New Mexico estimated a closed bar's unfiled gross receipts tax using its best months from years earlier. Could the buyer who paid that inflated bill get a refund?

Subject

McDannald Enterprises d/b/a/ Cow Palace (D&O 00-11)

Plain-English summary

The Cow Palace was a struggling bar and restaurant in Cliff, New Mexico. In July 1995 the McDannalds agreed to sell the business — including its liquor license — to a joint venture of Robert Blair and Russel Tharp. Transferring a liquor license requires a tax clearance from the Department (Section 7-1-82), and when it was requested the Department found the McDannalds had filed no gross receipts tax returns from June 1994 through August 1995.

Because no returns existed, the Department issued a provisional (estimated) assessment — $9,590.02 in tax plus penalty and interest, about $11,853 total. It built the estimate by averaging the three highest months the business had reported back in 1989, 1990, and 1992 (each around $11,000-$12,000). But the bar's receipts had declined substantially since then, and the Department later admitted its method did not conform to generally accepted accounting practice. To close the sale, Tharp paid the assessment (with accrued interest), totaling $12,052.45. The McDannalds then left New Mexico, leaving no records to show the business's actual receipts.

As the successor owner, Tharp filed a refund claim. The Department denied it, but the Hearing Officer partially granted the protest. Department assessments carry a presumption of correctness under Section 7-1-17(C), but that presumption was overcome here — the Department conceded its methodology was not sound and had ignored the decline in receipts. A far more reasonable estimate (the Department's own Exhibit B) averaged the last 12 months actually reported — June 1993 through May 1994, about $3,626.70 per month — and projected it across the unfiled period, producing a total liability of $3,992.53. Tharp agreed that method was reasonable and offered no better one, so he was refunded the difference: $8,059.92.

What this means for you

• An estimated assessment is not the last word — it can be beaten with a better estimate. When you don't file returns, New Mexico can assess tax based on an estimate, and that estimate is presumed correct. But the presumption is rebuttable: if you show the method was unreasonable and offer a more accurate figure, the assessment can be cut.
• A "provisional" assessment is deliberately high. The Hearing Officer explained the Department estimates high on purpose — to protect the state's revenue and to pressure non-filers into filing real returns. If the numbers are believable, the Department will adjust down once actual returns come in. Don't treat the estimated number as your true liability.
• The fix for a non-filer is usually to file real (or best-reconstructed) returns. The cleanest way to reduce an estimated assessment is to produce actual receipts. Where records are gone, a defensible reconstruction — like averaging your most recent reported months — can carry the day.
• Buying a business means inheriting its tax exposure. Because a liquor-license transfer needs a tax clearance, the buyer here had to pay the seller's estimated tax to close, then chase the refund himself as successor. If you buy business assets, check for unfiled returns and unpaid tax before closing.

Key questions answered

How did the Department come up with the tax if no returns were filed?
It issued a provisional (estimated) assessment, averaging the three highest-reporting months from 1989, 1990, and 1992 — years when the bar was doing far better than in 1994-1995.

Why was that estimate rejected?
Because the presumption of correctness was overcome. The Department admitted its method did not conform to generally accepted accounting practice and had failed to account for the substantial decline in the bar's receipts after 1992.

What estimate replaced it?
A projection (the Department's Exhibit B) that averaged the last 12 months the business actually reported — about $3,626.70 per month — and applied it across the unfiled period, plus the local rate, penalty, and interest, for a total of $3,992.53.

How much was refunded, and to whom?
$8,059.92 — the difference between the $12,052.45 the buyer/successor Tharp paid and the $3,992.53 fair estimate. The protest was partially granted and partially denied.

Verbatim citations

Why provisional assessments run high:

Admittedly, the Department used a methodology to estimate the amount of gross receipts of the Cow Palace for the periods for which returns were not filed which produced an assessment which was high. This is done to protect the interests of the state in obtaining all taxes it is owed. This procedure is also followed to provide leverage over taxpayers who have not filed returns to get them to file returns based upon actual receipts.

