Can New Mexico hold a corporation's officers and directors personally liable for withholding taxes the company deducted from employee paychecks but never paid over, even if a dishonest bookkeeper was actually responsible?
Apply this to your situation
This page answers the general question as of 1997. Ezel answers yours, under current New Mexico tax law, with citations.
Plain-English summary
Associated Court Reporters, Inc. (ACR) was once the largest court-reporting firm in Albuquerque. Two of its owner-officers, Jerry Potts and John De La Rosa, were held personally liable for state withholding taxes ACR deducted from its employees' paychecks but never paid over to the Taxation and Revenue Department.
ACR's day-to-day finances were run by office managers. The first, Celina Salazar, quietly stopped paying payroll taxes; when the officers found out in 1990–91, their CPA warned them they were personally exposed, yet those known-unpaid taxes were never paid even as the company operated for four more years. The second office manager, Teresa Langwell, lied about paying the taxes for three years, embezzled nearly $10,000, and destroyed the company's records when she quit. The officers argued they couldn't be liable because they trusted their bookkeepers and their accountant and had no idea the taxes weren't being paid.
The Hearing Officer held both officers liable anyway. Under the Withholding Tax Act (§ 7-3-5), "every withholder" is liable, and a "withholder" includes any "employer" — a person with control of the payment of wages (§ 7-3-2(C)). The officers were directors and served as president during the unpaid periods; the corporate bylaws gave the board and president control over the company's affairs, so they had the power to control wage payments. Delegating that responsibility to a bookkeeper does not remove the liability. New Mexico's standard is deliberately lower than the federal one: unlike the federal 100% "trust fund" penalty under 26 U.S.C. § 6672, New Mexico requires no willfulness — just control.
The officers also invoked § 7-3-5(B)'s "reasonable cause" exception, but the Hearing Officer held it does not apply here because it only excuses a failure to deduct and withhold the tax in the first place — and ACR had in fact withheld the tax from paychecks; it simply kept the money. The Hearing Officer was pointed about the officers' inattention: they never looked at the books, bank statements, or checkbook, never asked why no tax checks over the bookkeeper's $500 limit were being written, and never noticed their accountant had stopped preparing corporate returns after 1991. Result: De La Rosa's protest was denied in full; Potts's protest was granted only for the periods on or after October 8, 1993 (when he resigned, as the Department had stipulated) and otherwise denied.
What this means for you
Owners, officers, and directors of any business with employees
Withheld payroll tax is money that belongs to the state, not the business. In New Mexico, if you have the power to control how wages (and the associated taxes) are paid, you can be held personally liable when withheld taxes aren't remitted — even if you never touched the checkbook and even if a trusted employee hid the problem or stole the money. You cannot delegate that liability away. If you're an officer or director, confirm directly that payroll taxes are actually being paid; don't just assume.
Business owners who rely on a bookkeeper or office manager
This case is a cautionary tale about handing the entire financial function to one person without oversight. The bookkeeper's dishonesty and embezzlement drew sympathy from the Hearing Officer but did not excuse the officers, in part because they had actual knowledge of an earlier round of unpaid taxes and still did nothing for years. Periodically review bank statements, tax filings, and returns yourself, and watch for red flags like your own paychecks being delayed.
Accountants and tax professionals
New Mexico's responsible-person standard under § 7-3-5 / § 7-3-2(C) turns on control of the payment of wages, not willfulness — a materially lower bar than the federal § 6672 trust-fund-recovery penalty, and federal case law construing § 6672 is not controlling. Note also the narrow reading of the § 7-3-5(B) reasonable-cause exception: it applies only to a failure to deduct and withhold, so it offers no defense once the tax has actually been withheld from paychecks but not remitted.
Common questions
Q: The bookkeeper lied and embezzled — why are the officers still liable?
A: Because New Mexico's Withholding Tax Act imposes liability on anyone with control over the payment of wages, regardless of willfulness or fault. Delegating the task to a bookkeeper — even a dishonest one — does not remove the officers' underlying power and responsibility, so it does not remove their liability.
Q: How is this different from the federal rule?
A: The federal trust-fund penalty under 26 U.S.C. § 6672 requires a willful failure to pay over the tax. New Mexico's § 7-3-5 has no willfulness requirement; it imposes liability on any "employer" who has control of the payment of wages. The Hearing Officer expressly found the federal standard and its cases inapplicable.
