The state taxed my equipment lease twice — once to me, once to my customer. Can I get credit for the tax already paid?

Plain-English summary

This consolidated case grew out of a costly bookkeeping mismatch on a single equipment lease. Teco Investments (a Florida company) leased roughly $7 million of mining equipment — haul trucks, loaders, pickups — to Chino Mines Company for use at Chino's copper mine in Hurley, New Mexico. Two mistakes followed:

• Teco never reported or paid New Mexico gross receipts tax on the lease income it received, even though the lease itself said Teco would file the gross receipts returns.
• Chino mistakenly paid compensating (use) tax on the same lease payments, month after month, believing its lease contract required it.

Because Teco filed no returns, the Department used the seven-year assessment window (§ 7-1-18(C)) and, in 1995, assessed Teco over $600,000 (about $374,777 in gross receipts tax, plus penalty and interest) for 1988–1994. Chino then filed a refund claim for the compensating tax; the Department refunded 1992–1994 (within the three-year refund window) but denied 1988–1991 as too late. Both companies protested, and Hearing Officer Gerald B. Richardson decided four issues — denying both protests entirely.

1. Equitable recoupment — met the requirements, but the equities said no

The companies' main argument was equitable recoupment: credit Chino's compensating tax against Teco's gross receipts tax so the one lease isn't taxed twice. New Mexico adopted this federal doctrine (from Bull v. United States) in Vivigen v. Minzner and Siemens Energy v. TRD. It requires (1) one taxable event, (2) two taxes imposed on inconsistent bases, and (3) a strict identity of interest between the taxpayers. The Hearing Officer found all three met — the one lease was the event; gross receipts and compensating tax are complementary and mutually exclusive (there was no statutory basis to charge compensating tax on this lease at all); and the lease's tax-indemnity clause (Chino must indemnify Teco for such taxes) tied the companies' interests together, with the tax-rate mismatch that defeated recoupment in Siemens absent here because Teco, as an out-of-state lessor, reported at the state rate only.

But equitable recoupment is discretionary, and the equities didn't favor the taxpayers. Unlike Bull, where coercive government action caused the double tax, the Department did nothing wrong here. Both companies caused their own problem: Teco never checked its liability and ignored the lease clause requiring it to file gross receipts returns; Chino had no basis to pay compensating tax, ignored the same lease clause, and never inquired — even though the Department offers a Form TS-22 that would have let Chino properly pay gross receipts tax on Teco's behalf. The Department promptly refunded everything it legally could. With no state misconduct, recoupment was denied. (The Hearing Officer also rejected the Department's claim that Chino's "voluntary" payment was an absolute bar — voluntariness is a factor in the equities, not a bar.)

2. Commerce Clause nexus — Teco had plenty (protest denied)

Teco argued, as a fallback, that with no office, employees, or other property in New Mexico, it lacked the "substantial nexus" the Commerce Clause requires (Complete Auto Transit; Quill). Not so: Teco owned millions of dollars of equipment leased on an ongoing basis in New Mexico, generating about $7 million in receipts — far beyond Quill's "few floppy discs" or the brief rentals in Cally Curtis, and much closer to the long-term equipment leasing that created nexus in Union Oil. Substantial nexus existed; the tax was valid.

3. Negligence penalty upheld (protest denied)

Teco said relying on Chino to handle the taxes was ordinary business care. The Hearing Officer disagreed: every taxpayer has a duty to determine its own tax consequences (Tiffany Construction), and relying on another party — even one's own accountant — is no defense (El Centro Villa). Teco ignored the lease's requirement that it file the returns and never inquired, so the § 7-1-69(A) negligence penalty stood.

4. Chino's 1988–1991 refund stayed barred (protest denied)

Chino invoked § 7-1-26(B)(3), which extends the refund window to one year after an extended-period assessment. But that extension runs to the person actually assessed under § 7-1-18 — here Teco, not Chino. Chino was never assessed under an extended period, so it couldn't borrow Teco's assessment to revive its own stale refund; reading the statute otherwise would gut the refund limitations period.

What this means for you

The same transaction can be hit by gross receipts tax and compensating tax if the wrong party pays the wrong one

Gross receipts tax (on the seller/lessor) and compensating tax (on the buyer/user) are meant to be complementary and mutually exclusive — you shouldn't pay both on one deal. But if the seller never pays gross receipts tax and the buyer mistakenly pays compensating tax, the state can end up collecting on both, and getting that untangled is hard. Make sure exactly one of the two taxes is being paid, by the right party, on any leased or purchased equipment.

Equitable recoupment is a narrow, discretionary safety valve — not a reliable backstop

Even when you meet every technical element (one event, inconsistent taxes, identity of interest), a hearing officer can still deny recoupment if the equities don't favor you. The decisive factor here was that the taxpayers, not the state, caused the double payment. Courts weigh whether the taxing authority did anything coercive or inconsistent. Don't plan to rely on recoupment to fix a self-inflicted reporting error.

Watch the refund clock — and don't count on someone else's assessment to extend it

The three-year refund limit (§ 7-1-26(B)(1)) is firm. The one-year extension for extended-period assessments (§ 7-1-26(B)(3)) helps only the taxpayer who was assessed under the long limitations period. If you overpaid, file your own refund claim within three years; you cannot piggyback on a related party's later assessment to reopen years already closed to you.

If one company is going to pay another's New Mexico tax, use Form TS-22

The Department has a formal mechanism — the Form TS-22 "Agreement to Collect and Pay Over Taxes" — that lets one party properly report and pay gross receipts tax on another's behalf and receive the related notices. Had Chino used it, the whole mess (and the double tax) could have been avoided. A private indemnity clause in a lease is not a substitute for actually filing the correct returns.

Contractually shifting the tax burden doesn't move the legal duty — or excuse a penalty

Teco's lease put the economic burden of taxes on Chino, but the legal duty to file gross receipts returns and pay the tax stayed with Teco. Relying on the other side to handle it is negligence, not reasonable care. If you're the party legally liable, file and pay yourself, whatever the contract says about who ultimately bears the cost.

An out-of-state lessor can have taxable nexus in New Mexico

Owning equipment and leasing it for use in New Mexico — especially high-value equipment leased on an ongoing basis — creates the "substantial nexus" the Commerce Clause requires, even with no office or employees in the state. If your property is here earning lease income, expect New Mexico gross receipts tax to reach it.

Common questions

Q: The state is taxing one lease twice — as gross receipts tax to me and compensating tax to my customer. Won't a court fix that?
A: Not automatically. Equitable recoupment can, in narrow circumstances, credit one tax against the other, but only when the equities favor it. Here, because the taxpayers (not the Department) caused the double payment and never inquired, recoupment was denied even though the technical requirements were met.

Q: My contract says the other party is responsible for the taxes. Doesn't that get me off the hook?
A: No. A contract can shift the economic cost, but the legal duty to file and pay stays with the party the statute makes liable. Relying on the other side is negligence, so Teco kept both the tax and the penalty despite its indemnity clause.

