Did Sipapu owe civil penalties when a previously reliable bookkeeper concealed seven missed 2008 gross receipts tax filings and payments?

Plain-English summary

Sipapu Recreation Development II, LLC did not owe civil penalties for seven missed 2008 gross receipts tax periods because a previously reliable bookkeeper deliberately concealed the failures. The resort exercised ordinary business care, could not reasonably have detected the deception sooner, and was not negligent.

Sipapu owned and operated Sipapu Ski and Summer Resort in southern Taos County. From 2000 through March 2008, it timely filed and paid gross receipts tax for 86 reporting periods.

Its paid bookkeeper had handled gross receipts tax since 2004 and had performed satisfactorily for three years. During 2008 she continued to appear competent, said that the taxes were being handled, and visibly set aside work near month-end to prepare them. A supervising partner asked whether the taxes were complete and received assurances that they were.

In fact, Sipapu failed to file and pay for seven monthly periods ending in March, April, and August through December 2008.

The bookkeeper constructed a convincing false record

The problem surfaced in January 2009 when a manager's credit-card purchase was declined. Although an altered statement appeared to show a $24,000 limit, the card issuer said the limit had fallen to $3,100 because payments had not been received.

Sipapu investigated and found that the bookkeeper had altered or fabricated credit-card statements. It relieved her of duties on February 3, 2009, hired a new accountant, and retained two forensic accountants to reconstruct records going back to 2007.

The forensic review found that records had been destroyed and that checks for the March and April 2008 gross receipts payments had been entered into Sipapu's internal system even though they never cleared the bank. No missing money was ultimately identified; the managing member concluded that the deception was intended to hide poor job performance.

After the Department contacted Sipapu in early May 2009, the company verified the missing periods and filed all missing CRS-1 reports on May 12.

Only the civil penalty remained in dispute

The Department issued seven assessments for principal, penalty, and interest. During the protest, the parties discovered that the assessments understated principal because withholding payments had been credited against gross receipts tax.

Sipapu stipulated to increased principal and interest and withdrew its protest of those amounts. The sole remaining issue was whether civil penalty applied.

Reasonable supervision did not reveal the intentional concealment

The negligence regulation asked whether the taxpayer failed to exercise the ordinary business care and prudence that reasonable taxpayers would use in similar circumstances.

The hearing officer found Sipapu's managing member highly credible. The company had a long compliance history, the bookkeeper had earned trust through years of successful performance, a partner continued to supervise and question her, and her conduct was designed to defeat an internal review. Even checking the accounting system would have shown entries for tax checks that appeared to have been prepared.

Once Sipapu discovered the problem, it fired the bookkeeper, hired a replacement, engaged forensic accountants, corrected the filings, and remained current through the hearing.

The decision distinguished an agent's ordinary inadvertent error from intentional deception engineered to hide noncompliance. It found that a reasonable taxpayer could not have uncovered this scheme sooner.

Destroyed records independently supported abatement

The hearing officer also found an alternative basis for relief. Regulation 3.1.11.11(C) treated physical damage to records that delayed filing or payment as a nonnegligence factor.

The decision saw no logical difference between records destroyed by a catastrophe and records deliberately altered, hidden, or destroyed by an agent when both events were beyond the taxpayer's reasonable control. The absence of the destroyed records did not defeat Sipapu's credible testimony about what happened.

Result: protest GRANTED. All civil penalty was ordered abated.

What this means for you

Business owners delegating tax compliance

Delegating tax work does not automatically excuse a missed filing. Here, relief depended on a strong prior compliance history, active supervision, direct false assurances, falsified records, prompt corrective action, and proof that the scheme could defeat reasonable review.

Employers discovering accounting misconduct

Preserve available records, reconcile bank activity, document false entries or altered statements, and correct tax filings promptly. Sipapu's immediate replacement of the employee and use of forensic accountants supported its credibility.

Tax professionals seeking penalty abatement

Frame the evidence around the regulatory definition of ordinary business care and every specific nonnegligence factor supported by the record. The hearing officer treated intentional destruction of records as physical damage for purposes of the cited rule.

Common questions

Q: Did Sipapu still owe the gross receipts tax and interest?
A: Yes. It stipulated to the corrected principal and interest and withdrew its protest of those amounts.

