Was a jockey agent's percentage of her clients' race purses exempt from gross receipts tax as jockey or horseman income?

Plain-English summary

Lynette Baldwin's commissions as a jockey agent were taxable service receipts, not exempt race-purse income of a horseman, jockey, or trainer. The gross receipts tax and interest assessments were upheld, but penalty was reduced from the Department's 20% calculation to the 10% cap that applied when the 2005-2006 taxes became due.

Baldwin was a state-licensed jockey agent. She marketed jockey clients to horse owners and trainers, arranged meetings, secured appropriate mounts, sought better mounts that could increase purse earnings, and handled administrative needs. Her compensation was a percentage of her clients' race-purse winnings.

Believing she qualified as a “horseman,” Baldwin filed no CRS reports and paid no gross receipts tax for 2005 or 2006. An IRS matching program detected her Schedule C income. The Department assessed:

• 2005: $2,444.98 tax, $489 penalty, and $1,043.43 interest; and
• 2006: $2,091.60 tax, $418.32 penalty, and $579.61 interest.

A jockey agent was a separate occupation

Section 7-9-40(A) exempted receipts of “horsemen, jockeys and trainers” from race purses at regulated New Mexico tracks. It did not mention agents or jockey agents.

The accompanying regulation defined a horseman as an owner of a racehorse that wins purse money. Baldwin owned no horses, trained no horses, and rode no horses in races. The Horse Racing Act and licensing regulations separately listed owners, trainers, jockeys, and jockey agents, confirming distinct roles. Baldwin also testified that holding a jockey-agent license required surrendering other racing licenses.

Her percentage-based compensation did not change the character of her work. She earned it for services that could increase a jockey's opportunity to obtain mounts and win purses, not as the owner, rider, or trainer receiving the purse itself.

Possible past treatment of another agent did not control

Baldwin offered a Department document that she believed showed another jockey agent receiving the exemption. The hearing officer admitted it but gave it limited weight because it lacked enough facts to show that the other taxpayer was similarly situated.

Even if the Department had granted the exemption before, an error or strategic decision involving an unrelated taxpayer would not override the statute and regulations in Baldwin's case. The Department was required to apply the law correctly rather than repeat a possible past mistake.

Delay did not invalidate the assessments or stop interest

Baldwin objected to the time between the 2005-2006 periods and the December 2009 assessments. The decision found the timing consistent with the IRS matching process and the statutory period for a nonfiler.

Section 7-1-67 made interest mandatory until principal was paid. The Department had told Baldwin she could stop additional interest by paying the principal while continuing the dispute.

Negligence penalty applied, but only to 10%

Baldwin's belief that she was a horseman was genuine and not intentional evasion. Still, erroneous belief or inattention met the cited definition of civil negligence, and she presented no statutory ground for nonnegligence.

The Department used the 20% penalty maximum effective in 2008. The 2005 and 2006 liabilities had already reached the earlier statute's 10% ceiling in June 2006 and June 2007. With no clear retroactive authorization, the Department could not reopen those completed calculations.

The assessed penalties totaled $907.32. The order abated $453.66, leaving penalty at 10% of the $4,536.58 tax principal. Assessed interest totaled $1,623.04 and continued until payment.

Result: the purse exemption was denied; tax, interest, and a 10% penalty remained; $453.66 of excess penalty was abated.

What this means for you

Horse-racing professionals

Do not assume that compensation tied to a purse receives the same exemption as the purse itself. The worker's licensed role and the statutory list controlled here.

Agents paid as a percentage of client revenue

A contingent or percentage fee can still be taxable compensation for services. The payment formula did not transform Baldwin into the jockey or horse owner receiving the underlying purse.

Taxpayers relying on another person's treatment

An example involving another taxpayer needs enough facts to show true comparability. Even then, a prior agency error may not create the same result in a later case.

Common questions

Q: Why was Baldwin not a horseman under the exemption?
A: The regulation defined horseman as the owner of a racehorse that wins purse money, and Baldwin owned no racehorses.

Q: Was a jockey agent treated the same as a jockey?
A: No. The racing statutes and regulations listed and licensed jockey agents separately from jockeys, owners, and trainers.

Q: Did another jockey agent's possible exemption help Baldwin?
A: No. The evidence lacked sufficient facts, and a possible prior error did not change the governing law.

Q: How much tax and interest were assessed?
A: $4,536.58 of tax and $1,623.04 of interest for 2005 and 2006 combined.

Q: How much penalty was removed?
A: $453.66, reducing the total penalty from 20% to the applicable 10% cap.

Citations and references

Statutes and regulations:

• NMSA 1978, § 7-9-40(A) (1989) and Regulation 3.2.128.7 NMAC — race-purse exemption and horseman definition
• NMSA 1978, §§ 7-9-4, 7-9-3.5(A)(1), and 7-9-5 — taxable New Mexico service receipts
• NMSA 1978, § 60-1A-2(Q) (2010) and the cited racing-license regulations — separate occupational roles
• NMSA 1978, § 7-1-18(C) (1994) — assessment period for nonfilers
• NMSA 1978, § 7-1-67 (2008) — mandatory interest
• NMSA 1978, § 7-1-69 (2003 and 2008 versions) — negligence penalty and maximums
• Regulations 3.1.11.10-.11 NMAC — negligence and nonnegligence

Cases cited:

• Wing Pawn Shop v. Taxation and Revenue Department, 111 N.M. 735 (Ct. App. 1991)
• El Centro Villa Nursing Center v. Taxation and Revenue Department, 108 N.M. 795 (Ct. App. 1989)
• Psomas v. Psomas, 99 N.M. 606 (1982)
• Kewanee Industries, Inc. v. Reese, 114 N.M. 784 (1993)

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Lynette Baldwin
• Decision PDF: D&O 11-08

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
LYNETTE BALDWIN No. 11-08
TO ASSESSMENT ISSUED UNDER LETTER
ID NOs. L1690161216 and L0900147264

DECISION AND ORDER

A hearing was held on the above captioned matter on February 17, 2011. Ms. Lynette

Baldwin (“Taxpayer”) appeared pro se. The Taxation and Revenue Department of the State of

New Mexico (“Department”) was represented by Staff Attorney Ida M. Lujan. Protest Auditor

Thomas Dillon appeared as a witness for the Department. In addition to the documents

contained in the Administrative File articulated in the beginning of the hearing, Taxpayer #1

(Notice of Limited Scope Audit Resolution of May 11, 2010), and Department A-N are admitted

into the record. Additionally, the arguments of the Department filed on February 24, 2011 and

March 3, 2011 (and its attached exhibit) are also part of the administrative record in this matter.