Q: I overpaid a tax years ago. Can a related company's recent audit reopen my old years for a refund?
A: No. The one-year refund extension (§ 7-1-26(B)(3)) applies only to the taxpayer actually assessed under an extended limitations period. You can't use someone else's assessment to revive your own time-barred refund. File your own claim within three years.

Q: I'm out of state with no office or staff in New Mexico. Can New Mexico still tax my lease income here?
A: Likely yes. Owning millions of dollars of equipment leased for ongoing use in New Mexico is "substantial nexus" under the Commerce Clause — well beyond the minimal presence that defeated the tax in Quill. Physical property earning lease income in the state is enough.

Q: How could this double-tax situation have been avoided?
A: By having exactly one party pay the correct tax. The lessor (Teco) should have filed gross receipts returns as its lease required, or the parties could have used the Department's Form TS-22 so the customer could pay the gross receipts tax on the lessor's behalf. A quick call to the Department would have surfaced that option.

Citations and references

Statutes and regulations:

• § 7-9-7 NMSA 1978 — imposition of compensating tax; §§ 7-9-49, 7-9-50, 7-9-7(A)(3) — the limited situations where leased property draws compensating tax (misuse of a nontaxable transaction certificate)
• § 7-9-3(Q) NMSA 1978 — "local option gross receipts tax"; an out-of-state lessor with no New Mexico business location reports at the state rate only, making the state gross receipts and compensating rates identical here
• § 7-1-18(C) NMSA 1978 — where a taxpayer files no return, the Department may assess within seven years of the end of the calendar year in which the tax was due
• § 7-1-26(B)(1)(a) NMSA 1978 — refund claims must generally be made within three years of the end of the calendar year in which the tax was due (or the overpayment resulted from an assessment)
• § 7-1-26(B)(3) NMSA 1978 — a one-year refund window tied to an extended-period assessment under § 7-1-18(B), (C), or (D), available to the person who was so assessed
• § 7-1-69(A) NMSA 1978 — 2%-per-month penalty (up to 10%) for failure to pay or file due to negligence or disregard of rules; Regulation TA 69:3 — definition of negligence
• § 7-1-8 NMSA 1978 — confidentiality of taxpayer information (waived here for the consolidated proceeding); Form TS-22 — Agreement to Collect and Pay Over Taxes, allowing one taxpayer to pay another's gross receipts tax

Cases cited:

• Bull v. United States, 295 U.S. 247 (1935) — origin of equitable recoupment in tax cases; unjust detention of tax taken by mistake
• Vivigen, Inc. v. Minzner, 117 N.M. 224, 870 P.2d 1382 (Ct. App. 1994) — New Mexico adopts equitable recoupment but stresses its narrow scope; recoupment requires taxation on inconsistent bases and favorable equities
• Siemens Energy and Automation, Inc. v. Taxation and Revenue Department, 119 N.M. 316, 889 P.2d 1238 (Ct. App. 1994) — recoupment among multiple taxpayers requires a strict identity of interest; denied where seller and buyers were distinct
• Proficient Food Co. v. New Mexico Taxation & Revenue Dept., 107 N.M. 392, 758 P.2d 806 (Ct. App. 1988) — a buyer's voluntary compensating-tax payment does not relieve the seller's gross receipts tax liability
• Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977) — four-part Commerce Clause test; a tax must apply to an activity with substantial nexus to the state
• Quill Corp. v. North Dakota, 504 U.S. 298 (1992) — "substantial nexus" (Commerce Clause) requires more than the "minimum contacts" of Due Process; owning a few floppy discs was not enough
• National Bellas Hess, Inc. v. Department of Revenue of Illinois, 386 U.S. 753 (1967) — physical presence required before a state may compel use-tax collection
• Cally Curtis Co. v. Gruppo, 572 A.2d 302 (Conn. 1990) — a few short-term out-of-state rentals did not create sufficient nexus
• Union Oil Co. of California v. Board of Equalization, 34 Cal. Rptr. 872 (1963) — long-term leasing of equipment (oil tankers) created taxable nexus
• Tiffany Construction Co. v. Bureau of Revenue, 90 N.M. 16, 558 P.2d 1155 (Ct. App. 1976) — every person has a duty to ascertain the tax consequences of its actions; failure is negligence
• El Centro Villa Nursing Center v. Taxation and Revenue Department, 108 N.M. 795, 779 P.2d 982 (Ct. App. 1989) — a taxpayer cannot avoid the negligence penalty by relying on its accountant to handle reporting generally

Source

• Listing: New Mexico Decisions & Orders
• Decision post: TECO Investments, Inc. & Chino Mines Co.
• Decision PDF: D&O 96-27

Original ruling text

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

IN THE MATTER OF THE CONSOLIDATED
PROTESTS OF TECO INVESTMENTS, INC.,
ID. NO. 02-121553-00 7, PROTEST TO
ASSESSMENT NO. 1914991; AND NO. 96-27
CHINO MINES COMPANY, ID. NO.
02-067168-00 7, PROTEST TO DENIAL
OF CLAIM FOR REFUND.

DECISION AND ORDER

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

basis of stipulated facts and documentary evidence and briefs of the parties. Teco Investments, Inc.,

hereinafter, "Teco," was represented by Curtis W. Schwartz, Esq. Chino Mines Company,

hereinafter, "Chino," was represented by Paul D. Barber, Esq. The Taxation and Revenue

Department, hereinafter, "Department," was represented by Margaret B. Alcock, Special Assistant

Attorney General. Because the protests of Teco and Chino are based upon the same transactions, and

because these two taxpayers moved that these matters be consolidated for determination, these

matters were consolidated for purposes of this administrative adjudication.

Based upon the stipulated facts, exhibits and the briefs of the parties, IT IS DECIDED AND

ORDERED as follows:

FINDINGS OF FACT

1. Teco is a Florida corporation whose corporate headquarters and its principal place of

business are located in Tampa, Florida. Florida is Teco's commercial domicile.

2. As its name suggests, Teco's principal business activity is investments.

3. Chino is a New Mexico general partnership between Phelps Dodge Chino, Inc. and

Heisei Minerals.

4. Phelps Dodge Chino, Inc. is a wholly owned subsidiary of Phelps Dodge Corporation,

a New York corporation with its principal place of business in Phoenix, Arizona.

5. Heisei Minerals is a wholly owned subsidiary of Mitsubishi Corporation.

6. Chino was formed in March, 1981 for the purpose of owning and operating a copper

mine located in Hurley, New Mexico. Chino is a New Mexico general partnership whose original

partners were Kennecott Santa Fe, a subsidiary of Kennecott Copper, and MC Minerals Corporation,

a subsidiary of Mitsubishi Corporation. Kennecott Santa Fe owned a two-thirds interest in Chino.

MC Minerals Corporation owned a one-third interest in Chino.

7. Chino has owned and operated a copper mine located in Hurley, New Mexico since

1981.

8. Effective January 1, 1987, Phelps Dodge Chino, Inc. purchased Kennecott Santa Fe's

two-thirds interest in Chino. At approximately the same time, Mitsubishi restructured its ownership

of Chino resulting in Heisei Minerals' ownership of Mitsubishi's one-third interest in Chino.

