Can I recover attorney fees after New Mexico fully abates a gross receipts tax assessment it knowingly issued to the wrong spouse?

Plain-English summary

Harry Barnes won $3,451.66 in attorney fees and administrative costs after the Department fully abated a gross receipts tax assessment it had issued to the wrong spouse.

The Department began with a Schedule C mismatch audit of Harry and his wife's joint 2015–2017 income-tax returns. The remaining apparent income came from Forms 1099 issued by the Social Security Administration to Mrs. Barnes, a licensed attorney, for work associated with her law-firm employment. Mr. Barnes communicated that fact to the Department before assessment, and the Department employee handling the matter acknowledged that the remaining discrepancies related to those SSA forms.

Despite that knowledge, the Department issued a $17,258.28 assessment solely against Mr. Barnes: $12,475.46 gross receipts tax, $2,495.09 penalty, and $2,287.73 interest. He protested. After an informal conference, the Department abated his assessment in full and issued a separate assessment to Mrs. Barnes involving the same alleged receipts, later addressed in D&O 22-14.

Mr. Barnes had incurred more than $19,000 in legal fees and sought recovery under Section 7-1-29.1. Hearing Officer Chris Romero granted summary judgment for Barnes:

• Barnes was the prevailing party. Full abatement meant he prevailed on the entire amount in controversy, and he also won the central issue of whether the receipts belonged to him.
• A joint income-tax return does not transfer gross receipts tax liability between spouses. Under Breen, only the person engaging in business and generating the receipts is the gross-receipts taxpayer. Community-property concepts or putting one spouse's name first on a joint federal return did not make Mr. Barnes liable for Mrs. Barnes's activity.
• The assessment lacked substantial evidence when issued. The Department already knew the 1099s named Mrs. Barnes and related to her legal work. It had no evidence that Mr. Barnes received those amounts or generated them through his own business.
• The Department also departed from published guidance. Statutes, regulations, and the Department's FYI-105 publication all tied liability to the person conducting the taxable activity.
• The Department did not prove a reasonable application of law to facts. Section 7-1-29.1 put that burden on the Department once Barnes established prevailing-party status. The statute did not excuse departmental inadvertence or lack of care.

The fee formula then in effect capped recovery at the lesser of 20% of the judgment or settlement or $75,000. The complete $17,258.28 abatement was the judgment amount, so the award was $3,451.66, even though Barnes's actual fees were much higher.

Result: protest GRANTED; $3,451.66 awarded.

What this means for you

Full pre-hearing abatement can make you a prevailing party

You do not necessarily need a merits judgment after a hearing. Under the authority applied here, the Department's complete abatement before the hearing established prevailing-party status.

Winning is not the only fee requirement

A prevailing taxpayer may still be denied costs if the Department proves its position was a reasonable application of law to the facts. Here it could not: the assessment was unsupported when issued and inconsistent with published guidance.

Spouses remain separate gross-receipts taxpayers

Filing a joint income-tax return does not make one spouse liable for gross receipts generated by the other's business. The liable taxpayer is the person or entity that conducted the taxable activity.

The Department's knowledge at the assessment date matters

The hearing officer focused on what the Department knew when it issued the assessment, not merely what it learned later. Pre-assessment emails had already identified Mrs. Barnes as the recipient and source of the disputed amounts.

Fee awards may be far below actual costs

Barnes spent more than $19,000 but recovered $3,451.66 because the statutory percentage cap was tied to the amount abated.

Common questions

Q: Can a taxpayer recover fees if the Department abates before the merits hearing?
A: Yes under the authority applied in D&O 22-25. Complete abatement can confer prevailing-party status.

Q: Why was the original assessment unreasonable?
A: The Department knew before issuing it that the 1099s named Mrs. Barnes and arose from her work, yet assessed Mr. Barnes solely because the couple filed joint income-tax returns and his name appeared first.

Q: Does community property or joint filing make a spouse liable for the other's GRT?
A: No under the decision and Breen. Gross receipts tax attaches to the person engaging in the business activity that generated the receipts.

Q: How was the $3,451.66 award calculated?
A: It was 20% of the fully abated $17,258.28 assessment, the percentage cap applicable under Section 7-1-29.1(E).

Q: Why didn't Barnes recover all $19,000-plus of his fees?
A: The statutory cap controlled even though his reasonable actual expenses exceeded it.

Q: Can another taxpayer rely on this decision?
A: No. Fee eligibility depends on the assessment record, the Department's knowledge, prevailing-party status, reasonableness, and the statute applicable to that proceeding.

Citations and references

Statutes, regulations, and guidance:

• NMSA 1978, § 7-1-29.1 — prevailing-party award of reasonable administrative and litigation costs and attorney fees; reasonableness exception; percentage cap
• NMSA 1978, § 7-9-2 — gross receipts tax on the privilege of engaging in specified New Mexico activities
• NMSA 1978, § 7-9-4(A) — gross receipts tax imposed on persons engaging in business
• NMSA 1978, § 7-9-3.5(A) — activities generating gross receipts
• NMSA 1978, §§ 7-1B-6 and 7-1B-8 — hearing procedure and timing
• NMSA 1978, § 7-1-25 — right to appeal the decision
• Regulations 3.2.4.8 and 3.2.6.9 NMAC — person conducting the taxable activity is liable
• FYI-105, Gross Receipts and Compensating Tax — An Overview — Department guidance identifying the person conducting the activity as the taxpayer

Cases:

• Breen v. New Mexico Taxation & Revenue Department, 2012-NMCA-101 — only the person engaging in business and generating the receipts is liable for gross receipts tax; one spouse is not liable for the other's receipts merely because they file jointly
• Helmerich & Payne International Drilling Co. v. New Mexico Taxation & Revenue Department, 2019-NMCA-054 — pre-hearing abatement, prevailing-party status, Department burden, and mandatory costs
• New Mexico Depo v. New Mexico Taxation & Revenue Department, 2021-NMCA-011 — the entity conducting the business is the liable gross-receipts taxpayer rather than its owner in an individual capacity
• Koenig v. Perez, 1986-NMSC-066; Roth v. Thompson, 1992-NMSC-011 — summary-judgment standards applied in the decision

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Harry Barnes
• Decision PDF: D&O 22-25

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 HARRY R. BARNES
6 TO ASSESSMENT ISSUED UNDER
7 LETTER ID NO. L1183035056

8 v. AHO Case Number 22.05-029A, D&O No 22-025

9 NEW MEXICO TAXATION AND REVENUE DEPARTMENT

10 DECISION AND ORDER
11 GRANTING SUMMARY JUDGMENT FOR TAXPAYER

12 This matter came before the Administrative Hearings Office, Hearing Officer Chris

13 Romero, Esq., upon a Motion for Summary Judgment Re: Fees Under Section 7-1-29.1

14 (“Motion”) of Mr. Harry Barnes, Jr. (“Taxpayer”). The Motion was filed on September 13, 2022

15 pursuant to the Tax Administration Act and the Administrative Hearings Office Act. Taxpayer is

16 represented by Mr. Frank Crociata, Esq. The Taxation and Revenue Department (“Department”)

17 is represented by Ms. Cordelia Friedman, Esq. The Department, by and through Ms. Friedman,

18 filed Department’s Response to Taxpayer’s Motion for Summary Judgment Requesting that

19 Motion be Denied (“Response”) on September 27, 2022. A hearing on the Motion occurred on

20 December 6, 2022.

21 The facts and legal issues presented concentrate on whether Taxpayer is entitled to recoup a

22 portion of costs and fees expended in defense of an assessment which Taxpayer alleges was

23 unsupported by evidence at the time it was issued. Because the Hearing Officer agrees that under

24 the facts presented, Taxpayer is entitled to relief under NMSA 1978, Section 7-1-29.1,

25 Taxpayer’s motion and protest should be granted. IT IS DECIDED AND ORDERED AS

26 FOLLOWS:

27 FINDINGS OF FACT

In the Matter of the Protest of Harry R. Barnes
Page 1 of 21
1 Taxpayer’s Motion presented 23 statements of undisputed material fact. The Department

2 did not contest facts corresponding with statement numbers 1, 5 – 10, 12 – 14, and 16 – 22. [See

3 Motion; Response (Page 4 - Section II)]

4 With respect for the balance, representing statement numbers 2 – 4, 11, 15, and 23, the

5 Department asserts that it has insufficient information with which to admit or deny the asserted

6 fact. These facts will also be deemed as true and uncontested. See Carrillo v. Hoyl, 1973-

7 NMCA-149, ¶ 4, 85 N.M. 751, 752, 517 P.2d 73, 74. Although relying on “insufficient

8 information” is a common and acceptable method of responding to the factual allegations in a

9 complaint under the rules of civil procedure for the district courts (Rule 1-008 B), the same

10 cannot be said of the burden placed on a non-moving party in contesting material facts presented

11 in support for a motion for summary judgment.

12 Although favored procedurally, a non-moving party cannot rely solely on the allegations

13 contained in its complaint or upon mere argument or contention to defeat a motion once a prima

14 facie showing has been made. See Oschwald v. Christie, 1980-NMSC-136, ¶ 6, 95 N.M. 251,

15 253, 620 P.2d 1276, 1278.

16 The non-movant “must demonstrate genuine issues of material fact by way of sworn

17 affidavits, depositions, and similar evidence.” See Juneau v. Intel Corp., 2006-NMSC-002, ¶ 15,

18 139 N.M. 12, 17, 127 P.3d 548, 553; Archuleta v. Goldman, 1987-NMCA-049, ¶ 11, 107 N.M.

19 547, 551, 761 P.2d 425, 429 (a party opposing a motion for summary judgment must come

20 forward with evidence to refute assertions of fact). Mere assertions of insufficient information

21 with which to admit or deny fail to establish the existence of disputed material facts.

22 Material Facts

23 1. Taxpayer and Sarah L. Barnes (“Mrs. Barnes”) are a married couple. [See Exhibit

In the Matter of the Protest of Harry R. Barnes
Page 2 of 21
1 1 to Motion (Affidavit of Harry Barnes, Jr. or “Barnes Aff.,” ¶3)]

2 2. Taxpayer is the managing member of, and operates, Transmission & Distribution

3 Services, LLC (“T&D Services”), a business that provides engineering and surveying services to

4 the electric utility industry. [See Exhibit 1 to Motion (Barnes Aff., ¶5)]

5 3. T&D Services has its own New Mexico Gross Receipts Tax (“GRT”)

6 identification number and reports GRT directly to the Department. [See Exhibit 1 to Motion

7 (Barnes Aff., ¶6)]

8 4. Mrs. Barnes is a duly licensed New Mexico attorney. [See Exhibit 1 to Motion

9 (Barnes Aff., ¶ 7)]

10 5. Mrs. Barnes was employed by a law firm1 (“Law Firm”) from October 2012

11 through February 2016 and, during portions of the overall employment period, represented Law