The Taxpayer submitted a letter on March 14, 2011, which is also part of the administrative

record in this matter. Based on the evidence and arguments presented, IT IS DECIDED AND

ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. In tax year 2005 (“TY05”) and tax year 2006 (“TY06”) Taxpayer was a state-

licensed jockey agent. [Department E, Department G, and Taxpayer’s admission]

2. As such, Taxpayer derived income from services performed in securing horses—

referred to as obtaining a mount—for her jockeys to race in State-sanctioned horse races.

3. Taxpayer’s income in TY05 and TY06 resulted solely from a percentage of money

paid from her jockey-client’s purse earnings.

4. Taxpayer in good-faith believed that she was a “horsemen” for purposes of

NMSA 1978, Section 7-9-40 (1989), and consequently believed that her income earned as a

percentage from her jockey client’s horse-racing purses was exempt from gross receipts taxes in

New Mexico.

5. Taxpayer consequently did not file any CRS Reports, and paid no gross receipts

tax on income derived from performing services a jockey agent in TY05 and TY06 to the State of

New Mexico.

6. Taxpayer did report her income derived from performing services as jockey agent

in TY05 and TY06 to the Internal Revenue Service (“IRS”) on a Schedule C. [Department L &

Department M]

7. As part of the Department’s Tape Match Program with the IRS, the Department

detected a difference between the Taxpayer’s Federal Schedule C reported income and her New

Mexico CRS reported income for TY05 and TY06.

8. Because of this mismatch, the Department initiated an audit of Taxpayer to review

her TY05 and TY06 tax obligations.

9. According to Protest Auditor Thomas Dillon, it is common in his experience in

the ten-years he had worked for the Department for the Tape Match Program to take two-to-three

years for the IRS to provide the requisite information and an additional year for the Department

to process this information.

In the Matter of the Protest of Lynette Baldwin, page 2 of 26

10. As a result of this tape-match audit, on December 15, 2009 the Department

assessed the Taxpayer for $2,444.98 gross receipts tax, $489.00 penalty, and $1043.43 interest

for TY05 under letter ID number L1690161216. [Department B]

11. As a result of this tape-match audit, on December 15, 2009 the Department further

assessed the Taxpayer for $2,091.60 gross receipts tax, $418.32 penalty, and $579.61 interest for

TY06 under letter ID number L1690161216. [Department A]

12. On January 7, 2010, the Taxpayer protested the imposition of gross receipts

principal tax, penalty, and interest for TY05 and TY06, claiming that she qualified for an

exemption under NMSA 1978, § 7-9-40 (1989) and therefore owed no tax, penalty, or interest.

13. Taxpayer’s protest was assigned to the Department’s protest auditor Thomas

Dillon.

14. On January 26, 2010, Mr. Dillon consulted with the New Mexico Racing

Commission via email to determine what a jockey agent does and whether a jockey agent is

considered a jockey or has other duties associated with horse racing. [Department F]

15. The Deputy Director of the New Mexico Racing Commission informed Mr.

Dillon via email on January 26, 2010 that a jockey agent is someone employed by a jockey to

secure mounts, and that they are paid by negotiating a percentage of their jockey’s purse

earnings. [Department F]

16. On January 27, 2010, Mr. Dillon wrote the Taxpayer’s representative and

informed Taxpayer that the Department had concluded that a jockey agent was performing a

service that did not qualify for an exemption under the language of NMSA 1978, § 7-9-40

(1989). Mr. Dillon informed the Taxpayer that she could either agree to the Department’s

In the Matter of the Protest of Lynette Baldwin, page 3 of 26
position and pay the assessments or pursue a formal hearing appealing the Department’s position.

[Department H]

17. On February 10, 2010, the Taxpayer renewed her protest to the two assessments

and requested that the matter be set for a formal hearing.

18. On June 22, 2010, the Department filed a request for hearing with the Hearing

Bureau of the Taxation and Revenue Department.

19. On June 29, 2010, the Hearing Bureau sent Notice of Administrative Hearing,

setting a protest hearing on Tuesday, January 25, 2011.

20. On October 26, Taxpayer mailed a letter asking that the matter be set on a day

other than a Tuesday. Without objection from the Department, on November 1, 2010 an

Amended Notice of Administrative Hearing was sent to all parties changing the date of hearing

to Thursday, February 17, 2011.

21. The protest hearing occurred on February 17, 2011.

22. At the Department’s request, the record was left open for seven-days to allow the

Department to respond to the Taxpayer’s proposed Exhibit #1 and also submit any written

argument related to the possible retroactive application of the amended penalty provision.

23. On February 24, 2011, the Department submitted a motion related to Taxpayer’s

Exhibit #1, continuing its objection to the admissibility of that exhibit and objecting to what it

perceived to be an order to disclose confidential information about another unrelated taxpayer.

24. On February 25, 2011, the Hearing Bureau issued an order leaving the record open

for an additional seven-days for the Department to submit any non-confidential documents or

arguments it wished to related to Taxpayer’s proposed Exhibit #1.

In the Matter of the Protest of Lynette Baldwin, page 4 of 26

25. On March 3, 2011, the Department submitted additional written argument related

to its objection to Taxpayer’s proposed Exhibit #1. Included with that argument was an Affidavit

of Thomas J. Dillon, stating that Mr. Dillon reviewed the circumstances surrounding Taxpayer’s

proposed Exhibit #1, and after the review of that information, was still of the opinion that

Taxpayer, as well as any jockey agent, does not qualify for exemption under NMSA 1978, § 7-9-

40 (1989).

