Could an independent registered nurse deduct payments from a developmental-disabilities service company under New Mexico's health-practitioner or Medicare gross receipts rules?

Plain-English summary

Mary Johnson's independent-contractor nursing receipts were taxable because she did not prove that the company paying her was a qualified payer under either claimed deduction. The Administrative Hearings Office upheld the gross receipts tax and interest but abated the penalty for a good-faith, reasonable mistake of law.

The Department's assessment covered 2013–2017 and totaled $11,163.74: $7,932.84 of gross receipts tax, $1,644.36 of interest, and $1,586.54 of penalty.

Johnson was a New Mexico registered nurse who contracted with The Tungland Corporation, a company providing services through New Mexico's Developmental Disabilities Waiver program. She assessed clients, attended medical appointments, prepared care plans, participated in meetings, and conferred with physicians. Tungland paid her for those services. She had no contract with New Mexico and no direct recourse against the state if Tungland failed to pay.

The Johnsons treated the receipts as deductible under Sections 7-9-93 and 7-9-77.1, relying on the statutes, CRS-1 instructions, and information similar to Department publication FYI-105. But each deduction turns on the source of the taxpayer's own receipts, not on where the payer may have obtained its money.

For Section 7-9-93, being a health care practitioner was necessary but not enough. The receipts had to be paid by a managed health care provider or health care insurer for qualifying commercial-contract or Medicare Part C services. Johnson's only contract was with Tungland, and the record did not establish that Tungland met either statutory definition. The hearing officer therefore denied that deduction.

Section 7-9-77.1 failed for the same source-of-payment reason. Johnson did not receive her payments directly from the United States government or one of its agencies for the specified Medicare services; she received them from Tungland. The possible source of Tungland's money did not change the source of Johnson's receipts.

The regulation excluding certain home-care payments from "engaging in business" also provided no relief. Regulation 3.2.1.12(G) concerns an individual who contracts with New Mexico to provide home-based support and receives qualified foster care payments. Johnson admitted that she had no contract with the state.

Penalty was different. Section 7-1-69(B) bars penalty when nonpayment results from a mistake of law made in good faith and on reasonable grounds. The Department did not oppose abatement, the hearing officer credited the Johnsons' reliance and testimony, and the recent Golden Services opinions showed that legally trained decision-makers had genuinely disagreed about Section 7-9-93's meaning. On those unique facts, imposing a negligence penalty would have been unreasonable.

Result: protest DENIED IN PART and GRANTED IN PART. The Johnsons remained liable for the gross receipts tax and interest, including interest accruing until payment, while the assessed and accruing penalty was abated.

What this means for you

A professional license does not establish the deduction by itself

Section 7-9-93 requires both a qualifying practitioner and receipts from a qualifying payer for qualifying services. A nurse cannot stop at proving that the work was within the nursing license.

Follow the payment one transaction at a time

When an intermediary pays an independent contractor, the relevant receipt is the intermediary's payment to that contractor. A government or insurer's separate payment to the intermediary does not automatically pass a deduction through.

Document the payer's legal status

If the deduction depends on the payer being a managed health care provider or health care insurer, retain evidence that the payer meets the statutory definition and that the contract covers the required services.

Developmental-disability work has its own narrow regulation

The qualified-foster-care-payment rule requires, among other things, an agreement with New Mexico for qualifying home-based support. Work connected to a waiver program is not enough without the regulatory elements.

Good-faith penalty relief is fact-specific

The penalty was abated because credible evidence showed reasonable reliance amid genuine legal ambiguity. The decision called the circumstances unique; misunderstanding an otherwise accurate publication will not ordinarily guarantee relief.

Common questions

Q: Was Mary Johnson a qualifying health care practitioner?
A: Yes. The parties did not dispute that she was a registered nurse and a health care practitioner under Section 7-9-93. The deduction failed because the required payer and service-source elements were not proven.

Q: Why did Tungland's Developmental Disabilities Waiver work not make the receipts deductible?
A: Johnson's receipts came from Tungland under a separate transaction. The record did not prove that Tungland was a managed health care provider or health care insurer, and the source of Tungland's own receipts was not controlling.

Q: Could the Medicare deduction apply because government funds may have reached Tungland?
A: No on this record. Section 7-9-77.1 required Johnson's receipts to come from the United States government or an agency for the specified services; her receipts came directly from Tungland.