Q: How many filing periods were missed?
A: Seven monthly periods ending in March, April, August, September, October, November, and December 2008.

Q: Why was the company not negligent?
A: The bookkeeper had years of reliable performance, remained supervised, gave false assurances, and created records that appeared to show compliance. The hearing officer found that ordinary business care would not have exposed the deception sooner.

Q: Does any employee mistake eliminate a tax penalty?
A: No. The decision distinguished intentional, difficult-to-detect concealment from an agent's inadvertent accounting error.

Q: What happened to the civil penalty?
A: It was abated in full.

Citations and references

Statutes and regulations:

• NMSA 1978, § 7-1-17(C) (2007) — presumption that an assessment is correct
• NMSA 1978, § 7-1-69(A) (2007) — civil penalty for negligent failure to pay tax
• Regulation 3.1.11.10 NMAC — negligence and ordinary business care
• Regulation 3.1.11.11(C) NMAC — physical damage to records as a nonnegligence factor

Authorities discussed:

• Archuleta v. O'Cheskey, 84 N.M. 428, 504 P.2d 638 (Ct. App. 1972)
• MPC Ltd. v. New Mexico Taxation and Revenue Department, 2003-NMCA-021
• El Centro Villa Nursing Center v. Taxation and Revenue Department, 108 N.M. 795, 779 P.2d 982 (Ct. App. 1989)
• In the Matter of the Protest of Sandia Oil Company, D&O 01-01

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Sipapu Recreation Dev. II, LLC
• Decision PDF: D&O 10-21

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
SIPAPU RECREATION DEV. II, LLC. No. 10-21
TO ASSESSMENT ISSUED UNDER LETTER
ID NOs. L14373577856, L0399836032, L1742013312,
L0668271488, L1205142400, L0131400576, L2077557632

DECISION AND ORDER

A formal hearing on the above-referenced protest was held on June 29, 2010 and again on

October 14, 2010, before Brian VanDenzen, Hearing Officer. At both hearings, the Taxation and

Revenue Department ("Department") was represented by Ida Lujan, Special Assistant Attorney

General. Ms. Silvia Sena appeared as a witness on behalf of the Department. Mr. James Coleman,

managing partner of Sipapu Recreation Development II LLC (Taxpayer) appeared pro se at both

hearings. Department Exhibits A1-A7, B, C, D, F, G, H, I, J, and K are admitted into the record.

The Department withdrew Exhibits E1 & E2. Department L is not admitted into the record as it

is a series of communications related to settlement discussion between the Department and the

Taxpayer. Based on the evidence and arguments presented, IT IS DECIDED AND ORDERED

AS FOLLOWS:

FINDINGS OF FACT

1. Taxpayer is a limited liability corporation that owns and operates Sipapu Ski and

Summer Resort in southern Taos County, New Mexico.

2. Mr. James Coleman has been the managing member/partner for Taxpayer since

2000.

3. From 2000 until March 2008, which encompassed 86 gross-receipts reporting

periods, Taxpayer had always filed and paid its monthly gross-receipts taxes on time.

4. Ms. Dara Nichols, a paid bookkeeper for Taxpayer, was responsible for the filing

and payment of New Mexico gross receipts taxes for a 4-year period of time beginning in 2004.

5. Ms. Nichols was not a certified public accountant or tax professional, but she did

have previous business experience working as an accountant.

6. Until 2008, Ms. Nichols had a history of satisfactory and trustworthy completion

of accounting with the Taxpayer, including the timely filing and payment of New Mexico gross

receipts taxes.

7. Based on her satisfactory and timely performance of her duties in filing taxes,

paying taxes, and reconciling the various accounts during the three-years preceding 2008, Ms.

Nichols had earned the trust of Taxpayer.

8. During 2008, Ms. Nichols maintained an outward appearance of successful

compliance with her job duties: she showed up on time, performed her duties, maintained a

professional and competent attitude, and assured her supervisor, partner Jesse McBain, that she

was continuing to comply with her tax obligations. Mr. McBain also visually observed Ms.

Nichols setting aside other work at the end of the month when the taxes were due. Since Ms.

Nichols had earned Taxpayer’s trust, Taxpayer took her assurances that she was complying with

the necessary accounting obligations at face value.

