Can a corporation deduct its gross receipts for administrative services it performs for an affiliated limited partnership under the affiliated-corporation deduction?

Plain-English summary

Sprint/United Management Company (SUMC) was a New Mexico corporation registered to pay gross receipts tax. It performed administrative and accounting services within New Mexico for U.S. Sprint Communications Company (SPRT), a limited partnership. Through a chain of holding companies, Sprint Corporation owned 100% of SUMC, and a group of other Sprint corporate subsidiaries together owned 100% of the SPRT limited partnership — so SUMC and SPRT were affiliated, but SPRT was a partnership, not a corporation.

SUMC did not report gross receipts tax on the receipts from those services. After a 1993 audit covering January 1990 through February 1993, the Department assessed $105,893.82 in tax plus interest and penalty. SUMC paid $151,214.93 (tax plus $45,321.11 of interest) in September 1994, then filed a claim for refund, which the Department denied. SUMC protested.

SUMC's argument was that the gross receipts deduction in Section 7-9-69 — which lets a corporation deduct receipts for administrative, managerial and accounting services performed for an affiliated corporation on a nonprofit or cost basis — should be read broadly to cover services performed for an affiliated limited partnership too. Hearing Officer Gerald B. Richardson denied the protest:

• The statute is clear and unambiguous. Section 7-9-69 allows the deduction only for services performed for an "affiliated corporation." Its own definition of "affiliated corporation" turns on ownership of stock meeting voting-power and value thresholds — and only corporations issue stock. So "corporation" carries its ordinary, plain meaning and does not reach limited partnerships (State v. Elliott).
• No room for construction; but construction wouldn't help either. Where statutory language is clear, courts don't construe it. Even if they did, words get their ordinary meaning and courts won't read in language the Legislature omitted (Klineline v. Blackhurst; Hammonds v. Freymiller Trucking; Burroughs v. Board of County Commissioners).
• The Legislature's failed amendments prove the point. In 1995 a bill to extend the deduction to any "business entity" failed; in 1996 a bill to reach an "affiliated limited partnership" passed but was vetoed by the Governor. Those efforts show the Legislature knew the existing language did not cover services for an affiliated limited partnership (State v. Cotton).
• Deductions are strictly construed against the taxpayer. A deduction must be clearly and unambiguously expressed and clearly established by the taxpayer (Wing Pawn Shop; Security Escrow Corp.). SUMC did not meet that burden.

What this means for you

The affiliated-corporation GRT deduction is limited to corporations

Section 7-9-69 lets a corporation deduct gross receipts from administrative, managerial and accounting services performed for an affiliated corporation on a nonprofit or cost basis. If the affiliate you serve is a limited partnership, LLC, or other non-corporate entity, this deduction — as written and applied in this decision — does not reach those receipts, even when the entities are all under common Sprint-style ownership.

Corporate form of each affiliate matters, not just the ownership relationship

It wasn't enough that SUMC and SPRT were affiliated and that SPRT was owned 100% by corporations. The deduction keys off the legal form of the entity receiving the services. Structuring intercompany service arrangements through partnerships or LLCs can forfeit a deduction that would have applied if the service recipient were a corporation.

A failed or vetoed bill can cut against you

New Mexico read the Legislature's unsuccessful attempts to broaden Section 7-9-69 as confirmation that the existing statute did not already cover affiliated limited partnerships. When you're relying on a "spirit of the statute" reading, be aware that a history of rejected amendments in the same direction can be strong evidence against you.

Deductions must be clearly established

New Mexico construes gross receipts tax deductions strictly in favor of the state. The taxpayer bears the burden of showing the deduction clearly applies. A plausible policy argument that the deduction should extend to your situation is not enough if the words don't clearly say so.

Common questions

Q: My company provides administrative services to an affiliated LLC or partnership at cost. Can I deduct those receipts under Section 7-9-69?
A: Based on this decision, no. As written, the deduction reaches services performed for an affiliated corporation; the Hearing Officer held it does not extend to a limited partnership. Confirm the current statute and consult a professional, because the law can change.

