Could Santa Fe Baking avoid negligence penalties after its office manager omitted 33 months of gross receipts tax while continuing to file and pay withholding tax?

Plain-English summary

Santa Fe Baking remained liable for civil negligence penalties after its office manager omitted gross receipts tax from 33 months of CRS returns. The restaurant conceded the underlying tax and interest. The AHO denied every asserted basis for penalty relief and ordered the Department to provide a clear statement of the remaining penalty because the record did not contain a clear total.

Santa Fe Baking timely filed CRS returns and paid withholding tax from February 2012 through October 2014, but it did not report or pay the gross receipts tax portion. Its office manager maintained the books, changed accounting programs three times during 2013-2014, and left records extremely difficult to reconcile.

The owner focused on the restaurant kitchen and trusted the office manager and a CPA to handle finances. A newly hired CPA later reconstructed the records, found the 33-month omission, notified the Department, and prepared the missing returns.

System silence was not affirmative Department advice

Santa Fe Baking argued that the Department's system should have detected gross receipts omissions when withholding returns and payments continued.

Regulation 3.1.11.11(A) required proof that a Department employee affirmatively misled the taxpayer. No employee told the restaurant that gross receipts tax was not due. A system's failure to flag the omission did not shift the restaurant's duty to determine and report its CRS liabilities.

Disorganization was not physical damage

The restaurant argued that its confused books were effectively “physically damaged.” The AHO rejected that comparison.

The regulation contemplated physical events such as fire or flood. Inadequate accounting systems and disorganized records were instead the kind of carelessness the negligence penalty was designed to discourage.

Delegation did not establish competent-adviser reliance

The retained CPA handled federal filings based on the office manager's books. The office manager—not the CPA—was responsible for CRS reporting and payment, and she was neither a CPA nor shown to have tax-accounting training.

The owner had effectively handed over bookkeeping and CRS functions so he could focus on food operations. Under the cited El Centro Villa decision, appointing an agent did not allow a taxpayer to abdicate its own duty to learn and meet tax obligations. The record therefore did not prove reasonable reliance on advice from competent tax counsel or an accountant after full disclosure.

Hardship, prior amnesty, and suspected fraud did not supply relief

The owner argued that penalties threatened the restaurant and its roughly 20 employees. The AHO found no New Mexico statute or regulation authorizing abatement based on inability to pay, and a hearing officer could not decide tax policy.

Earlier tax-amnesty programs arose from time-limited legislation that had expired. The restaurant also had not entered a managed audit before filing amended returns and receiving assessments.

The new CPA considered some banking practices questionable and potentially suggestive of fraud or misappropriation. But the record did not establish active deception comparable to the separate Sipapu decision. It remained unclear whether the conduct was fraud or simply incompetence and inadequate supervision, and speculation could not overcome the penalty assessment.

Result: protest DENIED. The assessed penalty remained due. Because the Department's exhibit did not state a clear remaining total, the AHO ordered the Department to give Santa Fe Baking a clear penalty summary.

What this means for you

Business owners delegating tax work

Assigning filing duties does not eliminate oversight responsibility. Confirm the person's tax qualifications, define who handles each return, and review proof that every tax component was reported and paid.

Businesses using combined reporting systems

Do not assume a successful filing or payment for one tax means all liabilities on the combined return were satisfied. Reconcile gross receipts, withholding, and other components separately.

Taxpayers seeking penalty relief

Match the facts to a specific statutory or regulatory ground. System silence, messy books, financial pressure, and an expired amnesty program did not qualify here.

Businesses discovering possible employee misconduct

Preserve evidence showing what representations were made, what controls were bypassed, and why ordinary supervision would not have uncovered the conduct. Suspicion alone did not establish nonnegligence in this case.

Common questions

Q: Did Santa Fe Baking dispute the tax and interest?
A: No. It agreed that the assessed principal and interest were due; only penalty was contested.

Q: Why did continued withholding filings not help?
A: They showed that one CRS component was handled, but the restaurant still omitted gross receipts tax for 33 months.