9. Since three partners, Mr. Coleman, Mr. McBain, and Mr. Jimbo Alley (last name

uncertain—it could be Gallie), shared check signing responsibilities depending on who was

available and in the office, Mr. McBain assumed based on Ms. Nichols continuing assurances

In the Matter of the Protest of Sipapu Recreation Dev. II, LLC., page 2 of 17
that New Mexico gross receipts taxes had been completed and paid, that one of the other two

partners actually signed the check for the New Mexico gross receipts tax payments.

10. Taxpayer assumed that all appropriate New Mexico gross receipts taxes filings

and payments had been made in 2008 based on their history of previous compliance, their trust in

Ms. Nichols’ previous job performance, and Ms. Nichols’ continuing verbal assurances that she

had completed her obligations.

11. Despite the Taxpayer’s assumption at that time, it is now undisputed that

Taxpayer failed to timely file and pay New Mexico gross receipts taxes in 2008 during required

monthly reporting period ending on March 31st, April 30th, August 31st, November 30th, and

December 31st.

12. In January 2009, Mr. Coleman attempted to make a large purchase with a credit

card that he believed based on reviewing his credit card statement had a credit limit of $24,000.

When Mr. Coleman’s transaction was declined by the credit card company, Mr. Coleman called

the credit company. The credit card company informed Mr. Coleman that his credit limit had

been reduced to $3,100 because no payments had been received. Ms. Nichols was responsible

for payment of the credit cards.

13. Mr. Coleman investigated the matter further and determined that Ms. Nichols had

altered and/or fabricated Mr. Coleman’s credit card statements to make it appear like she had

properly paid the credit card balance and to make it appear that the credit limit remained at

$24,000 rather than the reduced $3,100 credit limit.

14. Based on these discrepancies, which suggested to Mr. Coleman either fraud or

embezzlement of funds, Mr. Coleman relieved Ms. Nichols of her duties with Taxpayer on

February 3, 2009.

In the Matter of the Protest of Sipapu Recreation Dev. II, LLC., page 3 of 17

15. Taxpayer hired Ms. Jennifer Baker as a new accountant to deal with all

immediate accounting obligations at the time of her hiring. Ms. Baker immediately prepared,

filed, and paid the requisite gross receipts taxes for the gross receipts reporting period ending on

January 31, 2009. Taxpayer has timely reported every gross receipts obligation since January 31,

2009 through the time of the hearing in this matter.

16. Because of their concern that Ms. Nichols may have embezzled funds and to

determine whether there were any other unknown outstanding obligations, Taxpayer hired two

forensic accountants in February 2009 to reconcile all bank statements and statements of account

going back to 2007.

17. Taxpayer’s forensic accountants determined that Ms. Nichols destroyed many

records related to the Taxpayer’s accounts, making it extremely time-consuming for Taxpayer to

reconcile the accounts and determine what if any outstanding obligations from that time period

remained.

18. Taxpayer’s forensic accountants determined that Ms. Nichols had deceptively

entered checks for March 2008 and April 2008 gross receipts payments into Taxpayer’s internal

account management system, but those checks never cleared the banks.

19. Taxpayer’s forensic accountants believed that Ms. Nichols had taken funds based

on her elaborate and deceptive accounting schemes discovered during the reconstruction.

20. However, to date, the Taxpayer has not discovered any missing or unaccounted

for money. Since there is now no evidence of theft, Mr. Coleman now believes that Ms. Nichols

was deceptive simply to hide her bad job performance in 2008 and keep her job.

21. In early May 2009, just as the forensic accountants were beginning the process of

reconciling the 2008 bank statements and accounts, the Department contacted Taxpayer by phone

In the Matter of the Protest of Sipapu Recreation Dev. II, LLC., page 4 of 17
to inform Taxpayer about the outstanding gross receipts tax obligations in March, April, August,

September, October, November, and December 2008.

22. Taxpayer’s forensic accountants quickly verified through bank reconciliation that

checks listed in Taxpayer’s internal accounting software for the gross receipts tax payments in

March and April 2008 never cleared the bank. Additionally, Taxpayer verified that no filings or

payments were made for the periods ending in August, September, October, November, and

December 2008.