Q: Didn't the "reasonable cause" exception protect them?
A: No. Section 7-3-5(B) excuses only a failure to deduct and withhold the tax — for example, where an employer reasonably believed no withholding was required. ACR did withhold the tax from employees' paychecks; it just failed to pay it to the state, so the exception did not apply.
Q: Why did Mr. Potts partly win?
A: The Department stipulated that Mr. Potts should not be responsible for taxes that went unpaid after he resigned as a director and officer on October 8, 1993. So his protest was granted for periods on or after that date and denied for the earlier periods when he still had control.
Q: Does this decision apply to my situation?
A: Not directly. A Decision and Order resolves one taxpayer's protest on its specific facts and the law in effect at the time. It illustrates how New Mexico applies personal liability for unpaid withholding tax, but your facts may lead to a different result.
Citations and references
Statutes:
- §§ 7-3-1 through 7-3-11 NMSA 1978 — the Withholding Tax Act
- § 7-3-5 NMSA 1978 — every withholder is liable for amounts required to be deducted and withheld, with a limited reasonable-cause exception in subsection (B) for a failure to deduct and withhold
- § 7-3-2(C) NMSA 1978 — "employer" means a person, or an officer/agent/employee of that person, having control of the payment of wages
- § 7-3-2(J) NMSA 1978 — "withholder" means a payor or an employer
- § 7-3-2(A) NMSA 1978 — "person" includes individuals and corporations
- 26 U.S.C. § 6672 — the federal 100% trust-fund penalty, which requires willfulness and which the Hearing Officer held does not govern New Mexico's lower "control" standard
Source
- Listing: New Mexico Decisions & Orders
- Decision post: Associated Court Reporters, Inc.
- Decision PDF: D&O 97-45
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 JERRY M. POTTS
AND JOHN DE LA ROSA, AS CORPORATE NO. 97-45
OFFICERS OF ASSOCIATED COURT REPORTERS, INC.
ID. NO. 01-898678-00 1, PROTEST TO DEMAND
FOR PAYMENT OF UNPAID WITHHOLDING TAX
DECISION AND ORDER
This matter came on for hearing on September 11, 1997, before Gerald B.
Richardson, Hearing Officer. Mr. John De La Rosa was represented by Anthony B.
Jeffries, Esq. Mr. Jerry M. Potts was represented by Karen J. Meyers, Esq. The Taxation
and Revenue Department, hereinafter, “Department”, was represented by Gail
MacQuesten, Special Assistant Attorney General. At the close of the hearing a briefing
schedule was established. The final brief was received on November 5, 1997, and the
matter was considered submitted for determination at that time. The parties granted the
Hearing Officer additional time, until December 12, 1997, to render his decision.
Based upon the evidence and the arguments presented, IT IS DECIDED AND
ORDERED AS FOLLOWS:
1
FINDINGS OF FACT
- Associated Court Reporters, Inc., hereinafter, “ACR” is a New Mexico
corporation which was formed in 1980. The three original directors of the corporation
were Michael Mahan, John De La Rosa and Jerry Potts. All three directors are certified
court reporters.
- Originally, Michael Mahan held the office of Secretary-Treasurer of ACR. In
that capacity he took care of day to day bookkeeping matters and oversaw an assistant
bookkeeper. He also made decisions as to which bills and creditors were paid and when
those payments were made. Eventually, an office manager was hired who took over those
functions but Mr. Mahan retained oversight over the financial affairs of ACR until he left
the corporation. Mr. Mahan withdrew as a director and shareholder of ACR in 1990.
-
Jerry Potts served as President of ACR from its formation until April of
-
Thereafter he served as Treasurer until he left the corporation. In addition to
performing court reporting services he oversaw the staff doing production work on
ACR’s court reporting jobs to ensure that the jobs were performed in a timely manner.
Mr. Potts resigned as a director and officer of ACR effective October 8, 1993 and
surrendered his stock to the corporation at that time.
- John De La Rosa was originally vice-president of ACR and took over the
duties of President from Mr. Potts in 1991. In addition to performing court reporting
services himself, Mr. De La Rosa oversaw the assignment of court reporting jobs among
the staff of court reporters.