12 Firm’s clients before the United States Social Security Administration (“SSA”). [See Exhibit 1 to

13 Motion (Barnes Aff., ¶8)]

14 6. As a married couple, Taxpayer and Mrs. Barnes filed joint federal and New

15 Mexico personal income tax returns for tax years 2015 through 2017. [See Exhibit 1 to Motion

16 (Barnes Aff., ¶ 4)]

17 7. The Department conducted a Schedule C mismatch Gross Receipts Tax (“GRT”)

18 audit based on the Barnes’ joint income tax returns for tax years 2015 through 2017 and issued a

19 Notice of Intent to Assess-Gross Receipts, dated April 2, 2020 to both Taxpayer and Mrs.

20 Barnes. [See Exhibit 1 to Motion (Barnes Aff., ¶ 9); Exhibit 2 to Motion (Notice of Intent to

21 Assess – Gross Receipts (“Notice of Intent”)); Department’s Answer to Protest (“Answer”), at 3]

22 8. All of the alleged taxable gross receipts in the Notice of Intent derived from

1
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 Harry R. Barnes
Page 3 of 21
1 Forms 1099 from various parties, including the State of New Mexico and SSA, issued to Mrs.

2 Barnes. [See Exhibit 1 to Motion (Barnes Aff., ¶10); Exhibit 3.2 – 3.3 (electronic

3 communications between Taxpayer and Debbie Rael (May 1, 2020 – Aug. 20, 2020))]

4 9. Upon receiving the Notice of Intent, Taxpayer worked directly with Department

5 employee, Debbie Rael, to try to resolve the matter. [See Exhibit 1 to Motion (Barnes Aff., ¶11);

6 Exhibit 3 to Motion]

7 10. In May of 2020, by email and telephone conversations, Taxpayer informed Ms.

8 Rael that the SSA 1099s, while incorrect as issued, related to Mrs. Barnes’ employment with

9 Law Firm and her representation of its clients before the SSA. [See Exhibit 1 to Motion (Barnes

10 Aff., ¶¶ 12, 13); Exhibit 3.3 to Motion]

11 11. Also in May of 2020, Taxpayer sent Ms. Rael copies of nominee Forms 1099 that

12 had been prepared from Mrs. Barnes back to Law Firm for years 2013, 2014 and 2017. These

13 nominee Forms 1099 were intended to unwind or correct the Forms 1099 forms the SSA had

14 issued, in name, to Mrs. Barnes for the same tax years. [See Exhibit 1 to Motion (Barnes Aff.,

15 ¶13); Exhibit 3.3 to Motion]

16 12. In August of 2020, Taxpayer further communicated to Ms. Rael information

17 related to Law Firm and the Forms 1099 the SSA had issued, in name, to Mrs. Barnes. [See

18 Exhibit 1 to Motion (Barnes Aff.,¶ 14); Exhibit 3.2 to Motion]

19 13. Under Letter ID L1183035056, dated September 16, 2020, the Department

20 assessed $17,258.28 against Taxpayer (Mr. Barnes), individually. The assessment consisted of

21 $12,475.46 in GRT, $2,495.09 in penalties, and $2,287.73 in interest. [See Exhibit 1 to Motion

22 (Barnes Aff., ¶15); Exhibit 4 to Motion (Notice of Assessment and Demand for Payment, dated

23 Sep. 16, 2020); Administrative File]

In the Matter of the Protest of Harry R. Barnes
Page 4 of 21
1 14. Due to Ms. Rael’s adjustments during the review period, all of the alleged gross

2 receipts that formed the tax base for the assessment against Taxpayer were observed to derive

3 from the monies reflected in the Forms 1099 the SSA had issued to Mrs. Barnes. [See Exhibit 1

4 to Motion (Barnes Aff., ¶16); Exhibit Ex. 3.2 to Motion (Ms. Rael stated, “The remaining

5 discrepancies are related to the SSA – 1099s.”); Administrative File (Hearing Request – Exhibit

6 No. 3 (Mrs. Barnes is identified as “Recipient” of the reported income.); Answer at 3 (“This

7 matter began as a Schedule C mis-match assessment for non-payment of gross receipts taxes

8 upon income reported to Taxpayer’s wife on Federal Forms 1099-MISC.”)]

9 15. Ms. Rael knew, prior to September 16, 2020, and the assessment of that date that

10 the SSA Forms 1099 had been issued to Mrs. Barnes and that the forms related to Mrs. Barnes’

11 work as an attorney employed by Law Firm. [See Exhibit 1 to Motion (Barnes Aff., ¶17)]

12 16. Taxpayer filed an initial Protest to the assessment on December 15, 2020. [See

13 Exhibit 1 to Motion (Barnes Aff., ¶18)]

14 17. Taxpayer filed a Supplemental Protest on April 1, 2021, claiming, among other

15 things, that the assessment was illegal and erroneous because none of the monies at issue

16 constitute gross receipts of Mr. Barnes. The Supplemental Protest also requested recovery of

17 costs under Section 7-1-29.1. [See Exhibit 1 to Motion (Barnes Aff., ¶20); Administrative File

18 (Supplemental Protest)]

19 18. Taxpayer had an informal conference with the Department in mid-April, 2021.