23. Taxpayer filed all the missing CRS-1 reports on May 12, 2009.

24. On May 26, 2009, the Department issued seven assessments for unpaid principal

gross receipts tax, penalty, and interest.

25. Taxpayer timely protested the seven-assessments on June 3, 2009 and again on

June 10, 2009.

26. At the hearing on June 29, 2010, the Department found an error in the total

amount of taxes due listed on these seven assessments because apparently the Department

incorrectly had credited some withholding tax payments against the outstanding gross receipts

tax principal. The Department believed that the Taxpayer’s actual gross receipts taxes due

exceeded the amounts listed on the notices of assessment.

27. The June 29, 2010 hearing was stayed to give the Department and the Taxpayer

more time to reconcile the apparent discrepancy between the lower amount of principal tax due

under the assessments and the higher amount the Department was requesting during that hearing.

28. On July 13, 2010, the Taxpayer and the Department reached a stipulation

amending and increasing the total amount of gross receipt tax principal due. No new assessment

was issued. [Department K, ¶10]

In the Matter of the Protest of Sipapu Recreation Dev. II, LLC., page 5 of 17

29. On July 13, 2010, the Taxpayer and the Department reached a stipulation

amending and increasing the total amount of interest due on outstanding gross receipt tax. No

new assessment was issued. [Department K, ¶11]

30. On July 13, 2010, the Taxpayer withdrew his protest as to tax principal and

interest. [Department K, ¶12]

31. On July 13, 2010, Taxpayer and the Department stipulated that the only remaining

issue for a determination during the protest is the assessment of civil penalty. [Department K,

¶13]

32. That matter was reconvened on October 14, 2010 for further testimony,

presentation of exhibits, and closing arguments.

DISCUSSION

Based on the stipulation of the parties, the only issue to be decided in this case is whether

the Taxpayer is liable for payment of civil penalty for gross receipts tax periods ending March

31, April 30, August 31, September 30, October 31, November 30, and December 31, 2008 when

a previously trusted account-manager/bookkeeper responsible for the filing and payment of gross

receipt taxes affirmatively misled Taxpayer about the status of those filings and payments,

altered and/or forged statements of accounts during that period of time, and destroyed relevant

account records during that period of time. Because the Taxpayer has demonstrated that it

exercised the degree of ordinary business care and prudence which reasonable taxpayers would

exercise under like circumstances, and because Taxpayer has demonstrated indicators of non-

negligence, civil penalty for these reporting periods is abated.

In the Matter of the Protest of Sipapu Recreation Dev. II, LLC., page 6 of 17
Presumption of Correctness and Burden of Proof.

Under NMSA 1978, §7-1-17(C) (2007), the assessment issued in this case is presumed to

be correct. Consequently, the Taxpayer has the burden to overcome the assessment and establish

that he was not required to pay the tax principal, interest, and penalty. See Archuleta v.

O'Cheskey, 84 N.M. 428, 431, 504 P.2d 638, 641 (NM Ct. App. 1972).

However, once a taxpayer rebuts the presumption of correctness, the burden shifts to the

Department to show the correctness of the assessed tax. See MPC Ltd. v. N.M. Taxation & Revenue

Dep't, 133 N.M. 217, 220, 2003 NMCA 21, ¶13, 62 P.3d 308, 311 (N.M. Ct. App. 2002).

Assessment of Penalty.

When a taxpayer fails to pay taxes due to the State as a result of negligence or disregard

of rules and regulations, NMSA 1978, Section 7-1-69(A) (2007) imposes a penalty of two

percent per month “from the date the tax was due,” not to exceed twenty percent of the

outstanding tax liability. The term “negligence” is defined in Regulation §3.1.11.10 NMAC

(1/15/01) 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.

Regulation §3.1.11.11 NMAC (1/15/01) provides instances of nonnegligence where no

penalty should be assessed against a taxpayer under the civil penalty statute. Of particular

relevance is Regulation §3.1.11.11 (C) NMAC (1/15/01), which establishes non-neglignce when

In the Matter of the Protest of Sipapu Recreation Dev. II, LLC., page 7 of 17
“the taxpayer shows that physical damage to the taxpayer’s records or place of business caused a

delay in filing a return or making payment of tax.”