26. Also included with the Department’s March 3, 2011 submission was an argument

supporting the Department’s position that application of a 20% maximum penalty is permissible

application of the amended penalty provision against a liability that predated the effective date of

the amended penalty provision. While the Department only had seven-days to submit such an

argument related to penalty, and the Hearing Bureau’s February 25, 2011 Order Leaving the

Record Open specifically extended only the time for submission of argument related to

Taxpayer’s proposed Exhibit #1, the Department’s argument related to penalty is nevertheless

accepted into the record as this is an administrative proceeding with relaxed procedural rules

designed to give both parties an opportunity to argue the merits of their respective positions.

27. The Taxpayer was also given an opportunity until March 11, 2011 to respond to

the Department’s positions. The Taxpayer submitted a written letter on March 11, 2011, which

was received by the Hearing Bureau the afternoon of March 14, 2011. This letter will also be

admitted into the record.

DISCUSSION

The fundamental issue in this case is much more straightforward than the extensive

record of filings made after the hearing in this protest suggests: whether the Taxpayer, as an

In the Matter of the Protest of Lynette Baldwin, page 5 of 26
admitted “jockey agent” qualifies for exemption from payment of gross-receipts taxes under the

plain language of NMSA 1978, § 7-9-40 (1989) when her earnings during Tax Year 2005

(“TY05”) and Tax Year 2006 (“TY06”) came from payment of a percentage of a jockey’s purse at

a New Mexico horse race track? A plain language reading of the exemption and its

accompanying regulations, in conjunction with a reading of the New Mexico Horse Racing Act

and its accompanying regulations, establishes that a jockey agent does not qualify for the relevant

exemption at issue in this case. Since the Taxpayer was performing a service as a jockey agent,

and the exemption does not apply to the facts of this protest, the Taxpayer is liable for gross

receipts tax principal, appropriate penalty, and interest.

Presumption of Correctness and Burden of Proof.

Under NMSA 1978, Section 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 or she 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).

Unless exempted, income earned from performance of a service as a jockey agent is subject to

gross receipts tax.

Under NMSA 1978, Section § 7-9-4 (2010), any person or entity “engaging in business in

New Mexico” is subject to a gross receipts tax. The term “gross receipts” is broadly defined under

NMSA 1978, Section 7-9-3.5(A)(1) to include instances of “performing services in New Mexico.”

Moreover, there is a statutory presumption that all receipts of a person engaging in business in New

Mexico are subject to gross receipts tax. See NMSA 1978, Section 7-9-5 (2002).

In the Matter of the Protest of Lynette Baldwin, page 6 of 26
The evidence in this case clearly establishes that the Taxpayer was engaged in business in

New Mexico as a licensed jockey agent during TY05 and TY06. As a jockey agent, Taxpayer was

responsible for marketing her jockey clients to perspective horse owners and trainers, arranging

meetings between her jockey clients and horse owners and trainers, securing horse mounts

appropriate for the skill, experience, and prestige of her respective jockey clients, securing better

horse mounts that might increase her jockey client’s opportunity to win larger purses, and for taking

care of the administrative needs of her jockey clients. Indeed, in performing her services as a

jockey agent, Taxpayer could significantly increase a jockey’s ability to earn income from purses.

That possibility of maximizing her jockey client’s income is in itself a service, akin to the services

provided by an accountant, attorney, investment banker, realtor, etc, all of whom are generally

subject to gross receipts tax. By any definition, there is no dispute that Taxpayer was performing a

service for her jockey clients here in New Mexico in executing these various aspects of her job.

Further, considering that the Taxpayer never disputed that she was performing a service in

New Mexico subject to gross receipts tax, and instead only claimed a specific exemption from

imposition of gross receipts tax to her particular service as a jockey agent, the presumption of

taxability and basic logic (why claim an exemption if you don’t otherwise believe your income was

subject to the gross receipts tax?) hold that Taxpayer is subject to gross receipts as a person engaged

in business in New Mexico.

A jockey agent does not qualify for exemption under the plain language of §7-9-40.

Taxpayer claims that her income earned as a jockey agent came as a percentage of jockey

purse earnings, and therefore is exempted from gross receipts taxes under NMSA 1978, § 7-9-40

(1989). In the alternative, Taxpayer argues that she is “horseman” in every sense of that word,

In the Matter of the Protest of Lynette Baldwin, page 7 of 26
and therefore also is exempted by NMSA 1978, § 7-9-40 (1989) because that statute states that

horseman are not subject to gross receipts. In support of this claim, Taxpayer argues that the

Department has granted the exemption to other jockey agents in the past. Finally, Taxpayer

expresses frustration with the length of the process and the delay between TY05 and TY06 and

the assessment.

a. Taxpayer is not a horseman, jockey, or trainer for the purposes of the exemption.

“Where an exemption or deduction from tax is claimed, the statute must be construed

strictly in favor of the taxing authority, the right to the exemption or deduction must be clearly

and unambiguously expressed in the statute, and the right must be clearly established by the

taxpayer.” Wing Pawn Shop v. Taxation & Revenue Dep't, 111 N.M. 735, 740 (N.M. Ct. App.

1991); see also Security Escrow Corp. v. Taxation and Revenue Department, 107 N.M. 540, 543,

760 P.2d 1306, 1309 (Ct. App. 1988). An exemption provision must be narrowly yet reasonably

construed. See id. The Taxpayer must show that the claimed exemption is both within the letter

and the spirit of the law. See id.

The Security Escrow Corp. court is particularly insightful on how to best interpret a

statute, like the exemption at issue in here:

In construing the meaning of a particular statute, a
reviewing court's central concern is to determine and give effect to
the intention of the legislature. State ex rel. Klineline v. Blackhurst,
106 N.M. 732, 749 P.2d 1111 (1988). In determining this intent,
we look primarily to the language of the act and the meaning of the
words, and when they are free from ambiguity, we will not resort to
any other means of interpretation. See State v. Pitts, 103 N.M. 778,
714 P.2d 582 (1986); New Mexico Beverage Co. v. Blything, 102
N.M. 533, 697 P.2d 952 (1985).