20 [See Exhibit 1 to Motion (Barnes Aff., ¶21); See Exhibit A to Response (Affidavit of Angelica

21 Rodriguez or “Rodriguez Aff.”), ¶4 (specifying the date of the conference to be April 16, 2021)]

22 19. The Department abated the assessment against Taxpayer, individually, in its

23 entirety. [See Exhibit 1 to Motion (Barnes Aff.. ¶22); Exhibit 5 to Motion (Notice of Abatement,

In the Matter of the Protest of Harry R. Barnes
Page 5 of 21
1 dated April 26, 2021 - Letter ID L2063145392); Exhibit A to Response (Rodriguez Aff., ¶5)]

2 20. The Department issued a new assessment, dated April 20, 2021 against Mrs.

3 Barnes under Letter ID L1302456752. This assessment included the same monies reflected in the

4 SSA Forms 1099 for tax years 2015 through 2017 that had previously been assessed against Mr.

5 Barnes. [See Exhibit 1 to Motion (Barnes Aff., ¶22); Exhibit 6 to Motion (Notice of Assessment

6 and Demand for Payment, dated April 20, 2021 (Letter ID L1302456752)]

7 21. During the informal conference, the option of amending the assessment against

8 Taxpayer, to identify Mrs. Barnes as the taxpayer, was discussed and offered to the Department.

9 The Department declined this option and indicated it would have to issue a new assessment to

10 Mrs. Barnes and that a separate protest process would be necessary for that new assessment. [See

11 Exhibit 1 to Motion (Barnes Aff., ¶23); Exhibit A to Response (Rodriguez Aff., ¶15)]

12 22. The assessment against Mrs. Barnes was addressed in AHO Case No. 21.12-070A

13 and Decision and Order No. 22-142.

14 23. To date, Mr. Barnes has paid more than $19,000 in attorney’s fees in his protest,

15 not including fees and costs associated with this Motion. $16,892 of those fees were incurred

16 prior to the April 26, 2021 date of the Department’s abatement and were incurred in order for his

17 attorney to review the case and related documentation, research and prepare Taxpayer’s

18 Supplemental Protest, and represent him at the informal conference with the Department. [See

19 Exhibit 1 to Motion (Barnes Aff., ¶¶ 19, 24, 25)]

20 Procedural History

21 24. On May 27, 2022, Taxpayer submitted a Request for Hearing of the assessment

22 issued under Letter ID No. L1183035056 indicating that the issue submitted for determination

2
The Decision and Order was appealed to the New Mexico Court of Appeals on June 24, 2022 and is on that court’s
general calendar in A-1-CA-40461.

In the Matter of the Protest of Harry R. Barnes
Page 6 of 21
1 was the application of Section 7-1-29.1 which provides for the recovery of administrative fees

2 and costs. [Administrative File]

3 25. The Request for Hearing included a copy of Taxpayer’s Supplemental Protest to

4 Assessment Issued under Letter ID L1183035056 and included the following items as exhibits:

5 (1) Notice of Assessment (Letter ID No. L L1183035056); (2) Tax Information Authorization;

6 (3) Form 1099-MISC (2017); (4) Notices of Pending Collection Action under Letter ID No.

7 L0163331760, L0022535856, L0411123376, L1096302256, L1434631856, L1668628144; (5)

8 Information from SSA entitled “Direct Fee Payment to Representative and Form IRS 1099-

9 MISC and 1099-NEC[;]” (6) instructions for Completing Form SSA-1696 and relevant form; (7)

10 instructions for Registration for Appointed Representative Service and Direct Payment and

11 relevant form; (8) instructions for submitting Requests for Business Entity Taxpayer

12 Information; (9) SSA guidance for Registration Requirements for Direct Payments to

13 Representatives; (10) redacted Fee Agreement and associated forms; (11) statement to SSA from

14 Mrs. Barnes dated May 4, 2018; (12) Original Complaint filed by Taxpayer and Mrs. Barnes

15 against Law Firm in the State of New Mexico, County of Bernalillo, Second Judicial District (D-

16 0202-CV-2020-06619). [Administrative File]

17 26. On May 27, 2022, Taxpayer filed a Motion to Consolidate Re: Administrative

18 Fees. The request sought to consolidate the present protest with the protest addressed in Decision

19 and Order 22-14. [Administrative File]

20 27. On June 3, 2022, Taxpayer filed his Fee Accounting and Legal Argument.

21 [Administrative File]

22 28. On June 7, 2022, Taxpayer supplemented its Request for Hearing with the

23 following items: a copy of the assessment issued under Letter ID No. L1183035056 dated

In the Matter of the Protest of Harry R. Barnes
Page 7 of 21
1 September 16, 2020; correspondence acknowledging the protest under Letter ID No.

2 L0053273008 dated January 29, 2021; and a Notice of Abatement of Tax Assessment dated

3 April 26, 2021 under Letter ID No. L2063145392. [Administrative File]

4 29. On June 16, 2022, the Administrative Hearings Office entered an Order Denying

5 Motion to Consolidate and Notice of Telephonic Scheduling Hearing. According to the order, the

6 request for consolidation was denied for the following reason:

7 The Request for Hearing was accompanied by a Motion to Consolidate
8 Re: Administrative Fees (“Motion”) also filed on May 27, 2022. The
9 Motion sought to consolidate the above-captioned protest with Case No.
10 21.12-070A which was the subject of D&O 22-14 entered on May 25,
11 2022. The Department opposed the Motion. Given the procedural status
12 of the latter, the request to consolidate at this time is DENIED in order to
13 maintain a clear record for the potential appeal of D&O 22-14 and to
14 avoid any confusion or uncertainty regarding the timeframes for
15 perfecting an appeal under NMSA 1978, Section 7-1-25. See Gelinas v.
16 New Mexico Taxation & Revenue Dep't, 2020-NMCA-038, ¶6, 472 P.3d
17 1231, 1234, cert. denied (May 11, 2020) (“[T]he rule governing a direct
18 appeal of a hearing officer’s decision establishes the filing timeline based
19 on the issuance of the decision and order.”)