Analysis

While much of the hearing was spent focused on the indicators of non-negligence under

regulation §3.1.11.10 NMAC (1/15/01), the facts of this case suggest that the first issue to consider

is whether the Taxpayer was even negligent, and thus liable for civil negligence penalty. As

relevant to the facts of this case, regulation §3.1.11.10 NMAC (1/15/01) defines negligence as

“failure to exercise that degree of ordinary business care and prudence which reasonable taxpayers

would exercise under like circumstances.”

The analysis of this question begins with the most basic issue presented to all fact-finders:

the credibility of the witnesses and its role in determining the weight of the evidence. In this

case, the testimony of Mr. Coleman was extremely credible. Mr. Coleman was forthwith in

admitting any perceived faults and in responding with candor to any questions suggesting a

possible negative inference about the Taxpayer’s business practices. At all times, Mr. Coleman

was cooperative with the Department and made every effort to be agreeable with the Department,

even to the point of stipulating to amount of total tax due above what was legally required by the

Department’s seven notices of assessment.

In response to Mr. Coleman’s cooperation, including his voluntary stipulation to pay

more principal tax than Taxpayer was legally compelled under the seven notices of assessment,

the Department asserted in closing argument that the Taxpayer is “shoe-string operation” that

does not take its accounting and tax-paying obligations seriously and that Taxpayer’s failure to

In the Matter of the Protest of Sipapu Recreation Dev. II, LLC., page 8 of 17
report and pay gross receipts tax occurred “every month.” These two Department allegations

against the Taxpayer are simply not supported by the record. In discussing why these allegations

are unsupported, it becomes apparent that rather than being negligent under the regulatory

definition, the Taxpayer was the victim of deceptive accounting practices that even a reasonable

taxpayer exercising ordinary business care and prudence could not have detected in time to pay the

required monthly gross-receipts taxes at issue in this case.

Rather than missing every month of payments, as the Department suggests in closing

argument, in ten years or so, the Taxpayer properly filed and paid its required New Mexico gross

receipt taxes for all but seven-months in 2008. Those seven-months of missed payments in 2008

are directly attributable to the deceptive and arguably-fraudulent actions of one bad employee,

Ms. Nichols. Ms. Nichols had earned Taxpayer’s trust by satisfactorily and timely executing her

duties as an accountant for the Taxpayer for the three years preceding 2008. In 2008, Ms.

Nichols was supervised by another partner, Mr. Jesse McBain. Mr. McBain was satisfied that

Ms. Nichols was filing and paying the required New Mexico gross receipts tax during 2008

because when he would ask her, she would assure him that it was taken care. Given her history

of performance that had earned her the Taxpayer’s trust, Mr. McBain had no reason to doubt Ms.

Nichols assurances that she had taken care of the taxes.

Only later, it became apparent that in 2008 Ms. Nichols had abused her position of

employment with deceptive, inaccurate, and arguably-fraudulent accounting practices. Upon

learning of this bad employee’s intentional altering and/or forging of bank statements,

destruction of records, and elaborately deceptive accounting practices, Taxpayer promptly fired

Ms. Nichols. In addition to replacing Ms. Nichols with a new internal business accountant,

In the Matter of the Protest of Sipapu Recreation Dev. II, LLC., page 9 of 17
Taxpayer also hired two forensic accountants to reconstruct what occurred, correct Ms. Nichols’

errors, omissions, and misrepresentations, and reconcile Taxpayer’s accounting. The action of

hiring two forensic accountants, which most certainly required a substantial unplanned financial

commitment from the Taxpayer, is hardly indicative of the “shoe-string operation” the

Department suggests, but rather supports the Taxpayer’s contention that the Taxpayer in general

takes its accounting obligations and taxpaying obligations seriously.

While it may be easy in hindsight to suggest that Taxpayer should have maintained much

closer supervision of Ms. Nichols in 2008, at the time there was no basis for Taxpayer to do so.

Ms. Nichols had earned a basic level of trust in her job performance based on three prior years of

successful tax filings, tax payments, and account management. It would be one thing if Taxpayer

provided no supervision to Ms. Nichols based on this trust, but the evidence in this case

established that Mr. McBain continued to supervise her during 2008. While supervising her, Mr.