9. Phelps Dodge Chino, Inc. is the managing general partner of Chino.

10. In 1987, Chino desired to acquire certain tangible personal property, including haul

trucks, loaders and pick-up trucks. Chino determined that leasing the equipment was preferable to

outright purchase. On November 13, 1987 Chino entered into an agreement, called the Master

Equipment Lease Agreement, (hereinafter the "equipment lease") with Teco for the equipment it

desired. Under the terms of the lease, the total cost of the equipment to be leased was not to exceed $

7,800,000.

11. In 1987, Teco determined that it wanted to develop a leveraged lease portfolio. A

leveraged lease is a lease whereby Teco borrowed money to purchase equipment which it would, in

turn lease to a third party, with the lease payments structured so that the payments over the life of the

lease pay for Teco's debt service costs and provides a profit margin for Teco as well.

12. To develop a leveraged lease portfolio, Teco hired a specialist in leveraged leases.

That person worked primarily through a broker or series of brokers to acquire leveraged leases.

Teco's leveraged lease operation was essentially a one person operation.

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13. One of the leveraged leases acquired by Teco with the assistance of a broker was the

equipment lease with Chino.

14. Approximately two years after Teco had commenced its initiative to establish a

leveraged lease portfolio, it had entered into only nine or ten leases for various types of equipment.

Teco then altered its course and determined that it no longer wanted to expand into leveraged leases.

As a result, the position of the person who conducted Teco's leveraged lease investment function was

eliminated. Teco, however, maintained its investment in the leveraged leases in which it had already

invested.

15. The Treasurer's office of Phelps Dodge Corporation arranged for the financing and

equipment leasing on behalf of Chino. The actual financing and leasing was arranged through a

broker.

16. Teco worked through the broker. Almost all of Teco's contact regarding the

transaction was with the broker. There was little direct contact, if any, between Teco and Chino.

Financing for the transaction was provided through Atlantic Leasing and Financial, Inc. The actual

leasing was done by Teco.

17. Teco lease equipment to Chino pursuant to the equipment lease. All equipment

leased pursuant to the equipment lease was tangible personal property. All such leased equipment

was located in New Mexico at Chino's Hurley, New Mexico mine.

18. Teco has never had, nor does it now have, property in New Mexico other than the

equipment leased pursuant to the equipment lease with Chino.

19. Teco has never had, not does it now have, any office, employees, sales people, or any

business location in New Mexico.

20. Teco's only contact with New Mexico involves the use by Chino of equipment leased

to it by Teco pursuant to the Equipment lease. Teco has no other property in New Mexico.

21. Paragraph 12 of the equipment lease sets out each party's obligations in connection

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with taxes. In pertinent part, it provides that Chino agrees to pay and on demand to indemnify Teco

for any taxes, together with any applicable penalty and interest which may be imposed upon the

ownership, leasing renting, sale possession or use of the equipment leased, except for income taxes on

Teco's net income. It further provides that Teco is to notify Chino of any claims made by any taxing

authorities against Teco for any taxes which would be subject to indemnification and it allows for

Chino to contest any such tax claims. It further provides that Teco shall file, at Chino's expense, any

returns required with respect to New Mexico taxes on gross receipts and Chino shall cause, to the

extent permitted by law, all billings of taxes to be made to Teco in care of Chino, and Chino is to

make payment of such billings.

22. Teco understood that Chino had undertaken to remit whatever transaction taxes were

due with respect to the leasing of the mining equipment in New Mexico.

23. Teco relied on Chino Mines for compliance with any and all New Mexico transaction

tax obligations under the equipment lease. Teco did not consult a tax advisor or contact the

Department to determine whether Teco was in compliance with the Department's views of Teco's

obligations under New Mexico tax laws.

24. Teco did not report and pay gross receipts tax with respect to amounts paid to it by

Chino for the lease of the equipment pursuant to the equipment lease.

25. Because Teco does not have a place of business in New Mexico, if Teco is subject to

the gross receipts tax, it is not subject to "local option gross receipts tax" as defined in Section

7-9-3(Q) NMSA 1978. Rather, it would be subject to tax at the state tax rate. Assessment no.

1914991 imposes gross receipts tax at the state tax rate only.

26. The state tax rate and the compensating tax rate are identical.

27. The Department will allow one person to pay taxes on behalf of another person, upon

filing a Form TS-22 , Agreement to Collect and Pay Over Taxes. No one has filed a Form TS-22

with the Department to pay gross receipts taxes on behalf of Teco with regard to receipts from the

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equipment lease.

28. In late 1994, the Department conducted an audit of Teco. On March 30, 1995 the

Department mailed Assessment no. 1914991 ("the Assessment") to Teco. The reporting periods with

respect to which the Assessment was issued covered a seven year period commencing on January 1,

1988 and ending on December 31, 1994.

29. Because Teco had not filed any CRS-1 reports (the reports used for reporting gross

receipts tax) with the Department, the Department invoked the extended statute of limitations for

assessment of taxes contained in Section 7-1-18(C) NMSA 1978 which provides that in the case of

the failure of a taxpayer to complete and file any return, the Department may assess tax at any time

within seven years from the end of the calendar year in which the tax was due.

30. The Assessment asserted that the following amounts of gross receipts tax, penalty and

interest were due and owing by Teco:
gross receipts tax $ 374,777.47
penalty $ 37,473.13
interest $ 212,487.92
Total $ 624,738.52

31. The audit determined that Teco had not reported and paid gross receipts tax with

respect to its receipts derived from leasing tangible personal property located in New Mexico to

Chino. The amount of the tax assessed with respect to this issue is approximately $364,587.

32. The audit also determined that Teco had not reported and paid gross receipts tax with

respect to its receipts derived from the sale of tangible personal property in New Mexico. In

December, 1992, after the lease with Chino of specific equipment had expired, Teco sold that

equipment. The sale took place in New Mexico. The total amount of gross receipts tax assessed

with respect to the equipment sale issue was approximately $10,190.47.

33. On April 11, 1995, Teco timely filed a request for additional time to file a written

protest to the Assessment. Responding to this request, the Department granted Teco until June 28,

1995 to file its protest. Teco filed its written protest to the Assessment on June 2, 1995. Teco's

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protest was limited to the amounts of tax, penalty and interest assessed pursuant to the Assessment

relating to receipts derived from leasing tangible property located in New Mexico to Chino. Teco did

not protest the portion of the Assessment imposing tax on receipts derived from the sale of equipment

in New Mexico.

34. Since its formation in 1981, Chino has on a monthly basis filed CRS-1 Reports with

the Department.

35. Each monthly report filed by Chino included a report of Chino's compensating tax

liability, if any, and such reports were accompanied by full payment of any compensating tax liability.

36. Chino reported and paid compensating tax to the Department at the applicable

compensating tax rate with respect to all amounts paid by it to Teco for lease of equipment pursuant

to the equipment lease.