Q: Did the home-care regulation apply?
A: No. Regulation 3.2.1.12(G) required an agreement with New Mexico and qualified foster care payments. Johnson had no contract with the state.

Q: How much of the assessment was removed?
A: The $1,586.54 assessed penalty was abated. The $7,932.84 tax and $1,644.36 assessed interest remained, and interest continued to accrue until payment.

Citations and references

Statutes and regulations:

• NMSA 1978, §§ 7-9-4, 7-9-3.5(A)(1), and 7-9-5 — gross receipts tax, gross receipts, and the presumption of taxability
• NMSA 1978, § 7-9-93(A), (C) — health care practitioner deduction and defined qualifying payers and services
• NMSA 1978, § 7-9-77.1(A) — specified medical-service receipts from the United States government or its agencies
• NMSA 1978, §§ 7-1-17(C) and 7-1-3(X) — assessment presumption and inclusion of interest and civil penalty in "tax"
• NMSA 1978, § 7-1-69(A)-(B) — negligence penalty and the good-faith mistake-of-law exception
• Regulations 3.2.1.12(E)-(G), 3.1.6.12-.13, and 3.1.11.10 NMAC — activities outside engaging in business, assessment presumption, and negligence
• 26 U.S.C. § 131 — qualified foster care payments
• 42 U.S.C. § 1395 et seq. — Medicare

Cases:

• Golden Services Home Health & Hospice v. Taxation & Revenue Department, No. A-1-CA-36987, 2020 WL 2045956 (N.M. Ct. App. Apr. 20, 2020) (non-precedential) — Section 7-9-93's contract requirements and disagreement about statutory ambiguity
• Wing Pawn Shop v. Taxation and Revenue Department, 1991-NMCA-024 — deductions strictly construed and clearly established by the taxpayer
• TPL, Inc. v. New Mexico Taxation & Revenue Department, 2003-NMSC-007 — strict construction of deductions
• New Mexico Taxation & Revenue Department v. Casias Trucking, 2014-NMCA-099 — taxpayer's burden to overcome an assessment
• MPC Ltd. v. New Mexico Taxation & Revenue Department, 2003-NMCA-021 — evidence required to rebut the assessment presumption
• C & D Trailer Sales v. Taxation and Revenue Department, 1979-NMCA-151 — informed consultation and penalty
• Marbob Energy Corp. v. New Mexico Oil Conservation Commission, 2009-NMSC-013 — mandatory effect of "shall"

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Gordon E Johnson
• Decision PDF: D&O 21-10

Original ruling text

1 STATE OF NEW MEXICO
2 ADMINISTRATIVE HEARINGS OFFICE
3 TAX ADMINISTRATION ACT

4 IN THE MATTER OF THE PROTEST OF
5 GORDON E JOHNSON
6 TO ASSESSMENT ISSUED UNDER
7 LETTER ID NO. L1823067824

8 v. Case Number 20.12-142A
9 D&O 21 – 10

10 NEW MEXICO TAXATION AND REVENUE DEPARTMENT

11 DECISION AND ORDER

12 On February 15, 2021, Hearing Officer Chris Romero, Esq., conducted a hearing on the

13 merits of the protest of Gordon E. Johnson pursuant to the Tax Administration Act and the

14 Administrative Hearings Office Act. Mr. Gordon E. Johnson and Mrs. Mary Johnson

15 (collectively referred to herein as “Taxpayer”) appeared representing themselves. Mr. Johnson

16 testified on behalf of Taxpayer. Mr. David Mittle, Esq. appeared on behalf of the opposing party

17 in the protest, the Taxation and Revenue Department (“Department”) accompanied by Ms. Alma

18 Tapia, protest auditor. The Department called Mrs. Johnson and Ms. Tapia to testify.

19 The hearing occurred by videoconference pursuant to NMSA 1978, Section 7-1B-8 (H)

20 under the circumstances of the ongoing public health emergency presented by COVID-19, as

21 discussed in greater detail in Standing Order 20-02, which is made part of the record of the

22 proceeding.

23 Taxpayer Exhibits 1 (Contract), 2 (License Information), and 3 (Forms 1099) were

24 admitted. The Department did not proffer any exhibits.