How the presumption of correctness was overcome:

While assessments by the Department are entitled to a presumption of correctness pursuant to § 7-1-17(C) NMSA 1978, in this case, the presumption of correctness was overcome when the Department admitted that its method of creating the provisional assessment did not conform to generally accepted accounting principles for projecting the receipts of a business. Additionally, the presumption of correctness was overcome by demonstrating that the Department's methodology failed to take into account the decline in the receipts of the Cow Palace ....

The holding:

For the foregoing reasons, the Taxpayer's protest IS HEREBY PARTIALLY GRANTED AND PARTIALLY DENIED. IT IS HEREBY ORDERED THAT THE DEPARTMENT GRANT THE CLAIM FOR REFUND IN THE AMOUNT OF $8,059.92.

Source

• Listing: New Mexico Decisions & Orders
• Decision post: McDannald Enterprises d/b/a/ Cow Palace
• Decision PDF: D&O 00-11

Original ruling text

BEFORE THE HEARING OFFICER
OF THE TAXATION AND REVENUE DEPARTMENT
OF THE STATE OF NEW MEXICO

IN THE MATTER OF THE PROTEST OF
MCDANNALD ENTERPRISES, D/B/A/ COW PALACE NO. 00-11
NM ID. NO. 01-133761-00 3, PROTEST TO
DENIAL OF CLAIM FOR REFUND

DECISION AND ORDER

This matter came on for formal hearing on March 23, 2000 before Gerald B. Richardson,

Hearing Officer. McDannald Enterprises, d/b/a/ Cow Palace, was represented by J.C. Robinson,

Esq. of Robinson, Quintero and Lopez, P.C. The Taxation and Revenue Department, hereinafter,

“Department”, was represented by Bruce J. Fort, Special Assistant Attorney General. Based

upon the evidence and the arguments presented, IT IS DECIDED AND ORDERED AS

FOLLOWS:

FINDINGS OF FACT

1. The Cow Palace was a bar and restaurant owned and operated by Jerry and Harlene

McDannald in Cliff, New Mexico which operated under New Mexico Retail Dispenser’s Liquor

License No. 108.

2. The McDannalds were experiencing financial difficulties and in July of 1995 they agreed

to sell their business, the liquor license, property and improvements to Robert G. Blair and

Russel Tharp, who were engaged in a joint venture to purchase and resell the assets of

McDannald Enterprises.

3. In order to transfer ownership of a liquor license, a tax clearance from the Department

must be obtained pursuant to Section 7-1-82 NMSA 1978.

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4. When a tax clearance was sought to transfer the McDannalds’ liquor license, the

Department determined that no monthly CRS-1 returns reporting or paying gross receipts taxes

had been filed by the McDannalds from June, 1994 through August, 1995.

5. On January 10, 1996 the Department issued Assessment No. 1992577 to McDannald

Enterprises in the amount of $9,590.02 in gross receipts tax, $945.87 in penalty and $1,317.75 in

interest for a total of $11,853.64 for the reporting periods June, 1994 through August, 1995.

6. The Department’s assessment was a provisional or estimated assessment, since

McDannald Enterprises had not filed returns for the assessment period. The assessment was

estimated by using the average of the three reporting periods in which McDannald Enterprises

had reported the highest amount of gross receipts during the years 1989, 1990 and 1992. Those

months were November, 1989, May, 1990 and September, 1992. In each of those months,

McDannald Enterprises reported gross receipts of between $11,000 and $12,000. During those

three years McDannald Enterprises gross receipts were in the range of $4,000 to $12,000 per

month.

7. The Department’s assessment failed to take into account that the gross receipts of

McDannald Enterprises, as reported, declined substantially from the levels of 1989-1992.

8. Department’s methodology in estimating the gross receipts of McDannald Enterprises

during the assessment period does not conform to generally accepted accounting practices for

projecting estimated receipts.

9. In order for the sale and transfer of the McDannald’s liquor license to be consummated,

Mr. Tharp paid Assessment No. 1992577 together with the interest which had accrued to the date

of payment.

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10. Shortly after the sale and transfer of the property and assets of McDannald Enterprises to

Messrs. Blair and Tharp, the McDannalds moved from New Mexico. They left no business

records or other information from which the actual gross receipts of their business could be

determined for the period covered by the Department’s provisional assessment.