In the Matter of the Protest of Lynette Baldwin, page 8 of 26
When a term is not defined by the statute, a court may
interpret the word in accordance with its ordinary meaning. United
States v. State of New Mexico, 536 F.2d 1324 (10th Cir.1976).
Unless the legislature indicates a different intent, we must give
statutory words their ordinary meaning. State ex rel. Klineline v.
Blackhurst. Although we cannot add a requirement that is not
provided for in the statute or read into it language that is not there,
we do read the act in its entirety and construe each part in
connection with every other part to produce a harmonious whole.
Id. Security Escrow Corp. v. State Taxation & Revenue Dep't, 107
N.M. 540, 543 (N.M. Ct. App. 1988).

In sum, any question of statutory construction/interpretation must begin with a review of the

plain language of the act, and where the words are free from ambiguity, no others means of

interpretation are necessary.

The relevant statute at issue here is NMSA 1978, § 7-9-40 (1989). NMSA 1978, § 7-9-40

(1989) is titled “Exemption; gross receipts tax; purses and jockey remuneration at New Mexico

racetracks; receipts from gross amounts wagered.” In pertinent part, NMSA 1978, § 7-9-40 (A)

(1989) reads “receipts of horseman, jockeys and trainers from race purses at New Mexico horse

racetracks subject to the jurisdiction of the state racing commission” are exempt from imposition

of a gross receipts tax. Italics added for emphasis. At no point does the NMSA 1978, § 7-9-40

(1989) use the term “agent” or the phrase “jockey agent.” The statute seems to be free of

ambiguity in that it applies solely to horseman, jockeys, and trainers, and specifically does not

include jockey agents.

The only term in the statute without immediate clarity as to its ordinary meaning is the

term “horseman.” While the Taxpayer argues that she qualifies as a “horseman” in every sense

within the horse racing community, Regulation 3.2.128.7 NMAC [5/15/01] specifically defines a

“horseman” under the exemption to mean “the owners of race horses that win purse money in

In the Matter of the Protest of Lynette Baldwin, page 9 of 26
races held at New Mexico horse racetracks.” Italics added for emphasis. The letter of the law, at

least with how the regulation defines “horseman”, does not include a jockey agent as a horseman.

Under the regulation, the Taxpayer does not qualify as a “horseman” because there is no evidence

that she was an owner of a race horse in TY05 or TY06.

Further, the evidence in this case clearly established that a jockey agent is different then a

jockey or a trainer. The Taxpayer indicated that her role was specifically to work with a jockey

to secure mounts from horse owners and/or horse trainers. Taxpayer did not own any horses, did

not train any horses, and did not ever ride any horses during a race. In fact, Taxpayer said that a

jockey agent can only hold one license at a time, and therefore as a jockey agent, any additional

licenses held concurrently with her jockey agent license, such as a jockey, trainer, or any other

licensed position associated with a horse racing track, would be void. In other words, a jockey

agent license is entirely unique and distinct from being a horse owner, horse trainer, or jockey

because a jockey agent’s license requires surrender of any other licenses as a horse owner,

trainer, or jockey.

Indeed, a review of both the Horse Racing Act and its accompanying regulations clearly

show that a “jockey agent” is a legally distinct entity from a horse owner, horse trainer, or horse

jockey. In defining “occupational license” under the Horse Racing Act, the legislature separately

listed “a horse owner, trainer, jockey, agent…” NMSA 1978, Section 60-1A-2(Q) (2010).

Although all may qualify for an occupational license, by separately listing each respective title, it

is clear that the legislature believed the each respective function listed had a unique and distinct

role/purpose under the Horse Racing Act. Since the legislature was aware of a jockey agent’s

distinct purpose, yet choose not to include a jockey agent under the exemption, the legislature

must have not intended to exempt a jockey agent from the payment of gross receipts taxes.

In the Matter of the Protest of Lynette Baldwin, page 10 of 26
Under the regulations associated with the Horse Racing Act, a jockey agent is also

consistently addressed distinctively from a horse owner, horse trainer, or a horse jockey. Under

Regulation 16.47.1.8(A)(2) NMAC [09/15/09], there is separate licensing fee listed for jockeys

(between $80-100 depending on length), trainers (again between $80-100 depending on length),

and jockey agents ($55 per year). In discussing the specific license requirements and duties of

each respective licensee, the regulations place “owners”, “trainers”, “jockeys”, and “jockey

agents” into separate, dedicated subsections: Regulation 16.47.1.9 NMAC [07/15/2003]

addresses “owners”; Regulation 16.47.1.10 NMAC [09/15/09] addresses “trainers”; Regulation

16.47.1.12 NMAC [06/15/09] addresses “jockeys”; and Regulation 16.47.1.13 NMAC

[08/14/08] addresses “jockey agents.” Whether or not the Horse Racing Commission in practice

strictly comports with its own regulations and definitions, or rather as Taxpayer suggests loosely

considers everyone licensed as a “horseman”, does not change the legislature’s intent to give

each respective position a distinct application from the other, which is supported by the language

of the Horse Racing Act and the regulatory definitions.

While there is no doubt that the Taxpayer genuinely believes she is “horseman” in the

broader horse racing community, with respect to the limited tax liability considerations

articulated by statute and regulation, the Taxpayer does not qualify as horseman, trainer, or

jockey under the pertinent exemption, NMSA 1978, § 7-9-40 (1989) because she does not meet

the regulatory definition of a horseman and because by statute and regulation a jockey agent is a

separate and distinct occupation then a horse owner, trainer, or jockey.

In the Matter of the Protest of Lynette Baldwin, page 11 of 26
b. Taxpayer’s Exhibit #1 and its admissibility.

Over the Department’s strong and continuing objections, the Taxpayer tendered Exhibit #1

into the record, claiming that it was evidence that the Department had granted an exemption under

NMSA 1978, § 7-9-40 (1989) previously to a similarly situated jockey agent. The Department

objected on relevancy grounds, on hearsay grounds, and legal residuum grounds. During the

hearing, the hearing officer reserved ruling on the Department’s objections and the admission of

Taxpayer’s Exhibit #1.

The Department’s hearsay and legal residuum grounds are easily dismissed. During an

informal administrative hearing, the formal rules of evidence, including the hearsay rules, do not

strictly apply. Even if the hearsay rules did apply, Taxpayer’s Exhibit #1 appears to be a copy of

a regularly maintained business record of the Department, and as such, would likely be a

recognized exception to the hearsay rule under either the regularly maintained business records

exception or under the catch-all exception as having sufficient indicia of reliability.

