Could a restaurant partnership recover a negligence penalty when an autonomous regional office stopped paying tax and an employee said abatement was likely?

Plain-English summary

Redrock Foods was not entitled to a refund of $98,696.04 in penalties after its regional office stopped paying New Mexico gross receipts tax. The partnership's management breakdown constituted negligence, and neither an informal Department comment nor Redrock's prior compliance history authorized abatement.

Redrock, a California limited partnership, owned 14 Burger King restaurants in New Mexico. Its Durango office handled New Mexico gross receipts tax and operated with almost total autonomy under one partner.

In late 2002 or early 2003, management in that office broke down. Gross receipts tax went unpaid from February 2003 through April 2004, while the other partners remained unaware of the problem. After discovering it, Redrock moved tax responsibility to California, resumed current payments, obtained financing, and entered a payment plan with a $100,000 down payment.

Redrock eventually paid all assessed amounts. The partners paid the penalty from their own funds and sought a refund of $98,696.04.

The office breakdown was negligence

Section 7-1-69(A) required a penalty when failure to pay resulted from negligence or disregard of rules and regulations. Regulation 3.1.11.10 NMAC defined negligence to include failure to use ordinary business care, inaction when action was required, and carelessness or inattention.

Redrock acknowledged that insufficient supervision and tardy management caused the nonpayment. The hearing officer found that description fit the regulatory definition.

The partnership answered for its people

The responsible partners argued that it had been reasonable to trust the Durango partner because he knew the business, had a personal stake in success, and had managed successfully for years.

But Redrock itself was the taxpayer. It was liable for the actions of all partners and employees, so responsible conduct by some partners did not cancel negligence in the Durango office. The decision also found that ordinary care required some periodic review, however trustworthy the local manager appeared.

A tentative comment did not create estoppel

A Department employee told Redrock's CFO that she was "pretty sure" the penalty could be abated if the company arranged a short-term payment plan. Redrock's own correspondence said the employee was still working on abatement, and a supervisor later told the company that the penalty could not be abated.

Because the Department made no firm commitment, the hearing officer found no basis for estoppel.

Prior compliance did not authorize a waiver

Redrock also relied on its past reporting history and substantial tax payments. The decision held that the Legislature required a penalty when late payment resulted from negligence and did not authorize the Department or hearing officer to waive it for prior good history.

Result: protest DENIED. The negligence penalty was properly imposed, and Redrock received no refund.

What this means for you

Multi-location businesses

Delegating tax functions does not remove the taxpayer's responsibility. Periodic review and controls matter when a remote office or manager has broad autonomy.

Partnerships and employers

The entity may be responsible for negligent actions of partners and employees even when other owners acted responsibly and did not know about the failure.

Taxpayers negotiating payment plans

Do not treat a tentative employee statement as a binding abatement agreement. The decision distinguished "pretty sure" from a firm Department commitment.

Businesses with a strong compliance record

Past compliance did not give the hearing officer discretion to erase a negligence penalty required by statute.

Common questions

Q: What caused the missed tax payments?
A: A management breakdown in Redrock's Durango office led to nonpayment from February 2003 through April 2004.

Q: Why were the other partners' responsible actions insufficient?
A: The taxpayer was the partnership, which was liable for actions of all its partners and employees.

Q: What oversight did the decision expect?
A: It said ordinary business care required some periodic review of the autonomous manager's activities.

Q: Did the Department promise to waive the penalty?
A: No. An employee said she was "pretty sure" it could be abated, but no firm commitment was made.

Q: Why did Redrock's prior reporting history not help?
A: The hearing officer lacked authority to waive the statutory negligence penalty on that basis.