Q: Was the Department required to detect the omission?
A: No. The cited nonnegligence rule required affirmative misleading by an employee, not a system's failure to flag missing tax.

Q: Did reliance on a CPA excuse the omission?
A: No. The CPA handled federal filings, while the unqualified office manager handled CRS reporting and payment.

Q: Did possible fraud justify abatement?
A: No. The CPA suspected questionable conduct, but the record did not prove active deception or fraud that prudent business controls could not detect.

Q: How much penalty remained?
A: The decision did not provide a clear total. It ordered the Department to give the taxpayer a clear summary of the outstanding penalty.

Citations and references

Statutes and regulations:

• NMSA 1978, § 7-1-17(C) — presumption that assessments are correct
• NMSA 1978, § 7-1-69 — mandatory civil negligence penalty and good-faith mistake-of-law exception
• NMSA 1978, § 7-1-20 — compromise when the Department has good-faith doubt as to liability
• Regulations 3.1.11.10 and 3.1.11.11 NMAC — negligence and regulatory indicators of nonnegligence
• Regulation 3.1.6.14 NMAC — inability to pay does not authorize abatement of a required assessment

Cases cited:

• Tiffany Construction Co. v. Bureau of Revenue, 1976-NMCA-127 — taxpayer duty to ascertain possible tax consequences
• El Centro Villa Nursing Center v. Taxation and Revenue Department, 1989-NMCA-070 — delegation to an accountant does not eliminate the taxpayer's responsibility
• C & D Trailer Sales v. Taxation and Revenue Department, 1979-NMCA-151 — no good-faith mistake of law without informed consultation
• Archuleta v. O'Cheskey, 1972-NMCA-165 — assessment presumption and taxpayer's burden

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Santa Fe Baking Co.
• Decision PDF: D&O 15-36

Original ruling text

STATE OF NEW MEXICO
ADMINISTRATIVE HEARINGS OFFICE
TAX ADMINISTRATION ACT

IN THE MATTER OF THE PROTEST OF
SANTA FE BAKING COMPANY & CAFÉ INC. No. 15-36
TO ASSESSMENTS ISSUED UNDER LETTER
ID NOs. L1350039504, L1910280144, L0813168592, L0165449680, L1886910416,
L1239191504, L0142079952, L0702320592, L1776062416, L0433885136, L1215821776 and
L0678950864

DECISION AND ORDER

A protest hearing occurred on the above captioned matter on September 22, 2015 before

Brian VanDenzen, Esq., Interim Chief Hearing Officer, in Santa Fe. At the hearing, Erik Struck,

owner of Santa Fe Baking Company & Café, Inc. (“Taxpayer”) appeared, along with his

representative Andrew Perkins, CPA. Staff Attorney Gabrielle Dorian appeared representing the

State of New Mexico Taxation and Revenue Department (“Department”). Protest Auditor

Nicholas Pacheco appeared as a witness for the Department. Taxpayer Exhibits #1-2 were

admitted into the record. Department Exhibits A-C were admitted into the record. All exhibits

are more thoroughly described in the Administrative Exhibit Coversheet. Based on the evidence

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

FINDINGS OF FACT

1. On March 11, 2015, under letter id. no. L1350039504, the Department assessed

Taxpayer for $990.75 in withholding tax, $198.15 in penalty, and $77.57 in interest for the CRS

reporting period ending on June 30, 2012.

2. On March 11, 2015, under letter id. no. L0813168592, the Department assessed

Taxpayer for $766.37 in withholding tax, $153.27 in penalty, and $48.44 in interest for the CRS

reporting period ending on December 31, 2012.

3. On March 11, 2015, under letter id. no. L1886910416, the Department assessed

Taxpayer for $696.48 in withholding tax, $139.30 in penalty, and $33.66 in interest for the CRS

reporting period ending on June 30, 2013.

4. On March 11, 2015, under letter id. no. L0142079952, the Department assessed

Taxpayer for $651.60 in withholding tax, $130.30 in penalty, and $21.53 in interest for the CRS

reporting period ending on December 31, 2013.