Q: All of the affiliated entities are wholly owned by the same corporate parent. Doesn't that make them 'affiliated corporations'?
A: Not for this deduction. The statute defines "affiliated corporation" by ownership of stock meeting specific thresholds, and only corporations issue stock. Common ownership does not turn a partnership into a corporation for purposes of Section 7-9-69.

Q: The Legislature tried to expand the deduction — doesn't that mean it was always meant to cover partnerships?
A: The Hearing Officer read it the opposite way. Because the Legislature had to introduce bills to broaden the statute (and one such bill was vetoed), that showed the existing language did not already cover services for an affiliated limited partnership.

Q: I paid the assessment and then asked for a refund. Does paying first hurt my case?
A: No. SUMC paid the assessment, filed a timely refund claim, and — when the claim was denied — filed a timely written protest, which gave the Hearing Officer jurisdiction. The protest still failed here, but on the merits of the deduction, not because SUMC had paid.

Citations and references

Statute:

• § 7-9-69 NMSA 1978 — a corporation may deduct from gross receipts its receipts for administrative, managerial and accounting services performed for an affiliated corporation on a nonprofit or cost basis (and receipts from an affiliated corporation for the joint use or sharing of office machines and facilities on a nonprofit or cost basis); "affiliated corporation" means a corporation that, directly or indirectly, controls, is controlled by, or is under common control with the subject corporation, where "control" means owning stock representing at least fifty percent of total voting power and at least fifty percent of total value

Cases cited:

• State v. Elliott, 89 N.M. 756, 557 P.2d 1105 (1977) — there is no room for statutory construction where the statutory language is clear and unambiguous
• State ex rel. Klineline v. Blackhurst, 106 N.M. 732, 749 P.2d 1111 (1988) — in construing a statute, the primary concern is to determine the Legislature's intent
• Hammonds v. Freymiller Trucking, 115 N.M. 364, 851 P.2d 486 (Ct. App. 1993) — words in a statute are given their ordinary meaning unless a different intent is clearly indicated
• Burroughs v. Board of County Commissioners, 88 N.M. 303, 540 P.2d 233 (1975) — courts will not read language into a statute that isn't there, particularly where the statute makes sense as written
• State v. Cotton, 109 N.M. 769, 790 P.2d 1050 (Ct. App.), cert. denied, 109 N.M. 751, 790 P.2d 1032 (1990) — when the Legislature amends a statute, it is presumed to have intended to modify the act
• Wing Pawn Shop v. Taxation and Revenue Department, 111 N.M. 735, 809 P.2d 649 (Ct. App. 1991) — a deduction statute is construed strictly in favor of the taxing authority; the right to the deduction must be clearly and unambiguously expressed and clearly established by the taxpayer
• Security Escrow Corp. v. State Taxation and Revenue Department, 107 N.M. 540, 760 P.2d 1306 (Ct. App. 1988) — same strict-construction rule for tax exemptions and deductions

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Sprint/United Management Company
• Decision PDF: D&O 96-16

Original ruling text

BEFORE THE HEARING OFFICER
OF THE TAXATION AND REVENUE DEPARTMENT
OF THE STATE OF NEW MEXICO

IN THE MATTER OF THE PROTEST OF
SPRINT/UNITED MANAGEMENT COMPANY
I.D. NO. 02-150510-00 1 PROTEST
TO DENIAL OF CLAIM FOR REFUND. No. 96-16

DECISION AND ORDER

This matter came on for determination before Gerald B. Richardson, Hearing Officer.

Sprint/United Management Company (hereinafter "SUMC") was represented by Anthony M.

Whalen, Esq. The Taxation and Revenue Department (hereinafter "Department") was

represented by Margaret B. Alcock, Special Assistant Attorney General. The parties agreed to

submit the matter for decision upon a Stipulation of Facts and written argument of the parties.

Based upon those submissions, IT IS DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. SUMC is a corporation registered with the Department for payment of gross

receipts tax under I.D. No. 02-150510-00 1.

2. In 1993, the Department conducted an audit of SUMC's payment of gross receipts

tax for tax periods January 1, 1990 through February 28, 1993.

