpayer’s protest was denied.


09/30/2016

16-48

Anthony Martinez

On April 27, 2016, the Department assessed the Taxpayer for gross receipts tax, penalty and interest for the tax periods from January 1, 2011 through December 31, 2013.  On May 13, 2016, the Taxpayer filed a protest.  A healthcare company was providing services to the Taxpayer’s grandfather through a federal program.  The Taxpayer was working as an independent contractor for the healthcare company so that he could be paid for providing services to his grandfather.  The healthcare company issued 1099s to the Taxpayer.  In 2013, the Taxpayer’s grandfather became dissatisfied with the healthcare company and switched to another provider.  The Taxpayer also ceased being an independent contractor to that healthcare company and began working as an independent contractor for the new provided so that he could continue to help his grandfather.  The Taxpayer and the first healthcare company became involved in a lawsuit at some point after the split, and there has been some animosity between them.  The Department audited the Taxpayer because of a mismatch it found between business income on his federal tax return and no gross receipts reported to New Mexico.  The Taxpayer received the audit notice that informed him he had 60 days to obtain any necessary nontaxable transaction certificates (NTTCs) needed to support any claimed deductions.  The Taxpayer contacted the healthcare company and was told that the company paid gross receipts tax on the services he provided, but refused to provide any proof of tax payments or provide an NTTC.  The Taxpayer was providing services and had receipts that were subject to the gross receipts tax.  Because the Taxpayer was not in possession of the necessary NTTC, he was not entitled to take a deduction.  The Taxpayer was also unable to prove that the healthcare company paid gross receipts tax on his behalf.  The hearing officer found that the Taxpayer was properly assessed.  The Taxpayer’s protest was denied.


09/28/2016

16-47

Sonja Foote

On April 11, 2016, the Department assessed the Taxpayer for personal income tax, penalty and interest for the tax periods from January 1, 2011 through December 31, 2013.  On May 2, 2016, the Taxpayer filed a protest.  The Taxpayer and her husband owned approximately 1300 acres of land in Quay County, which they purchased in 2009.  The Taxpayer’s husband earned a substantial income from work unrelated to the land and cattle.  The Taxpayer’s husband retired, became ill, and passed away prior to the assessment.  The Taxpayer made improvements to the land, which included fencing and drilling wells, and bought three cows to begin a cattle-breeding operation.  The Taxpayer’s herd now has 19 pairs of heifers and calves, and the Taxpayer intends to continue breeding until the herd is 50 head.  The Taxpayer’s cattle-breeding operation and land improvements have generated substantial losses, which the Taxpayer claimed against her income.  The Taxpayer did not provide any evidence to show that the operation has made a profit.  The issue to be decided at hearing is whether the Taxpayer is liable for the assessment.  The parties agree that the determination hinges on whether the Taxpayer’s cattle operation should be considered as a for-profit business or not under 26 USCS Section 183.  There is a federal deduction allowed for expenses occurred when engaging in any trade or business, but this deduction is disallowed when the activity is not for-profit.  The federal regulations list nine factors to aid in determining whether an activity is for-profit or not.  In examining each of these factors, the Hearing Officer found that some factors weighed against finding that the activity is for-profit, while others weighted for it, but in the end seven of the nine factors indicated that the activity engaged in by the Taxpayer was not for-profit and the deductions were correctly disallowed by the Department.  The Taxpayer’s protest was denied.