37. Commencing in late 1987, each CRS-1 Report filed by Chino included a

compensating tax liability respect to the lease payments made by Chino to Teco for equipment leased

by Chino from Teco pursuant to the equipment lease. All leased equipment was used by Chino in

New Mexico.

38. Chino did not contact the Department to determine whether Chino's reporting was in

compliance with the Department's views of Chino's obligations under the equipment lease.

39. Chino paid compensating tax on the amounts paid by it to Teco for the lease of the

equipment because it was Chino's understanding that it was required to do so under its contractual

obligations pursuant to paragraph 12 of the equipment lease.

40. In 1995, it was brought to the attention of Chino that the Department had assessed

Teco for gross receipts tax, penalty and interest with respect to receipts derived by Teco from the

lease of equipment to Chino pursuant to the equipment lease.

41. Chino believes that, pursuant to paragraph 12 of the equipment lease, that it is also

contractually obligated to indemnify and hold Teco harmless of any and all taxes, penalty and interest

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imposed upon Teco with respect to the lease of the equipment leased pursuant to the equipment lease.

42. On December 28, 1995, Chino filed with the Department a claim for refund in the

amount of $ 393,168.57 for compensating taxes paid by it with respect to its lease payments to Teco

pursuant to the equipment lease for the reporting periods of February, 1988 through December, 1994.

43. The Department granted Chino's refund claims for the reporting periods occurring

during calendar years 1992, 1993 and 1994, and refunded Chino the sum of $ 178,281.38.

44. Chino did not request, nor did the Department refund any interest with respect to the

amount which it refunded to Chino.

45. On January 16, 1996, the Department denied Chino's refund claims for the reporting

periods occurring during calendar years 1988, 1989, 1990 and 1991 on the basis that the statute of

limitations for claiming refunds of tax for those reporting periods had expired.

46. On February 14, 1996, Chino timely filed a protest to the Department's denial of its

claims for refund for 1988, 1989, 1990 and 1991.

47. Chino is willing to withdraw its protest to the Department's denial of its refund claims

to the extent that it is allowed to equitably recoup against any liability of Teco pursuant to the

Assessment.

DISCUSSION

This case is an unusual case in many respects. It is procedurally unusual in that the protests

of two separate taxpayers, Chino and Teco have been consolidated for resolution because their

determination hinges on a common set of facts, and resolution of this case, because of the contractual

relationship between the taxpayers, necessarily implicates both taxpayers.1 It is also unusual in that it

calls for a determination of whether the doctrine of equitable recoupment should be applied to take

into account compensating taxes paid by Chino on its lease of equipment from Teco in determining

1
The consolidation of these separate protests was requested by the two taxpayers and each has agreed that
the administrative record may be made open to the other, thereby removing any concerns about the
confidentiality of these proceedings between the two taxpayers pursuant to Section 7-1-8 NMSA 1978.

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Teco's gross receipts tax liability for leasing the same equipment to Chino. The doctrine of equitable

recoupment has only recently been incorporated into New Mexico tax jurisprudence and the extent of

its application is at the core of the dispute between these Taxpayers and the Department.

The essential facts are undisputed. In late 1987, Teco entered into a lease agreement with

Chino whereby it agreed to lease several millions of dollars of equipment to Chino for use at its

copper mine in Hurley, New Mexico. Teco did not report and pay gross receipts taxes upon its

receipts from renting the equipment, but Chino erroneously paid compensating tax on its lease

payments to Teco. These actions were taken on the basis of the parties' understanding of their

obligations under the lease agreement, although the obligations imposed by the lease agreement are

disputed between the Department and the Taxpayers and will be discussed at more length later in this

decision. The gross receipts tax rates applied to Teco and the compensating tax rates paid by Chino

were identical due to the fact that Teco is entitled to report at a rate, due to its out-of-state location,

that includes no local option gross receipts taxes.

In 1995 the Department assessed Teco over $500,000 in gross receipts taxes, penalty and

interest for failing to report and pay gross receipts taxes upon its lease receipts. In issuing the

assessment, the Department was able to assess back to 1988 due to the seven year statute of

limitations2 which applies when there has been a failure to file returns reporting and paying taxes.

Upon learning that Teco had been assessed gross receipts tax upon its equipment lease receipts by the

Department, Chino filed a claim for refund, seeking to recover the compensating taxes it had paid on

the same lease transactions, from 1988 forward. The Department allowed the claim for the 1992,

1993 and 1994 tax years as those fell within the three year statute of limitations for claiming refund of

tax, pursuant to Section 7-1-26(B)(1) NMSA 1978, but it denied the claim for prior years on the basis

that Chino's claim was barred by the statute of limitations. Chino has protested the denial of its

refund claims on the basis that their claim is not barred by the statute of limitations, but it has agreed

2
Section 7-1-18(C) NMSA 1978.

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that if equitable recoupment is applied, which it argues it should be, that it will withdraw its protest.

Teco has protested the assessment of tax on its lease receipts on the basis that equitable

recoupment should be applied to allow Teco credit against the assessment for the compensating taxes

paid by Chino. Alternatively, Teco alleges that any imposition of gross receipts taxes would violate

the Commerce Clause of the United States Constitution because there exists insufficient nexus with

New Mexico for the Department to be allowed to impose its taxes.

THE CLAIM OF EQUITABLE RECOUPMENT

Because the issue of equitable recoupment is common to both protests and, if applied, would

resolve these protests without the need to address the other issues raised, it will be addressed first.

The doctrine of equitable recoupment in the context of tax administration has been developed in the

federal courts. The doctrine was first applied by the Supreme Court in Bull v. United States, 295

U.S. 247, 55 S.Ct. 695, 79 L.Ed. 1421 (1935). In that case, the Internal Revenue Service, "IRS",

required an estate to include in its value and to pay estate tax upon a decedent's share of partnership

income. The IRS subsequently determined that the partnership income should be included as income

to the estate, upon which income tax was due, and sought to collect the income tax. Thus, the same

transaction was subjected to both estate and income tax. The estate filed suit and sought either a

refund of the estate tax paid or to recoup the estate tax paid against any income tax deficiency. The

lower court ruled that the matter taxed was properly taxed as income to the estate and although it had

been improperly classified as an asset of the estate for estate tax purposes, that the statute of

limitations for refund of the estate tax had expired, preventing any refund or credit against income

taxes for that erroneously collected tax. The Supreme Court agreed that the estate's action for

refund of the estate taxes was barred by the statute of limitations, but it reversed the lower court and

applied the doctrine of equitable recoupment to allow the estate to claim a credit against its income

taxes for the erroneously paid estate taxes.3 In applying equitable recoupment, the Court noted:

3
There was no statute of limitations problem with respect to the litigation over the imposition of income tax
upon the estate. Thus, there was no jurisdictional bar to the court acting upon the IRS' claim to income taxes

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While here the money was taken [by the federal government] through mistake without any
element of fraud, the unjust detention is immoral and amounts in law to a fraud on the
taxpayer's rights.
Id., 295 U.S. at 261.

The doctrine of equitable recoupment has only recently been adopted into the jurisprudence of

New Mexico. It was first addressed in Vivigen, Inc. v. Minzner, 117 N.M. 224, 870 P.2d 1382 (Ct.