5. On March 11, 2015, under letter id. no. L1215821776, the Department assessed

Taxpayer for $797.40 in withholding tax, $63.80 in penalty, and $6.55 in interest for the CRS

reporting period ending on October 31, 2014.

6. On March 11, 2015, under letter id. no. L0678950864, the Department assessed

Taxpayer for $172.01 in withholding tax, $13.76 in penalty, and $1.41 in interest for the CRS

reporting period ending on October 31, 2014.

7. On March 18, 2015, under letter id. no. L1910280144, the Department assessed

Taxpayer for $29,699.69 in gross receipts tax, $7,009.58 in penalty, and $2,455.39 in interest for

the CRS reporting period ending on June 30, 2012.

8. On March 18, 2015, under letter id. no. L0165449680, the Department assessed

Taxpayer for $45,145.53 in gross receipts tax, $9,182.38 in penalty, and $2,879.41 in interest for

the CRS reporting period ending on December 31, 2012.

9. On March 18, 2015, under letter id. no. L1239191504, the Department assessed

Taxpayer for $52,437.94 in gross receipts tax, $10,626.88 in penalty, and $2,564.43 in interest

for the CRS reporting period ending on June 30, 2013.

In the Matter of the Protest of Santa Fe Baking Company & Café Inc., page 2 of 13

10. On March 18, 2015, under letter id. no. L0702320592, the Department assessed

Taxpayer for $52,482.82 in gross receipts tax, $10,626.88 in penalty, and $1,764.29 in interest

for the CRS reporting period ending on December 31, 2013.

11. On March 18, 2015, under letter id. no. L1776062416, the Department assessed

Taxpayer for $47,430.79 in gross receipts tax, $6,640.34 in penalty, and $869.35 in interest for

the CRS reporting period ending on June 30, 2014.

12. On March 18, 2015, under letter id. no. L0433885136, the Department assessed

Taxpayer for $47,673.71 in gross receipts tax, $3,891.44 in penalty, and $419.27 in interest for

the CRS reporting period ending on October 31, 2014.

13. On June 17, 2015, Taxpayer protested the Department’s assessment1.

14. On July 1, 2015, the Department’s protest office acknowledged receipt of a valid

protest.

15. On August 5, 2015, the Department filed a request for hearing in this matter with

the Administrative Hearings Office.

16. On August 7, 2015, the Administrative Hearings Office sent Notice of

Administrative Hearing, scheduling this matter for a merits hearing on September 22, 2015,

within 90-days of the Department’s acknowledgment of receipt of a valid protest.

17. The only issue at protest is whether the Department’s assessments of penalty

should be abated in light of Taxpayer’s arguments at protest.

18. Taxpayer is a restaurant in Santa Fe, owned and operated by Mr. Erik Struck since

1998.

1
Taxpayer had attempted to protest on May 8, 2015, but the protest package was apparently destroyed in the mail.
This June 8, 2015 protest date comes from the postage date on the protest packet that the Department received in this
matter.

In the Matter of the Protest of Santa Fe Baking Company & Café Inc., page 3 of 13

19. When Mr. Struck purchased the businesses, he discovered the previous owner had

racked up a tax debt that Mr. Struck had to pay off, which he did with the assistance of office

manager Ms. Cassandra Jeffers.

20. During the relevant period, Ms. Cassandra Jeffers continued to serve as office

manager for Taxpayer.

21. Ms. Jeffers was responsible for maintaining financial records for Taxpayer.

22. Ms. Jeffers was responsible for reporting and paying New Mexico combined

reporting system (“CRS”) taxes.

23. During the relevant period, Taxpayer had also engaged the services of a CPA,

Richard Aragon, to prepare federal tax filings based on the books that Ms. Jeffers maintained.

24. Ms. Jeffers was not a CPA or otherwise trained in tax accounting methods.

25. Ms. Jeffers changed accounting programs three times from 2013 to 2014,

including making changes in the middle of the month.

26. As a result of the changes in accounting system, Taxpayer’s financial records

were extremely difficult to reconcile.

27. Mr. Struck focused primarily on the kitchen area of the restaurant during the

relevant period and trusted that Ms. Jeffers and Mr. Aragon, CPA, were taking care of the

financial aspects of the business.