Under the legal residuum principle, the Department’s argument seems to be that every

piece of evidence submitted during an administrative hearing must be supported by a residuum of

legally competent and admissible evidence. Respectfully, this position is an over reading of the

legal residuum principle, and if applied as the Department argues in this specific case would be

contrary to the Department’s position in other administrative hearings held in the Hearing Bureau

and even contrary to the evidence that the Department tendered in this specific case.

The legal residuum rule requires that an agency’s administrative decision be “supported

by some evidence that would admissible under the rules” of evidence. Chavez v. City of

Albuquerque, 124 N.M. 239, 241, 1997 NMCA 111, 947 P.2d 1059, 1061 (N.M. Ct. App. 1997).

In the Matter of the Protest of Lynette Baldwin, page 12 of 26
As the New Mexico Court of Appeals explained in Anaya v. New Mexico State Personal Board,

107 N.M. 622, 626, 762 P.2d 909, 913 (N.M. Ct. App 1988),

[t]he legal residuum rule does not require that all evidence
considered by the administrative agency be legally admissible
evidence, but only “that an administrative action be supported by
some evidence that would be admissible in a jury trial” Duke City
Lumbar Co. v. New Env’tl Improvement Bd., 101 N.M. at 295, 681
P.2d at 721.
As mentioned above, Taxpayer Exhibit #1 would survive a hearsay objection as one of two

possible exceptions to the hearsay rules, and thus would be admissible in a jury trial, satisfying

the Duke City and Chavez standard. And even if Taxpayer Exhibit #1 would not survive a

hearsay objection, it is hardly the only piece of evidence supporting an administrative decision in

this case, nor does it relate to an essential element at issue during the protest hearing.

What is striking is that Taxpayer’s Exhibit #1 is no different than over half of the exhibits

tendered by the Department in this case: to exclude the Taxpayer’s Exhibit #1 on hearsay

grounds or under the Department’s theory of the residuum principle would necessitate excluding

most of the Department’s exhibits (A, B, E, F, G, H, L, M, N) on those same grounds.

Considering that the Department apparently has no problem relying on hearsay as part of its case

during an informal administrative hearing where the rules of evidence are relaxed, aside from its

legitimate confidentiality concerns, it is a bit perplexing why the Department spent so much

energy trying to exclude a pro-se Taxpayer’s attempt to produce a single solitary exhibit that is

on its face a Department document produced in the regular course of the Department’s business.

Whether Taxpayer’s Exhibit #1 is relevant is a much more difficult analysis. The

Department is correct that on the face of the document, Taxpayer Exhibit #1 does not provide

enough information either way to substantiate the Taxpayer’s claim that the Department granted

another similarly situated jockey agent the pertinent exemption. Even if, as Taxpayer credibly
In the Matter of the Protest of Lynette Baldwin, page 13 of 26
testified she believed, another jockey agent in the past was granted in exemption, that is not

dispositive of whether the Taxpayer is legally entitled to such an exemption during this protest.

It is possible that, although Taxpayer has a good faith belief that the taxpayer referenced in

Exhibit #1 was similarly situated to Taxpayer in this protest, there are other unknown facts and

circumstances involved in that case that distinguish that other taxpayer from the Taxpayer

involved in this protest. Additionally, even for the sake of argument that Taxpayer is correct that

the Department previously granted an exemption to a similarly situated jockey agent, it is

possible that the Department’s decision was made for strategic reason, or was just simply made

in error in interpretation of the law. A past error in the law made to an unrelated taxpayer does

not prevent the Department from correcting its interpretation of the law in a future case involving

an unrelated Taxpayer. Since this appears to be question of first impression, there is no clear

legal precedent determining whether a jockey agent qualifies for the exemption, and

consequently, the Department’s own legal analysis of the issue may have legitimately changed

over time.

That being said, the structure and purpose of an administrative hearing is to give each

party—both the administrative agency and the member of public for whom the agency works—a

reasonable opportunity to present their case on the merits in a relaxed procedural setting.

Considering that Taxpayer’s Exhibit #1 is this pro se Taxpayer’s only exhibit in a relaxed

administrative proceeding, it strikes the undersigned hearing officer as particularly draconian to

exclude it on narrow relevancy grounds when there is at least some arguable relevancy in the

question of whether the Department may have previously had a different view of the exemption

at issue in this protest. The document is relevant to the presentation of the Taxpayer’s argument,

even if the document by itself lacks the necessary weight to carry Taxpayer’s factual burden.

In the Matter of the Protest of Lynette Baldwin, page 14 of 26
Taxpayer’s Exhibit #1 is admitted over objection, with the caveat that it is of limited weight and

any confidential information identified on that Exhibit will be redacted.

In the Taxpayer’s March 14, 2011 filing, Taxpayer argued for the admission of the

Exhibit #1. Taxpayer also argued that the Department’s failure to squarely address whether the

other taxpayer referenced in Exhibit #1 was similarly situated and was given the exemption

meant that the Department either did not act with diligence to research the issue or that the other

taxpayer was indeed granted the exemption in a similar situation. However, even if Taxpayer is

correct that the Department had previously granted the exemption to a jockey agent, that does not

change that fact that under the clear language of the exemption in conjunction with its

accompanying regulations, as wells as the Horse Racing Act and its accompanying regulations,

that a jockey agent does not legally qualify for the exemption. While the Department should

strive to treat all taxpayers equally, the Department’s action must also comport with the law. To

say simply that a possibly similarly situated taxpayer in the past may have been granted an

exemption, and therefore this Taxpayer is entitled to the exemption, fails to address whether such

exemption is legally permissible.

c. Taxpayer’s timeliness concerns.