McBain recalled and observed that Ms. Nichols would tell him near the end of every month that

she needed to set aside other work to make sure the New Mexico gross receipt taxes were

completed. And as part of his supervisory role, Mr. McBain would ask whether the New Mexico

gross receipt taxes had been completed, to which Ms. Nichols assured him that they had been

completed. Mr. McBain’s visual observation of Ms. Nichols setting aside other work to prepare

the New Mexico gross receipt taxes, Ms. Nichols affirmative assurances in response to Mr.

McBain’s inquiries about the taxes, and Ms. Nichols own past satisfactory performance would

have likely caused any reasonably prudent taxpayer to believe that Ms. Nichols had acted

appropriately by filing and paying the taxes when due.

In the Matter of the Protest of Sipapu Recreation Dev. II, LLC., page 10 of 17
The Taxpayer’s closing argument—that the Department expects perfection rather than

ordinary business care by a reasonable taxpayer as required under Regulation §3.1.11.10 NMAC

(1/15/01)—is compelling. No business is immune from the deceptive and arguably fraudulent

actions of a bad employee. As we have all unfortunately learned from reading the newspaper

over the past ten-years, even model Fortune 500 companies relying on many internal checks and

balances in accounting practices as well as high priced outside professional accounting firms

have been the victim of clever and deceptive accountants, employees, managers, and executives.

In a perfect world, such deception would immediately be caught and addressed. But in

this real world case, it is difficult to accept that at the time of Ms. Nichols’ deceptive conduct, a

reasonable taxpayer using ordinary business care would have been able to detect Ms. Nichols’

fraudulent actions any sooner than when Taxpayer detected it in 2009. Ms. Nichols convincingly

altered and/or forged bank statements in order to hide her failure in performing her work

obligations. Ms. Nichols was hiding and destroying records that might otherwise have shown her

deception. Ms. Nichols was falsely assuring her supervisor when questioned by him about her

ongoing obligations. The forensic accountants later learned that the checks for the March and

April 2008 gross-receipts taxes had been entered into the Taxpayer’s internal account

management system, but had never cleared the bank, suggesting again that Ms. Nichols devised a

highly deceptive system designed to hide her job failings. That is, even if Mr. McBain had

decided that Ms. Nichols’ verbal assurances that the taxes had been completed were insufficient

and he decided to conduct his own independent review, Ms. Nichols had rigged that potential

internal review by entering the checks into the internal account system in such a way to suggest

she had taken care of the outstanding taxes.

In the Matter of the Protest of Sipapu Recreation Dev. II, LLC., page 11 of 17
The Department argues that this case is no different than El Centro Villa Nursing Center

v. Taxation and Revenue Department, 108 N.M. 795, 799, 779 P.2d 982, 986 (Ct. App. 1989)

wherein the New Mexico Court of Appeals held a taxpayer liable for penalty based on the negligent

actions of its agent. However, El Centro is distinguishable from the facts of this matter as El

Centro dealt with inadvertent error in that taxpayer’s accounting system. The facts of this case

do not involve inadvertent error, but the intentional acts of deception (if not fraudulent acts) of an

agent designed to hide her poor job performance from the Taxpayer. In other words, the question

of negligence in this case is not related to inadvertence, but to whether the Taxpayer exercised

“the degree of ordinary business care and prudence which reasonable taxpayers would exercise in

similar circumstances.”

The Department further argues that two other Decisions and Orders are relevant to the

determination in this case: Matter of the Protest of Rio Rancho Pharmacy, No. 97-05 (“Rio

Rancho Pharmacy”), and Matter of the Protest of G.M. and Bernice Thompson, No 98-19

(“Thompson”). In Rio Rancho Pharmacy, tax penalty was properly assessed against a taxpayer,

even though the taxpayer’s initial failure to file and pay gross receipts tax was caused by her non-

negligent prolonged illness, when taxpayer nevertheless failed to timely act upon learning of the

delinquent tax obligation after recovering from her various conditions. Rio Rancho Pharmacy

dealt specifically with the application of the injury or prolonged illness non-negligence factor

articulated under §3.1.11.11(B) NMAC (1/15/01), a factor not at issue in the present controversy.

