Could a fuel center defeat a negligence penalty using only stipulated dates and amounts, without admissible evidence explaining its tax underpayment?

Plain-English summary

Albertson's Fuel Center failed to prove that its large gross receipts and compensating tax underpayment was not negligent. The stipulated record contained no admissible evidence explaining the underpayment, so the presumed-correct penalty remained in place.

The Department originally assessed $518,750.53, consisting of:

• $249,766.75 gross receipts tax;
• $72,223.09 compensating tax;
• $32,199.14 penalty; and
• $164,561.55 interest.

Albertson's paid $350,000 to stop interest. The Department later abated $6,046.56 of compensating tax, $604.82 of related penalty, and $3,402.94 of related interest. The remaining tax principal was $315,943.28.

Albertson's challenged only whether the negligence penalty complied with New Mexico law. Shortly before the scheduled hearing, its manager sent a letter asserting a high compliance level and timely tax practices, but the letter lacked sworn testimony and supporting exhibits.

The parties then jointly asked the hearing officer to cancel the hearing and decide from stipulated facts.

The assessment and penalty were presumed correct

Sections 7-1-17 and 7-1-3 extended the assessment's presumption of correctness to related penalty. Albertson's therefore had the burden to produce facts and legal authority showing that the underpayment was not negligent.

Section 7-1-69 and Regulation 3.1.11.10 defined negligence broadly to include failure to use ordinary business care, inaction when action was required, inadvertence, carelessness, erroneous belief, and inattention.

The stipulation did not address negligence

The stipulated facts listed the assessment amounts and dates of filings, extensions, acknowledgments, and hearing documents. They did not explain why Albertson's failed to pay the $315,943.28 or why that failure reflected ordinary care rather than negligence.

Without those facts, the stipulation left the company with no evidentiary support for its claim.

The manager's letter was not evidence

Administrative tax hearings were quasi-judicial proceedings requiring an adequate evidentiary record. The manager's factual assertions were not sworn, tested by cross-examination, or adopted in the stipulation.

The decision treated the letter as inadmissible hearsay. Under the legal-residuum rule described in the cited cases, an agency decision needed support from at least some evidence admissible under court evidence rules.

Result: protest DENIED. The negligence penalty remained due because Albertson's did not carry its burden of proof.

What this means for you

Taxpayers protesting negligence penalties

Explain the actual cause of the underpayment and support the explanation with admissible documents and testimony. A good compliance history alone may not address the specific failure.

Parties proposing stipulated facts

Make sure the stipulation contains the facts needed for every element of the claim. Procedural dates and dollar amounts did not prove non-negligence here.

Businesses unable to attend a hearing

An unsworn advocacy letter may not substitute for exhibits and testimony subject to evidentiary procedures. Coordinate a valid record rather than assuming written allegations will be accepted as facts.

Common questions

Q: What issue remained for decision?
A: Only whether the negligence penalty on the remaining gross receipts and compensating tax was lawful.

Q: How much tax principal remained after the Department's abatement?
A: $315,943.28.

Q: What did the stipulation prove?
A: It established assessment amounts and procedural dates but did not explain the underlying nonpayment.

Q: Why was the manager's letter insufficient?
A: Its factual allegations were unsworn hearsay, not evidence admitted through the hearing process or adopted by stipulation.

Q: Did the hearing officer decide that a specific accounting error was negligent?
A: No specific cause was proven. The taxpayer lost because it presented no sufficient evidence to rebut the penalty.

Citations and references

Statute and regulation:

• NMSA 1978, § 7-1-3 — tax includes related interest and civil penalty
• NMSA 1978, § 7-1-17 — presumption that an assessment is correct
• NMSA 1978, § 7-1-69(A) — negligence penalty
• Regulation 3.1.11.10 NMAC — definition of negligence

Cases cited:

• El Centro Villa Nursing Center v. Taxation and Revenue Department, 108 N.M. 795, 779 P.2d 982 (Ct. App. 1989)
• Arco Materials, Inc. v. Taxation & Revenue Department, 118 N.M. 12, 878 P.2d 330 (Ct. App. 1994)
• Chavez v. City of Albuquerque, 1997-NMCA-111, 124 N.M. 239, 947 P.2d 1059
• Young v. Board of Pharmacy, 81 N.M. 5, 462 P.2d 139 (1969)

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Albertson’s Fuel Center #990
• Decision PDF: D&O 06-03

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
ALBERTSON’S FUEL CENTER #990 No. 06-03
ID No. 01-773247-00-6; TO PENALTY ASSESSED
UNDER ASSESSMENT NOS. 4089509-4089553