App. 1994). In its discussion of the doctrine, the Court of Appeals emphasized the limited application

of the doctrine as it has been applied in federal tax cases because of the inherent tension between the

government's need for certainty and finality with respect to its tax revenues, which statutes of

limitation provide, and the need to assure that the government is not treating taxpayers unfairly by

taxing them twice on the same transaction under inconsistent theories. Vivigen, Inc. sought to have

equitable recoupment applied to receive a credit against its compensating tax liability for an

investment tax credit which it had failed to apply for within the statute of limitations. The court

denied equitable recoupment because the state had not sought to tax the same transaction on

inconsistent theories. Additionally, the court found that the equities did not favor Vivigen's claim,

because there had been, "[N]o conduct by the State--in particular, no conduct inconsistent with the

State's present contentions--[which] prevented Vivigen from timely claiming an investment credit if

one was available." Id. at 231, 870 P.2d at 1389.

Although the Court of Appeals declined to apply equitable recoupment in Vivigen, it held that

New Mexico would follow the weight of authority from other states and would adopt the standard set

forth by the federal courts for application of the doctrine of equitable recoupment to tax collections.

Specifically, the court stated:
In particular, we hold that a taxpayer is not entitled to seek a credit after the
statute-of-limitations period has expired unless the state is imposing a tax on the same
taxable event on a ground that is inconsistent with the original payment by the taxpayer.

Id. at 231, 870 P.2d at 1389.

and applying equitable recoupment to resolve the issue of liability for those taxes.

• 10 -
  The issue of equitable recoupment of taxes was visited once again by the Court of Appeals in

Siemens Energy and Automation, Inc v. Taxation and Revenue Department, 119 N.M. 316, 889

P.2d 1238 (Ct. App. 1994). In that case, the taxpayer sought to have equitable recoupment applied to

relieve it of gross receipts tax assessed upon some of its sales of equipment in New Mexico on the

basis that the purchasers of the equipment had paid compensating tax upon their purchase of the

equipment. This case provided the court with the opportunity to apply the other requirement of

equitable recoupment developed in the federal case law, which is when equitable recoupment is

claimed where multiple taxpayers are involved in the same transaction there must be a strict identity

of interest between those taxpayers. In Siemens, the court denied equitable recoupment because such

identity of interest did not exist. As stated by the court:
While the compensating use tax and gross receipts tax would both tax the same event,
Siemens' sale of equipment, there is not an identity of interest between the purchasers
and sellers. Siemens and the purchasers are totally distinct entities that do not have an
identity of interest. A savings to Siemens under equitable recoupment would not
necessarily redound to the benefit of the purchasers. This lack of congruity between
Siemens and the purchasers is emphasized by the fact that, by paying compensating tax
rather than gross receipts tax, the purchasers did not pay the additional amount local
governments are entitled to under the gross receipts tax. NMSA 1978, § 7-9-3(Q)
(Supp. 1994).

Id. at 323, 889 P.2d at 1245.

Thus, the requisites which must be established in this case before equitable recoupment can

be applied are (1) that there is one taxable event, (2) that taxes have been assessed on that same

transaction on an inconsistent basis, and (3) that there is a strict identity of interest between Chino and

Teco with respect to the taxed transaction.

There can be no doubt that the first requisite has been met, because the taxable event was

Teco's lease of equipment to Chino. It is that event upon which the Department's seeks to assess

gross receipts tax and it is that taxable event upon which Chino reported and paid compensating tax.

The second requisite has also been met. Although there is no language in the statute which

imposes compensating tax, NMSA 1978, Section 7-9-7, to support a conclusion that compensating tax

• 11 -
  could have been imposed upon a lease of property in the circumstances of this case, 4 the gross

receipts tax and the compensating tax are designed to be complementary and mutually exclusive.

Compensating tax is only assessed when gross receipts tax was not paid on the transaction. With

there being no statutory basis for imposing compensating tax upon Chino's lease of the equipment,

and there being no dispute between the parties that Teco's lease receipts are subject to gross receipts

tax, I have little difficulty in concluding that an inconsistency exists between the imposition of the two

taxes on the lease transaction.

With respect to the third requisite, a strict identity of interest when multiple taxpayers are

involved, Siemens makes it clear that it is not enough to establish that both compensating tax and

gross receipts tax have been paid or imposed on the same transaction. Id., 119 N.M. 316, 889 P.2d

at 1245. To paraphrase the Court of Appeals, there must be an identity of interest such that a savings

to the taxpayer claiming equitable recoupment would necessarily redound to the benefit of the other

taxpayer. That requirement is met in this case because of the indemnification agreement with respect

to taxes which existed between TECO and Chino. Specifically, paragraph 12(a) of the lease

agreement provided:

Lessee [Chino] agrees to pay and on demand to indemnify and hold lessor [Teco] harmless from

all license fees, registration fees, assessments, charges and taxes, together with any

penalties or interest applicable thereto, which may now or hereafter be imposed upon the

ownership, leasing, renting, sales possession or use of the Equipment, excluding

however, all taxes on or measured by Lessor's net income. (emphasis added)

4
The only circumstances where compensating tax may apply where the leasing of property in New Mexico
is involved would be where a deduction from gross receipts tax was claimed pursuant to Section 7-9-49, where
tangible personal property was bought tax free by the delivery of a non-taxable transaction certificate by the
purchaser who purported that the property was being purchased for leasing or resale, and the purchaser does not
use the property for those purposes, or where a deduction was claimed under section 7-9-50 because the lessee of
property delivered a non-taxable transaction certificate to a lessor of property to lease property free of gross
receipts tax on the grounds that the property would be released by the lessee. In both of these circumstances,
because the issuer of the non-taxable transaction certificates subsequently uses the property in a way that does not
conform to the requirements for the issuance of a non-taxable transaction certificate, the issuer would be subject
to compensating tax on the use of the property pursuant to Section 7-9-7(A)(3).

• 12 -
  This provision requires Chino to indemnify Teco for any taxes, and applicable penalties or interest

imposed upon the leasing of the equipment. Thus, to the extent that Teco is found liable for gross

receipts tax on the lease of the equipment, Chino is bound to indemnify Teco. If Teco's claim of

equitable recoupment is granted, Chino will be directly benefitted in the identical amount which Teco

equitably recoups. Additionally, since Chino has stipulated to the withdrawal of its protest to the

denial of its refund claim if Teco's claim for equitable recoupment is granted, there would be no

double or disproportionate tax benefit to Chino. The other matter the Court of Appeals relied upon in

Siemens as demonstrating a lack of identity of interest, the incongruity in the tax rates between the

gross receipts tax and the compensating tax, does not exist in this case. That is because as an

out-of-state taxpayer with no business location in New Mexico, Teco would report gross receipts tax

at the state rate only. Without local option gross receipts taxes, the state gross receipts tax rate and

the compensating tax rate are the same.