20 30. The Department filed Department’s Answer to Protest on June 27, 2022.

21 [Administrative File]

22 31. A telephonic scheduling hearing occurred on July 15, 2022 at which time the

23 parties agreed that the hearing satisfied the 90-day hearing requirement established by the

24 Administrative Hearings Office Act. [Administrative File]

25 32. On July 15, 2022, the Administrative Hearings Office entered a Dispositive

26 Motion Briefing Schedule. [Administrative File]

27 33. Taxpayer filed his Motion on September 13, 2022. The Department filed its

28 Response on September 27, 2022. [Administrative File]

29 34. On October 5, 2022, the Administrative Hearings Office entered a Notice of

30 Videoconference Hearing on Motion for Summary Judgment. [Administrative File]

In the Matter of the Protest of Harry R. Barnes
Page 8 of 21
1 35. On October 25, 2022, Taxpayer filed an unopposed Request for Continuance.

2 [Administrative File]

3 36. On November 1, 2022, the Administrative Hearings Office entered an Amended

4 Notice of Videoconference Hearing on Motion for Summary Judgment. [Administrative File]

5 37. Argument on the Motion and Response occurred by videoconference on

6 December 6, 2022. [Administrative File]

7 DISCUSSION

8 In controversies involving a question of law, or application of law where there are no

9 disputed facts, summary judgment is appropriate. See Koenig v. Perez, 1986-NMSC-066, ¶10-

10 11, 104 N.M. 664. If the movant for summary judgment makes a prima facie showing that it is

11 entitled to a judgment as a matter of law, the burden shifts to the opposing party to show

12 evidentiary facts that would require a trial on the merits. See Roth v. Thompson, 1992-NMSC-

13 011, ¶17, 113 N.M. 331.

14 The issue presented in this case is appropriate for summary judgment. The question is

15 whether Mr. Barnes is entitled to recoup a share of attorney’s fees incurred in protesting an

16 individual assessment issued solely against him. To reach a conclusion, Section 7-1-29.1 requires

17 the Hearing Officer consider what the Department knew and when it knew it.

18 Taxpayer asserts that as of the date the Department issued its assessment against him,

19 individually, that it possessed information which demonstrated that the receipts in question were

20 in no way attributable to his engagement of business in New Mexico. Conversely stated, that the

21 Department’s assessment was not based on a reasonable application of law to the facts of the

22 case, an issue for which the Department bears the burden of proof. See NMSA 1978, Section 7-

23 1-29.1 (C) (2); See Helmerich & Payne, 2019-NMCA-054, ¶¶ 25, 26.

In the Matter of the Protest of Harry R. Barnes
Page 9 of 21
1 Some introduction is helpful prior to addressing that particular issue. Section 7-1-29.1(A)

2 provides that a taxpayer shall be awarded “reasonable administrative costs” incurred in any

3 “administrative proceeding” brought by or against the taxpayer and conducted in connection with

4 determination of any tax, penalty, or interest when the tax at issue is governed by the Tax

5 Administration Act and the taxpayer is the “prevailing party.”

6 First, “administrative proceeding” means “any procedure or other action before the

7 Department or the administrative hearings office.” See Section 7-1-29.1 (B) (1) (emphasis

8 added). Second, a taxpayer is the “prevailing party” if the taxpayer has either: (a) substantially

9 prevailed with respect to the amount in controversy; or (b) substantially prevailed with respect to

10 most legal issues, or the most significant legal issues, involved in the case. See Section 7-1-29.1

11 (C) (1) (a) & (b). Third, “reasonable administrative costs,” means, among other things, the actual

12 charges for fees and costs paid or incurred for attorney services in connection with the

13 administrative proceeding. See Section 7-1-29.1 (B) (3) (b).

14 The undisputed facts establish that Mr. Barnes and Ms. Sarah L. Barnes are a married

15 couple. They filed joint federal and New Mexico personal income tax returns for tax years 2015

16 through 2017. Concurrent with a significant portion of those years, from October of 2012

17 through February of 2016, Mrs. Barnes was employed by a law firm, and in that capacity, she

18 represented the law firm’s clients before the SSA.

19 On April 2, 2020, the Department issued a Notice of Intent to Assess-Gross Receipts and

20 commenced an audit of Mr. Barnes’ purported gross receipts. The intent to audit arose from the

21 Department’s detection of a Schedule C mismatch for tax years 2015 through 2017.

22 The mismatch arose from the detection of income reported on Taxpayer’s Schedule C

23 which was not also reported on Taxpayer’s CRS-1s in the same tax periods. Further evaluation of

In the Matter of the Protest of Harry R. Barnes
Page 10 of 21
1 the facts at the time determined that the income included in the Schedule C, but not reported for

2 gross receipts tax purposes, was attributable to compensation seemingly3 paid to Mrs. Barnes by

3 the SSA as reported on Forms 1099, as well as by the State of New Mexico for reasons attributed

4 to her service in the New Mexico Legislature.