Citations and references

Statute and regulation:

• NMSA 1978, § 7-1-69(A) — penalty for negligence or disregard of rules and regulations
• Regulation 3.1.11.10 NMAC — definition of negligence

Cases cited:

• State ex rel. Taylor v. Johnson, 1998-NMSC-015, 961 P.2d 768
• State ex rel. State Park & Recreation Commission v. New Mexico State Authority, 76 N.M. 1, 411 P.2d 984 (1966)

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Redrock Foods, Ltd.
• Decision PDF: D&O 06-16

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
REDROCK FOODS, LTD. No. 06-16
NM ID NO. 02-258838-00 8, TO DENIAL OF
CLAIM FOR REFUND ISSUED UNDER
LETTER ID L1968004608

DECISION AND ORDER

A formal hearing on the above-referenced protest was held on August 30, 2006,

before Margaret B. Alcock, Hearing Officer. The Taxation and Revenue Department

(“Department”) was represented by Bruce J. Fort, Special Assistant Attorney General. Redrock

Foods, Ltd. was represented by Julian Josephson, one of its partners. Based on the evidence

and arguments presented, IT IS DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. Redrock Foods, Ltd. (“Redrock”) is a California limited partnership that owns

14 Burger King restaurants in New Mexico.

2. When Redrock began doing business in New Mexico in 1995, its Durango,

Colorado, office had responsibility for payment of New Mexico gross receipts taxes.

3. The Durango office was managed by one of Redrock’s partners, who had been

an employee of the partnership prior to 1995 and was familiar with the business.

4. In late 2002 or early 2003, there was a breakdown in management in the

Durango office, resulting in the nonpayment of Redrock’s New Mexico gross receipts taxes

beginning in February 2003.

5. Because the other partners had given the Durango partner almost total

autonomy in his sphere of operation, they were not aware that required tax payments were

not being made.

6. Over time, the other partners began receiving notices from their franchisor and

various governmental agencies indicating that there was a problem in the Durango office.

7. In early 2004, the other partners closed the Durango office and transferred

responsibility for payment of taxes to an office in California.

8. The problem with Redrock’s New Mexico gross receipts tax reporting was not

discovered until June 2004.

9. Beginning in June 2004, Redrock timely reported and paid gross receipts taxes

due for May 2004 and all subsequent reporting periods. At the same time, Redrock

approached its lender for a loan commitment to pay back taxes due for reporting periods

February 2003 through April 2004.

10. On August 16, 2004, Michael Wells, Redrock’s vice president and chief

financial officer, sent a letter to Carolyn Konz, an employee in the Department’s Audit and

Compliance Division, stating that Redrock was ready to proceed with a payment plan.

11. Mr. Wells’ letter said that in arranging for a loan commitment to repay the

back taxes, he determined that Redrock’s lender would not agree to the payment of penalty.

Mr. Wells concluded:

Therefore, we are requesting that you waive all of the penalties and we will
begin the payment plan as soon as our lender permits, but no later than
September 15, 2004. We appreciate your assistance in this matter and assure it
was never Redrock Foods intention not to pay the New Mexico Sales Tax.

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12. On August 20, 2004, Carolyn Konz had a telephone conversation with Mr.

Wells and told him that if Redrock could arrange for a short-term payment plan, she was

“pretty sure” the penalty could be abated.

13. On August 26, 2004, Mr. Wells mailed Ms. Konz a signed copy of Redrock’s

payment plan, together with a check for $100,000 as a down payment.

14. In his transmittal letter Mr. Wells stated: “We understand that you are

continuing to work on getting the penalties abated or reduced and that when that occurs we

will receive a new payment plan with adjusted dollar amounts.”

15. On November 18, 2004, Shannon Baxter, a supervisor in the Department’s

Audit and Compliance Division, called Mr. Wells and told him that the Department would

not be able to abate the penalty associated with Redrock’s late payment of gross receipts tax.

16. On May 24, 2005, Julian Josephson, one of Redrock’s partners, notified

Carolyn Konz that Mr. Wells had left the company due to health problems and requested “an

abatement of penalties regarding the Short Term Payment Plan we entered into with you on

August 25, 2004.” Mr. Josephson further stated: “My hope is that you have been successful

in having your department agree to an abatement of the penalty.”

17. By June 2005, Redrock had paid all amounts assessed by the Department,

including the penalty, which the partners paid from their own funds.

18. After the final payment was made, Mr. Josephson continued to send letters to

the Department concerning the abatement of penalty.

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19. On September 16, 2005, the Department advised Mr. Josephson to file a

formal claim for refund of the penalty.