The Taxpayer expressed frustration that it took so long for the Department to assess her

for TY05 and TY06. Mr. Dillon explained the delays that occurred in this case were not unusual

given the regular course of events in the Tape Match program, the protest office review, the

Department’s legal staff review, and the scheduling of the hearing by the hearing bureau. The

hearing was scheduled within days of receipt of a request for hearing, and the setting was made

in approximately six-months of the initial request for hearing, only to be continued an additional

In the Matter of the Protest of Lynette Baldwin, page 15 of 26
month for the Taxpayer’s request to conduct a hearing on a day other than a Tuesday. Moreover,

the Department’s assessments in this case comply with the statute of limitations requirements

expressed by the Tax Administration Act for a non-filer. See NMSA 1978, Section 7-1-18(C)

(1994).

The Taxpayer was also uncomfortable allowing the Department additional time to submit

argument in her case because she had concerns about the continuing accrual of interest. As part

of this concern, the Taxpayer expressed reluctance in allowing the Department any additional

time to submit argument about Taxpayer #1 because of her overall concerns about the timeliness

of the process, the accrual of interest, and the timeliness of the decision. However, by regulation

3.1.8.9 NMAC [8/30/01], the hearing officer has the authority to allow submission of legal

arguments after the conclusion of a hearing. The Taxpayer was notified by the Department that

she could stop the accrual of interest by paying the principal amount of tax. See Department

Exhibit D.

Assessment of Interest

When a taxpayer fails to make timely payment of taxes due to the state, “interest shall be

paid to the state on that amount from the first day following the day on which the tax becomes

due...until it is paid.” NMSA 1978, Section 7-1-67 (2008). Under the statute, the Department has

no discretion in the imposition of interest, as the statutory use of the word “shall” makes the

imposition of interest mandatory regardless of the explanation provided by a taxpayer. See State

v. Lujan, 90 N.M. 103, 105, 560 P.2d 167, 169 (1977). The language of the statute also makes it

clear that interest begins to run from the original due date of the tax and continues until the tax

principal is paid in full. The assessment of interest is not designed to punish taxpayers, but to

In the Matter of the Protest of Lynette Baldwin, page 16 of 26
compensate the state for the time value of unpaid revenues. Here, the Taxpayer failed to pay

gross receipts tax due the state. In effect, the Taxpayer had a loan of state funds during the time

taxes were owed but not paid. Therefore continuing interest is due until such time as the principal

tax due is paid. While Taxpayer believes that interest rates charged to her were exorbitant, those

rates were set in statute by the legislature and are beyond the control of the Department.

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) (2003) imposes a penalty of two

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

tax liability. Again, the statute’s use of the word “shall” makes the imposition of penalty

mandatory in all instances where a taxpayer’s failure to act timely meets the legal definition of

“negligence.” The term “negligence” is defined in Regulation §3.1.11.10 NMAC (1/15/01) to

include “inadvertence, indifference, thoughtlessness, carelessness, erroneous belief or inattention.”

In this case, due to her erroneous belief that she legally qualified as a “horseman” for

purposes of the exemption, Taxpayer did not file and pay the appropriate gross receipts tax for

TY05 and TY06 when due. While certainly not an intentional error or omission, erroneous

belief, inadvertent error or inattention meets the legal definition of “negligence” under the

penalty statute. See El Centro Villa Nursing Center v. Taxation and Revenue Department, 108

N.M. 795, 799, 779 P.2d 982, 986 (Ct. App. 1989). Taxpayer presented no evidence under

Regulation §3.1.11.11 NMAC (1/15/01) to demonstrate nonnegligence. As such, the Department

is required by statute to impose penalty.

In the Matter of the Protest of Lynette Baldwin, page 17 of 26
Computation of Penalty.

On both of the assessments issued in this matter, the Department seeks to impose a

penalty of up to 20% under NMSA 1978, § 7-1-69 (2008) rather than under NMSA 1978 Section

7-1-69 (2003, prior to amendments through 2007), in effect prior to January 1, 2008. Since the

Taxpayer protested the imposition of any penalty, and because the Taxpayer’s Bill of Rights

requires that an assessment not be incorrect, erroneous, or illegal, the accuracy of the computation

of total penalty amount assessed is an issue for consideration in this protest. See NMSA 1978,

Section 7-1-4.2 (2003). Even when a Taxpayer is liable for civil negligence penalty, as in here, a

Taxpayer is not required to pay a miscalculated or incorrect amount of penalty. See id.

As the Department is well aware, the four hearing officers in the hearing bureau who hear

tax cases have considered whether the Department may apply the amended penalty provisions

against unpaid tax liabilities that had reached their statutory cap before the effective date of the

amended penalty provision have ruled against the Department. The Department has appealed the

Hearing Bureau’s ruling on this penalty issue to the Court of Appeals seven times, and those

appeals remain pending as of the date of this decision. In an eighth case, In the Matter of the

Pretest of GEA Integrated Cooling Technology, which was cited by the Department in its brief, a

contract hearing officer with the Department ruled in favor of the Department. The Taxpayer in

that case has appealed that decision to the Court of Appeals, and that appeal also remains pending

as of the date of this decision. This matter is a legal issue where there is a dispute as to the

meaning of the application of Section 7-1-69 to cases where the tax or return due predates the

effective date of January 1, 2008. Eventually, rather than continuing to be a source of contention,

this issue will become moot since either there will be fewer of these cases because it has been three

In the Matter of the Protest of Lynette Baldwin, page 18 of 26
years since the effective date of this statute or because the Court of Appeals will have had reached a

decision on one of the appeals.

NMSA 1978 Section 7-1-69 (2003, prior to amendments through 2007), in effect prior to

January 1, 2008 states,

A. Except as provided in Subsection C of this section, in the
case of failure due to negligence or disregard of department rules
and regulations, but without intent to evade or defeat a tax, to pay
when due the amount of t ax required to be paid, to pay in
accordance with the provisions of Section 7-1-13.1 NMSA 1978
when required to do so or to file by the date required a return
regardless of whether a tax is due, there shall be added to the
amount assessed a penalty in an amount equal to the greater of: (1)
two percent per month or any fraction of a month from the date the
tax was due multiplied by the amount of tax due but not paid, not
to exceed ten percent of the tax due but not paid.