Thus, Teco has met the three conditions necessary for making a claim for equitable

recoupment. The Department has argued that Teco's claim for equitable recoupment would be

barred in any event because Chino's payment of compensating tax was voluntary. In making this

argument, the Department relies upon the language in Siemens where the Court of Appeals, in first

addressing Siemens' claim for a credit against gross receipts taxes due from it for compensating taxes

paid by its purchasers stated:
However, voluntary payment of compensating tax by the purchaser does not relieve the
seller of liability for gross receipts tax otherwise collectible. Proficient Food Co. v.
New Mexico Taxation & Revenue Dept., 107 N.M. 392, 397-398, 758 P.2d 806,
811-812 (Ct. App. ), cert. denied, 107 N.M. 308, 756 P.2d 1203 (1988).

Teco and Chino have responded to the Department's argument by arguing that the payment of

compensating taxes was not voluntary by Chino because such payment was required by the terms of

the lease agreement between the parties. I disagree that there is anything in the contractual

agreement which made the payment of compensating taxes involuntary on Chino's part. In the first

place, the contract makes no reference to payment of compensating taxes by Chino, but rather,

• 13 -
  specifically requires Teco to file gross receipts tax returns. Paragraph 12(C) of the contract provides

as follows:
Lessee [Chino] shall timely prepare and file all reports and returns which are required to be
made with respect to any obligation of Lessee under, or arising out of, Section 12(a) [the
paragraph providing for indemnification of taxes] hereof, except that Lessor [Teco] shall
file, at Lessee's expense, any returns required with respect to New Mexico taxes on gross
receipts. (Emphasis added.)

Even if the contract did require Chino to pay compensating taxes, I would still not consider the

payment to be involuntary, since the contractual terms were negotiated and freely entered into

between the parties.

Regardless of whether the payments were voluntary or involuntary, however, I believe that the

Department's reading of the language from Siemens as a complete bar to the application of equitable

recoupment when compensating tax was voluntarily paid misreads the Court's meaning when it used

the language in issue. While there can be no disagreement with the court's statement of law that the

voluntary payment of compensating tax does not relieve a seller of its liability for gross receipts tax,

the court's citation to the Proficient Foods case is instructive, because the doctrine of equitable

recoupment was not raised in that case. Even more instructive is the court's treatment of the

equitable recoupment issue in the remainder of its decision in Siemens. Following the citation to

Proficient Foods, the court goes on to state that, "[S]iemens seeks to avoid this rule by reliance upon

the doctrine of equitable recoupment." The court then went on to analyze whether the application of

equitable recoupment was appropriate under the facts of the case and under the law of equitable

recoupment. If application of equitable recoupment was barred in circumstances where

compensating tax had been paid voluntarily by a purchaser rather than gross receipts tax being paid by

a seller, there would have been no reason for the court to make any analysis about equitable

recoupment and its applicability. Thus, I read the court's decision as recognizing that equitable

recoupment can be applied even when compensating tax has been voluntarily paid, if application of

equitable recoupment is appropriate.

• 14 -
  Even though the voluntariness of a tax payment is not a bar to the application of equitable

recoupment, consideration of the voluntariness of tax payment may be appropriate when determining

whether equitable recoupment should be applied. This is because I read the case law applying

equitable recoupment to also require an analysis of whether equitable considerations render the

application of equitable recoupment appropriate even though the bottom line requisites for applying

the doctrine have been met. From the genesis of the doctrine in tax cases, Bull v. U.S., supra,

equitable considerations weighed heavily in whether the doctrine would be applied. In addition to

the fact that the IRS had taken inconsistent positions with regard to which tax should be applied, a

significant factor in the Supreme Court's decision to allow the equitable recoupment of the estate

taxes which the IRS had erroneously assessed was the coercive nature of the government's tax

collection procedures themselves. Not only had the IRS taken action initially to impose

(erroneously) and collect estate taxes, but it initiated a subsequent action to collect income taxes on

the same transaction, and because a claim for refund of the estate taxes was barred by the statute of

limitations, the only avenue of recourse for the taxpayer was to pay the income taxes and seek refund

of them as a means to challenge the IRS' action. See, Id. 295 U.S. at 259-263.

The Court of Appeals in its Vivigen decision also looked beyond the bare requisites of

equitable recoupment in determining whether equitable recoupment was warranted. After

determining that Vivigen did not qualify for equitable recoupment of an investment tax credit against

its compensating tax liability because there had been no taxation by the state on an inconsistent basis,

the court went further in its analysis and evaluated the equities of Vivigen's claim as well. In that

case, Vivigen's claim for an investment credit was barred by the statute of limitations but Vivigen

sought to have the investment credit claim applied, on the basis of equitable recoupment, to the

Department's claim for compensating taxes. In examining the equities the Court found it significant

that:
No conduct by the State--in particular, no conduct inconsistent with the State's present
contentions--prevented Vivigen from timely claiming an investment credit if one was
available. Any equity favoring Vivigen here is not of sufficient magnitude to justify

• 15 -
  overriding the limitations period of Section 7-9-8(A). We therefore reject Vivigen's
  claim of equitable recoupment.

Id., 117 N.M. at 231.

Thus, the Court of Appeals found it significant to examine the conduct of the state taxing

authorities in weighing the equities before determining whether equitable recoupment was appropriate

in a given case.

An examination of the equities in this matter reveals a significant equity in favor of the

taxpayers, the fact that if equitable recoupment is not allowed, the effect will be to allow the

imposition of both gross receipts tax, and compensating tax on the same lease receipts, as well as the

imposition of interest and possibly penalty on the same transaction. It should be the goal of the

taxing authorities to only collect the correct tax, and to collect it only once from a taxable

transaction. 5 An examination of the equities surrounding the circumstances which caused the

erroneous payment of compensating tax by Chino and Teco's failure to report and pay gross receipts

taxes is not so favorable to the taxpayer's however. Teco made no effort to determine its tax liability

under the lease agreement. Although the agreement required Teco to file gross receipts tax returns,

Teco made no attempt to do so, and it made no inquiry of a tax professional or the Department

concerning its tax obligations under the lease agreement. Additionally, there was also no evidence

that Teco made a written request under the terms of the lease agreement (or any other less formal

request) to confirm that Chino had acted to satisfy Teco's tax obligations. Teco apparently just

presumed that, somehow, its tax obligations were being taken care of.

The equities are no more favorable for Chino. As noted earlier in this decision, there was no

basis under the compensating tax statutes or regulations for Chino to conclude that compensating tax

was payable on its lease of equipment in New Mexico. Nor did Chino follow the terms of its own

lease agreement, which required Teco to file, at Chino's expense, gross receipts tax returns. Chino
5
In this regard, it is should be noted that the Department promptly refunded all of the compensating tax
which Chino sought to have refunded which was allowable under the statute of limitations, upon being put on
notice that compensating tax had been erroneously paid by Chino.