DECISION AND ORDER

On January 30, 2006, the parties filed a motion asking the undersigned Hearing Officer to

vacate the administrative hearing scheduled on the above-referenced protest and decide this matter

based on the Stipulations and Admissions of Fact set forth in the parties’ motion. The motion was

granted on January 31, 2006, at which time the matter was submitted for decision. Based on the

facts presented by the parties, IT IS DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. On June 23, 2003, the New Mexico Taxation and Revenue Department

(“Department”) issued an audit assessment to Albertson’s Fuel Center #990 (“Taxpayer”) under

assessment numbers 4089509 through 4089553 in the total amount of $518,750.53, consisting of

gross receipt tax, compensating tax, penalty, and interest, in the amounts set forth below:

Gross Receipts Tax $249,766.75
Compensating Tax 72,223.09
Total Tax Principal $321,989.84
Penalty $ 32,199.14
Interest 164,561.55
Total Assessment $518,750.53

2. The Taxpayer paid $350,000 on July 22, 2003 to stop the accrual of interest.

3. The Department abated $6,046.56 in compensating tax and related penalty and

interest in the amounts of $604.82 and $3,402.94.

4. By letter dated July 22, 2003, the Taxpayer requested a 60-day extension of time to

file a protest.

5. By letter dated August 1, 2003, the Department granted the Taxpayer’s request for an

extension to file a written protest until September 21, 2003.

6. The Taxpayer filed a formal protest on September 19, 2003.

7. By letter dated October 8, 2003, the Department’s Protest Office acknowledged

receipt of the the Taxpayer’s protest.

8. On November 8, 2005, the Department filed a Request for Hearing with the

Department’s Hearing Bureau.

9. On November 15, 2005, the Hearing Officer issued a Notice of Administrative

Hearing scheduling a formal hearing on the Taxpayer’s protest for 1:30 p.m. on January 31, 2006.

10. The sole issue raised in the Taxpayer’s protest is whether the Department’s penalty

assessment is in accordance with New Mexico law.

11. On January 25, 2006, Robert S. Overstreet, the Taxpayer’s manager for state and

local tax matters, sent an overnight letter to the Hearing Officer stating that the Taxpayer would be

unable to appear at the administrative hearing on its protest and asking the Hearing Officer to

consider various facts and arguments set out in his letter.

12. On January 26, 2006, the Hearing Officer faxed a letter to Mr. Overstreet and the

Department’s attorney explaining that Mr. Overstreet’s letter was not an acceptable substitute for the

Taxpayer’s appearance at the administrative hearing for the following reasons:

Mr. Overstreet’s letter makes a number of factual allegations. For example, his letter
states that “all that is presented in the record is a detailed description of the
taxpayer’s high level of compliance with statutes and regulations, the taxpayer’s
timely and accurate remittance of tax and the timely responses in regard to audit
requests of the department.” I have nothing to substantiate these allegations. Mr.

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Overstreet must understand that the only documents I have in my file are the
following:

The Department’s June 23, 2003 assessment;
The Taxpayer’s July 22, 2003 request for an extension of time to file its protest;
The Department’s August 1, 2003 letter granting the extension;
The Taxpayer’s September 19, 2003 Formal Protest;
The Department’s November 8, 2005 Request for Hearing; and
The Hearing Officer’s November 8, 2006 Notice of Administrative Hearing.

I do not have a copy of the Department’s audit report or any of the correspondence
between the parties. If the Taxpayer believes these documents are relevant to its
protest, the documents must be offered into evidence as exhibits at the administrative
hearing. Any testimony concerning the exhibits must be given under oath and will be
subject to cross-examination by the other side. Administrative tax hearings are
quasi-judicial proceedings which are required to follow certain procedures in order to
insure the due process rights of both parties and establish an adequate record for any
appeal that might be filed with the New Mexico Court of Appeals. Mr. Overstreet’s
letter does not meet these procedural requirements.

13. On January 30, 2006, the parties filed a joint motion asking the Hearing Officer to

vacate the January 31, 2006 hearing and decide this matter based on a stipulation of facts set forth in

the parties’ motion, which are the same facts set out in Findings of Fact 1 through 10, above.

14. On January 31, 2006, the Hearing Officer granted the parties’ motion.

DISCUSSION

As the parties have stipulated, the sole issue to be determined is whether the Department’s

assessment of penalty on the Taxpayer’s underpayment of gross receipts and compensating tax is in

accordance with New Mexico law.

Burden of Proof. Section 7-1-17 NMSA 1978 provides that any assessment of taxes made by

the Department is presumed to be correct. Section 7-1-3 NMSA 1978 defines tax to include not only

the amount of tax principal imposed but also, unless the context otherwise requires, “the amount of

any interest or civil penalty relating thereto." See also, El Centro Villa Nursing Center v. Taxation

and Revenue Department, 108 N.M. 795, 779 P.2d 982 (Ct. App. 1989). Accordingly, the

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presumption of correctness applies to the assessment of penalty at issue in this case, and it is the

Taxpayer’s burden to present evidence and legal arguments to support an abatement.