09/23/2016

16-46

Hector Martinez 

On April 1, 2016, the Department assessed the Taxpayer for gross receipts tax, penalty and interest for the CRS reporting periods from January 1, 2009 through December 31, 2013.  On April 12, 2016, the Taxpayer protested the Department’s assessment.  The Taxpayer is a sole-proprietor who provides tile-installation services.  During the relevant period, the Taxpayer worked with a bookkeeper to prepare his taxes.  The bookkeeper informed the Taxpayer that he needed to obtain nontaxable transaction certificates (NTTCs) for his work.  The company to whom the Taxpayer was providing his services during the relevant period issued a Type 2 NTTC on August 5, 2011, but did not properly complete that NTTC by failing to fill out any seller information and not completing the execution date.  The company also provided the Taxpayer with the buyer’s copy of the incomplete NTTC, rather than the seller’s copy that should have been provided.  Two years after the initial execution date, someone handwrote in the seller information on the buyer’s copy of the NTTC and added an execution date of April 23, 2013.  The Department’s internal database of issued NTTCs shows the Type 2 NTTC that the company attempted to execute to the Taxpayer as incomplete.  Through its Schedule C mismatch program with the IRS, the Department detected a discrepancy between the amount of gross receipts tax reported and paid to the Department and the amount of business income reported to the IRS by the Taxpayer.  On January 1, 2016, the Department mailed the Taxpayer a limited scope audit commencement notice, informing the Taxpayer that he had 60-days, until March 1, 2016, to present any required NTTCs.  The Taxpayer submitted all his documentation to the Department in January of 2016.  The Department informed the Taxpayer and his bookkeeper that the Type 2 NTTC was inadequate to support the claimed deduction.  The Taxpayer did not timely present a properly completed and executed NTTC by the deadline.  On March 1, 2016, the Department sent the Taxpayer a letter stating that there remained a discrepancy and the Department was preparing to issue an assessment.  On March 18, 2016, 17 days after the deadline, the Taxpayer presented an untimely but properly executed Type 5 NTTC from the company.  The Taxpayer is not allowed to claim and the Department is not allowed to grant the Taxpayer’s claimed deduction under Section 7-9-51 NMSA 1978 without a timely executed NTTC.  The hearing officer determined that the gross receipts tax and interest were properly assessed.  The hearing officer did order the penalty to be abated in this case because the Taxpayer’s bookkeeper failed to inform him that he had both the wrong type of NTTC and that the NTTC was not properly completed and executed.  The Taxpayer’s protest was granted in part and denied in part.


09/15/2016

16-45

SMPC, P.A. 

On December 1, 2014, the Department assessed the Taxpayer for gross receipts tax, penalty and interest for the CRS reporting periods from January 31, 2008 through December 31, 2013.  On December 15, 2014, the Taxpayer protested the assessment.  The Taxpayer provides architectural services as part of design-build construction contracts.  The Taxpayer’s services were resold by the general contractor and the contractor paid the gross receipts tax associated with the design-build contract.  The Taxpayer requested nontaxable transaction certificates (NTTCs) from the general contractors under the projects.  The Taxpayer timey possessed properly executed Type 6 NTTCs from the various contractors it provided architectural design services to as part of design-build contracts.  In 2014, the Department selected the Taxpayer for an audit of gross receipts tax, compensating tax, and withholding tax for the reporting periods from January 1, 2008 through December 31, 2013.  Upon audit, the Department disallowed the deductions where the Taxpayer possessed Type 6 NTTCs because a Type 5 NTTC would be the necessary certificate to support the deduction of receipts from the sale of a service for resale.  Because of a statutory change in 2012, architectural services now fall under the construction service for resale deduction, which is covered by a Type 6 NTTC.  The Taxpayer argued that it is entitled to claim the deduction because it timely accepted the Type 6 NTTCs in good faith.  The Department argued that the Taxpayer did not demonstrate that it accepted the Type 6 NTTC in good faith, and should have known that a Type 5 NTTC was required.  The hearing officer found that the Taxpayer’s acceptance of the Type 6 NTTC was in good faith as provided in Section 7-9-43(A) NMSA 1978.  The Taxpayer’s protest was granted.


09/12/2016

16-44

Market Scan Information Systems, Inc.

On March 4, 2013, the Department assessed the Taxpayer for gross receipts tax, penalty and interest for the periods from January 31, 2007 through September 30, 2011.  On April 24, 2013, the Taxpayer filed a formal protest letter.  The Taxpayer sells licenses to use software in New Mexico, mainly to car dealerships.  The Taxpayer admits that its sales in New Mexico are subject to gross receipts tax.  The Taxpayer contracts directly with its customers when it sells the software licenses.  The customers are required to make an initial down payment, and then frequently need to use financing options, either directly with the Taxpayer or with a lender to pay for the software licenses.  The Taxpayer has a separate agreement with the lenders it recommends to customers, but these lenders are free to decline to finance the customers and the Taxpayer cannot bind the lenders in any transaction.  With regard to the assessment, the Taxpayer argued that the lenders were responsible for the gross receipts taxes on its contracts with its customers, and that the lenders in fact paid the gross receipts tax.  The Taxpayer argued that the assessed amounts were incorrect, but did not provide any evidence.  The Department argued that the Taxpayer was required to pay gross receipts tax on all of its sales and if the lenders were paying gross receipts tax, that tax was their own, and they were not paying the Taxpayer’s gross receipts taxes.  The Taxpayer presented no evidence or argument regarding any specific exemption or deduction that it believed applied to its receipts, nor did the Taxpayer meet any of the necessary conditions for equitable recoupment.  The Taxpayer’s protest was denied.