• 16 -
  made no inquiry of the Department or of a tax professional to determine the tax consequences of the

lease transaction. Chino has never offered an explanation as to how it concluded to report and pay

compensating taxes.6 It is noteworthy, that in this regard, the Department does have a procedure

whereby one taxpayer may pay gross receipts taxes on behalf of another taxpayer. By filing a Form

TS-22, Agreement to Collect and Pay Over Taxes, Chino could have properly reported and paid gross

receipts tax on behalf of Teco and received all notices and assessments issued in connection with

Teco's liability for New Mexico gross receipts tax. If Chino had made inquiry of the Department, it

could have learned of this procedure and avoided its present dilemma.

Thus, even though an erroneous tax was paid, the two taxpayers have only themselves to

blame for this situation. Unlike the situation in Bull v. United States, there was no action, coercive

or otherwise, by the taxing authority, which in any way caused the erroneous payment of the

compensating taxes which the taxpayers seek to equitably recoup. As noted above, the Department

was never consulted concerning the proper way to handle the taxes on the lease transaction. When

Chino filed its monthly tax returns reporting compensating taxes, the Department had no way of

knowing that compensating tax was being reported erroneously, since the return merely reports an

amount of compensating tax being self-assessed and provides no detail of the transactions involved.

The Department did not assess the compensating taxes, it only accepted Chino's own declaration of its

tax liability. It is also significant that the Department took no action which would have prevented

Chino from making a timely refund claim for the erroneously paid compensating tax. Finally, it

promptly refunded the erroneously paid taxes which it was authorized to refund within the statute of

limitations upon being informed that the taxes were erroneously paid by the filing of Chino's refund

claim. In short, to paraphrase the language quoted just above from Vivigen, there has been no

6
Although the record is completely silent as to the basis for Chino's decision to report compensating taxes,
and in this case, because Teco has no business location in New Mexico, the tax rates are the same, it is
conceivable that Chino, as a large and significant taxpayer with lots of taxable activities in New Mexico, was aware
that, as noted in the Siemens decision, in most cases, the amount of compensating tax is less than the amount of
gross receipts tax imposed on a transaction because compensating tax does not include the local option gross
receipts taxes imposed by counties and municipalities.

• 17 -
  conduct by the state--in particular, no conduct inconsistent with the State's present contentions--which

prevented Chino from timely claiming a refund of the compensating taxes which it erroneously paid

and reported. Given the Court of Appeals' emphasis on the narrow scope of equitable recoupment

because of the tension application of the doctrine creates with statutes of limitation, and given the

Court of Appeals' emphasis on whether conduct by the taxing authority caused the problem resulting

in the imposition of two taxes on inconsistent bases, it must be concluded that the circumstances of

this case do not warrant the application of equitable recoupment of the erroneously paid compensating

taxes for which the claim for refund is barred.

NEXUS

Teco argued, in the alternative that equitable recoupment was denied, that because Teco has

no employees, office, sales people or business location in New Mexico and since its only activity with

respect to New Mexico was the leasing of the equipment to Chino under the lease agreement, that it

lacks "substantial" nexus with New Mexico and as such, it would violate the Commerce Clause to

allow the imposition of the tax at issue.

Under the first prong of the four-part Commerce Clause test applied in Complete Auto

Transit, Inc. v. Brady, 430 U.S. 274, 279, 97 S.Ct. 1076 (1977), one of the requirements to sustain a

tax against a Commerce Clause challenge is that the tax must be applied to an activity with a

"substantial" nexus with the taxing state. More recently, in Quill Corporation v. North Dakota, 504

U.S. 1904, 112 S.Ct. 1904 (1992), the Supreme Court distinguished between the "minimum contacts"

nexus requirement for jurisdiction under the Due Process Clause from the "substantial" nexus

requirement under the Commerce Clause. Under the minimum contacts Due Process Clause

standard, a state can tax a non-domiciliary corporation, even if the corporation had no physical

presence in the state, as long as the corporation has "purposefully directed" its activities at residents of

the taxing state. The Commerce Clause, requires more, however. In Quill, the Supreme Court

reaffirmed its decision in National Bellas Hess, Inc. v. Department of Revenue of Illinois, 386 U.S.

• 18 -
  753, 87 S. Ct. 1389 (1967) that a vendor must have some physical presence in a state before the

vendor can be required to collect a state use tax from the purchaser. Quill Corporations was an

out-of-state mail order house with neither outlets nor sales representatives in North Dakota and which

utilized the mails or common carriers to deliver its merchandise into the state. Its in-state presence

was limited to owning tangible property in the form of a computer software program on floppy discs

which it licensed to its customers and which enabled Quill's customers to check Quill's inventories

and prices and to place orders directly with Quill. The Supreme Court held Quill's licensing of

software in North Dakota, was too minimal or insignificant to meet the "substantial nexus"

requirement of the Commerce Clause. Id. 504 U.S. at 315, n.8 112 S.Ct at 1914 n.8.

Teco relies upon Quill, and Cally Curtis Co. v. Gruppo, 572 A.2d 302, (Conn. 1990), cert.

denied, 498 U.S. 824, 111 S.Ct 77 (1990) in support of its argument that New Mexico lacks

substantial nexus to tax its lease transactions. In Cally Curtis, the Connecticut Supreme Court ruled

that a limited number of three day rental transactions by an out-of-state company that produced

industrial films and video tapes for personnel training purposes did not create sufficient nexus to

sustain Connecticut's effort to tax.

I find both Quill and Cally Curtis to be distinguishable from the facts of this case. During

the years in question, Teco owned millions of dollars of equipment which it leased on an ongoing

basis to Chino, generating approximately $ 7 million in lease revenues. 7 This far exceeds the

ownership of a "few floppy discs" (Quill) or the limited number of short term film and video rentals

which occurred in Cally Curtis. In this regard it is noteworthy that the Connecticut Supreme Court

distinguished the facts in Cally Curtis from Union Oil Co. of California v. Board of Equalization, 34

Cal. Rptr. 872 (1963), appeal dismissed, 377 U.S. 404, 84 S.Ct. 1629 (1964), where nexus to tax was

found on the basis of the long term leasing of oil tankers. Teco's case is far closer to Union Oil than

7
Although the exact dollar value of the equipment was not disclosed, the Master Lease Agreement sets a
total acquisition cost for the equipment "not to exceed $ 7,800,000. The Department's audit revealed that Teco
had failed to report $7,438,149.28 in lease revenues from Chino. Exhibit S-1, p. C 6.

• 19 -
  it is to the facts of Cally Curtis. Teco's ownership of the equipment used by Chino and its receipt of

substantial lease receipts over the years involved in this case are sufficient to create "substantial

nexus" to tax in this case.

PENALTY

Teco also argues that it should not be assessed penalty for failure to report and pay gross

receipts taxes on the basis that its understanding with Chino was that Chino would bear the economic

burden of any taxes on the lease of the equipment and that in doing so, Teco exercised ordinary

business care so as not to be subject to penalty.

The imposition of penalty is governed by the provisions of Section 7-1-69(A) NMSA 1978

(1995 Repl. Pamp.), which imposes a penalty of two percent per month, not to exceed ten percent:
[I]n the case of failure, due to negligence or disregard of rules and regulations, but without
intent to defraud, to pay when due any amount of tax required to be paid or to file by the
date required a return regardless of whether any tax is due,....