2
- Meyners + Company, Certified Public Accountants provided certain
accounting services to ACR until 1995, such as occasional preparation of state and
federal corporate income tax returns. Bruce Malott, Senior Partner of Meyners +
Company recommended to ACR that it hire an office manager to run all aspects of the
day to day non-court reporting aspects of its business based upon his opinion that the
directors of ACR had limited business financial acumen and needed a great deal of
assistance with such day to day aspects of running a business as contacts with creditors,
paying creditors, paying and reporting taxes, making out payroll, etc.
- As a result of the recommendation to hire an office manager, in 1988,
ACR hired Celina Salazar as office manager. In June, 1989, Ms. Salazar hired Teresa
Langwell to work as a bookkeeper under Ms. Salazar’s supervision.
- The office manager was responsible for keeping the financial and business
records of ACR, the preparation and maintenance of tax return information and tax
returns, except for corporation income tax returns, preparation of payroll, payment of
taxes and payment of creditors. The office manager was given signature authority upon
checks drawn upon ACR’s account in amounts up to $500. Checks over that amount
required the signature of a corporate officer as well.
- During the late 1980s ACR went through a period of rapid growth and
expansion. At that time it was the largest court reporting firm in Albuquerque, employing
approximately fifteen court reporters.
- In May of 1990, ACR took on a large bank loan to purchase computer
equipment to support its growing business.
3
- By the Fall of 1990 ACR began experiencing financial problems, in part due
to the large indebtedness it was carrying and also because revenues were declining.
Michael Mahan was asked to leave the company in September of 1990.
- For the 1990 tax year ACR reported to the Internal Revenue Service gross
income in excess of $ 1 million.
- In October of 1990 ACR was contemplating filing bankruptcy. Mr. Potts, Mr.
De La Rosa and Ms. Salazar met with an attorney to discuss the situation ACR was in.
During that meeting Ms. Salazar revealed that she had not been making payments of
withholding or payroll tax to the taxing authorities.
- In either late 1990 or early 1991 Mr. Potts, Mr. De La Rosa and Ms. Salazar
met with Mr. Malott, ACR’s CPA to discuss the financial condition of ACR. The fact
that Ms. Salazar had not been making payroll tax payments to the tax authorities was
discussed. Ms. Salazar explained her actions by saying that she thought that she had the
authority to determine which creditors to pay and she thought she was helping the
business by paying the business creditors first. Ms. Salazar had not informed Mr. Potts or
Mr. De La Rosa that she was not making payroll tax payments, nor had she been
instructed to pay other creditors first. Mr. Malott informed Ms. Salazar that this was not
an appropriate practice and that it left Mr. Potts, Mr. De La Rosa and herself exposed to
personal liability for those taxes. Ms. Salazar was instructed to pay payroll taxes on a
timely basis before other creditors were paid and that she was not to pay payroll unless
there were sufficient funds to pay the payroll taxes as well.
- As part of a management plan presented to and approved by Mr. Potts and
Mr. De La Rosa for ACR for the period of January through June, 1991, they approved a
4
provision stating that, “[A]ll expenses will be held to a minimum in order to show a
profit, and efforts will be made to catch up all payables as soon as possible, including the
IRS and New Mexico Tax & Revenue Dept.” Although Mr. Potts and Mr. De La Rosa
approved this plan, they did not review the company records to examine expenses which
could be cut, nor did they cut their own salaries or car allowances. Instead, they left it to
the discretion of the office manager to find ways to cut expenses.
- Withholding taxes are reported and paid along with gross receipts and
compensating taxes under New Mexico’s Combined Reporting System (“CRS system”).
Taxes reported under the CRS system are due on the twenty-fifth day of the month
following the month in which the taxable event occurs. Because ACR was a monthly
filer under the CRS system, withholding taxes would be due and owing on the twenty-
fifth day of the month following the month in which payroll was paid.
- At the approximate time of the meeting with Mr. Malott concerning payroll
taxes, ACR had not reported or paid withholding taxes for the months of July, August,
September, October, November or December of 1990. According to the returns later
filed by ACR, the amounts of withholding tax reported to be due for these months
amounted to $7,822.47. Although Mr. De La Rosa and Mr. Potts were aware that ACR
had not made payment of withholding taxes during this period of time, these amounts
have never been paid by ACR.
- Apparently, as a result of the discussions involving Mr. Malott, Mr. Potts and
Mr. De La Rosa, Celina Salazar, on behalf of ACR, reported and paid New Mexico
withholding taxes on a timely basis for the months of January, February and March of
1991.