09/09/2016

16-43

David M. Gonzales

On November 16, 2015, the Department assessed the Taxpayer for personal income tax, penalty and interest for the tax periods from January 1, 2011 through December 31, 2014.  On January 14, 2016, the Taxpayer filed a protest.  The Taxpayer is a full-time employee for the New Mexico Department of Transportation, and has been since approximately 1992.  Sometime in 2001, the Taxpayer began a cattle operation.  Over time, the Taxpayer’s cattle operation went from purchasing some cows to lease to roping and rodeo operators to breeding cattle and selling them for beef.  In the process of establishing the breeding operation, the Taxpayer determined what type of cattle would be most desirable for beef cattle, and that it might take up to ten years to breed that type and grow the herd large enough to be profitable.  At one point in 2010, the Taxpayer had 110 head of cattle, but had to sell most of them off because of various issues and sometime in 2012 or 2013, the herd was as low as 18 head.  The Taxpayer has never made a profit on his cattle operation and categorizes his best years as “breaking even.”  During all the tax years in question, the Taxpayer claimed significant losses on his personal income taxes in relation to his cattle operation.  The issue to be decided at hearing is whether the Taxpayer is liable for the assessment.  The parties agree that the determination hinges on whether the Taxpayer’s cattle operation should be considered as a for-profit business or not under 26 USCS Section 183.  The Taxpayer argues that the time and effort required to engage in the cattle business make it a for-profit activity, while the Department argues that the Taxpayer’s conduct was not sufficient to show that the activity was for-profit.  There is a federal deduction allowed for expenses occurred when engaging in any trade or business, but this deduction is disallowed when the activity is not for-profit.  The federal regulations list nine factors to aid in determining whether an activity is for-profit or not.  In examining each of these factors, the Hearing Officer found that some factors weighed against finding that the activity is for-profit, while others weighted for it, but in the end six of the nine factors indicated that the activity engaged in by the Taxpayer was not for-profit and the deductions were correctly disallowed by the Department.  The Hearing Officer did find that the Taxpayer reasonably relied on a tax professional, an enrolled agent, who prepared his tax returns and advised him to take the deductions.  Due to this, the penalty was ordered to be abated, but the assessed tax and interest were determined to be correct.  The Taxpayer’s protest was granted in part and denied in part.


08/17/2016

16-42

Weil Construction Inc.

On November 25, 2014, the Taxpayer filed an application for refund of gross receipts tax for the periods from October 1, 2012 through December 31, 2013.  The Department took no action on the request for refund within 120 days of its filing.  On June 15, 2015, the Taxpayer filed a protest.  The Taxpayer is engaged in the construction business in New Mexico.  During the period in question, the Taxpayer was involved in a construction project for Santa Fe County, building a new fire station for the city of Edgewood.  The Taxpayer issued Type 6 nontaxable transaction certificates (NTTCs) to its vendors for items that were included in the construction project.  The Taxpayer paid gross receipts tax on its receipts from the county for the construction of the fire station, including on items of tangible personal property that were incorporated into the fire station.  At the behest of the county, a firm was hired to perform a cost segregation study on the construction of the fire station.  They concluded that many items of tangible personal property that were incorporated into the station were items that could be classified as 3-year, 5-year, 7-year, 10-year, and 15-year property under Section 168 of the Internal Revenue Code (depreciable property).  The firm agreed to represent the Taxpayer to try and obtain tax refunds and reduce the county’s expenses.  The Taxpayer is seeking a refund on the gross receipts tax paid on the items of tangible personal property incorporated into the fire station that could be classified as depreciable property.  Since the protest was filed, the Department granted a partial refund, but the majority of the refund request remains outstanding.  The portion of the refund that was granted was for items easily removed from the fire station and not permanently affixed, such as window treatments, appliances and fire extinguishers, among other items.  The remaining items include cabinets and countertops, flooring, piping and ventilation, and other similar items.  The Department denies that these items are eligible for refund because they are permanent structural components of the building or permanently affixed.  The Taxpayer argues that the depreciable property is tangible personal property sold to a government agency and should be deductible.  The Department made several arguments, mainly that receipts from performing a construction project for a governmental agency are receipts derived from performing a service and are not deductible (Regulation 3.2.212.10 NMAC).  The Department acknowledged that depreciable property might be deducted in a sale to a government agency, but only when there is a bond project with a third party acting as an agent for the government, which was not the case here.  Receipts from the sale of construction materials to government agencies are not able to be deducted, and construction materials include any items incorporated into a construction project.  The Taxpayer was performing construction services for a government agency and the items they are attempting to claim a deduction for were items incorporated into the construction project.  The hearing officer found that the deductions were properly denied.  The Taxpayer’s protest was denied.


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