28. Mr. Struck realized there were problems with the accounting when he learned of

unpaid bills to vendors in the fall of 2014.

29. Around October 1, 2014, Taxpayer hired Andrew Perkins, CPA, to audit its

financial records and reconstruct Taxpayer’s records.

In the Matter of the Protest of Santa Fe Baking Company & Café Inc., page 4 of 13

30. Mr. Perkins, CPA, discovered that beginning with the reporting period starting on

February 1, 2012, and continuing through October 31, 2014, Taxpayer had gone 33-months

without reporting and paying the gross receipts tax portion of the CRS returns, even though

Taxpayer timely filed CRS related to withholding taxes and paid the withholding taxes.

31. Mr. Perkins, CPA, notified the Department of Taxpayer’s omission.

32. Mr. Perkins, CPA, prepared the CRS returns from the reporting periods from

February 1, 2012, and continuing through October 31, 2014.

33. Mr. Perkins, CPA, discovered that Taxpayer had two bank accounts in Santa Fe.

34. Mr. Perkins floated checks between local banks to cover account shortages in the

short term.

35. The two banks apparently discovered this problem and informed Ms. Jeffers they

would only accept cash deposits.

36. Ms. Jeffers continued this practice by writing out checks to herself and then

depositing the cash into the account.

37. Mr. Perkins, CPA, found this practice highly questionable and potentially

suggestive of potential fraud or misappropriation of business funds.

38. Mr. Perkins, CPA, recommended Mr. Struck relieve Ms. Jeffers of her duties in

May of 2015 in light of numerous errors and omissions related to accounting.

39. Ms. Jeffers was in fact relieved of her duties on September 15, 2015.

DISCUSSION

Taxpayer agrees that it owes assessed tax principal and interest. Taxpayer has worked

diligently to establish a payment plan to catch up on the outstanding tax principal. The only issue

in this protest is whether civil negligence penalty under NMSA 1978, Section 7-1-69 (2007)

In the Matter of the Protest of Santa Fe Baking Company & Café Inc., page 5 of 13
must be abated because of Taxpayer’s claimed economic hardship and other alleged grounds

establishing nonnegligence under Regulation 3.1.11.11 (A) NMAC.

Under NMSA 1978, Section 7-1-17 (C) (2007), the assessments issued in this case are

presumed correct. Consequently, Taxpayer has the burden to overcome the assessments. See

Archuleta v. O'Cheskey, 1972-NMCA-165, ¶11, 84 N.M. 428. Unless otherwise specified, for the

purposes of the Tax Administration Act, “tax” is defined to include interest and civil penalty. See

NMSA 1978, §7-1-3 (X) (2013). Under Regulation 3.1.6.13 NMAC, the presumption of

correctness under Section 7-1-17 (C) extends to the Department’s assessment of penalty and

interest. See Chevron U.S.A., Inc. v. State ex rel. Dep't of Taxation & Revenue, 2006-NMCA-50,

¶16, 139 N.M. 498, 503 (agency regulations interpreting a statute are presumed proper and are to be

given substantial weight).

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

rules and regulations, but without intent to evade or defeat a tax, NMSA 1978 Section 7-1-69

(2007) requires that

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.

(italics added for emphasis).

The statute’s use of the word “shall” makes the imposition of penalty mandatory in all instances

where a taxpayer’s actions or inactions meets the legal definition of “negligence.” See Marbob

Energy Corp. v. N.M. Oil Conservation Comm'n, 2009-NMSC-013, ¶22, 146 N.M. 24, 32 (use of

the word “shall” in a statute indicates provision is mandatory absent clear indication to the

contrary).

In the Matter of the Protest of Santa Fe Baking Company & Café Inc., page 6 of 13
Regulation 3.1.11.10 NMAC defines negligence in three separate ways: (A) “failure to

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

exercise under like circumstances;” (B) “inaction by taxpayer where action is required”; or (C)

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

case, Taxpayer was negligent under Regulation 3.1.11.10 (B) & (C) NMAC because Taxpayer

failed to take action to report and pay gross receipts on its filed CRS system returns when required

through carelessness or inattention of Taxpayer’s bookkeeper and accountant.

