Do erroneous SSA Forms 1099 create New Mexico gross receipts tax when an employee attorney never received the reported fees?

Plain-English summary

Sarah Barnes won full abatement of an $18,929.08 gross receipts tax assessment because the Social Security Administration reported fees to her that she never received.

Barnes worked part time as a W-2 employee of an Albuquerque law firm that represented clients before the SSA. The firm supervised and trained her, paid her wages, and received the legal fees earned through the representation. Barnes had no ownership interest in the firm or its bank account and received no direct nonemployee compensation from SSA.

Nevertheless, SSA issued Forms 1099-MISC reporting more than $200,000 of nonemployee compensation to Barnes for 2015–2018. The problem was plainly inconsistent with the facts:

• Barnes performed only limited law-firm work in 2015 and no work for it in 2016;
• her employment ended in February 2016;
• she did not practice before SSA after 2015; yet
• SSA reported more than $138,000 to her for later assessed years when she performed no relevant activity and received no SSA money.

The law firm acknowledged that SSA direct-paid fees were the firm's gross receipts and that the firm was solely responsible for New Mexico gross receipts tax on fees paid in the names of its attorneys, including Barnes. The firm had also entered an installment agreement addressing its own gross receipts tax liability for overlapping periods.

The Department nonetheless assessed Barnes $13,617.61 tax, $2,723.52 penalty, and $2,723.52 interest because the 1099 forms labeled the amounts as nonemployee compensation.

Hearing Officer Chris Romero rejected that form-over-substance approach:

• Gross receipts require receipt. Section 7-9-3.5 defines receipts as money or consideration actually received from specified activities. Barnes never received the SSA fees.
• Her actual compensation was employee wages. The law firm paid Barnes as a W-2 employee, and Section 7-9-17 excludes employee wages and similar remuneration from gross receipts.
• The 1099 forms were not conclusive. They were a reasonable starting point for investigation, but the Department could not disregard highly credible evidence showing that the forms were erroneous.
• Barnes overcame the assessment presumption. Her testimony, firm records, bank evidence, employment documents, and the continuing post-employment reporting errors shifted the burden back to the Department, which did not re-establish the assessment.

The decision ordered the assessment abated in full. Barnes had also requested administrative costs and fees; the hearing officer set a later briefing procedure on prevailing-party status and reasonableness rather than deciding the fee amount in D&O 22-14.

Result: protest GRANTED; assessment fully ABATED.

What this means for you

An information return is evidence, not the taxable event itself

A Form 1099 may justify an audit, but it does not create gross receipts if the named person never received the money. Taxability must follow the real transaction.

Gather evidence from the actual payment chain

Barnes proved who earned, received, controlled, and reported the fees through employment records, law-firm statements, bank information, and testimony. Those materials defeated the incorrect information returns.

Employee wages and business receipts are different

Barnes was paid wages by her employer. The law firm received the SSA-derived client fees. Treating the firm's receipts as her nonemployee business revenue ignored both the employment relationship and the actual flow of funds.

Persistent third-party reporting errors can strengthen the factual showing

SSA kept issuing forms after Barnes stopped working for the firm and stopped practicing before SSA. Those impossible later-year amounts were persuasive evidence that the reporting mechanism was wrong.

A merits win does not automatically state the fee award

D&O 22-14 established full abatement but reserved the costs-and-fees question for additional submissions. Do not read this order as specifying an attorney-fee recovery.

Common questions

Q: Does a 1099-MISC prove I received taxable gross receipts?
A: No. It is evidence and may trigger an inquiry, but the Department must account for reliable proof that the form is wrong and that you never received the reported money.

Q: Who received the SSA legal fees here?
A: The Albuquerque law firm. Barnes was its employee, had no interest in its accounts, and received wages rather than the direct SSA fees.

Q: Why were Barnes's wages not gross receipts?
A: Section 7-9-17 excludes employee wages, salaries, commissions, and other remuneration for personal services from gross receipts.

Q: What assessment was abated?
A: The full $18,929.08 assessment: $13,617.61 tax, $2,723.52 penalty, and $2,723.52 interest.

Q: Did Barnes receive attorney fees in this decision?
A: D&O 22-14 did not decide the amount. It ordered further briefing on prevailing-party status, the reasonableness of the Department's position, and a potential award.

Q: Can another taxpayer rely on this decision?
A: No. It resolves Barnes's assessment based on her specific employment relationship, payment records, erroneous forms, and tax periods.

Citations and references

Statutes and regulations:

• NMSA 1978, § 7-9-3.5(A)(1) (2007, amended 2019) — gross receipts require money or consideration actually received from specified activities
• NMSA 1978, § 7-9-4 (2002) — gross receipts tax on persons engaging in business
• NMSA 1978, § 7-9-17 — employee wages and similar remuneration excluded from gross receipts
• NMSA 1978, §§ 7-1-17 and 7-1-3(X) — assessment presumed correct; “tax” includes penalty and interest
• NMSA 1978, § 7-1-29.1; Regulation 22.600.3.28 NMAC — potential prevailing-party costs and post-decision briefing procedure
• NMSA 1978, § 7-1B-8 — hearing procedure and jurisdiction
• NMSA 1978, § 7-1-25 — right to appeal the decision
• Regulations 3.1.6.12 and 3.1.6.13 NMAC — evidence required to overcome an assessment; presumption extending to penalty and interest

Cases:

• MPC Ltd. v. New Mexico Taxation & Revenue Department, 2003-NMCA-021 — sufficient evidence rebuts the assessment presumption and shifts the burden back to the Department
• New Mexico Taxation & Revenue Department v. Casias Trucking, 2014-NMCA-099 — taxpayer's initial burden to show entitlement to abatement
• Dugger v. City of Santa Fe, 1992-NMCA-022 — substance should not be disregarded in favor of form
• Chevron U.S.A. v. State ex rel. Department of Taxation & Revenue, 2006-NMCA-050 — agency regulations interpreting a statute are presumed proper

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Sarah Maestas Barnes
• Decision PDF: D&O 22-14

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 SARAH MAESTAS BARNES
6 TO ASSESSMENT ISSUED UNDER
7 LETTER ID NO. L1302456752

8 v. Case Number 21.12-070A, D&O 22-14

9 NEW MEXICO TAXATION AND REVENUE DEPARTMENT

10 DECISION AND ORDER

11 On May 11, 2022, Hearing Officer Chris Romero, Esq., conducted a hearing on the

12 merits in the matter of the protest of Sarah Maestas Barnes1 (“Taxpayer”) pursuant to the Tax

13 Administration Act and the Administrative Hearings Office Act. Mr. Frank Crociata, Esq.

14 represented Taxpayer and was accompanied by Taxpayer and her spouse, Mr. Harry Barnes. Ms.

15 Cordelia Friedman, Esq. appeared on behalf of the Taxation and Revenue Department

16 (“Department”) accompanied by Ms. Angelica Rodriguez, protest auditor. Harry Barnes and

17 Sarah Barnes testified for Taxpayer. Ms. Rodriguez testified for the Department.

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

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

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

21 proceeding.

22 Department Exhibits A – D and Taxpayer Exhibits 2 – 6 and 13 – 16 were admitted without

23 objection. Taxpayer Exhibits 7 – 12 were admitted over the Department’s objections. Because

1
Since Taxpayer testified that she has never filed her taxes under the name Sarah Maestas Barnes, the Hearing
Officer, when necessary, will refer to her as Sarah Barnes or Ms. Barnes. Reference to Sarah Maestas Barnes in the
caption and footer merely correspond with the name appearing on the Notice of Assessment and Demand for
Payment from which the protest arose.

In the Matter of the Protest of Sarah Maestas Barnes
Page 1 of 21
1 Taxpayer Exhibit 1 and Department Exhibit C were substantially similar, the parties concurred that

2 Department Exhibit C should be admitted in lieu of Taxpayer Exhibit 1.

3 The central issue presented for consideration was whether Taxpayer derived taxable gross

4 receipts from the Social Security Administration. Because the evidence established by a

5 preponderance that the reported amounts of nonemployee compensation were not gross receipts

6 under NMSA 1978, Section 7-9-3.5, Taxpayer’s protest should be granted. IT IS DECIDED AND

7 ORDERED AS FOLLOWS:

8 FINDINGS OF FACT

9 Background

10 1. Harry Barnes, Jr., and Sarah Barnes are married. In all relevant years, they filed

11 married joint income tax returns. [Direct Examination of Mr. Barnes]

12 2. Neither Ms. Barnes nor her spouse have filed a tax return under the name Sarah

13 Maestas Barnes. Her legal name is Sarah Lee Barnes even though the name Sarah Maestas

14 Barnes has been used in a limited manner for other purposes not relevant to the protest. [Direct

15 Examination of Ms. Barnes]

16 3. From October 11, 2012 through February 22, 2016, Ms. Barnes was a part-time

17 employee of a law firm2 (“Law Firm”) in Albuquerque, New Mexico. Law Firm specialized in

18 representing individuals in matters before the Social Security Administration (“SSA”). [Direct

19 Examination of Mr. Barnes; Direct Examination of Ms. Barnes; Taxpayer Ex. 12]

20 4. In about 2012, an attorney acquaintance with Law Firm communicated to Ms.

21 Barnes that it had an employment vacancy that it wished to fill. Ms. Barnes expressed her lack of

22 experience with the SSA and was assured that Law Firm would provide supervision and training.

2
Although the name of the law firm is contained in the record, the Hearing Officer finds that referring to the law
firm by name is not necessary to the discussion contained herein.

In the Matter of the Protest of Sarah Maestas Barnes
Page 2 of 21
1 [Direct Examination of Ms. Barnes]

2 5. Because Ms. Barnes had no experience with the SSA, she relied wholly on Law

3 Firm for direction, supervision, and instruction. [Direct Examination of Ms. Barnes]

4 6. Ms. Barnes was a parttime W-2 employee of Law Firm. Consequently, income

5 derived from her employment was paid by Law Firm in the form of wages. In contrast, Ms.

6 Barnes received no direct, nonemployee compensation from the Social Security Administration

7 for work performed for Law Firm. [Direct Examination of Mr. Barnes; Taxpayer Exs. 7 (Para. 7,

8 8, 9); 12]

9 7. Tax year 2015 is the only year relevant to the assessment in which Ms. Barnes

10 derived actual income from her parttime employment with Law Firm. “Despite the overall tenure

11 of her employment with [Law Firm], [Ms.] Barnes performed limited work for [Law Firm] in

12 2015…[.] [Ms.] Barnes performed no work for [Law Firm] in 2016.” [Direct Examination of Ms.

