Mr. Hubcap, Inc.



The Taxpayer is a family-owned business registered in New Mexico for payment of CRS taxes. From 1997 until midyear 2000, the Taxpayer had an exemplary reporting history with the Department. In 2000, the business hired a family friend to assume bookkeeping and accounting tasks. The bookkeeper prepared tax returns and checks for payment of taxes and other bills.  She then took them to one of the Taxpayer’s corporate officers for review and signature. The bookkeeper was also responsible for making all bank deposits and reconciling the Taxpayer’s bank statements. The Taxpayer’s corporate officers did not provide any oversight of the bookkeeper’s activities. For portions of 2000, 2001 and into 2002 the bookkeeper did not pay the Taxpayer’s CRS taxes. She also embezzled funds from the business either by having a corporate officer sign blank checks and cashing them for her own use, or by writing checks to herself and forging the corporate officer’s signature. Department assessments for taxes, penalty and interest began to arrive in 2002 with notices from other creditors. The Taxpayer investigated and discovered the bookkeeper’s illegal activities.  The Taxpayer then protested the Department’s assessment of penalty, arguing that it was not responsible for the bookkeeper’s activities.  Held: An employer is generally liable for the acts of employees committed in the course and scope of their employment (the doctrine of respondeat superior). Embezzlement by an employee is an illegal act that is outside the ordinary course and scope of employment. Although the bookkeeper’s illegal acts are not attributable to the Taxpayer under the doctrine of respondeat superior, the Taxpayer was nevertheless negligent in failing to exercise internal financial controls or properly supervise the bookkeeper’s activities. Penalty is due and payable. Protest denied.