In instances where a taxpayer might otherwise fall under the definition of civil negligence

generally subject to penalty, Section 7-1-69 (B) provides a limited exception: “[n]o penalty shall

be assessed against a taxpayer if the failure to pay an amount of tax when due results from a

mistake of law made in good faith and on reasonable grounds.” Here, there is no evidence that

Taxpayer made an informed judgment or determination based on reasonable grounds that gross

receipts tax did not apply to it when Taxpayer failed to report and pay gross receipts tax on its

CRS returns. See C & D Trailer Sales v. Taxation and Revenue Dep’t, 1979-NMCA-151, ¶8-9, 93

N.M. 697 (penalty upheld where there was no evidence that the taxpayer “relied on any informed

consultation” in deciding not to pay tax). Consequently, this mistake of law provision of Section

7-1-69 (B) does not mandate abatement of penalty in this case.

The other grounds for abatement of civil negligence penalty are found under Regulation

3.1.11.11 NMAC. That regulation establishes eight indicators of nonnegligence where penalty

may be abated. Based on the argument of Taxpayer and the evidence presented, only three

In the Matter of the Protest of Santa Fe Baking Company & Café Inc., page 7 of 13
factors under Regulation 3.1.11.11 NMAC are potentially pertinent in this proceeding:

A. the taxpayer proves the taxpayer was affirmatively misled by a
department employee;
…
C. 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;
D. the taxpayer proves that the failure to pay tax or to file a return was
caused by reasonable reliance on the advice of competent tax counsel or
accountant as to the taxpayer's liability after full disclosure of all relevant
facts; failure to make a timely filing of a tax return, however, is not
excused by the taxpayer's reliance on an agent;

In Taxpayer’s closing argument, Mr. Perkins argued that under 3.1.11.11 (A) NMAC,

Taxpayer was misled by the Department’s technological or systematic failure to detect the

absence of gross receipts tax filings and payments when Taxpayer filed and paid withholding

taxes on its CRS returns. This alleged systematic failure does not equate to being “affirmatively

misled by a department employee” required under subsection A. Under New Mexico's self-

reporting tax system, “every person is charged with the reasonable duty to ascertain the possible

tax consequences” of his or her actions. Tiffany Construction Co. v. Bureau of Revenue, 1976-

NMCA-127, ¶5, 90 N.M. 16. It is the duty of Taxpayer to determine what CRS taxes need to be

reported and paid. Unless a specific Department employee affirmatively told Taxpayer that the

gross receipts taxes were not due with the withholding taxes on the CRS returns, which there is no

evidence of in this protest, the alleged systematic failure does not abrogate Taxpayer of its

responsibility to file and pay the tax.

Taxpayer also argued that because Ms. Jeffers did such a poor job maintaining the books

and developing a coherent and consistent accounting system, Taxpayer’s records were effectively

physically damaged under Regulation 3.1.11.11 (C) NMAC. As part of this argument, Mr.

Perkins argued that no one from the Department bothered to check the state of the records.

In the Matter of the Protest of Santa Fe Baking Company & Café Inc., page 8 of 13
However, as discussed above, under the presumption of correctness attached to the assessment of

penalty, it is Taxpayer’s burden to establish the grounds for abatement. Physical damage to

records, such as a fire or a flood at the place of business, is not equivalent to the inadequate

accounting systems and disorganization established on this record—which are the exact things

civil negligence penalty is designed to discourage. This factor gives no relief to Taxpayer.