5 Having received the Notice of Intent to Assess-Gross Receipts, Mr. Barnes worked and

6 communicated directly with Ms. Debbie Rael, employee of the Department, to resolve the

7 matter. As of May of 2020, it was undisputed that Mr. Barnes informed Ms. Rael by email and

8 telephone that the SSA 1099s, while incorrect (discussed in Decision and Order 22-14), related

9 to Mrs. Barnes’ employment with the law firm and, more precisely, her representation of its

10 clients before the SSA. In other words, they were not in any way related to Mr. Barnes’ business

11 activities in New Mexico. Communications on this subject occurred through August of 2020 and

12 were acknowledged by Ms. Rael, who in response to information provided by Mr. Barnes

13 (Exhibit 3.2 to Motion), made various adjustments and then noted, “The remaining discrepancies

14 are related to the SSA – 1099s[,]” which clearly identified Mrs. Barnes, not Mr. Barnes, as the

15 recipient of income. [Administrative File (Hearing Request – Exhibit No. 3).

16 Despite the foregoing, the Department assessed $17,258.28 against Mr. Barnes

17 individually. The assessment consisted of $12,475.46 in gross receipts tax, $2,495.09 in penalty,

18 and $2,287.73 in interest issued under Letter ID L1183035056 and dated September 16, 2020. At

19 this point, the Hearing Officer will also emphasize that the assessment was for gross receipts tax,

20 not personal income tax.

21 Mr. Barnes filed a protest of the assessment on December 15, 2020, and supplemented

22 the protest on April 1, 2021. Mr. Barnes asserted that the assessment was “illegal and erroneous”

3
Additional details are contained in Decision and Order No. 22-14 which may explain the Hearing Officer’s use of
this particular adjective.

In the Matter of the Protest of Harry R. Barnes
Page 11 of 21
1 because none of the money which formed the basis for the assessment derived from his business

2 activities in New Mexico, and for that reason, were not his gross receipts.

3 In mid-April of 2021, after an informal conference, the Department abated the assessment

4 against Mr. Barnes. Although Mr. Barnes suggested that the assessment merely be amended to

5 identify the correct taxpayer, in this case, Mrs. Barnes, the Department abated the assessment in

6 full and then generated a new assessment against Mrs. Barnes. The Department never explained

7 why it declined the suggestion. Once again, the assessment against Mrs. Barnes was protested

8 and subject of Decision and Order 22-14.

9 Given the summarized facts, the Hearing Officer agrees that Taxpayer meets the

10 definition of prevailing party for two reasons. First, Mr. Barnes prevailed with respect to the

11 amount in controversy. The Department abated the entire assessment against him. See Helmerich

12 & Payne, 2019-NMCA-054, ¶¶ 20, 21 (Department abatement issued before an AHO hearing

13 confers prevailing party status on a taxpayer). Second, Mr. Barnes also prevailed with respect to

14 the most significant legal issue in his case, which was whether the alleged tax base constituted

15 taxable gross receipts to Mr. Barnes and was therefore pursued against the correct taxpayer.

16 Yet, Section 7-1-29.1, contains an exception to the rule. If the Department’s position in

17 the administrative proceeding was based on a reasonable application of law to the facts of the

18 case, then the taxpayer’s status as prevailing party will afford no relief. See Section 7-1-29.1 (C)

19 (2). The Department bears the burden of proof on this issue. See Helmerich & Payne, 2019-

20 NMCA-054, ¶¶ 25, 26.

21 Under Section 7-1-29.1 (C) (2), the Department’s position is statutorily presumed not to

22 constitute a reasonable application of law to the facts of the case under two circumstances. First,

23 the Department’s position cannot be reasonable if the Department failed to follow its own

In the Matter of the Protest of Harry R. Barnes
Page 12 of 21
1 published regulations, information releases, instructions, technical advice memoranda,

2 announcements, or private letter rulings or letters issued to the taxpayer in the proceeding. See

3 Section 7-1-29 (C) (2) (a) & (3) (deeming the position unreasonable if the Department fails to

4 follow applicable published guidance). Second, the Department’s position cannot be reasonable

5 if the assessment giving rise to the administrative proceeding is not supported by substantial

6 evidence, determined at the time of the issuance of the assessment. See Section 7-1-29.1 (C) (2)

7 (b).

8 In essence, Section 7-1-29.1 provides taxpayers a remedy for having to defend

9 themselves against an unreasonable assessment or Departmental overreach. See Helmerich &

10 Payne, 2019-NMCA-054, ¶ 12. Nothing in the statute pardons Departmental inadvertence, lack

11 of care, or inattentiveness.

12 If the Department’s assessment was not supported by substantial evidence at the time the

13 assessment was issued, the Department’s position in the proceeding is not reasonable. If the

14 Department does not follow its own published guidance in the proceeding, its position is not

15 reasonable. Finally, even if neither presumption is met, the statute compels a fee award if AHO

16 determines that the position the Department maintains in the proceeding is not a reasonable

17 application of law to the facts of the case.

18 At the time it issued the assessment against Mr. Barnes, the Department had actual

19 knowledge that the gross receipts underlying the assessment derived from Forms 1099 that the

20 SSA had issued to Mrs. Barnes rather than to Mr. Barnes.

21 In other words, the Department knew, from previous communications with Mr. Barnes,

22 before it issued the assessment that: (a) none of the alleged tax base constituted taxable gross

In the Matter of the Protest of Harry R. Barnes
Page 13 of 21
1 receipts to Mr. Barnes; and (b) all of the gross receipts at issue, if ultimately taxable, belonged to

2 a different taxpayer – Mrs. Barnes.

