The Whitehurst Group

10-02

The Taxpayers registered as an LLC in New Mexico in 2001.  They made the decision to register their company as an LLC to protect the partners from personal liability.  For the 2004 tax year the Taxpayers filed a federal income tax return on which they requested that the LLC be given S-Corporation status.  For the 2004 tax year, the Taxpayers timely filed personal income tax returns, including a pass-through for their S-Corporation LLC with New Mexico.  In early 2006, the IRS informed the Taxpayers that their LLC did not qualify as an S-Corporation in 2004 because they failed to timely sign and submit the correct form.  As a result of this change, the Taxpayers filed an amended New Mexico personal income tax return.  On this amended return, they were entitled to a $1,937 refund.  Also because of this information from the IRS, the Taxpayers filed a New Mexico corporate income tax return for their LLC for the 2004 tax year.  This return was originally due on March 15, 2005.  The New Mexico corporate income tax indicated that the LLC owed the state $1,239 in tax principle.  The Taxpayers also submitted a cover letter explaining the reason for the amended personal income tax return and lat filing of the LLC’s corporate income tax return.  The letter also said that, because of financial difficulties, the LLC would not be able to pay its outstanding corporate income tax until the Taxpayers received their personal income tax refund.  In March, 2007, the Department issued the personal income tax refund to the Taxpayers and two weeks later the Taxpayers remitted the outstanding corporate income tax to the Department.  Eight days later the Department issued the LLC a Notice of Assessment for unpaid tax, penalty and interest.  A protest auditor in the Department audited the file of both the LLC and the personal income tax returns of the Taxpayers and credited the payment of taxes and adjusted the outstanding interest as a result of that payment.  The LLC filed a timely written protest to the assessment of penalty and interest.  At the hearing the Taxpayers pointed out that they timely filed and paid their personal income tax and relied on the fact that the LLC has always been accepted as an S-Corporation.  When the IRS informed them otherwise, the filed the corporate income tax return.  They also argue that the refund owed to them upon amending their personal income tax return was more than enough to pay the outstanding corporate income tax.  However, the Taxpayers and the LLC are separate legal entities with separate accounts with the Department, and the Department is not allowed to use money that will be refunded to the Taxpayers to satisfy the debt of the LLC.  The hearing officer found that the Taxpayers were liable for interest and penalty for late payment of 2004 corporate income tax.  The Taxpayers’ protest was denied.