5
- In May of 1991, Ms. Salazar left ACR to start her own court reporting
business.
- When Ms. Salazar resigned as officer manager, her former assistant, Teresa
Langwell was promoted to the office manager position. Ms. Langwell also had signature
authority on checks up to $500, with larger checks requiring an additional signature of a
corporate officer.
- Ms. Langwell was also instructed that payroll should not be paid unless
payroll taxes could be paid. When payroll checks were presented to Mr. De La Rosa for
signature, he questioned Ms. Langwell before payroll was paid if there was enough
money to cover the payment of taxes. If there was not enough to cover payroll for all
employees, Mr. De La Rosa would instruct who should be paid. Those with the smallest
salaries were paid first and Mr. Potts and Mr. De La Rosa were the last to be paid. This
often resulted in late paychecks for Mr. De La Rosa and Mr. Potts.
- Except for those times when Mr. De La Rosa’s and Mr. Pott’s paychecks
were held, Ms. Langwell represented to Mr. De La Rosa that there were sufficient funds
for payroll taxes and that she would report and pay the taxes in a timely manner.
- Ms. Langwell resigned on May 31, 1994. She left a resignation note to that
effect and simply failed to show up for work on June 1st. The officers of ACR then
learned that Ms. Langwell had destroyed or stolen many of the business records of ACR.
She took the canceled checks for several years and deleted all financial information from
the company’s computers.
- Meyners + Company was brought in to reconstruct the business records of
ACR. The check book ledger revealed many questionable checks under the $500
6
signature authority held by Ms. Langwell. It was discovered that she had embezzled
nearly $10,000 between January and the end of May, 1994. ACR did not attempt to
determine the full extent of Ms. Langwell’s embezzlement because of the cost of
reconstructing its records for prior years.
- With the exception of the month of August, 1991, New Mexico withholding
taxes were neither reported or paid by ACR for the reporting periods of April, 1991
through May of 1994, during Ms. Langwell’s tenure as office manager.
- After Ms. Langwell’s departure, Mr. De La Rosa’s wife assumed the duties of
office manager. She reported and paid New Mexico withholding taxes for the months of
June, July, August, and December 1994 and January, February, March and April, 1995,
although some months were reported and paid late. Payroll taxes for the months of
September, October and November of 1994 and the month of May of 1995 were reported
late and remain unpaid.
- Mr. De La Rosa never checked with his wife to see if New Mexico payroll
taxes were being paid.
-
ACR went out of business on May 24, 1995.
-
During the time that ACR was experiencing financial difficulties, Mr. De La
Rosa’s approach to ACR’s financial difficulties was to try to produce more work and
more revenue. Mr. De La Rosa never looked at the books of the company, never looked
at bank statements, the check book or check book ledger, never asked to look at the tax
returns which were supposed to be filed with the Department on a monthly basis and
never questioned why there were no checks to the Department over $500 for the payment
of monthly taxes. Instead, these matters were entrusted to ACR’s office manager.
7
- During the time that ACR was experiencing financial difficulties and payroll
taxes were not being reported or paid to the Department, ACR was making payments to
other creditors, such as the bank which held the loan for the computer equipment.
- During the time that ACR was experiencing financial difficulties, no audit
was conducted of ACR.
- As officers of ACR, both Mr. De La Rosa and Mr. Potts had the authority to
direct the activities of the office manager.
- After the time that Mr. De La Rosa became President of ACR and while
Teresa Langwell was office manager, Mr. Potts never oversaw the activities of the office
manager and never reviewed the financial books, bank statements or check ledger of
ACR. He assumed that payroll taxes were being paid and that Mr. De La Rosa and Ms.
Langwell were tending to the financial affairs of ACR.
- As directors and corporate officers of ACR, both Mr. De La Rosa and Mr.
Potts were periodically provided with financial reports on ACR which were prepared by
the office manager.
- Mr. Potts and Mr. De La Rosa assumed that the financial reports and other
financial information about ACR were being provided to Meyners + Company.
- In addition to failing to timely report and pay withholding taxes for most
periods from mid-1990 forward, ACR also failed to timely report and pay gross receipts
taxes on its receipts from performing court reporting services. For instance, for 1993, no
gross receipts were reported. For 1994, although gross receipts were reported, no gross
receipts tax was paid on those receipts.