3 At first blush, one may be disinclined to perceive a husband and wife as distinct and

4 separate taxpayers under the New Mexico Gross Receipts and Compensating Tax Act, but this

5 has long been the rule in New Mexico. In 2012, the New Mexico Court of Appeals ruled that

6 only the person engaging in business and generating “gross receipts” at issue is the “taxpayer”

7 for GRT purposes. See Breen v. Taxation & Revenue Dep’t, 2012-NMCA-101, ¶31, 287 P.3d

8 379. In Breen, the court rejected the Department’s attempts to treat a husband (a state employee)

9 as the GRT “taxpayer” with respect to gross receipts his wife (an attorney) generated from her

10 legal practice. Id. The court rejected the proposition that the husband was the “taxpayer” because

11 the couple filed joint income tax returns or on notions of community property. Id.; See also New

12 Mexico Depo v. New Mexico Taxation & Revenue Dep't, 2021-NMCA-011, ¶ 11, 485 P.3d 773,

13 776 (the single-member limited liability company is the liable taxpayer for GRT, not the single

14 member in her individual capacity).

15 At the time of the assessment, the Department had no evidence that the alleged tax base

16 constituted gross receipts to Mr. Barnes. In fact, communications leading up to the assessment

17 provided actual notice that the alleged tax base could only be gross receipts of Mrs. Barnes, not

18 Mr. Barnes. The Department’s subsequent conduct seemingly reaffirmed that fact in that the

19 Department fully abated the assessment against Mr. Barnes and issued a new assessment to Mrs.

20 Barnes, based on the same alleged gross receipts. See D&O 22-014.

21 Mr. Barnes does not challenge the Department’s policy of initiating GRT audits by

22 reviewing a married couple’s joint income tax returns. However, his request for fee recovery

23 falls squarely within the language, purpose, and spirit of Section 7-1-29.1. In practical effect, Mr.

In the Matter of the Protest of Harry R. Barnes
Page 14 of 21
1 Barnes has had to incur legal expenses to avoid being held liable for GRT on monies that do not

2 constitute “gross receipts” to him under law, that bear no relationship whatsoever to his business

3 activities, and that the Department knew, before it issued the assessment, directly stemmed from

4 Mrs. Barnes’ work as an attorney employed by Law Firm.

5 The Hearing Officer agrees that the assessment against Mr. Barnes was not supported by

6 substantial evidence at the time it was issued.

7 Mr. Barnes emphasized his pre-abatement suggestion to the Department that it amend the

8 assessment against him to identify Mrs. Barnes as the correct taxpayer. The Department

9 indicated that it could not do that, but that a new assessment against Mrs. Barnes would be

10 required. It is unclear exactly why the Department could not amend the assessment as the

11 Department provided no citation or explanation for that position. In making this observation, the

12 Hearing Officer does not suggest any error with the Department’s stance, only that its foundation

13 is not articulated and the Hearing Officer will refrain from speculation on that question. The

14 Hearing Officer notes that the Notice of Intent was addressed collectively to Mr. and Mrs.

15 Barnes, but for reasons not readily apparent from the record, the assessment for GRT omitted

16 Mrs. Barnes and focused exclusively on the individual it knew would not be liable for the tax.

17 See Exhibit 3.2 – 3.3 (noting that after adjustments, all “remaining discrepancies are related to

18 the SSA – 1099s.”).

19 The Hearing Officer notices Ms. Rodriguez’s sworn affidavit in which she explains, “At

20 the time the Department assessed Mr. Barnes, it did not know his role in the spouse’s

21 business(es).” See Exhibit A to Response, ¶10. The Hearing Officer finds this statement

22 unpersuasive. Exhibit 3 to the Motion contains a clear and concise explanation of the relevant

23 facts to Ms. Rael, the employee at the Department with whom Mr. Barnes was communicating

In the Matter of the Protest of Harry R. Barnes
Page 15 of 21
1 regarding the issues, and who had authority to make appropriate adjustments. See Exhibit 3.2 to

2 Motion. In this regard, Ms. Rael was the most competent witness to testify with respect to what

3 she knew, and by extension, what the Department knew, at the time of the assessment. Ms.

4 Rodriguez is highly qualified and respected but her testimony on this fact is speculative and

5 unpersuasive because she cannot reliably testify to what Ms. Rael knew.

6 The Department also avers that its “initial review of the facts and evidence led its

7 auditors to reasonably attribute the reported income on Taxpayer’s SSA Federal Forms 1099-

8 MISC to Taxpayer’s wife, and by extension to him as the primary taxpayer on the married

9 couple’s jointly filed” income tax returns. Quite candidly, the Department’s explanation

10 corroborates Taxpayer’s assertion that when the Department issued the assessment, it knew Mr.

11 Barnes had no association to the income reported by the SSA for the years in question and was

12 not the “taxpayer” under the rationale in Breen.

13 Regardless, the Department attributed one spouse’s gross receipts to the other spouse

14 based solely on the fact that the couple filed joint income tax returns and Mr. Barnes’ name

15 appeared first4 in those returns. There is simply no known New Mexico authority in support of

16 this proposition. In fact, all authority provides otherwise.

17 Thus, there is simply no authority in New Mexico for establishing gross receipts tax

18 liability by one spouse through an assessment against the other. “[O]nly those persons who

19 engage in business can be held liable for the gross receipts tax.” See Breen, 2012-NMCA-101,

20 ¶31. See Section 7-9-2 (levying a tax on the privilege of engaging in certain activities in New

21 Mexico); Section 7-9-4(A) (imposing GRT on the “gross receipts” of persons engaging in

22 business); Section 7-9-3.5 (A) (defining what activities generate “gross receipts”); NMAC

4
Form 1040, for example only, does not refer to a “primary” or “secondary” taxpayer. For married couples filing
jointly, it merely designates them in terms of “you” and “your spouse.”