The factor most potentially relevant in this case is found under Regulation 3.1.11.11 (D)

NMAC, where civil negligence penalty may be abated if Taxpayer reasonably relied on the

advice of competent tax counsel or accountant after full disclosure of all relevant facts. Here,

Taxpayer did employ a C.P.A., Mr. Aragon, to assist with its tax filings. Employing a licensed

C.P.A. meets the baseline competency requirement necessary to find reasonable reliance on that

accountant’s advice. The problem in this case is that the evidence established that Mr. Aragon,

C.P.A. was focused on filing of federal taxes while Ms. Jeffers was responsible for filing and

paying the CRS taxes, including the unreported and paid gross receipts tax liabilities. There is no

evidence that Ms. Jeffers was a C.P.A. or otherwise a competent tax accountant. In fact, there is

very little evidence at all about her credentials. While credentials are not necessarily dispositive,

they certainly play a part in determining the reasonableness of Taxpayer’s reliance on Ms. Jeffers

in tax matters. In this case, Mr. Struck indicated that he essentially handed over the accounting,

bookkeeping, and CRS tax reporting functions to Ms. Jeffers and trusted her to get the job done

so he could focus on the food side of the business. Given a taxpayer’s duty under Tiffany

Construction Co., 1976-NMCA-127, ¶5, to ascertain the tax consequences of its actions, a taxpayer

cannot “abdicate this responsibility [to learn of tax obligations] merely by appointing an

accountant as its agent in tax matters.” El Centro Villa Nursing Center v. Taxation and Revenue

Department, 1989-NMCA-070, ¶14, 108 N.M. 795. Consequently, since Taxpayer essentially asks

In the Matter of the Protest of Santa Fe Baking Company & Café Inc., page 9 of 13
for abatement of penalty because it delegated its own responsibilities to a person whom was

ultimately not up to the tax reporting and accounting requirements, El Centro Villa Nursing

established that the civil negligence penalty is appropriate for such delegated, inadvertent error and

Regulation 3.1.11.11 (D) NMAC does not provide grounds for abatement of that penalty.

Taxpayer also argued that the Department in fact has forgiven penalty in the past without

specific statutory or regulatory cause under the Tax Amnesty programs, giving the Department the

precedence necessary to do so in this circumstance despite the absence of a specific authorizing

statute or regulation. The Tax Amnesty programs came from specific Legislative action,

authorized for a defined, limited period of time that has now expired. There is currently no

statutory provision that allows for Tax Amnesty. The closest current equivalent to the Tax

Amnesty programs is a managed audit under NMSA 1978, Section 7-1-11.1 (2003), which is a

program that Taxpayer did not seek to enter in this case before filing its amended returns and

before receiving the assessments.

Taxpayer claimed undue financial hardship as a basis to abate penalty, as Taxpayer

believed it would be extremely difficult to keep the restaurant open, pay its employees, pay the

undisputed tax principal and interest, as well as pay for the assessed penalty. By abating penalty,

Taxpayer believed it would be in a much better position to satisfy its outstanding tax obligation

and meet its continuing business obligation. Related to this argument is Taxpayer’s claim that

policy should dictate abatement of penalty in this case, as Taxpayer employees some 20 employees

and abatement of penalty might be the difference in allowing this long-standing business to remain

in New Mexico rather than close like so many other businesses have had to do over the past five

years. This is a particularly difficult decision to render in light of these financials circumstances

and this policy consideration. However, despite sympathy with Mr. Perkins’ rather persuasive

In the Matter of the Protest of Santa Fe Baking Company & Café Inc., page 10 of 13
closing argument about maintaining business in this state, a hearing officer of the Administrative

Hearings Office is not allowed to engage in questions of tax policy. See NMSA 1978, § 7-1-24.1

(2013) and NMSA 1978, § 7-1B-8 (2015). Nor does New Mexico law provide a statutory or

regulatory provision for abatement of penalty for undue financial hardship. While federal law

does allow for abatement of penalty for undue financial hardship in limited circumstances, New

Mexico’s treatment of civil negligence penalty differs from federal law. See El Centro Villa

Nursing Center v. Taxation and Revenue Department, 1989-NMCA-070, ¶8, 108 N.M. 795. The

Department is required to assess a taxpayer for any tax liability exceeding $25.00. See § 7-1-17

(A). NMSA 1978, Section 7-1-20 (1995) only allows the Department to compromise on a tax

assessment when it has a “good faith doubt” to the liability. That section does not contain any

financial hardship exception. Regulation 3.1.6.14 NMAC (01/15/01) does not allow the Department

to abate otherwise legally required assessments based on Taxpayer’s ability to pay.