13 Barnes; Taxpayer Exs. 7 (Para. 6); 15; 16]

14 8. Ms. Barnes has not practiced as an attorney before the SSA since she concluded

15 her employment with Law Firm in 2016. [Direct Examination of Ms. Barnes]

16 SSA Issuance of 1099-MISC Forms

17 9. In early 2018, long after Ms. Barnes concluded her employment with Law Firm,

18 Mr. Barnes and Ms. Barnes received a 1099-MISC from SSA reflecting nonemployee

19 compensation paid to Ms. Barnes by SSA in the 2017 tax year. [Direct Examination of Mr.

20 Barnes; Taxpayer Ex. 13.1]

21 10. Ms. Barnes was neither employed by Law Firm nor otherwise deriving income

22 from engaging in business before the SSA in 2017. [Direct Examination of Ms. Barnes]

23 11. The 2017 1099-MISC reported $57,348.45 in Box 7 as nonemployee

In the Matter of the Protest of Sarah Maestas Barnes
Page 3 of 21
1 compensation paid to Ms. Barnes. [Taxpayer Ex. 13.1]

2 12. Mr. and Ms. Barnes received the 2017 1099-MISC from Law Firm at which time

3 Mr. Barnes observed that the form was addressed to Ms. Barnes at Law Firm’s address. [Direct

4 Examination of Mr. Barnes; Direct Examination of Ms. Barnes; Taxpayer Ex. 13.1]

5 13. Mr. Barnes and Ms. Barnes made further inquiry of Law Firm and were directed

6 to Law Firm’s certified public accountant. [Direct Examination of Mr. Barnes]

7 14. The general response from Law Firm and its accounting professionals was “very

8 nonchalant” suggesting that this sort of thing “happens all the time” and should be

9 straightforwardly resolved. [Direct Examination of Mr. Barnes]

10 15. The managing partner3 of Law Firm personally disclosed to Ms. Barnes that the

11 same thing also happened to her and that it was purportedly resolved without any formal

12 assessment by the Department. [Direct Examination of Ms. Barnes; Taxpayer Ex. 7 (Paras. 12 –

13 14)]

14 16. The managing partner of Law Firm also suggested that resolution of the issue

15 would be assisted with a form letter she prepared which Ms. Barnes executed and submitted to

16 the SSA on or about May 4, 2018. [Direct Examination of Ms. Barnes; Taxpayer Ex. 16]

17 17. The form letter clarified Ms. Barnes’ dates of employment, her employer-

18 employee relationship with Law Firm, and disclaimed any interest in fees paid by SSA.

19 [Taxpayer ex. 16]

20 18. Law Firm’s certified public accountant recommended acknowledging receipt of

21 the 1099-MISC in Taxpayers’ 2017 Schedule C and offset the purported income with a

22 corresponding expense which would accurately reflect Ms. Barnes’ net income from the SSA,

3
The name of the managing attorney is contained in the record. However, identifying the attorney by name is not
necessary to the discussion of the issues presented.

In the Matter of the Protest of Sarah Maestas Barnes
Page 4 of 21
1 which was zero dollars in 2017. [Direct Examination of Mr. Barnes]

2 19. Mr. and Ms. Barnes’ research revealed the existence of additional 1099-MISC

3 forms for tax years 2015 and 2016, in addition to the 2017 form which initially alerted Taxpayers

4 to the problem. Taxpayers had never received 1099-MISC forms for tax years 2015 and 2016.

5 [Direct Examination of Mr. Barnes]

6 20. Tax year 2015 is the only year assessed in which Ms. Barnes also derived income

7 through employment with Law Firm. [Direct Examination of Ms. Barnes; Taxpayer Exs. 7 (Para.

8 6); 15]

9 21. For tax year 2015, Ms. Barnes received two 1099-MISC forms reporting

10 nonemployee compensation purportedly paid to Ms. Barnes. The sum of Box 7 (Nonemployee

11 compensation) from both forms was $63,675.00 paid in 2015. [Direct Examination of Mr.

12 Barnes; Department Exs. B.1 – B.2; D]

13 22. For tax year 2016, Ms. Barnes received one 1099-MISC form reporting non-

14 employee compensation purportedly paid to Ms. Barnes. The sum of Box 7 (Nonemployee

15 compensation) was $64,850 paid in 2016. [Direct Examination of Mr. Barnes; Department Ex.

16 B.3; D; Taxpayer Ex. 7 (Para. 6)]

17 23. For tax year 2018, Ms. Barnes received two 1099-MISC forms reporting

18 nonemployee compensation purportedly paid to Ms. Barnes. The sum of Box 7 (Nonemployee

19 compensation) from both forms was $16,000 paid in 2018. [Direct Examination of Mr. Barnes;

20 Taxpayer Ex. 13.2 – 13.3; Department Ex. B]

21 24. All 1099-MISC forms issued to Ms. Barnes have been addressed to Ms. Barnes at

22 Law Firm’s address. [Direct Examination of Ms. Barnes; Taxpayer Ex. 13; Department Ex. B]

23 25. The SSA has continued to report non-employee compensation to Ms. Barnes

In the Matter of the Protest of Sarah Maestas Barnes
Page 5 of 21
1 despite the fact that she has not been employed by Law Firm or practiced law before the SSA

2 since concluding her employment with Law Firm in 2016. [Direct Examination of Ms. Barnes;

3 Direct Examination of Mr. Barnes; Taxpayer Ex. 13; Department Ex. B]

4 26. Although not relevant to the periods under the Assessment, SSA has issued a

5 1099-MISC for 2019. It was unknown at the time of the hearing whether SSA issued a 1099-

6 MISC form for 2020 and no information was provided for 2021. [Direct Examination of Mr.

7 Barnes]

8 27. Despite the amounts identified as non-employee compensation in the relevant