3. On February 14, 1994, the Department sent an audit report to SUMC identifying a

gross receipts tax liability of $105,893.82, plus applicable interest and penalty, resulting from

SUMC's failure to report gross receipts tax on receipts derived from the sale, within New Mexico,

of administrative services to U.S. Sprint Communications Company ("SPRT"), a limited
partnership.

4. Sprint Corporation owns 100 percent of the stock of SUMC, UCOM, Inc. US
   Telecom, Inc., and Utelcom, Inc. Utelcom, Inc. owns 100 percent of the stock of Sprint

International Communications Corporation. Together, UCOM, Inc., US Telecom, Inc., Utelcom,
Inc. and Sprint International Communications Corporation own a 100 percent interest in the

limited partnership known as SPRT.

5. On June 21, 1994, the Department mailed Assessment No. 1813025 to SUMC,

assessing gross receipts tax in the amount of $105,893.82 plus interest and penalty.

6. On September 23, 1994, SUMC paid the Department $151,214.93, representing

$105,893.82 of tax principal and $45,321.11 of interest. On September 26, 1994, SUMC filed a

claim for refund of this payment.

7. On October 3, 1994, the Department denied SUMC's refund claim.

8. On December 15, 1994, SUMC filed a protest of the Department's denial of its

claim for refund of the amounts paid under Assessment No. 1813025. By letter dated January 20,

1995, the Department acknowledged SUMC's protest.

9. During the 1995 legislative session, Senate Bill 927 was introduced in the New

Mexico legislature, proposing to amend Section 7-9-69 NMSA 1978 to expand the deduction

therein provided for receipts of corporations for administrative, managerial and accounting

services performed for an affiliated corporation. The bill substituted the word "business entity"

for "corporation" in Section 7-9-69 and defined "business entity" broadly to include a corporation,

partnership, limited liability company, sole proprietorship or other business entity. Senate Bill

927 failed to pass the legislature.

10. During the 1996 legislative session, Senate Bill 292 was introduced in the New

Mexico legislature proposing to amend Section 7-9-69 to expand the deduction therein provided

to allow the deduction of receipts of a corporation for administrative, managerial and accounting

services performed for an affiliated limited partnership. The bill defined affiliated limited

partnership broadly enough that it would have covered SPRT. Although this bill passed the

legislature, it was vetoed by the Governor.

DISCUSSION

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The sole issue to be determined herein is whether the deduction provided at Section

7-1-69 NMSA 1978 applies to Sprint/ United Management Company's ("SUMC's") receipts from

performing administrative and accounting services for U.S. Sprint Communications Company

("SPRT"), a limited partnership wholly owned by corporations affiliated with SUMC. Section

7-9-69 provides as follows:
A. Receipts of a corporation for administrative, managerial and accounting services
performed by it for an affiliated corporation upon a nonprofit or cost basis and
receipts from an affiliated corporation for the joint use or sharing of office
machines and facilities upon a nonprofit or cost basis may be deducted from gross
receipts.

B. For the purposes of this section, "affiliated corporation" means a corporation that
directly or indirectly through one or more intermediaries controls, is controlled by
or is under common control with the subject corporation. For the purposes of this
subsection "control" means ownership of stock in a corporation which:

(1) represents at least fifty percent of the total voting power of that corporation; and

(2) has a value equal to at least fifty percent of the total value of the stock of that
corporation. (emphasis added).

SUMC argues that "corporation" should be construed broadly to include non-corporate entities

such as limited partnerships, which, directly, or indirectly, through one or more intermediaries,

control, are controlled by or are under common control. In support of this construction, SUMC

argues that this would be within the spirit and intent of the deduction, which was intended to

provide a deduction from tax for the provision of administrative services on a non-profit basis

between affiliated business entities. Unfortunately, for SUMC, their argument runs afoul of both

well settled rules of statutory construction, and in this case, direct evidence that the legislative

intent was not to so broadly define a corporation for purposes of the deduction at issue.