25 The primary issues presented for consideration were whether Mrs. Johnson’s income from

26 performing nursing services was deductible from gross receipts pursuant to NMSA 1978, Section 7-

27 9-93 or Section 7-9-77.1; and (2) whether Taxpayer was entitled to abatement of penalty under the

In the Matter of the Protest of Gordon E. Johnson
Page 1 of 16
1 assessment. With regard for the primary issue in dispute, the Department argued that even

2 if Taxpayer derived income from providing nursing services, it was not deductible

3 because she did not receive it from a qualifying entity. As explained in greater detail in

4 the subsequent discussion, the Hearing Officer determined that Taxpayer did not establish

5 by a preponderance of evidence an entitlement to any deduction, but the Hearing Officer

6 was satisfied that the evidence and surrounding circumstances justified an abatement of

7 penalty based on a mistake of law made in good faith and on reasonable grounds.

8 Therefore, Taxpayer’s protest should be denied with regard to tax and interest, but

9 granted with respect to penalty. IT IS DECIDED AND ORDERED AS FOLLOWS:

10 FINDINGS OF FACT

11 Procedural History

12 1. On June 17, 2020, the Department issued a Notice of Assessment of Taxes

13 and Demand for Payment under Letter ID No. L1823067824 in the total amount of

14 $11,163.74 comprised of gross receipts tax in the amount of $7,932.84, gross receipts tax

15 interest in the amount of $1,644.36, and gross receipts tax penalty in the amount of

16 $1,586.54 for the periods from January 1, 2013 through December 31, 2017 (hereinafter

17 “Assessment”). [Administrative File]

18 2. On June 26, 2020, the Department received Taxpayer’s protest of

19 Assessment accompanied by attachments including: Forms 1099 for years 2013, 2014,

20 2015, 2016, and 2017 (admitted as Taxpayer Ex. 3); and New Mexico Board of Nursing

21 Licensure Information (admitted as Taxpayer Ex. 2). [Administrative File]

22 3. On July 15, 2020, the Department acknowledged receipts of Taxpayer

23 protest under Letter ID No. L0416577200. [Administrative File]

In the Matter of the Protest of Gordon E. Johnson
Page 2 of 16
1 4. On July 22, 2020, the Department requested additional information from

2 Taxpayer, specifically “copies of the contract you had with Tungland Corporation” and any other

3 information the Taxpayer may perceived as helpful. [Administrative File]

4 5. On August 10, 2020, Taxpayer provided additional information to the Department

5 which included a copy of an agreement with The Tungland Corporation that Taxpayer had to

6 provide services, responsive to the Department’s request dated July 22, 2020 (admitted as

7 Taxpayer Ex. 1). [Administrative File]

8 6. On December 1, 2020, the Department filed a request for a hearing in reference to

9 the protest of the Assessment. [Administrative File]

10 7. On December 1, 2020, the Department filed Department’s Original Answer to

11 Taxpayer’s protest. [Administrative File]

12 8. On December 1, 2020, the Administrative Hearings Office entered a Notice of

13 Videoconference Administrative Hearing which set a hearing on the merits of Taxpayer’s protest

14 for February 15, 2021. [Administrative File]

15 Merits of Taxpayer’s Protest

16 9. Mr. Gordon Johnson and Mrs. Mary Johnson are married. [Direct Examination of

17 Mr. Johnson]

18 10. Mrs. Johnson was, at all times relevant to the protest, a registered nurse in the

19 State of New Mexico licensed pursuant to the provisions of the Nursing Practice Act (License

20 No. R37185). [Direct Examination of Mr. Johnson; Taxpayer Ex. 2]

21 11. Mrs. Johnson was, during all times relevant to the protest, an independent

22 contractor to The Tungland Corporation (hereinafter “Tungland”) providing nursing services on

23 its behalf. [Direct Examination of Mr. Johnson; Taxpayer Ex. 1]

In the Matter of the Protest of Gordon E. Johnson
Page 3 of 16
1 12. Upon information and belief, the services that Tungland provided did not

2 require the services of more than one nurse. For that reason, Mrs. Johnson was the only

3 registered nurse with whom Tungland contracted and the only nurse providing services

4 by or through Tungland. [Direct Examination of Mr. Johnson]

5 13. Tungland was in the business of providing services under the State of New

6 Mexico’s Developmental Disabilities Waiver program. [Direct Examination of Mr.

7 Johnson]

8 14. In her capacity as a register nurse for Tungland, Mrs. Johnson conducted

9 client assessments, attended routine medical appointments, prepared patient care plans,

10 attended and participated in meetings, and conferred with physicians on behalf of

11 individuals receiving services through Tungland under the Developmental Disabilities

12 Waiver program. [Direct Examination of Mrs. Johnson]

13 15. Mrs. Johnson was paid by Tungland for services provided to Tungland.