9 1099-MISC forms, admitted as Taxpayer Ex. 13 and Department Ex. B, Ms. Barnes did not

10 receive any amounts of nonemployee compensation directly from the SSA. [Direct Examination

11 of Ms. Barnes; Taxpayer Ex. 13]

12 28. “All client fees paid directly by the SSA, in the name of [Ms.] Barnes, during her

13 employment with [Law Firm] and after her employment with [Law Firm] ended, were paid into

14 [Law Firm’s] U.S. Bank business checking account. [Taxpayer Ex. 7 (Para. 9); Direct

15 Examination of Ms. Barnes]

16 29. “At no time did [Ms.] Barnes have any right to, ownership of, or interest in any

17 fees paid directly by the [SSA] on behalf of [Law Firm’s] clients.” [Taxpayer Ex. 7 (Para 8)]

18 30. SSA did not directly deposit money into any account in which Mr. or Ms. Barnes

19 had an ownership interest. [Direct Examination of Ms. Barnes; Taxpayer Exs. 6.3 – 6.4; 14; 15]

20 31. Ms. Barnes’ bank statements for 2015 demonstrate that the sum of deposits

21 deriving from employment with Law Firm substantially correspond with compensation reported

22 on her 2015 W-2. [Direct Examination of Ms. Barnes; Taxpayer Ex. 15]

23 32. The standard Fee Agreement between Law Firm and its clients established that all

In the Matter of the Protest of Sarah Maestas Barnes
Page 6 of 21
1 revenue from attorney fees was to be paid to Law Firm, not any individual attorney, and that any

2 gross receipts taxes incurred would be passed on by Law Firm to the client. [Taxpayer Ex. 8.1]

3 The SSA Payment Process

4 33. SSA instructions explain that it does “not recognize entities as appointed

5 representatives or make direct payments to entities, such as firms or organizations.” Instead, it

6 pays “only individuals.” Individuals and their employer law firms can still be compensated

7 utilizing the approved SSA procedure which when properly engaged will cause a 1099-MISC to

8 be issued to the employing law firm which identifies taxable nonemployee compensation (Box

9 7), while the individual representative receives a 1099-MISC identifying the sum of gross

10 proceeds paid to an attorney (Box 14). [Taxpayer Ex. 3.8; 3-10; 4.1 – 4.2]

11 34. The SSA process during the relevant period provided:

12 a. “The one-time submission Form SSA-1699 is the first step of the two-step

13 registration process representatives must complete to receive direct payments for specific

14 claims.” [Taxpayer Ex. 4.1; 6]

15 b. “In the second step, representatives submit their Social Security numbers

16 on Form SSA-1695 each time their appointed to represent a claimant or when a federal court

17 approves the fee.” [Taxpayer Ex. 4.1; 8.2]

18 c. “With this form [Form SSA-1695 ] we set up a link between each claim

19 for direct fee payment and the appointed representative database. This link ensures that Social

20 Security captures all payments to representatives and properly reports these payments on Form

21 1099-MISC.” [Taxpayer Ex. 4.1]

22 d. Forms SSA-1699 and SSA-1695 are employed to obtain information

23 necessary to issue form 1099-MISC. [Taxpayer Ex. 4.1]

In the Matter of the Protest of Sarah Maestas Barnes
Page 7 of 21
1 e. “Most individual representatives belong to an entity. Payments count as

2 taxable income to the entities. If you give the business entity’s taxpayer information [Form SSA-

3 1694] to us, we’ll issue two Forms 1099-MISC. One will go to the entity with total payments

4 reflected as taxable income. We send another copy to the individual representative showing total

5 payments as not taxable income.” [Taxpayer Ex. 4.1; 5]

6 f. Instructions for Form SSA-1694 provide, “We [the SSA] will use the

7 information to identify appointed representatives associated with a business entity as employees

8 or partners, and to facilitate issuance of appropriate return information for reporting purposes.”

9 g. “Social Security must report the fees as taxable income to each

10 representative if we don’t have the entity’s information. Representatives must report the

11 payments as income on their tax returns or given nominee Form 1099-MISC to the entity and

12 Internal Revenue Service (IRS). This will avoid a notice of failure to report income from the IRS

13 on their individual tax returns. Social Security strongly recommends that all business entities

14 with affiliated individual representatives register as soon as possible.” [Taxpayer Ex. 4.1; 5]

15 35. The evidentiary record does not contain any evidence that Law Firm ever

16 completed a “Request for Business Entity Taxpayer Information (Form SSA-1694). [Taxpayer

17 Ex. 5 (blank Form SSA-1694)]]

18 36. When correctly employed, the SSA procedure should have caused Ms. Barnes to

19 receive 1099-MISC forms only in those years in which Law Firm earned fees from SSA for her

20 work, with the sum of those fees reported in Box 14 as “Gross proceeds paid to an attorney[.]”

21 Ms. Barnes would have then had the opportunity to report what, if any, amount contained therein

22 should have been taxable to her (“Amount in Box 10 are not reported as income to the IRS”).