Consequently, since Rio Rancho Pharmacy addressed a non-negligence factor that is not at issue

in the present controversy, it is of limited persuasive value to this case. Further, Thompson is

not particularly relevant to the present controversy because the penalty issue in Thomson dealt

with the reasonableness (or lack thereof) of the taxpayer’s reliance on a certified public
In the Matter of the Protest of Sipapu Recreation Dev. II, LLC., page 12 of 17
accountant (Ms. Nichols, a bookkeeper, was not an accountant for the purposes of the non-

negligence factor), another non-negligence factor not at issue in the present controversy.

Taxpayer argues that this matter is similar to a Decision and Order issued by the

Department in the Matter of the Protest of Sandia Oil Company, No. 01-01 (“Sandia Oil”). The

Department argued that the matter at hand is distinguishable from Sandia Oil because Taxpayer

did not make as detailed inquiries with the accountant in this matter as the taxpayer in Sandia Oil

made of the accountant at issue in that case.

While the Decision and Order of another hearing officer has no precedential or

controlling authoritative weight, the Sandia Oil decision is persuasive in support of the

Taxpayer’s argument for abatement of penalty because the facts are so similar. In Sandia Oil, a

long-time trusted employee-accountant became depressed and failed to timely file and pay New

Mexico gross receipts taxes. This Sandia Oil employee-accountant maintained an outward

appearance of remaining current on the tax obligations by speaking often of preparing and filing

returns, by visually working on returns, and by assuring the managing partner of Sandia Oil that

other partners were signing the appropriate tax checks. When asked if she needed assistance by

the managing partner, the Sandia Oil employee-accountant declined the invitation for help.

Later, when it became apparent that the Sandia Oil employee-accountant had failed to timely file

and pay taxes, the Sandia Oil employee-accountant stopped going to work and stopped

cooperating with Sandia Oil Company’s efforts to investigate what happened further. In Sandia

Oil, the hearing officer ultimately abated much of the penalty against the taxpayer because the

hearing officer found that the taxpayer acted in accord with the degree of ordinary business care

and prudence which reasonable taxpayers would have exercised under similar circumstances.

In the Matter of the Protest of Sipapu Recreation Dev. II, LLC., page 13 of 17
The evidence in this matter is quite similar to the facts of Sandia Oil. However, some

additional facts in this matter actually strengthen this Taxpayer’s claim for abatement even more

so than the taxpayer in Sandia Oil. Like the accountant in Sandia Oil, Ms. Nichols was a long-

time, trusted employee-accountant who had timely prepared, filed, and arranged payment of the

required gross-receipts taxes. Like the accountant in Sandia Oil, Ms. Nichols maintained the

outward appearances of continuing compliance based on her statements to Taxpayer that at the

end of the month she had to set aside other work to complete the taxes. Like the accountant in

Sandia Oil, Ms. Nichols provided verbal assurances to her supervisor Mr. McBain that she had

completed the taxes. While Taxpayer never asked if Ms. Nichols needed any assistance with

completing her work, unlike in Sandia Oil, Taxpayer did not notice any signs of physical illness,

mental illnesses, or other change in mood/attitude/morale that might affect Ms. Nichols work

performance and prompt such an inquiry. Similar to the accountant in Sandia Oil who drew

checks corresponding to the owed taxes but never submitted them, Ms. Nichols deceptively

entered information into the Taxpayer’s internal accounting system indicating that checks had

been drawn to pay the taxes even though such checks never cleared the bank.

However, more egregiously than the accountant in Sandia Oil, Ms. Nichols also actively

and intentionally altered and/or forged bank statements and destroyed business records in her

effort to cover-up her own job failings, making Ms. Nichols’ deception even more difficult to

detect than the deception found in Sandia Oil. Since the taxpayer in Sandia Oil was found to be

unable to detect the deception of his accountant while exercising the degree of ordinary business

care and prudence which reasonable taxpayers would exercise under similar circumstances, and

since Ms. Nichols employed even more sophisticated deceptive and fraudulent practices to hide

her own non-compliance from the Taxpayer in the current matter, the Taxpayer in the current
In the Matter of the Protest of Sipapu Recreation Dev. II, LLC., page 14 of 17
matter was even less likely to detect Ms. Nichols’ failure to pay taxes under the “exercising the

degree of ordinary business care and prudence which reasonable taxpayers would exercise under

similar circumstances” negligence definition than the taxpayer in Sandia Oil.