14 [Direct Examination of Mrs. Johnson]

15 16. Mrs. Johnson did not have a contract with the State of New Mexico.

16 [Direct Examination of Mrs. Johnson]

17 17. Mrs. Johnson did not have recourse against the State of New Mexico for

18 any failure of Tungland to pay for her services. [Direct Examination of Mrs. Johnson]

19 18. Taxpayer relied on the deductions provided at NMSA 1978, Section 7-9-

20 93 and NMSA 1978, Section 7-9-77.1 in concluding that Mrs. Johnson’s receipts from

21 Tungland were not taxable, as well as accompanying instructions for completing and

22 submitting CRS-1 returns. [Direct Examination of Mr. Johnson]

23 19. Mr. Johnson also relied on information substantially similar to that

In the Matter of the Protest of Gordon E. Johnson
Page 4 of 16
1 contained on Page 23 in FYI-105 (Rev. 7/2019) but admittedly overlooked the special reporting

2 requirements that were contained therein. [Direct Examination of Mr. Johnson; Cross

3 Examination of Mr. Johnson]

4 20. Receipts paid to Tungland derived from transactions that were separate and

5 distinguishable from the transactions under which Tungland paid Mrs. Johnson for her services.

6 [Direct Examination of Ms. Tapia]

7 21. Mrs. Johnson did not have any familial relationship to any of the clients with

8 whom she worked under her contract with Tungland. [Cross Examination of Mrs. Johnson]

9 22. Mrs. Johnson’s receipts derived directly from Tungland. [Direct Examination of

10 Ms. Tapia]

11 DISCUSSION

12 Taxpayer asserted that Mrs. Johnson’s receipts from services performed as a registered

13 nurse to Tungland should be deductible from Taxpayer’s taxable gross receipts. The central issue is

14 therefore whether Taxpayer was entitled to deductions under NMSA 1978, Section 7-9-93 or

15 Section 7-9-77.1 for receipts paid by Tungland for services rendered for, or on behalf of, Tungland.

16 The Department contends that Taxpayer is not entitled to either deduction because

17 Taxpayer’s receipts did not derive from a qualified entity, but instead derived from Tungland for

18 services provided to Tungland.

19 Prior to addressing Taxpayer’s claims, however, it is necessary to discuss the burden which

20 Taxpayer must overcome in order to prevail.

21 Presumption of Correctness

22 Pursuant to NMSA 1978, Section 7-1-17 (C) (2007), the Assessment of tax issued in this

23 case is assumed correct and unless otherwise specified, for the purposes of the Tax Administration

In the Matter of the Protest of Gordon E. Johnson
Page 5 of 16
1 Act, “tax” includes interest and civil penalty. See NMSA 1978, Section 7-1-3 (X) (2013). Therefore,

2 under Regulation 3.1.6.13 NMAC, the presumption of correctness under Section 7-1-17 (C) also

3 extends to the Department’s assessment of penalty and interest. See Chevron U.S.A., Inc. v. State

4 ex rel. Dep’t of Taxation & Revenue, 2006-NMCA-050, ¶16, 139 N.M. 498, 134 P.3d 785 (agency

5 regulations interpreting a statute are presumed proper and are to be given substantial weight).

6 As a result, the presumption of correctness in favor of the Department requires that

7 Taxpayer carry the burden of presenting countervailing evidence or legal argument to show that

8 she is entitled to abatement of the Assessment. See N.M. Taxation & Revenue Dep’t v. Casias

9 Trucking, 2014-NMCA-099, ¶8, 336 P.3d 436. “Unsubstantiated statements that [an] assessment

10 is incorrect cannot overcome the presumption of correctness.” See MPC Ltd. v. N.M. Taxation &

11 Revenue Dep’t, 2003-NMCA-021, ¶13, 133 N.M. 217, 62 P.3d 308; See also Regulation 3.1.6.12

12 NMAC. If a taxpayer presents sufficient evidence to rebut the presumption, then the burden

13 shifts to the Department to re-establish the correctness of the assessment. See MPC, 2003-