Applicable Law. NMSA 1978, § 7-1-69 governs the imposition of penalty. Subsection A

imposes a penalty of two percent, up to a maximum of ten percent, for each month that a taxpayer

fails “due to negligence or disregard of rules and regulations” to pay taxes due to the State of New

Mexico in a timely manner. Taxpayer negligence for purposes of assessing penalty is defined in

Regulation 3.1.11.10 NMAC as:

A. failure to exercise that degree of ordinary business care and
prudence which reasonable taxpayers would exercise under
like circumstances;

B. inaction by taxpayers where action is required;

C. inadvertence, indifference, thoughtlessness, carelessness,
erroneous belief or inattention.

In El Centro Villa Nursing Center v. Taxation & Revenue Department, 108 N.M. 795, 797, 779 P.2d

982, 984 (Ct. App. 1989), the New Mexico Court of Appeals upheld this interpretation of the term

“negligence” and rejected the taxpayer’s argument that inadvertent or human error does not support

the imposition of penalty under § 7-1-69:

It is apparent from the taped proceedings that taxpayer's advocate, its
accountant, did not understand the meaning of the term "negligence," either
generally or as specifically defined in Regulation 69:3. He admitted that
taxpayer's accounting system failed in December 1983 and November 1984 ...
but stated that this was due to "human error," which he did not characterize as
negligence. Taxpayer continues the misconception about when failure to pay
tax can be penalized under Section 7-1-69(A) by disregarding any accepted
definition of negligence and asserting that it is unfair to penalize a taxpayer for
inadvertent error.

The court concluded that “Section 7-1-69(A) is designed specifically to penalize unintentional failure

to pay tax.” Id. See also, Arco Materials, Inc. v. Taxation & Revenue Department, 118 N.M. 12, 16,

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878 P.2d 330, 334 (Ct. App. 1994) rev'd on other grounds by Blaze Construction Co. v. Taxation &

Revenue Department, 118 N.M. 647, 884 P.2d 803 (1994).

Application of the Law to the Facts. In order to prevail in this protest, the Taxpayer must

provide factual evidence and legal authority to establish that its failure to pay $315,943.28 of gross

receipts and compensating tax (the original assessment amount minus the subsequent abatement of

$6,046.56) was not the result of negligence as defined in the above-referenced regulations and case

law. As discussed below, the Taxpayer has failed to meet its burden of proof on this issue.

The parties’ January 30, 2006 stipulation of facts is limited to a recitation of the date and

amount of the Department’s assessment and the dates that various documents were filed. It does not

include any facts to explain why the Taxpayer failed to pay the assessed tax in a timely manner or

why this failure does not constitute negligence. Although Mr. Overstreet’s January 25, 2006 letter to

the Hearing Officer included some factual allegations concerning the Taxpayer’s compliance rate,

these allegations are not admissible as evidence. As the Hearing Officer explained to the Taxpayer

in her January 26, 2006 letter, administrative tax proceedings are quasi-judicial proceedings that

must meet certain requirements. One of those requirements is that an administrative decision must

be based, at least in part, on evidence that would be admissible under the rules of evidence for

district courts. As the New Mexico Court of Appeals held in Chavez v. City of Albuquerque, 1997-

NMCA-111, ¶ 4, 124 N.M. 239, 947 P.2d 1059:

Although an administrative agency may consider evidence that would not
be admissible under the rules of evidence, the legal residuum rule requires
that the agency's decision be supported by some evidence that would be
admissible under the rules. Otherwise the agency's decision is not
considered to be supported by substantial evidence.

See also, Young v. Board of Pharmacy, 81 N.M. 5, 9, 462 P.2d 139, 143 (1969) (hearsay evidence is

not competent to support a finding in an administrative agency hearing). Here, the statements made

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in Mr. Overstreet’s letter are inadmissible hearsay and do not meet the requirements of the legal

residuum rule. The stipulation of facts submitted by the parties does not endorse these statements,

nor does it include any other facts bearing on the issue of negligence. In effect, the stipulation

accomplishes nothing and leaves the Taxpayer in exactly the same position it was before, i.e., without

any facts to support its case. Based on the limited record submitted by the parties, the Taxpayer has

failed to meet its burden of proof.

CONCLUSIONS OF LAW

A. The Taxpayer filed a timely, written protest to Assessment Nos. 4089509-4089553,

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

B. The Taxpayer did not present sufficient evidence to support its claim of non-negligence

and failed to meet its burden of proof in this matter.

For the foregoing reasons, the Taxpayer's protest IS DENIED.

DATED February 1, 2006.

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