23 [Taxpayer Ex. 3.9; 4.1 – 4.2]

In the Matter of the Protest of Sarah Maestas Barnes
Page 8 of 21
1 37. Box 10 of 1099-MISC represents the sum of “Gross proceeds paid to an

2 attorney[.]” During the relevant periods in dispute, the box was identified as Box 14. It has

3 subsequently been renumbered as Box 10. [Taxpayer Ex. 3.9; 3.14; see also 4.1 – 4.2]

4 38. The instructions for Box 10, formerly Box 14, explain that the figure “Shows

5 gross proceeds paid to an attorney in connection with legal services. Report only the taxable part

6 as income on your return.” (Emphasis Added). [Department Ex. B.5 – B.6]

7 39. SSA has reported paying to Ms. Barnes the sum of $201,873.45 as nonemployee

8 compensation for tax years 2015 ($63,675.00), 2016 ($64,850.00), 2017 ($57,348.45), and 2018

9 ($16,000.00). [Taxpayer Exs. 13.1 (2017); 13.2 – 13.3 (2018); Department Exs. B.1 – B.2

10 (2015); B.3 (2016); B.4 (2017); B.5 – B.6 (2018)]

11 District Court Litigation and Discovery Revelations

12 40. Mr. and Ms. Barnes are engaged in litigation with Law Firm regarding the events

13 giving rise to the protest. The case is stayed pending a decision and order in this protest. [Direct

14 Examination of Mr. Barnes]

15 41. Mr. and Ms. Barnes have obtained various records from Law Firm regarding

16 preparation of SSA documents and other taxation issues pertinent to Law Firm. [Direct

17 Examination of Mr. Barnes]

18 42. Documents disclosed by Law Firm to Mr. and Ms. Barnes along with Ms. Barnes

19 testimony reveal its procedure in preparing and submitting documents to the SSA. [Direct

20 Examination of Mr. Barnes; Direct Examination of Ms. Barnes]

21 43. Ms. Barnes often provided live signatures on Fee Agreements with Law Firm

22 clients, but all other forms submitted to the SSA by Law Firm were prepared and executed using

23 a signature stamp (Taxpayer Ex. 6). Ms. Barnes did not prepare or assist in the preparation of

In the Matter of the Protest of Sarah Maestas Barnes
Page 9 of 21
1 Form SSA-1699, or any other SSA forms before they were submitted by Law Firm to the SSA.

2 [Direct Examination of Ms. Barnes; Cross Examination of Ms. Barnes; Taxpayer Ex. 6; 8.2

3 (Executed with a signature stamp)]

4 44. Form SSA-1699 was provided to Taxpayers by Law Firm. It was unsigned and

5 prepared without consultation of Ms. Barnes. [Direct Examination of Ms. Barnes; Taxpayer Ex.

6 6.]

7 45. The Employer Identification Number provided in Section IV, Part 1, of the Form

8 SSA-1699 is that of Law Firm. [Taxpayer Ex. 6.4]

9 46. Ms. Barnes’ contact information is represented to be the same as Law Firm.

10 [Direct Examination of Ms. Barnes; Taxpayer Exhibit 6. (Section IV, Subsection 6; VI,

11 Subsections 2 – 3)]

12 47. Form SSA-1699, Section IV, incorrectly identified Ms. Barnes as a “co-owner” of

13 the bank account provided for direct deposits from SSA (U.S. Bank Acct. No. ending 1882).

14 [Taxpayer Ex. 6.3 (Section IV, Subsection 5)]

15 48. The instructions for Form-1699 (Section IV) provide that in order to receive direct

16 deposit of payments, the representative must be an “owner or co-owner of [the] account.”

17 Otherwise, payment should be made by check mailed to the address provided for notice, which

18 in the case of Ms. Barnes, was Law Firm’s address. However, the form, as prepared disregarded

19 the instruction by identifying Ms. Barnes as a co-owner of the account. [Taxpayer Ex. 6.3 – 6.4

20 (Section IV, Subsection 5; Section V, Subsection 5)]

21 49. The bank account identified in Form-1699 (Sections IV and V) is Law Firm’s

22 account. Ms. Barnes has never had any interest in the account identified therein. [Direct

23 Examination of Ms. Barnes; Taxpayer Exs. 6.3; 9 (Statements corresponding with U.S. Bank

In the Matter of the Protest of Sarah Maestas Barnes
Page 10 of 21
1 Acct. No. ending 1882 in name of Law Firm); 7 (Para. 8)]

2 50. The combination of Form SSA-1699 (Taxpayer Ex. 6) and the bank statements

3 (Taxpayer Ex. 9) which bear the same account number as that provided in the Form SSA-1699

4 establish that the SSA made direct deposits to U.S. Bank Acct. No. ending 1882 upon

5 representation that Ms. Barnes was a “owner or co-owner of [the] account” when, in fact, she

6 was not. [Direct Examination of Mr. Barnes; Direct Examination of Ms. Barnes; Taxpayer Exs.

7 6; 7 (Para 8); 9]

8 51. For example, review of statements for U.S. Bank Acct. No. ending 1882 in name

9 of Law Firm revealed that it received direct deposits from the SSA which correlated to specific

10 matters Ms. Barnes worked on for Law Firm. Compare Taxpayer Ex. 9.124 (deposits dated “Aug

11 23”) to Taxpayer Ex. 8 (Fee Agreement). [Direct Examination of Mr. Barnes; Taxpayer Exs.