14 NMCA-021, ¶13.

15 In circumstances where a taxpayer’s claim for relief relies on the application of an

16 exemption or deduction, as in the case at hand, “the statute must be construed strictly in favor of

17 the taxing authority, the right to the exemption or deduction must be clearly and unambiguously

18 expressed in the statute, and the right must be clearly established by the taxpayer.” See Wing

19 Pawn Shop v. Taxation and Revenue Department, 1991-NMCA-024, ¶16, 111 N.M. 735, 809

20 P.2d 649 (internal citation omitted); See also TPL, Inc. v. N.M. Taxation & Revenue Dep’t, 2003-

21 NMSC-007, ¶9, 133 N.M. 447, 64 P.3d 474.

22 Computing Taxable Gross Receipts

23 As a practical matter, one of the initial steps in any audit is to compute or verify the amount

In the Matter of the Protest of Gordon E. Johnson
Page 6 of 16
1 of gross receipts. A subsequent step is to subtract from the taxpayer’s total gross receipts those

2 amounts which are deductible or exempt. The difference between total gross receipts and any

3 applicable deductions or exemptions is the amount of taxable gross receipts.

4 For the privilege of engaging in business, New Mexico imposes a gross receipts tax on the

5 receipts of any person engaged in business. See NMSA 1978, Section 7-9-4 (2002). Under

6 NMSA 1978, Section 7-9-3.5 (A) (1) (2007), “gross receipts” is defined to mean:

7 the total amount of money or the value of other consideration
8 received from selling property in New Mexico, from leasing or
9 licensing property employed in New Mexico, from granting a right to
10 use a franchise employed in New Mexico, from selling services
11 performed outside New Mexico, the product of which is initially
12 used in New Mexico, or from performing services in New Mexico.
13
14 [Emphasis Added]

15 Accordingly, under the Gross Receipts and Compensating Tax Act, all gross receipts of a

16 person engaged in business are presumed taxable. See NMSA 1978, Section 7-9-5 (2002).

17 But, as previously stated, a taxpayer’s actual obligation may be reduced by any number

18 of applicable deductions or exemptions, or by presenting evidence that its receipts are excludable

19 from taxation under NMSA 1978, Section 7-9-3.5 (e.g. services performed outside of New Mexico).

20 Application of Sections 7-9-93 and 7-9-77.1

21 NMSA 1978, Section 7-9-93 permits a deduction for the receipts of health care practitioners

22 under specific circumstances. Subsection A states in relevant part:

23 Receipts of a health care practitioner for commercial contract
24 services or medicare part C services paid by a managed health care
25 provider or health care insurer may be deducted from gross receipts
26 if the services are within the scope of practice of the health care
27 practitioner providing the service. Receipts from fee-for-service
28 payments by a health care insurer may not be deducted from gross
29 receipts.
30
31 [Emphasis Added]

In the Matter of the Protest of Gordon E. Johnson
Page 7 of 16
1 There is no dispute that Taxpayer is a health care practitioner under NMSA 1978, Section 7-9-93

2 (C) (3) (k). However, it is not enough under the statute that Mrs. Johnson is a health care

3 practitioner. The statute requires that the receipts derive from specific sources for particular types of

4 services, or as the Department appropriately described it, from a “qualified source.”

5 For example, only receipts paid by managed health care providers and health care insurers

6 are deductible, and then those receipts must derive from providing specific types of services,

7 particularly “commercial contract services” and “medicare part C services.”

8 The statute defines those terms. “Commercial contract services” means “health care services

9 performed by a health care practitioner pursuant to a contract with a managed health care provider

10 or health care insurer other than those health care services provided for medicare patients pursuant

11 to Title 18 of the federal Social Security Act or for medicaid patients pursuant to Title 19 or Title 21

12 of the federal Social Security Act[.]” See Section 7-9-93 (C) (1).

13 The New Mexico Court of Appeals recently observed that:

14 [T]he Legislature defined “commercial contract services” in the
15 statute to require services be performed “pursuant to a contract”
16 between a health care practitioner and a managed health care
17 provider or insurer. Similarly, “health care insurer” is also defined as
18 a person that “contracts to reimburse licensed health care
19 practitioners for providing basic health care services[.]” Such
20 specificity requiring a contract with a “health care practitioner” lends
21 support to the conclusion that only health care practitioners could
22 hold qualifying “receipts from payments by a managed health care
23 provider or health care insurer.”