11. On August 3, 1998, Mr. Tharp, as the owner and successor to the Cow Palace filed a

claim for refund with the Department, requesting a refund of $12,052.45, the amount he paid to

satisfy Assessment No. 1992577.

12. On December 15, 1998, the Department denied Mr. Tharp’s claim for refund on the basis

that he had not provided sufficient information to establish that the Cow Palace was not

operating during the period for which refund of taxes was claimed.

13. On December 29, 1998, counsel for Mr. Tharp filed a protest to the Department’s denial

of the claim for refund.

14. At the hearing, evidence was produced that the total gross receipts reported by

McDannald Enterprises for the last 12 months for which reports were filed with the Department,

June, 1993 through May, 1994, amounted to $43,520.38. That would represent an average of

$3,626.70 in gross receipts per month.

15. When average gross receipts of $3,626.70 are projected out for the period covered by

Assessment No. 1992577, June 1994 through August, 1995, the local gross receipts tax rate is

applied and interest to the date the assessment was paid and penalty are applied, it would result

in an estimated assessment of $3,071.40 in gross receipts tax, $307.13 in penalty and $614.00 in

interest for a total estimated assessment of $3,992.53.

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DISCUSSION

The issue to be determined herein is whether Mr. Tharp, as successor to the Cow Palace

and McDannald Enterprises, is entitled to a refund of any portion of the amount paid to satisfy

the Department’s provisional assessment and to obtain the tax clearance for the sale of Liquor

License No. 108. Admittedly, the Department used a methodology to estimate the amount of

gross receipts of the Cow Palace for the periods for which returns were not filed which produced

an assessment which was high. This is done to protect the interests of the state in obtaining all

taxes it is owed. This procedure is also followed to provide leverage over taxpayers who have

not filed returns to get them to file returns based upon actual receipts. When returns are filed,

provided the Department believes the amounts reported are credible, the assessment can then be

adjusted to reflect a taxpayer’s actual receipts. In this case, because it appears that the

McDannalds did not keep business records from which their actual receipts could be determined,

both the Department and the McDannalds’ successor are left to come up with some means to

reasonably estimate the receipts.

While assessments by the Department are entitled to a presumption of correctness

pursuant to § 7-1-17(C) NMSA 1978, in this case, the presumption of correctness was overcome

when the Department admitted that its method of creating the provisional assessment did not

conform to generally accepted accounting principles for projecting the receipts of a business.

Additionally, the presumption of correctness was overcome by demonstrating that the

Department’s methodology failed to take into account the decline in the receipts of the Cow

Palace during the years subsequent to the periods the Department used in calculating its

provisional assessment. It appears that a far more reasonable method to calculate the Cow

Palace’s receipts is that contained in Department’s Exhibit B, which averaged the Cow Palace’s

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reported receipts for the last twelve months for which receipts were reported and projected them

over the next fifteen months for which reports were not filed. Mr. Tharp concurs that this is a

reasonable methodology to calculate the gross receipts tax liability of the Cow Palace for the

periods covered by the Department’s provisional assessment. There being no evidence of any

other method which would be more accurate, it is concluded that Mr. Tharp, as successor to

McDannald Enterprises, d/b/a/ the Cow Palace, is entitled to a refund of the difference between

his refund claim in the amount of $12,052.45 and the $3,992.53 shown on the Department’s

Exhibit B, or $8,059.92.

CONCLUSIONS OF LAW

1. Mr. Tharp filed a timely, written protest to the Department’s denial of his claim for

refund and jurisdiction lies over both the parties and the subject matter of this protest.

2. Mr. Tharp overcame the presumption of correctness which attached to Assessment No.

1992577.

3. A more reasonable estimate of the gross receipts of McDannald Enterprises d/b/a/ the

Cow Palace is contained in Department’s Exhibit B.

For the foregoing reasons, the Taxpayer’s protest IS HEREBY PARTIALLY GRANTED

AND PARTIALLY DENIED.

IT IS HEREBY ORDERED THAT THE DEPARTMENT GRANT THE CLAIM FOR

REFUND IN THE AMOUNT OF $8,059.92.

DONE, this 30th day of March, 2000.

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