In the Matter of the Protest of Harry R. Barnes
Page 16 of 21
1 3.2.4.8 and 3.2.6.9 ((both stating that GRT is imposed on the person engaging in business and

2 reiterating that the person conducting the taxable activities is “solely liable” for the tax); FYI-

3 105, Gross Receipts and Compensating Tax – An Overview, at 5 (“the tax is imposed on the

4 gross receipts of persons who conduct” the activities described in Section 7-9-3.5(A)).

5 In fact, given such authority, the Department’s assessment against Mr. Barnes is also

6 unreasonable under Section 7-1-29.1 (C) (2) (a) because the Department did not adhere to its

7 regulations and publications governing the imposition and liability for gross receipts tax.

8 In summary, the Department cannot meet its burden under Section 7-1-29.1. From an

9 evidentiary perspective, the Department knew, before it issued the assessment, that the receipts

10 reflected in the Forms 1099 from the SSA did not report “gross receipts” paid to or received by

11 Mr. Barnes. Instead, the assessment to Mr. Barnes was based on the couple’s filing of joint

12 income tax returns contrary to Breen and the Department’s published regulations and guidance,

13 all of which identify the person liable for GRT as the person who engaged in the activities that

14 generated the receipts. The assessment was, therefore, not supported by substantial evidence at

15 the time it was issued.

16 Therefore, the Taxpayer has established entitlement to recoup a portion of his cost and

17 fees at the lesser of 20 percent of the amount of the settlement or judgment or $75,000. See

18 Section 7-1-29.1(E).

19 Here, the Department assessed $17,258.28 against Mr. Barnes and later abated the entire

20 assessment. The abatement amount comprises the judgment amount. See Helmerich & Payne,

21 2019-NMCA-054, ¶¶ 2, 29-31 (allowing fees at the then-existing cap of $50,000, which was less

In the Matter of the Protest of Harry R. Barnes
Page 17 of 21
1 than 20% of the abatement amount). Corresponding with the statutory cap, Mr. Barnes is entitled

2 to the sum of $3,451.66 reflecting 20 percent of the amount assessed.5

3 For the reasons stated, Taxpayer’s protest is GRANTED.

4 CONCLUSIONS OF LAW

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

6 parties and the subject matter of this protest.

7 B. Taxpayer made a timely request for hearing and the Administrative Hearings Office

8 conducted a timely hearing within 90 days of Taxpayer’s protest under NMSA 1978, Section 7-1B-

9 8 (2019).

10 C. The parties did not object that conducting the scheduling hearing satisfied the 90-

11 day hearing requirements of Section 7-1B-8 (A) while still allowing meaningful time for

12 completion of the other statutory requirements under Section 7-1B-6 (D). See also Regulation

13 22.600.3.8 (E) NMAC.

14 D. Taxpayer prevailed as to the entire amount in controversy when the assessment

15 was abated and with respect for the primary legal issue in dispute. Consequently, the Taxpayer

16 was the prevailing party. See NMSA 1978, § 7-1-29.1; See Helmerich, 2019-NMCA-054, ¶ 11

17 E. The Department did not follow applicable published guidance for correctly or

18 properly identifying the liable taxpayer. See Section 7-1-29.1 C; See Helmerich, 2019-NMCA-054,

19 ¶18.

20 F. The assessment giving rise to the proceeding was not supported by substantial

21 evidence determined at the time of the issuance of the assessment. See Section 7-1-29.1 C (2);

22 See Helmerich, 2019-NMCA-054, ¶18.

5
Mr. Barnes emphasizes that his actual costs and fees of more than $19,000.00 far exceed the requested amount.

In the Matter of the Protest of Harry R. Barnes
Page 18 of 21
1 G. The sum of $3,451.66 represents 20 percent of the amount originally assessed.

2 See Section 7-1-29.1 E.

3 H. “This taxpayer right is not dispensable. The statute says that a taxpayer ‘shall’ be

4 awarded costs if it is the prevailing party. Section 7-1-29.1(A). The Department thus does not have

5 the discretion to, in effect, deny costs to a prevailing-party taxpayer.” See Helmerich, 2019-

6 NMCA-054, ¶13.

7 For the reasons stated, Taxpayer’s protest is GRANTED and he “shall be awarded a

8 judgment …for reasonable administrative costs and reasonable litigation costs and attorney fees

9 incurred in connection with the proceeding” in the amount of $3,451.66 pursuant to NMSA

10 1978, Section 7-1-29.1.

11 DATED: December 22, 2022

12
13 Chris Romero
14 Hearing Officer
15 Administrative Hearings Office
16 P.O. Box 6400
17 Santa Fe, NM 87502

In the Matter of the Protest of Harry R. Barnes
Page 19 of 21
1 NOTICE OF RIGHT TO APPEAL

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

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

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

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

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

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

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

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

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

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

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

13

In the Matter of the Protest of Harry R. Barnes
Page 20 of 21
1 CERTIFICATE OF SERVICE
2 I hereby certify that I served the foregoing on the parties listed below this 22nd day of

3 December 2022 in the following manner:

4 First Class Mail and Email First Class Mail and Email

5

6 INTENTIONALLY BLANK

In the Matter of the Protest of Harry R. Barnes
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