8
- ACR filed New Mexico corporate income tax returns for years 1989, 1990,
and 1991. The return for 1991 was prepared by Meyners + Company. No corporate
income tax returns were filed for tax years 1992 and 1993. For tax years 1994, 1995 and
1996, corporate income tax returns were filed. Those returns were prepared by Empire
Accounting Service.
- ACR did deduct and withhold New Mexico withholding taxes from its
employees’ paychecks, even though those taxes were not paid over to the Department.
DISCUSSION
The issue to be determined herein is whether Mr. De La Rosa and Mr. Potts, as
corporate officers and directors of ACR may be held personally liable for the unpaid
income withholding taxes which the corporation failed to pay.
The law which governs this determination is the Withholding Tax Act, §§ 7-3-1
through 7-3-11 NMSA 1978.1 Section 7-3-5 is the provision relied upon by the Department
to impose the liability at issue herein upon the corporate officers and directors who are
parties to this proceeding. It provides as follows:
Every withholder shall be liable for amounts required to be
deducted and withheld by the Withholding Tax Act
regardless of whether or not the amounts were in fact
deducted and withheld, except that:
A. if the withholder fails to deduct and withhold the
required amounts and if the tax against which the required
1
All citations to the Withholding Tax Act are to the version which appears in the 1995 Replacement
Pamphlet for ease of reference. This is because the pertinent statutory provisions in the 1995 Replacement
Provisions are unchanged from those in effect during the periods relevant to the liabilities at issue herein.
9
amounts would have been credited is paid, the withholder
shall not be liable for those amounts not deducted and
withheld; or
B. if the withholder’s failure to deduct and withhold
the required amounts was due to reasonable cause, the
withholder shall not be liable for amounts not deducted and
withheld. (emphasis added).
The statute imposes liability upon “every withholder”. “Withholder” is defined at § 7-3-
2(J) , which provides that “withholder” means a payor or an employer”2
"Employer" is defined at § 7-3-2(C) as follows:
"employer" means a person, or an officer, agent or employee of that person
having control of the payment of wages, doing business in or deriving
income from sources within the state for whom an individual performs or
performed any services as the employee of that person except that if the
person for whom the individual performs or performed the services does not
have control of the payment of the wages for such services, “employer”
means the person having control of the payment of wages. (emphasis
added).
The Withholding Tax Act defines a "person" as follows:
"person" includes individuals, corporations, partnerships, associations, the
state and its political subdivisions and the federal government, its agencies
and instrumentalities.
Section 7-3-2(A). In this case, ACR. is the person who did business in the state, and was
clearly an employer. Both Mr. De La Rosa and Mr. Potts were officers and employees of
ACR, and also meet the definition of an employer who can be held liable, pursuant to
Section 7-3-5 for ACR’s unpaid withholding tax liability provided that they also meet the
2
Mr. De La Rosa’s counsel argued that his client was not a “withholder” because of an alleged
ambiguity in the definition of withholder due to the definition including “any person required to deduct and
withhold from winnings that are subject to withholding”. This language, however, was added to the
definition by Laws 1996, ch. 16, § 1, which was not effective during any of the periods at issue herein, nor
does this decision maker consider it to have made the definition ambiguous. It merely added a new
category of persons considered to be withholders.
10
condition that they have “control of the payment of wages.” It is upon this inquiry that the
determination of liability for the parties to this dispute turns.
In this regard, all of the parties have argued that even if this condition is met, that
Subsection B of § 7-3-5 provides a second hurdle to imposing liability upon these corporate
officers. Specifically, they argue that Subsection B provides an exception to liability if the
non-payment of taxes was due to “reasonable cause.” The parties have misread Subsection
B, however. While it does provide a reasonable cause exception, that exception does not
apply under the facts of this case. This is because by its very wording, the exception applies
only “if the withholder’s failure to deduct and withhold the required amounts was due to
reasonable cause”. In this case, there was no failure to deduct and withhold the withholding
tax from employees paychecks.3 Thus, this exception does not apply. Presumably, it was
intended to provide an exception to liability in such instances where an employer didn’t
withhold and deduct because it had reasonable cause to believe that no withholding was
required, such as where it had reasonable cause to believe that the person was not an
employee, or that the employee was a native american whose income would be exempt
from state income taxation.
Both Mr. De La Rosa and Mr. Potts dispute that they were employers who had
"control of the payment of wages" under the facts of this case. Because the facts upon
which they each rely in support of their position are somewhat different, they will be
discussed separately.