24 See Golden Services Home Health & Hospice v. Taxation & Revenue Dep't, 2020 WL 2045956, at

25 *7 (N.M. Ct. App. Apr. 20, 2020) (non-precedential).

26 In this case, Taxpayer did not assert nor did she present evidence to establish that she

27 contracted directly with a qualified entity. In contrast, Mrs. Johnson explained that the only contract

28 in which she was a party was between herself and Tungland, but there was no further evidence to

In the Matter of the Protest of Gordon E. Johnson
Page 8 of 16
1 establish that Tungland could qualify as a “managed health care provider” or “health care insurer”

2 as those terms are defined at Section 7-9-93 (C) (2) or (4).

3 For example, a “managed health care provider” means “a person that provides for the

4 delivery of comprehensive basic health care services and medically necessary services to

5 individuals enrolled in a plan through its own employed health care providers or by contracting with

6 selected or participating health care providers. ‘Managed health care provider’ includes only those

7 persons that provide comprehensive basic health care services to enrollees on a contract basis,” and

8 goes on to enumerate certain organizations, associations, plans, and systems. However, there is

9 insufficient evidence on which to conclude that Tungland would qualify as any one of those entities.

10 The same is true for the definition of “health care insurer” which means “a person that: (a)

11 has a valid certificate of authority in good standing pursuant to the New Mexico Insurance Code to

12 act as an insurer, health maintenance organization or nonprofit health care plan or prepaid dental

13 plan; and (b) contracts to reimburse licensed health care practitioners for providing basic health

14 services to enrollees at negotiated fee rates[.]” Once again, there is insufficient evidence on which to

15 determine that Tungland could qualify as a “health care insurer” as defined in the statute.

16 Because there was insufficient evidence to establish that Tungland was a managed health

17 care provider or health care insurer, or that Mrs. Johnson’s receipts derived from providing

18 “commercial contract services” and “medicare part C services” as those terms are defined by the

19 law, Mrs. Johnson did not establish entitlement to a deduction under Section 7-9-93.

20 The evaluation of Section 7-9-77.1 follows a similar course. As with Section 7-9-93, the

21 critical inquiry is once again the precise source of Taxpayer’s receipts. Once again, all receipts

22 were paid by Tungland to Mrs. Johnson and there was no evidence to establish any of the critical

23 elements underlying the application of Section 7-9-77.1.

In the Matter of the Protest of Gordon E. Johnson
Page 9 of 16
1 Similar to Section 7-9-93, Section 7-9-77.1 begins with the source of receipts, and in the

2 case of Section 7-9-77.1 (A), those receipts must be received by the Taxpayer from “the United

3 States government or any agency thereof for provision of medical and other health services by a

4 health care practitioner or of medical or other health and palliative services by hospices or

5 nursing homes to medicare beneficiaries pursuant to the provisions of Title 18 of the federal

6 Social Security Act[.]”

7 In Mrs. Johnson’s situation, there was no evidence on which to conclude that her receipts

8 were paid directly by “the United States government or any agency thereof” for provision of the

9 sorts of services specified. See NMSA 1978, Section 7-9-77.1 (A); 42 U.S.C.A. §1395 et seq.

10 (providing “Health Insurance for Aged and Disabled”).

11 Instead, Taxpayer’s receipts derived directly from Tungland, and the source of its receipts

12 (money paid to Tungland) is not relevant to the application of the deduction. The same

13 observations are made for other subsections of Section 7-9-77.1.

14 Effect of Regulation 3.2.1.12 (G) NMAC

15 Although not directly addressed by Taxpayer, the Hearing Officer at the suggestion of the

16 Department took notice of Regulation 3.2.1.12 (E), (F), and (G) NMAC which exclude certain

17 activities from the definition of “engaging in business.” Of those three subsections, the only

18 provision potentially relevant to the Developmentally Disabled Waiver program is Regulation

19 3.2.1.12 (G) NMAC which states:

20 G. Persons not engaging in business - home care for
21 developmentally disabled family members: Any individual who
22 enters into an agreement with the state of New Mexico to provide
23 home based support services for developmentally disabled
24 individuals in the home of the developmentally disabled
25 individuals or the home of the support provider and receives
26 payments which under 26 USCA 131 are “qualified foster care
27 payments” is not thereby engaging in business. Receipts of the

In the Matter of the Protest of Gordon E. Johnson
Page 10 of 16
1 individuals which are “qualified foster care payments” from
2 providing such home based support services pursuant to such an
3 agreement are not receipts from engaging in business.