12 9.124; 8]

13 52. Ms. Barnes was not compensated directly by SSA for any work she performed for

14 Law Firm. [Direct Examination of Mr. Barnes; Direct Examination of Ms. Barnes; Taxpayer Ex.

15 7 (Para. 9)]

16 53. Form-1699, Section IV, Subsection 6, instructed the SSA to mail 1099-MISC

17 forms to the address provided for notice, which in the case of Ms. Barnes, was Law Firm’s

18 address. [Taxpayer Ex. 6.3 (Section IV, Subsection 6)]

19 54. The record fails to establish that Law Firm ever completed a “Request for

20 Business Entity Taxpayer Information (Form SSA-1694). [Taxpayer Ex. 5 (blank Form SSA-

21 1694)]

22 55. Records disclosed by Law Firm to Mr. and Ms. Barnes also reveal that Law Firm

23 and the Department have executed an Installment Agreement for payment of an outstanding

In the Matter of the Protest of Sarah Maestas Barnes
Page 11 of 21
1 gross receipts tax liability consisting of principal, interest, and penalty. The liability was incurred

2 in specified periods between April 30, 2015 and December 31, 2019 which overlap the periods

3 for which the Department asserts Taxpayer is similarly liable. [Direct Examination of Mr.

4 Barnes; Taxpayer Ex. 10]

5 56. Comparison of the Installment Agreement to the statement for U.S. Bank Acct.

6 No. ending 1882 illustrates those periods in which a withdrawal in favor of the Department are

7 not included in the plan. For example, compare Taxpayer Ex. 9.35 (Withdrawal to Department

8 dated July 1, 2015 in amount of $6,909.61) to Taxpayer Ex. 10.2 (noting no outstanding liability

9 for corresponding period) and Taxpayer Ex. 11.3 (CRS-1 Return for June 2015). [Direct

10 Examination of Mr. Barnes; Taxpayer Ex. 9; 10; 11.3]

11 57. Law Firm acknowledged “[t]he SSA direct-paid fees referenced in [Taxpayer Ex.

12 7.1 (Para. 9)] constitute gross receipts to [Law Firm] as a professional corporation.” [Taxpayer

13 Ex. 7.1 (Para. 10)]

14 58. Law Firm acknowledged “[Law Firm] is solely responsible to pay the New

15 Mexico Gross Receipts Tax on all client fees paid directly by the SSA on behalf of all the

16 attorneys named on their forms 1099-MISC, including all fees paid in the name of [Ms.] Barnes

17 and reflected on 1099-MISC forms issued to [Ms.] Barnes by the SSA.” [Taxpayer Ex. 7.2 (Para.

18 11)]

19 59. The non-employee compensation contained in 1099-MISCs provides the bases for

20 the Assessment. [Cross Examination of Ms. Rodriguez]

21 60. SSA does not correct 1099-NEC or 1099-MISC unless the correction pertained to

22 a: name or address change; remittances of payment made the same calendar year but not properly

23 posted; or non-receipt of fees posted to 1099-NEC. [Taxpayer Ex. 3.12]

In the Matter of the Protest of Sarah Maestas Barnes
Page 12 of 21
1 61. Relying on the relevant 1099-MISC forms, the Department concluded that

2 Taxpayer derived gross receipts from engaging in business before the SSA, and on April 20,

3 2021, issued a Notice of Assessment of Taxes and Demand for Payment under Letter ID No.

4 L1302456752 (“Assessment”) in the total amount of $18,929.08. The total amount due was

5 comprised of $13,617.61 in gross receipts tax, $2,723.52 in penalty, and $2,723.52 in interest for

6 the periods from January 1, 2015 to December 31, 2018. [Administrative File]

7 Procedural History Before
8 Administrative Hearings Office

9 62. On May 20, 2021, Taxpayer submitted a protest of the Assessment to the

10 Department’s protest office. [Administrative File]

11 63. On June 30, 2021, the Department acknowledged the receipt of Taxpayer’s

12 protest under Letter ID No. L1083721136. [Administrative File]

13 64. On December 22, 2021, the Department filed a Request for Hearing with the

14 Administrative Hearings Office which requested that a scheduling hearing be set. The Request

15 for Hearing was accompanied by Department’s Answer to Protest. [Administrative File]

16 65. On December 28, 2021, the Administrative Hearings Office entered a Notice of

17 Telephonic Scheduling Hearing which set an initial telephonic scheduling hearing for January

18 28, 2022. [Administrative File]

19 66. An initial telephonic scheduling hearing occurred on January 28, 2022, a date

20 within 90 calendar days of December 22, 2022, at which time neither Taxpayer nor the

21 Department objected that the hearing satisfied the 90-day hearing deadline established by NMSA

22 1978, Section 7-1B-8 (F) (2019). [Administrative File]

23 67. On January 31, 2022, the Administrative Hearings Office entered a Scheduling

24 Order and Notice of Administrative Hearing which in addition to establishing various deadlines,

In the Matter of the Protest of Sarah Maestas Barnes
Page 13 of 21
1 set a hearing on the merits of Taxpayer’s protest to commence on May 11, 2022 and proceed as

2 necessary through May 12, 2022. [Administrative File]

3 68. On April 20, 2022, Taxpayer filed Taxpayer’s Pre-Hearing Statement and the

4 Department filed Department’s Prehearing Statement. [Administrative File]

5 69. On May 5, 2022, Taxpayer filed its Motion for Leave to Revise Pre-Hearing

6 Statement. [Administrative File]

7 70. On May 10, 2022, the Department filed Department’s Response to Protestant’s

8 Motion for Leave to Revise Pre-Hearing Statement and Department’s Notice of Rebuttal

9 Exhibits. [Administrative File]

10 71. On May 11, 2022, Taxpayer verbally withdrew Taxpayer’s Motion for Leave to

11 Revise Pre-Hearing Statement. [Record of Hearing (5/11/2022)]

12 DISCUSSION

13 Ms. Barnes presents several arguments in support of her protest: (1) Nonemployee

14 compensation reported on 1099-MISC forms are not gross receipts; (2) Law Firm, not Ms. Barnes,

15 is liable for gross receipts tax; (3) the Assessment results in impermissible double taxation; and (4)

16 the Assessment violates the Equal Protection Clause.

