Manuel Vigil

06-21

The Taxpayer is a resident of New Mexico who invested in two mutual funds.  The Taxpayer received a Form 1099 listing the dividend and capital gain distributions made from the funds during the previous tax year.  Pursuant to the Taxpayer’s agreement with the funds, the distributions were not made in cash, but were reinvested in additional shares.  After the close of the year, the Taxpayer sold all of his shares in the two mutual funds at a substantial loss.  The Taxpayer did not include the dividend and capital gain distributions he received from the funds on his state or federal income tax returns.  The IRS and the Department subsequently assessed the Taxpayer for additional income tax on these distributions.  The Taxpayer protested, arguing that he should not have to pay tax because he lost money on the mutual funds, and because he did not receive the distributions in cash.  The Hearing Officer held that as a shareholder in the funds, which are treated as pass through entities, the Taxpayer was liable for tax on the funds’ dividend and capital gain distributions.  The fact that he later lost money on the sale his shares did not absolve him of this liability.  Nor did his decision to have distributions reinvested, rather than paid in cash, affect the taxability of the distributions.  The Taxpayer’s protest was denied.