There is no room for courts to even engage in the exercise of statutory construction where

the statutory language is clear and unambiguous. State v. Elliott, 89 N.M. 756, 557 P.2d 1105

(1977). Such is the case, here. The statute refers only to corporations and makes no reference to

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any other form of business entity. If there was any doubt whatsoever that the legislature meant to

refer only to corporations, one need look no further than Subsection B of the statute itself, where

"affiliated corporation" is defined to mean "a corporation" which directly or indirectly controls or

is controlled by the subject corporation claiming the deduction. "Control" is defined to mean a

specified "ownership of stock in a corporation" under the terms of the deduction. Since only

corporations issue stock, there can be no doubt that in using the term "corporation", the legislature

intended it to have its ordinary and plain meaning, and not broadly encompass other forms of

business associations, such as the limited partnership at issue herein.

Even if we were to engage in statutory construction, the result would not favor SUMC. In

construing a statute, the primary concern is to determine the legislature's intent. State ex rel.

Klineline v. Blackhurst, 106 N.M. 732, 735, 749 P.2d 1111, 1114 (1988). In doing so, words are

to be given their ordinary meaning unless a different intent is clearly indicated. Hammonds v.

Freymiller Trucking, 115 N.M. 364, 367, 851 P.2d 486, 489 (Ct. App. 1993). The plain and

ordinary meaning of "corporation" is just that, a business entity incorporated under the laws

providing for incorporation. If the legislature had intended to cover limited or other types of

partnerships, it could have said so. It did not, and courts will not read language into statutes

which isn't there, particularly where the statute makes sense as written. Burroughs v. Board of

County Commissioners, 88 N.M. 303, 540 P.2d 233 (1975).

Equally fatal to SUMC's position is the Legislature's recent efforts to amend Section

7-9-69 to broaden it so that it would encompass the activities at issue herein. In the 1995

Legislature a bill, Senate Bill 927 was introduced to amend Section 7-9-69 to allow a "business

entity" performing services for an "affiliated business entity" to take the deduction. That bill

failed to pass the legislature. The 1996 Legislature did pass a bill, Senate Bill 292, which

proposed to amend section 7-9-69 to allow a corporation performing services for an "affiliated

corporation or affiliated limited partnership" to claim the deduction provided in that section. This

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bill passed the legislature but was vetoed. These legislative acts demonstrate that the legislature

was aware that the present language would not encompass the performance of administrative

services for an affiliated limited partnership and that the statute would need to be amended to

cover such a situation. This is because when the legislature amends a statute, it is presumed to

have intended to modify the act. State v. Cotton, 109 N.M. 769, 772, 790 P.2d 1050, 1053, (Ct.

App.), cert. denied, 109 N.M. 751, 790 P.2d 1032 (1990).

It is well established in New Mexico jurisprudence that exemptions and deductions from

tax are strictly matters of legislative grace. Thus:
When an exemption or deduction from tax is claimed, the statute must be construed
strictly in favor of the taxing authority, the right to an exemption or deduction
must be clearly and unambiguously expressed in the statute and the right must be
clearly established by the taxpayer.

Wing Pawn Shop v. Taxation and Revenue Department, 111 N.M. 735, 741, 809 P.2d 649, 655

(Ct. App. 1991)(quoting Security Escrow Corp. v. State Taxation and Revenue Department, 107

N.M. 540, 543, 760 P.2d 1306-1309 (Ct. App. 1988). In this case, the taxpayer has failed to

clearly establish its right to the deduction claimed, and the protest must be denied.

CONCLUSIONS OF LAW

1. The Taxpayer filed a timely, written protest to the Department's denial of its refund

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

2. Section 7-9-69 NMSA 1978 is clear and unambiguous in limiting the deduction

for administrative services performed for an affiliated corporation to business entities which are,

in fact, corporations, and as such, there is no reason to engage in statutory construction to

determine if the deduction should be available to SUMC under the facts and circumstances of this

case.

3. Even if statutory construction is engaged in, the deduction for administrative

services provided in Section 7-9-69 is limited to cases where such services are performed for an

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affiliated corporation and no other form of affiliated business entity.

For the foregoing reasons, SUMC's protest IS HEREBY DENIED.

DONE, this 30th day of April, 1996.

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