17 Since the evidence established by a preponderance that the reported amounts of

18 nonemployee compensation were not gross receipts under NMSA 1978, Section 7-9-3.5, because

19 they were never received by Ms. Barnes, and this finding is dispositive, the Hearing Officer will not

20 address Taxpayer’s other arguments in detail.

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 presumed correct and unless otherwise specified, for the purposes of the Tax

In the Matter of the Protest of Sarah Maestas Barnes
Page 14 of 21
1 Administration Act, “tax” includes interest and civil penalty. See NMSA 1978, Section 7-1-3 (X)

2 (2013). Therefore, under Regulation 3.1.6.13 NMAC, the presumption of correctness under

3 Section 7-1-17 (C) also extends to the Department’s assessment of penalty and interest. See

4 Chevron U.S.A., Inc. v. State ex rel. Dep’t of Taxation & Revenue, 2006-NMCA-050, ¶16, 139

5 N.M. 498, 134 P.3d 785 (agency regulations interpreting a statute are presumed proper and are to be

6 given substantial weight).

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

8 taxpayer carry the burden of presenting countervailing evidence or legal argument to show

9 entitlement to an abatement of an assessment. See N.M. Taxation & Revenue Dep’t v. Casias

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

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

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

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

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

15 NMCA-021, ¶13.

16 Taxable Gross Receipts

17 The evidence in this protest was resounding and persuasive. Simply stated, the SSA

18 erroneously reported significant amounts of taxable nonemployee compensation paid to Ms. Barnes

19 between 2015 and 2018 coinciding with the tax years relevant to the Assessment. The evidence also

20 established that this issue may be ongoing since the SSA has continued to report nonemployee

21 compensation to Ms. Barnes in subsequent years even though she has not been employed by Law

22 Firm or otherwise practiced before the SSA since 2016. Of course, nonemployee compensation

23 reported outside the relevant periods does not factor into the analysis but illustrates the ongoing

In the Matter of the Protest of Sarah Maestas Barnes
Page 15 of 21
1 predicament in which Mr. and Ms. Barnes find themselves, which is to be assertedly liable for

2 payment of taxes on substantial amounts of income which they never received, but which was

3 nevertheless reported from 2015 through 2018, and perhaps beyond.

4 In any event, the periods before the Hearing Officer are from January 1, 2015 to December

5 31, 2018. In those years, the SSA reported more than $200,000.00 in nonemployee compensation

6 on which the Department asserted gross receipts tax to be due, plus interest and penalty.

7 The evidence clearly established that Mr. and Ms. Barnes never received the reported

8 amounts of nonemployee compensation. Furthermore, to the extent any amounts should have been

9 reported, those amounts should have been reported in the 1099-MISC as “Gross proceeds paid to an

10 attorney[,]” not as nonemployee compensation. The consequence is that nonemployee

11 compensation is taxable while a taxpayer receiving “gross proceeds paid to an attorney” is permitted

12 to report the portion that is taxable to the attorney, which could range from nothing at all to the full

13 amount reported, depending on the circumstances. In this case, based on the evidence presented,

14 that amount would have been zero because the evidence established that Ms. Barnes received

15 nothing from the SSA. Instead, she was compensated as an employee of Law Firm during her

16 employment from October 11, 2012 until February 22, 2016, and she has not practiced with the

17 SSA since 2015. “[R]eceipts of employees from wages, salaries, commissions or from any other

18 form of remuneration for personal services” are exempt from gross receipts. See NMSA 1978,

19 Section 7-9-17.

20 Meanwhile, Law Firm has accepted responsibility for payment of gross receipts tax by

21 entering into an installment agreement (Taxpayer Ex. 10) and affirming:

22 [Law Firm] is solely responsible to pay the New Mexico Gross
23 Receipts Tax on all client fees paid directly by the SSA on behalf of
24 all the attorneys named on their forms 1099-MISC, including all fees

In the Matter of the Protest of Sarah Maestas Barnes
Page 16 of 21
1 paid in the name of [Ms.] Barnes and reflected on 1099-MISC forms
2 issued to [Ms.] Barnes by the SSA.

3 [Taxpayer Ex. 7.2 (Para. 11)]

4 Despite these facts, the Department nevertheless contends that Ms. Barnes still owes gross

5 receipts tax because, for lack of better words, the 1099-MISC forms say so. However, the

6 Department has failed or refused to recognize that those 1099-MISC forms, which form the basis

7 for the Assessment, are clearly erroneous. For example, the SSA continues to report substantial

8 amounts of nonemployee compensation to Ms. Barnes even after her employment with Law Firm

9 ended in 2016, and she credibly testified that she had not practiced before the SSA since 2015. Yet,

10 the SSA reports more than $138,000.00 in nonemployee compensation in the remaining years under

11 the Assessment; years in which Ms. Barnes credibly testified that she neither practiced nor derived

12 nonemployee or any other compensation from SSA under any scenario whatsoever.