4 However, this regulation is irrelevant to the facts of this protest because Ms. Johnson

5 readily admitted that she did not have any contract with the State of New Mexico and further

6 clarified that she had no direct means of redress against the State of New Mexico in the event

7 Tungland ever failed to satisfy its contractual obligations to her. Regulations 3.2.1.12 (E) and (F)

8 are also not applicable as they address receipts from programs not germane to the facts of this

9 protest.

10 Therefore, to the extent Taxpayer asserts any relief under Regulation 3.2.1.12 (E), (F), or

11 (G) NMAC, those provisions do not apply under the facts of this case and afford Taxpayer no

12 relief from the Assessment.

13 Penalty

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

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

16 (2007) requires that:

17 there shall be added to the amount assessed a penalty in an amount
18 equal to the greater of: (1) two percent per month or any fraction of
19 a month from the date the tax was due multiplied by the amount of
20 tax due but not paid, not to exceed twenty percent of the tax due but
21 not paid.

22 [Emphasis Added]

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

24 instances where a taxpayer’s actions or inactions meet the legal definition of “negligence.” See

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

26 (use of the word “shall” in a statute indicates that a provision is mandatory absent clear indication to

27 the contrary).

In the Matter of the Protest of Gordon E. Johnson
Page 11 of 16
1 Regulation 3.1.11.10 NMAC defines negligence in three separate ways: (A) “failure to

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

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

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

5 In instances where a taxpayer might fall under the definition of civil negligence subject to

6 penalty, Section 7-1-69 (B) provides an exception in that “[n]o penalty shall be assessed against a

7 taxpayer if the failure to pay an amount of tax when due results from a mistake of law made in

8 good faith and on reasonable grounds.” In this instance, the Department acknowledged that

9 Taxpayer consulted the Department’s publications, but either misinterpreted or misunderstood the

10 information provided. Under those circumstances, the Department stated that it would not object

11 to the abatement of penalty. The Department’s standpoint is commendable because the Hearing

12 Officer is unaware of any other circumstances in which a taxpayer relied on a misinterpretation or

13 misunderstanding of an otherwise correct and accurate Department publication and still qualified

14 for an abatement of penalty. See C & D Trailer Sales v. Taxation and Revenue Dep’t, 1979-NMCA-

15 151, ¶8-9, 93 N.M. 697 (penalty upheld where there was no evidence that the taxpayer “relied on

16 any informed consultation” in deciding not to pay tax).

17 But the circumstances of this protest are not typical. The interpretation and application of

18 NMSA 1978, Section 7-9-93 had been passionately disputed among reasonable and judicious

19 minds for several years until finally resolved by Golden Services, 2020 WL 2045956 (N.M. Ct.

20 App. Apr. 20, 2020) (non-precedential).

21 That is not to say that a history of disagreement among reasonable minds in reference to

22 the interpretation or application of a law should always justify an abatement of penalty. The

23 circumstances underlying the abatement of penalty in this case are unique. Not only were the

In the Matter of the Protest of Gordon E. Johnson
Page 12 of 16
1 Department and Hearing Officer satisfied by the evidence presented, particularly Mr. Johnson’s

2 credible testimony that Taxpayer made a mistake of law in good faith and on reasonable grounds,

3 but recent judicial history exemplifies the basis for such mistake. Two of three judges considering

4 the clarity of Section 7-9-93 in Golden Services observed, “we perceive ambiguity in the structure

5 and wording of the statute.” See Golden Services, 2020 WL 2045956, at *4 (N.M. Ct. App. Apr.

6 20, 2020). The third judge, although concurring with the result reached in Golden Services, did not

7 agree that the statute was ambiguous. See Golden Services, 2020 WL 2045956, at *9 (N.M. Ct.

8 App. Apr. 20, 2020) (Judge Z. Ives specially concurring) (non-precedential).

9 Hence, the circumstances in this case are unique in that experienced and knowledgeable

10 attorneys, hearing officers, and even judges have expressed divergent views regarding the

11 interpretation and application of Section 7-9-93. In this case, it would be unreasonable and patently

12 unfair to find that Mr. and Mrs. Johnson, who are not legally trained, did not make a mistake of

13 law in good faith and on reasonable grounds when legally trained and experienced minds have

14 grappled to reconcile their differing views of the statute. Penalty should be abated.