This statute imposes penalty based upon negligence (as opposed to fraud) for failure to timely pay tax

or for failure to file a return by its due date. Thus, the good faith of the Taxpayer in fairly reporting

its taxes is not at issue. What is at issue is whether a taxpayer was negligent in failing to file a return

or to pay its taxes when they were due. Taxpayer "negligence" for purposes of assessing penalty is

defined in Regulation TA 69:3 as:

1) failure to exercise that degree of ordinary business care and prudence which reasonable

taxpayers would exercise under like circumstances;

2) inaction by taxpayers where action is required;

3) inadvertence, indifference thoughtlessness, carelessness, erroneous belief or inattention.

In this case we have both failure to pay tax when due by Teco as well as a failure to file

timely returns reporting gross receipts tax. While Teco may have relied upon Chino to take care of

any tax consequences resulting from its lease of equipment, I don't find this reliance to be such as to

negate a conclusion that Teco was negligent in failing to report and pay taxes. In the first place, Teco

• 20 -
  failed to follow the terms of the lease itself, which required that it file the gross receipts tax reports,

even though the filing was to be at Chino's expense. Secondly, Teco's reliance on Chino for tax law

compliance does not vitiate against the imposition of penalty under well established New Mexico

authority. It is well settled that every person is charged with the reasonable duty to ascertain the

possible tax consequences of his actions, and the failure to do so has been held to amount to

negligence for purposes of the imposition of penalty pursuant to Section 7-1-69 NMSA 1978.

Tiffany Construction Co. v. Bureau of Revenue, 90 N.M. 16, 558 P.2d 1155 (Ct. App. 1976), cert.

denied, 90 N.M. 255, 561 P.2d 1348 (1977). Teco did nothing itself to determine the tax

consequences of its leasing activities. It neither consulted with the Department or with a professional

tax advisor. Nor was its reliance on Chino a defense to the imposition of penalty. In El Centro Villa

Nursing Center v. Taxation and Revenue Department, 108 N.M. 795, 799, 779 P.2d 982, 986 (Ct.

App. 1989), the court ruled that a taxpayer may not abdicate its responsibility to properly report and

pay taxes in reliance on the taxpayer's accountant.8 If reliance on one's agent, one's accountant, to

properly report and pay taxes is not sufficient to avoid the imposition of penalty for negligence, then

Teco's reliance on an independent third party to properly report and pay taxes would be insufficient to

avoid the conclusion that Teco was negligent in failing to properly report and pay its gross receipts

taxes. Teco was negligent both by failing to determine for itself the tax consequences of its activities

and in failing to determine how its reporting responsibilities for gross receipts taxes were being

fulfilled.

THE STATUTE OF LIMITATIONS ON CHINO'S REFUND CLAIM

The final issue to be determined is whether the Department's denial of a portion of Chino's

refund claim as being beyond the statute of limitations was proper.

The Department denied a portion of Chino's claim for refund based upon NMSA 1978,

8
The case is distinguishable from a case where a taxpayer inquires of a tax professional for advice as to the
taxability of something. The Department's regulation TA 69:3 recognizes this as a basis for abating penalty. In
El Centro Villa, the taxpayer did not seek such advice, but merely relied upon its accountant to handle its tax
reporting in general, properly.

• 21 -
  Section 7-1-26(B)(1)(a), which states:
  (B) ...no credit or refund of any amount may be allowed or made to any person unless as a
  result of a claim made by that person as provided in this section:
  (1) within three years of the end of the calendar year in which:
  (a) the payment was originally due or the overpayment resulted from an assessment by the
  department pursuant to Section 7-1-17 NMSA 1978, whichever is later;

Subsection (B)(1) thus requires that to be timely, a taxpayer must make a claim for refund within

three years of the end of the calendar year when the tax was due, or if the taxpayer paid a tax as a

result of an assessment issued by the Department, the taxpayer has three years from the end of the

calendar year in which the alleged overpayment was made.

Chino contends that its claim for refund is timely under Section 7-1-26 (B)(3) on the basis

that the statute of limitations for Chino's refund was extended by the Department's assessment of gross

receipts against Teco. Subsection (B)(3) provides:
(3) For assessments made on or after July 1, 1993, within one year of the date of an
assessment of tax made under Subsection B, C or D of Section 7-1-18 NMSA 1978 when
the assessment applies to a period extending at least three years prior to the beginning of
the year in which the assessment was made, but the claim for refund shall not be made
with respect to any period not covered by the assessment.

This subsection extends the limitation on refunds and allows a claim to be made within one

year of assessment for assessments made under the extended periods of limitation on assessment of

taxes, such as the seven year limitation period applied to Teco pursuant to Section 7-1-18(C) because

of its failure to file returns reporting gross receipts taxes. Chino argues that Subsection (B)(3) does

not require that the taxpayer making the claim for refund be identical to the taxpayer for which the

assessment is made. This argument disregards the language of Subsection (B) which speaks of

refunds being allowed or made as a result of a claim "made by that person" (emphasis added). In the

context of Subsection (B)(3) "that person" claiming the refund refers to the person who was assessed

a tax under the extended statute of limitations provisions of Section 7-1-18 (B),(C) or (D). In this

case, there has been no assessment of tax against Chino under any subsection of Section 7-1-18 and so

Chino cannot claim to fall under Subsection (B)(3).

• 22 -
  The absurdity of Chino's contention is patent. To construe Subsection (B)(3) otherwise

would completely eviscerate the statute of limitations on tax refunds. If identity of taxpayers is not

required and any taxpayer could claim a refund if any other taxpayer in the universe of taxpayers has

been assessed under the extended periods of Section 7-1-18 (B),(C) or (D), the only relevant statute of

limitations on refund claims would be the longest one, the ten year limitation on assessments in the

case of taxpayer fraud under Section 7-1-18(B). This would render meaningless the other statutory

provisions of Section 7-1-26 (B) (1) or (2). Chino simply does not qualify as a taxpayer who is

entitled to claim a refund under Section 7-1-26(B)(3) because it has not been assessed under the

extended limitation periods of Section 7-1-18.

CONCLUSIONS OF LAW

1. Teco filed a timely, written protest to Assessment No. 1914991 and jurisdiction lies

over the parties and the subject matter of its protest.

2. Chino filed a timely, written protest to the Department's partial denial of its claim for

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

3. Under the facts of this case, Teco may not equitably recoup the compensating taxes

paid by Chino with respect to the lease of equipment from Teco against Teco's liability for gross

receipts taxes upon the lease payments it received from Chino.

4. Teco was negligent in failing to properly report and pay gross receipts taxes on its

lease receipts from Chino and penalty was properly imposed.

5. Chino's claim for refund of compensating taxes paid for tax periods occurring in 1988,

1989, 1990 and 1991 were properly denied by the Department as barred by the provisions of Section

7-1-26 NMSA 1978.

For the foregoing reasons, the protests of Teco and Chino ARE HEREBY DENIED.

DONE, this 16th day of December, 1996.

• 23 -