13 As Ms. Barnes precisely explains, gross receipts taxation requires “gross receipts.” For the

14 privilege of engaging in business, New Mexico imposes a gross receipts tax on the receipts of any

15 person engaged in business. See NMSA 1978, Section 7-9-4 (2002). Under NMSA 1978, Section

16 7-9-3.5 (A) (1) (2007, Amended 2019), “gross receipts” is defined to mean:

17 the total amount of money or the value of other consideration
18 received from selling property in New Mexico, from leasing or
19 licensing property employed in New Mexico, from granting a right to
20 use a franchise employed in New Mexico, from selling services
21 performed outside New Mexico, the product of which is initially
22 used in New Mexico, or from performing services in New Mexico.

23 (Emphasis Added)

24 The critical term in this case is “received” in that receipts must derive from a specified

25 activity and actually be received. Conversely stated, “gross receipts” always excludes money that

26 was never received.

In the Matter of the Protest of Sarah Maestas Barnes
Page 17 of 21
1 In this protest, the evidence established that despite the SSA’s issuance of 1099-MISC

2 forms, Ms. Barnes never in fact received compensation from the SSA. With regard for 2015, Ms.

3 Barnes was compensated as a W-2 employee of Law Firm and she had no interest whatsoever in

4 Law Firm or its accounts. Any receipts Law Firm derived from her employment were received by

5 Law Firm. Ms. Barnes received nothing from SSA.

6 Problems with the 1099-MISC forms are further emphasized by the fact that Ms. Barnes

7 continued to receive them after 2016 when she derived no further income from employment with

8 Law Firm, and in 2017 and 2018 when she was no longer engaging in any activity before the SSA

9 which would generate any amount of nonemployee compensation, especially an amount exceeding

10 six figures.

11 Nevertheless, Ms. Rodriguez testified that the 1099-MISC forms form the basis for the

12 Assessment. Although the Hearing Officer agrees the 1099-MISC forms represent a reasonable

13 starting point in evaluating whether there is a gross receipts tax liability, the evaluation cannot

14 disregard other reliable, trustworthy, and credible evidence which substantially diminishes the

15 reliability of the information contained in the 1099-MISC forms. To do so clearly exalts form over

16 substance. See Dugger v. City of Santa Fe, 1992-NMCA-022, ¶13, 114 N.M. 47, 52, 834 P.2d 424,

17 429, writ quashed, Dugger v. City of Santa Fe, 113 N.M. 744, 832 P.2d 1223 (1992).

18 The Hearing Officer finds that Ms. Barnes overcame the presumption of correctness by

19 presenting compelling evidence that the 1099-MISC forms are erroneous. They wholly fail to

20 accurately report income paid by SSA to, and received by, Ms. Barnes and cannot reliably form the

21 basis for taxation under the New Mexico Gross Receipts and Compensating Tax Act because Ms.

22 Barnes never received this money.

In the Matter of the Protest of Sarah Maestas Barnes
Page 18 of 21
1 For the reasons stated, Taxpayer’s protest is GRANTED. Taxpayer established by a

2 preponderance of highly credible, trustworthy, and reliable evidence that she and her spouse are

3 entitled to a full abatement of the Assessment.

4 Administrative Costs and Fees

5 Taxpayer moved for fees and costs in her protest letter. Pursuant to Regulation

6 22.600.3.28 (A) NMAC, either party may provide legal briefing, affidavits, or other relevant

7 documents, limited to: (1) whether Taxpayer should be considered a prevailing party; (2)

8 whether the Department’s position in the proceeding was based upon a reasonable application of

9 the law to the facts of the case; and (3) asserting or disputing the reasonableness of a potential

10 award.

11 In order to evaluate, under NMSA 1978, Section 7-1-29.1, whether Taxpayer is a

12 prevailing party entitled to an award of administrative fees and costs: (1) Taxpayer shall within

13 ten calendar days from entry of this decision and order file an accounting of costs and fees along

14 with any additional legal argument in support of an award; (2) the Department shall file a

15 response within 10 calendar days of Taxpayer’s submission.

16 CONCLUSIONS OF LAW

17 A. Taxpayer filed a timely, written protest to the Assessment. Jurisdiction lies over the

18 parties and the subject matter of this protest.

19 B. The Administrative Hearings Office conducted a hearing within 90 days of

20 Taxpayer’s protest under NMSA 1978, Section 7-1B-8 (2019).

21 C. If a taxpayer presents sufficient evidence to rebut the presumption, then the

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

23 2003-NMCA-021, ¶13.

24 D. Nonemployee compensation reported on Ms. Barnes 2015 – 2018 Forms 1099-

In the Matter of the Protest of Sarah Maestas Barnes
Page 19 of 21
1 MISC from the Social Security Administration is not gross receipts under NMSA 1978, Section 7-

2 9-3.5 (A) (1) because the reported amounts were not received by Ms. Barnes.

3 E. The Department did not re-establish the correctness of the Assessment. See MPC

4 Ltd., 2003-NMCA-021, ¶13.

5 For the foregoing reasons, Taxpayer’s protest should be, and hereby is, GRANTED. The

6 Assessment shall be ABATED in full.

7 DATED: May 25, 2022

8
9 Chris Romero
10 Hearing Officer
11 Administrative Hearings Office
12 P.O. Box 6400
13 Santa Fe, NM 87502

14 NOTICE OF RIGHT TO APPEAL

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

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

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

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

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

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

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

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

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

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

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

In the Matter of the Protest of Sarah Maestas Barnes
Page 20 of 21
1 CERTIFICATE OF SERVICE

2 On May 25, 2022, a copy of the foregoing Decision and Order was submitted to the parties

3 listed below in the following manner:

4 Email Email
5
6 INTEMTIONALLY BLANK

In the Matter of the Protest of Sarah Maestas Barnes
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