In sum, the Taxpayer has credibly demonstrated sufficient facts to show that Taxpayer

exercised the degree of ordinary business care and prudence which reasonable taxpayers would

exercise under like circumstances. Once the Taxpayer overcomes this initial threshold, the burden

then shifts to the Department to show the correctness of the assessed penalty. Other than its

unsupported allegations that the Taxpayer runs a “shoe-string operation” and missed payments

every month, the Department did not meet this burden to show the correctness of the assessed

penalty. Because the evidence established that Ms. Nichols’ intentionally deceptive and

fraudulent business accounting practices caused Taxpayers’ failure to timely file and pay taxes

during the seven-months in question in 2008, and because a reasonable taxpayer exercising

ordinary degree of business care under similar circumstances could not have detected Ms.

Nichols’ deception any sooner than Taxpayer did in the present case, the Taxpayer was not by

definition negligent under regulation §3.1.11.10 NMAC (1/15/01), and thus not subject to civil

penalty under NMSA 1978, Section 7-1-69(A) (2007). Consequently, penalty should be abated

in full.

Moreover, even for the sake of argument that the Taxpayer was negligent because Taxpayer

did not exercise the degree of ordinary business care and prudence which reasonable taxpayers

would exercise under like circumstances, the Taxpayer still has a compelling defense under the

nonnegligence factors that supports the abatement of penalty under regulation §3.1.11.11(C)

NMAC (1/15/01).

In the Matter of the Protest of Sipapu Recreation Dev. II, LLC., page 15 of 17
There does not appear to be any case-law (and neither party cites to any case-law)

defining what is meant by physical damage to records under Regulation §3.1.11.11 (C) NMAC

(1/15/01). A narrow reading of that regulation seems to suggest that the non-negligence factor is

related to instances of catastrophic damage to a taxpayer’s place of business. However, there is

no readily apparent logical distinction between a catastrophe such as a fire causing the

damage/destruction of business records and the damage/destruction of records as the result of the

willful bad conduct of an agent because in both instances, the result is the same: damage to

business records that was beyond the reasonable control of the taxpayer.

The Department argued in closing that the Taxpayer failed to show that any business

records were destroyed because it did not produce those records during the hearing. Rather than

helping the Department’s claim, the absence of these destroyed records during the hearing actually

supports the otherwise credible and believable testimony of the Taxpayer that Ms. Nichols hid and

destroyed business records: it is difficult for the Taxpayer to produce a record that has been hidden

or destroyed.

The Taxpayer’s credible testimony is that Ms. Nichols actively altered, forged, hid, and

destroyed relevant statements of account and business records for 2008 in an attempt to hide her

poor job performance, and this hiding and destruction of records interfered with Taxpayer’s ability

to first detect that there was any problem and second to later reconstruct and reconcile his

accountants. But for this altering, forging, hiding, and destruction of records, it is certainly possible

if not likely based on the Taxpayer’s past successful history of filing and payment of taxes that

Taxpayer would have detected the problem and corrected it by timely filing and paying gross

receipts taxes during the relevant seven-month period in 2008. Ms. Nichols hiding and destruction

In the Matter of the Protest of Sipapu Recreation Dev. II, LLC., page 16 of 17
of records certainly qualifies as “physical damage to the taxpayer’s records… caus(ing) a delay in

filing a return or making payment of tax” under Regulation §3.1.11.11 (C) NMAC (1/15/01).

Therefore, the civil penalty should also be abated pursuant to this regulation.

CONCLUSIONS OF LAW

1. Taxpayer filed a timely, written protest to Assessment Nos. # ID NOs.

L14373577856, L0399836032, L1742013312, L0668271488, L1205142400, L0131400576,

L2077557632, and jurisdiction lies over the parties and the subject matter of this protest.

2. Taxpayer exercised the degree of ordinary business care and prudence which

reasonable would exercise under similar circumstances.

3. Taxpayer is not negligent and subject to civil penalty under NMSA 1978, Section

7-1-69(A) (2007).

For the foregoing reasons, the Taxpayer's protest IS GRANTED. The Department is

ordered to abate all civil penalty assessed against the Taxpayer.

DATED: December 20, 2010.

In the Matter of the Protest of Sipapu Recreation Dev. II, LLC., page 17 of 17