15 Having considered all of the evidence and arguments presented, the Hearing Officer was

16 persuaded that Taxpayer’s protest should be DENIED with regard to the assessment of gross

17 receipts tax and interest, but GRANTED with respect to any penalty assessed and since accruing,

18 CONCLUSIONS OF LAW

19 A. Taxpayer filed a timely, written protest to the Department’s Assessment, and

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

21 B. A hearing was timely set and held within 90 days of Taxpayer’s protest under

22 NMSA 1978, Section 7-1B-8 (2015).

23 C. Taxpayer carries the burden to present countervailing evidence or legal argument

In the Matter of the Protest of Gordon E. Johnson
Page 13 of 16
1 to show that it is entitled to an abatement of an assessment. See Casias Trucking, 2014-NMCA-

2 099, ¶8.

3 D. If a taxpayer presents sufficient evidence to rebut the presumption, then the

4 burden shifts to the Department to re-establish the correctness of the assessment. See MPC Ltd.,

5 2003-NMCA-021, ¶13.

6 E. Where a taxpayer’s claim for relief relies on the application of an exemption or

7 deduction, “the statute must be construed strictly in favor of the taxing authority, the right to the

8 exemption or deduction must be clearly and unambiguously expressed in the statute, and the

9 right must be clearly established by the taxpayer.” See Wing Pawn Shop v. Taxation and Revenue

10 Department, 1991-NMCA-024, ¶16, 111 N.M. 735, 809 P.2d 649 (internal citation omitted); See

11 also TPL, Inc. v. N.M. Taxation & Revenue Dep’t, 2003-NMSC-007, ¶9, 133 N.M. 447, 64 P.3d

12 474.

13 F. Taxpayer did not rebut the statutory presumption of correctness that attached to the

14 assessment under NMSA 1978, Section 7-1-17 and the burden did not therefore shift to the

15 Department to re-establish the correctness of its assessment.

16 G. Taxpayer did not establish an entitlement to a deduction from gross receipts under

17 NMSA 1978, Section 7-9-93 or Section 7-9-77.1 because Taxpayer’s receipts did not derive from

18 an eligible entity.

19 H. Any error in reporting or failing to report arose from a mistake of law made in

20 good faith and on reasonable grounds. See NMSA 1978, Section 7-1-69 (B).

21 For the foregoing reasons, Taxpayer’s protest should be DENIED IN PART and

22 GRANTED IN PART. Taxpayer shall pay the remaining balance of any outstanding gross

23 receipts tax plus interest accruing until paid in full. Assessed penalty shall be ABATED.

In the Matter of the Protest of Gordon E. Johnson
Page 14 of 16
1 DATED: April 27, 2021

2
3 Chris Romero
4 Hearing Officer
5 Administrative Hearings Office
6 P.O. Box 6400
7 Santa Fe, NM 87502

8 NOTICE OF RIGHT TO APPEAL

9 Pursuant to NMSA 1978, Section 7-1-25 (2015), the parties have the right to appeal this

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

11 date shown above. If an appeal is not timely filed with the Court of Appeals within 30 days, this

12 Decision and Order will become final. Rule of Appellate Procedure 12-601 NMRA articulates

13 the requirements of perfecting an appeal of an administrative decision with the Court of Appeals.

14 Either party filing an appeal shall file a courtesy copy of the appeal with the Administrative

15 Hearings Office contemporaneous with the Court of Appeals filing so that the Administrative

16 Hearings Office may begin preparing the record proper. The parties will each be provided with a

17 copy of the record proper at the time of the filing of the record proper with the Court of Appeals,

18 which occurs within 14 days of the Administrative Hearings Office receipt of the docketing

19 statement from the appealing party. See Rule 12-209 NMRA.

In the Matter of the Protest of Gordon E. Johnson
Page 15 of 16
1 CERTIFICATE OF SERVICE

2 On April 27, 2021, a copy of the foregoing Decision and Order was submitted to the parties

3 listed below in the following manner:

4 E-Mail and First-Class Mail E-Mail
INTENTIONALLY BLANK

5
6 John D. Griego
7 Legal Assistant
8 Administrative Hearings Office
9 Post Office Box 6400
10 Santa Fe, NM 87502
11 PH: (505)827-0466
12 FX: (505)827-9732
13 [email protected]

In the Matter of the Protest of Gordon E. Johnson
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