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  3. Thomas W and Linda L Krumland

Thomas W and Linda L Krumland



On August 1, 2016, the Department assessed both Taxpayers in two assessments for gross receipts tax, penalty and interest for the CRS filing periods ending June 30, 2009 through June 30, 2015. On September 8, 2016 the taxpayers filed a formal protest through their accounting firm. Delayed by various continuances, requests for admissions and interrogatories, and other motions the hearing eventually occurred on May 29, 2018. The primary issue in this protest concerned whether a partner’s income from “guaranteed payments” and reported by the partnership on IRS form Schedule K-1 are subject to gross receipts tax. The Department assessed only receipts that were termed guaranteed payments and determined that these payments were made in consideration of services. The Taxpayers argued that they saw themselves only as owners of the businesses and that the activities performed were in keeping with that of an owner and not an employee or a contractor providing services. They also claimed they were entirely ignorant of the implications of reporting these distributions as guaranteed payments. The IRS defines guaranteed payments as being for compensation of services or capital without regard for the income of the partnership. Though there are taxable benefits to characterizing the payments in this way, the Hearing Officer said that he would interpret that these payments were appropriately characterized as the weight of evidence suggested. The Taxpayer also argued that the receipts might be exempt under Regulation (S) (4) NMAC, but the Hearing Officer determined that this regulation was inappropriate as it applied to services provided to third parties. However, after the Hearing and before a decision was made in the protest, the Taxpayers noted the proposal of an amended regulation that would favor their position and requested that the decision in the protest be held until the new rule might be approved and decide the matter. The amended regulation specifically states that guaranteed payments are not gross receipts. The Hearing Officer decided to allow this request and then made the determination, after the amendment to NMAC was approved, that this Regulation could be applied in this case, not he said because a new law was being retroactively applied but because it was instead reinterpreting the preexisting law and seeking to clarify it. The application of the rule being allowed, the Hearing Officer ordered that the guaranteed payments were not gross receipts and not subject to gross receipts tax.