NMSA 1978 Section 7-1-69 (2007) states,
A. Except as provided in Subsection C of this section, in the
case of failure due to negligence or disregard of department rules
and regulations, but without intent to evade or defeat a tax, to pay
when due the amount of tax required to be paid, to pay in
accordance with the provisions of Section 7-1-13.1 NMSA 1978
when required to do so or to file by the date required a return
regardless of whether a tax is due, there shall be added to the
amount assessed a penalty in an amount equal to the greater of: (1)
two percent per month or any fraction of a month from the date the
tax was due multiplied by the amount of tax due but not paid, not
to exceed twenty percent of the tax due but not paid.

The only modification in the statute from the 2003 version as compared to the 2007 version is

simply the increase in penalty from 10% to 20%. The effective date of this amended penalty

provision was January 1, 2008.

Under both the previous version and the amended version of the penalty provision, the

Department was to apply two percent per month penalty from the time the tax was due and not

paid until the penalty reached its statutorily prescribed “not to exceed” limit of either 10% under

In the Matter of the Protest of Lynette Baldwin, page 19 of 26
the previous version (which effectively means a five-month period of time from the time the tax

was due but not paid) or 20% under the amended version (which effectively means a ten-month

period of time from the time the tax was due but not paid). Under both the previous and

amended versions of the penalty provision, although factually a tax principal may remain due and

not paid, the legislature prohibits the Department from imposing any additional penalty beyond

the “not to exceed” limit.

The question of dispute is whether the Department is impermissibly retroactively

applying the amended penalty provision without clear legislative intent allowing it to do so. As

the New Mexico Court of Appeals recently indicated, “a statute or regulation is considered

retroactive if it…affixes new disabilities to past transactions.” Wood v. State Educ. Ret. Bd.,

2010 N.M. App. LEXIS 134 (N.M. Ct. App. Nov. 10, 2010), citing Coleman v. United Eng'rs &

Constructors, Inc., 118 N.M. 47, 52, 878 P.2d 996, 1001 (1994), bold for emphasis. In this case,

the past transaction at issue is the Taxpayer’s failure to file and pay gross receipts taxes when due,

beginning in TY05 and continuing through the TY06 due date of January 25, 2007. See NMSA

1978, Section 7-9-11. Under the old penalty statute, the disability for this transaction terminated at

a 10% penalty in June 2007, five months after the tax was due but not paid. The amended penalty

provision affixes a new disability (an additional 10% of penalty) against a transaction that both

predates the effective date of the amended penalty provision and had already reached the former

statutory limit for imposition of penalty. Consequently, since the amended penalty provision would

affix a new disability against a past transaction, a transaction that had already reached its maximum

disability under the previous penalty provision, to apply the amended penalty provision in this

situation would be a retroactive application.

In the Matter of the Protest of Lynette Baldwin, page 20 of 26
A statute may only be applied retroactively if there is a clear, unambiguous legislative intent

to do so. See Psomas v. Psomas, 99 N.M. 606, 609, 661 P.2d 884, 887 (1982). Absent such clear

intent for a retroactive application, a statute only applies prospectively. See id. The Department

has never presented any evidence, nor does the plain language of the statute contain any evidence,

that the legislature intended NMSA 1978 Section 7-1-69 (2007) to apply retroactively to

obligations that originated before the January 1, 2008 effective date of that revision. Given the

legislature’s silence on the question of retroactivity of NMSA 1978 Section 7-1-69 (2007), case

law suggests that the amended statute should only apply prospectively. See Psomas; See also

N.M. Elec. Serv. Co. v. Jones, 80 N.M. 791, 793, 461 P.2d 924, 926 (Ct. Appl. 1969) (“where an

ambiguity or doubt exists as to the meaning or applicability of a tax statute, it should be construed

most strongly against the taxing authority and in favor of those taxed”).

Moreover, the New Mexico Supreme Court has also found that the Department may not

retroactively apply a modified penalty regulation against a taxpayer for an obligation that predates

the effective date of the modified regulation. See Kewanee Industries, Inc. v. Reese, 114 N.M. 784,

845 P.2d 1238 (1993). Interestingly, rather than address the New Mexico Supreme Court’s much

more recent holding on retroactive application of a penalty regulation, the GEA case that the

Department relies so heavily on focused on a less relevant and older case [Bradbury & Stamm

Construction Co. v. Bureau of Revenue, 70 N.M. 226, 372 P.2d 808 (1962)] dealing with the

interest statute, which as will be discussed below, is separate and distinct from the penalty statute at

issue here.

Of course, the Department takes a different position in this matter. Citing the GEA

decision, the Department argues that because NMSA 1978, §7-1-69 uses the phrase “there shall be

added to the amount assessed a penalty in an amount…”, that the word “assessed” has to mean

In the Matter of the Protest of Lynette Baldwin, page 21 of 26
“assessment” as defined by NMSA 1978, §7-1-17, and therefore any formal notice of assessment

issued on or after the January 1, 2008 effective date of NMSA 1978, § 7-1-69 may apply up to a

20% maximum penalty against any unpaid principal tax, even if that unpaid principal tax predates

the effective date of the amended statute and even if the penalty had already reached the previous

10% penalty cap. The Department argues that penalty does not get charged to a taxpayer until the

Notice of Assessment is issued or until a taxpayer self-reports pursuant to NMSA 1978, § 7-1-17.

This interpretation of the word “assessed” renders portions of NMSA 1978, § 7-1-69 (A)(1)

meaningless because it ignores the remaining provisions of that statute that require precise

accounting of the past months starting from the moment when the tax was due and not paid. The

calculation of penalty begins from the point where the failure of a taxpayer occurred, either the

failure to file or the failure to pay, not from the time a taxpayer is assessed. That is, the critical

triggering date or event under the penalty statute is the time that the tax was due and not paid rather

than the date assessed because that is the day a taxpayer is negligent and thus subject to civil

negligence penalty.

All portions of a statute have to be read together for meaning. See Security Escrow Corp,

107 N.M. 540, 543. In the context of the Tax Administration Act, the word “assessed” as used in

the NMSA 1978, § 7-1-69 has a different meaning because to interpret “assessed” in the way the

Department does would make “the not to exceed” language meaningless. Moreover, the

Department’s interpretation of the word “assessed” also renders NMSA 1978, Section 7-1-30

meaningless. Contrary to the Department’s theory that penalty only exists when “assessed,” NMSA

1978, Section 7-1-30 provides that the Department need not issue an assessment to collect penalty

and interest. Since the Department’s interpretation would render portions of both NMSA 1978, §

In the Matter of the Protest of Lynette Baldwin, page 22 of 26
7-1-69 and the Tax Administration Act meaningless, the Department’s interpretation violates basic

principles of statutory construction, as expressed by Security Escrow Corp.