Taxpayer’s current accountant Mr. Perkins, CPA, expressed concerns about some of Ms.

Jeffers questionable accounting practices (including using two banks to float checks), the general

disorganized state of the accounts, and the possibility that some of these accounting practices

may have hidden some broader fraudulent conduct. This raises some potential similarities in this

protest with another Decision and Order issued by this hearing officer, In the Matter of the

Protest of Sipapu Recreation Dev. II, LLC, No. 10-21 (non-precedential), where penalty was

abated in light of the fraudulent conduct of that taxpayer’s bookkeeper. However, in that case

there was much more evidence that the taxpayer’s accountant repeatedly assured her supervisors

that the taxes were being actively reported and paid while simultaneously engaging in active

deception making the accountant’s failings difficult to detect in the ordinary course of prudent

business. In that case, the taxpayer was more actively involved in the accounting side of the

In the Matter of the Protest of Santa Fe Baking Company & Café Inc., page 11 of 13
business and consequently more quickly discovered the problem, relieved the employee

immediately, and had a forensic audit done to detect the issues. Unfortunately in this case, and

distinct from Sipapu, Mr. Struck’s approach appeared to be much more hands off and it took

nearly two years for Taxpayer to discover the financial problem. And aside from Mr. Perkins,

CPA.’s informed speculation, it is still not clear on the record whether the problem in this case

was related to the accountant’s basic incompetence and lack of supervision (which is subject to

penalty) or some sort of active deception or fraud undetectable through reasonably prudent

business practices that may not constitute negligence subject to penalty. For the foregoing

reasons, Taxpayer’s protest IS DENIED.

CONCLUSIONS OF LAW

A. Taxpayer filed a timely, written protest to the Department’s denial of the claim for

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

B. The hearing was timely set within 90-days of protest under NMSA 1978, Section 7-

1-24.1 (2013).

C. Taxpayer did not overcome the presumption of correctness, including the assessed

penalty, that attached to the assessments under NMSA 1978, Section 7-1-17 (C) (2007) and

Archuleta v. O'Cheskey, 1972-NMCA-165, ¶11, 84 N.M. 428.

D. Under NMSA 1978, Section 7-1-69 (2007), Taxpayer is liable for civil negligence

penalty because Taxpayer’s inaction in failing to include gross receipts tax and payment of tax on

its CRS returns during the relevant period met the definition of civil negligence under Regulation

3.1.11.10 NMAC. Taxpayer did not establish a good faith, mistake of law made on reasonable

grounds that would allow for abatement of penalty under Section 7-1-69 (2007).

In the Matter of the Protest of Santa Fe Baking Company & Café Inc., page 12 of 13
E. None of the indicators of nonnegligence found under Regulation 3.1.11.11 NMAC

allow for abatement of penalty in this protest.

F. Inability to pay is not grounds for abatement of an assessed tax liability under

Regulation 3.1.6.14 NMAC (01/15/01).

For the foregoing reasons, the Taxpayers’ protest IS DENIED. IT IS ORDERED that the

Taxpayer is liable for the assessed penalty. The Department is further ordered to provide Taxpayer a

clear summary of outstanding penalty, as Department Ex. C did not include a clear total of the

remaining assessed penalty.

DATED: December 7, 2015.

Brian VanDenzen
Interim Chief Hearing Officer
Administrative Hearings Office
P.O. Box 6400
Santa Fe, NM 87502

NOTICE OF RIGHT TO APPEAL

Pursuant to NMSA 1978, Section 7-1-25 (1989), the parties have the right to appeal this

decision by filing a notice of appeal with the New Mexico Court of Appeals within 30 days of the

date shown above. See Rule 12-601 NMRA. If an appeal is not filed within 30 days, this

Decision and Order will become final. Either party filing an appeal shall file a courtesy copy of

the appeal with the Administrative Hearings Office contemporaneous with the Court of Appeals

filing so that the Administrative Hearings Office may being preparing the record proper.

In the Matter of the Protest of Santa Fe Baking Company & Café Inc., page 13 of 13