20. On September 28, 2005, Redrock filed an application for refund of the

$98,696.04 of penalty it had paid to the Department.

21. On December 16, 2005, the Department denied Redrock’s claim for refund.

22. On January 26, 2006, Redrock filed a written protest to the Department’s

denial of its claim for refund.

DISCUSSION

The sole issue to be decided is whether Redrock is entitled to a refund of the

$98,696.04 of penalty associated with the late payment of its gross receipts taxes for

reporting periods February 2003 through April 2004. NMSA 1978, § 7-1-69(A) governs the

imposition of penalty and provides that when a taxpayer fails to pay taxes as a result of

negligence or disregard of rules and regulations, a penalty “shall be added” to the amount of

the underpayment. The term negligence as used in § 7-1-69(A) 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 this case, Redrock concedes that its failure to pay New Mexico gross receipts taxes for the

period at issue was the result of a breakdown in its Durango office “due to insufficient

supervision and tardy management.” This situation meets the definition of negligence.

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At the administrative hearing, Mr. Josephson argued that he and the remaining

partners acted reasonably in allowing the Durango partner to operate without supervision or

outside oversight. Mr. Josephson pointed out that the Durango partner had a personal stake

in the success of the partnership; that before becoming a partner he was a mid-level manager

and was familiar with the operation of the business; and that he had successfully managed the

Durango office for several years before problems developed. These arguments might be

persuasive if the negligence of the current partners were the matter at issue. It is not. The

taxpayer in this case is the partnership, which is liable for the actions of all of its partners and

employees. The fact that some partners may have acted responsibly does not absolve

Redrock from liability for the negligence of the partner and employees located in the

Durango office. It is also clear that, however trustworthy the Durango partner appeared to

be, ordinary business care and prudence required the remaining partners to perform some

periodic review of his activities.

Redrock next raises an argument of estoppel, contending that Michael Wells, its

former vice president and chief financial officer, discussed the abatement of penalty with

Carolyn Konz, an employee in the Department’s Audit and Compliance Division. Mr.

Josephson acknowledges, however, that there was no firm commitment made by the

Department. During a telephone conversation with Mr. Wells in August 2004, Ms. Konz said

she was “pretty sure” the penalty could be abated if Redrock entered into a short-term

payment plan. The Department’s computer journal shows that two months later, in

November 2004, a supervisor in the Audit and Compliance Division spoke with Mr. Wells

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and told him that the Department would not be able to abate the penalty. These facts do not

provide a basis for estoppel.

Finally, Mr. Josephson asks the hearing officer to waive or reduce the penalty based

on Redrock’s exemplary reporting history and the substantial amount of CRS taxes it has

paid to the state over the years. Unfortunately, these are not factors the hearing officer can

consider. In State ex rel. Taylor v. Johnson, 1998-NMSC-015 ¶ 022, 961 P.2d 768, 774-775,

the New Mexico Supreme Court made the following observations concerning the power of

administrative agencies:

Generally, the Legislature, not the administrative agency, declares the policy
and establishes primary standards to which the agency must conform. See State
ex rel. State Park & Recreation Comm'n v. New Mexico State Authority, 76
N.M. 1, 13, 411 P.2d 984, 993 (1966). The administrative agency's discretion
may not justify altering, modifying or extending the reach of a law created by
the Legislature....

In this case, the Legislature has directed the imposition of penalty whenever a late payment

results from the taxpayer’s negligence. The Legislature has not granted the Department or its

hearing officer authority to waive the penalty based on a taxpayer’s past reporting history.

Because Redrock’s late payment of its gross receipts taxes was due to negligence, there is no

basis for abating the penalty.

CONCLUSIONS OF LAW

A. Redrock filed a timely, written protest to the refund denial issued under Letter ID

L1968004608, and jurisdiction lies over the parties and the subject matter of this protest.

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B. Redrock was negligent in failing to make timely payment of New Mexico gross

receipts taxes for reporting periods February 2003 through April 2004, and penalty was

properly imposed pursuant to NMSA 1978, § 7-1-69.

C. The Department did not agree to abate the penalties assessed against Redrock

and there is no basis for a finding of estoppel.

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

DATED September 14, 2006.

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