Mechanically in this case, the two assessments were for unpaid gross receipts taxes for

TY05 and TY06. For the December reporting period in each respective year (which is the last

required reporting period for each respective year), the gross receipts taxes were due but not paid on

January 25, 2006 for TY05 and January 25, 2007 for TY06. See NMSA 1978, Section 7-9-11. The

penalty for failure to pay TY05 gross receipts tax reached its “not to exceed” maximum limit in

June of 2006, well before the January 1, 2008 effective date of the amended penalty provision.

After that June 2006 date, the Taxpayer’s gross receipts tax principal still remained factually due

but not paid; yet, the legislature had prohibited the Department from imposing any more penalty

after that date because the penalty had reached its “not to exceed” limit of 10%. Likewise, the

penalty for failure to pay TY06 gross receipts tax reached its “not to exceed” maximum limit in

June of 2007, six-months before the January 1, 2008 effective date of the amended penalty

provision. After that June 2007 date, the Taxpayer’s gross receipts principal still remained factually

due but not paid; yet, the legislature had prohibited the Department from imposing any more

penalty after that date because the penalty had reached its “not to exceed” limit of 10%.

The fact that the Department continually points to in all these cases, including this one—

that the tax remains due and not paid at the time of the effective date of the amended statute—is

of no consequence because under either version of the statute at question, penalty is being

applied month-to-month beginning from a very specific past moment in time: the moment the tax

was due but not paid; once the penalty has reached the specified maximum cap, no more penalty

may be added under the “not to exceed” language even though the following month the tax still

may factually remain due and not paid. In other words, the significance of the due and not paid

In the Matter of the Protest of Lynette Baldwin, page 23 of 26
language of the penalty statute ends once the “not to exceed” condition has been met, because no

matter how many more months the principal tax may be due and not paid, no additional penalty

may be assessed against a taxpayer.

Nothing in the plain language of the amended penalty provision, NMSA 1978, Section 7-1-

69 (2008) indicates that the Department may re-open an exhausted penalty calculation once that

penalty has met its “not to exceed” condition. As mentioned before, without clear evidence of

legislative intent for retroactive application of NMSA 1978, Section 7-1-69 (2008), the outstanding

tax due for TY05 and TY05 were subject to a penalty “not to exceed” 10% pursuant to NMSA

1978, Section 7-1-69 (2003) because that was the provision in effect at the time the tax was due and

the “not to exceed” condition had been met before the effective date of the amended penalty

provision. See Kewanee Industries, Inc.; See also Psomas; See also N.M. Elec. Serv. Co.

The Department finally argues that since the interest provision was amended at the same

time as the penalty provision, the hearing bureau ought if it really believes that the penalty provision

is being improperly retroactively applied, also order the Department to impose the previous interest

provision against the Taxpayer. Unlike the provisions on the civil negligence penalty, the

Legislature did not impose either a cap in the cumulative interest or in the length of time interest is

too accrue under NMSA 1978, §7-1-67 (2008), other than that interest may not accrue against

interest or accrue against penalty. The critical distinction being that unlike penalty, the interest

provision does not contain any concept of expiration of a time period or any “not to exceed”

condition that stops further accrual of interest. Thus, when the new interest provision took affect

on January 1, 2008, since no maximum cap had already been reached and because no such

conceptual cap exists under the interest provision, the Department was mandated to continue to

In the Matter of the Protest of Lynette Baldwin, page 24 of 26
impose interest at the legislatively specified rate against any unpaid tax liability at the percentage

specified by the amended statute until the principal tax is paid in full.

Both before and after the 2008 changes of law to the interest and penalty provisions, the

legislative purpose of the interest statute and the civil penalty statute are entirely different, and

the manner in which they are calculated is also entirely different. The legislative purpose for

imposing interest is to recoup the time value of money. The legislative purpose for imposing a

civil penalty is for a taxpayer’s failure to act—either to pay or to file. Interest is calculated on a

daily basis until the unpaid principal tax is paid in full, while penalty is calculated on a monthly

basis for a limited period of time before being capped even if the principal tax remains due and

not paid. If the legislature wanted the penalty to accrue just like interest so long as the

outstanding tax remained unpaid, then it would have expressly so stated in the penalty statute.

Because there is a difference between the two provisions, the hearing officer has to conclude that

the legislature intended that each provision have a distinct application. Under those distinct

applications, the penalty is capped at a maximum of 10% as provided in §7-1-69(A)(1) (2003,

prior to amendments through 2007), while the interest was appropriately calculated in this case.

CONCLUSIONS OF LAW

1. Taxpayer filed a timely, written protest to the assessment of gross receipts principal

tax, interest and penalty under Assessment Nos. # L1690161216 and L0900147264, and

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

2. The Taxpayer is liable for gross receipts tax principal, interest, and penalty for

income earned as a jockey agent in TY05 and TY06 because she does not qualify for exemption

In the Matter of the Protest of Lynette Baldwin, page 25 of 26
pursuant to NMSA 1978, § 7-9-40 (1989), and because her erroneous belief that she qualified

under this exemption was negligent and subject to civil penalty.

3. The Department correctly assessed interest, pursuant to NMSA 1978, §7-1-67, and

the Taxpayers owe the amount of interest accrued until the principal tax is paid in full.

4. The amount of civil penalty added to the principal tax shall not exceed ten percent

as provided in §7-1-69(A)(1)(2003, prior to amendments through 2007) and any amounts added or

assessed in excess of the ten percent (10%) shall be abated.

For the foregoing reasons, the Taxpayer's protest IS GRANTED IN PART AND

DENIED IN PART: the Department is ordered to abate ten percent of the penalty amount, a

total of $453.66, for tax year 2005 and tax year 2006.

DATED: March 15, 2011.

In the Matter of the Protest of Lynette Baldwin, page 26 of 26