3
While there was no specific testimony given as to whether the withholding tax was actually
deducted and withheld from employee paychecks, since the arguments of Mr. De La Rosa and Mr. Potts are
premised upon the fact that they had no personal knowledge that withholding taxes were not being paid, and
since they were employees of ACR receiving the payment of wages, themselves, it can fairly be inferred that
taxes were being deducted and withheld from their paychecks.
11
Mr. Potts was a director and shareholder of ACR during all relevant periods until he
resigned and turned over his shares of the corporation in October of 1993. He held the
position of President until April, 1991 and thereafter, until his resignation, held the office
of Treasurer. The Department has stipulated that Mr. Potts should not be held responsible
for ACR’s failure to pay withholding taxes after the date of his resignation.
Mr. De La Rosa was a director and shareholder of ACR during all periods for which
tax liability is asserted. He held the position of Vice-President until April, 1991 and
thereafter held the office of President until the corporation ceased to do business.
Whether couched as a lack of “control in fact”, or as reasonable cause for failure to
withhold, both Mr. Potts and Mr. De La Rosa argue that they should not be held liable for
unpaid withholding taxes. With respect to the unpaid taxes which occurred during Celina
Salazar’s tenure as office manager, they argue that they were unaware that she was not
paying the taxes at first, that when they did become aware of the problem, that they directed
her to always pay payroll taxes in the future, and Mr. Potts testified that he thought that
arrangements to pay the unpaid taxes had been made. Mr. De La Rosa offered no testimony
to explain why the taxes which Ms. Salazar failed to pay were never paid after the problem
was revealed.
With respect to the unpaid taxes which were not paid during Theresa Langwell’s
tenure as office manager, Mr. De La Rosa argues that he should not be held liable because
he was relying upon Ms. Langwell to pay the taxes, she was instructed not to pay payroll to
employees if there wasn’t enough money to pay both the payroll and the taxes, that the
litany of inquiry as to whether sufficient funds existed to pay the taxes was made with
respect to each payroll, that Mr. De La Rosa was lied to and deceived by Ms. Langwell
12
during the three years that she was the office manager concerning the payment of payroll
taxes and that Ms. Langwell apparently embezzled the tax moneys.
Mr. Potts argues with respect to the portion of his tenure as a director and officer
during Ms. Langwell’s tenure as office manager that he relied upon Mr. De La Rosa to be
handling the oversight of the business affairs of ACR when Mr. Potts assumed the duties of
treasurer and Mr. De La Rosa took over as corporate president. Additionally, although he
was not involved in the oversight of Ms. Langwell’s activities, he assumed that she was
handling the payment of payroll taxes.
Both Mr. Potts and Mr. De La Rosa also argue that they believed that their
accountant was reviewing periodic financial statements prepared by Ms. Langwell, and
since their accountant did not raise any concerns, that they had no way of knowing that the
taxes were not being paid.
In response to these arguments, the Department has argued that both Mr. De La
Rosa and Mr. Potts had control over the payment of wages for purposes of imposing
liability because they had the actual power to control the payment of wages, and whether
they chose to actually exercise that power themselves or to delegate the power to another,
such as the office manager, is irrelevant to the determination of liability.
Control is not defined in § 7-3-2(C), the Department has promulgated no regulations
which provide any guidance on this issue and there are no cases in New Mexico interpreting
"control of the payment of wages” for purposes of the Withholding Tax Act. While the
Internal Revenue Code also imposes liability on persons who fail to pay over withheld
income tax, it does so by a different mechanism, the imposition of a penalty. Under §6672
of the Code, a 100% of tax penalty is imposed when withholding taxes are not paid for
13
willful failure to collect, account for and pay over tax or willful attempts to evade or defeat
tax or its payment. New Mexico’s statute makes no such reference to willfulness. It
imposes liability on any person with control over the payment of wages. Thus, it appears
that New Mexico's standard for imposing liability for failure to pay withholding taxes is a
far lower than the standard under the Internal Revenue Code. Additionally, there are a
number of instances in New Mexico’s tax statutes where provisions of the Internal Revenue
Code are referenced and incorporated into the law. For instance, both the Income Tax Act
and the Corporate Income and Franchise Tax Act adopt and incorporate definitions from the
Internal Revenue Code with respect to taxable income, net operating losses, etc. Thus, the
legislature is familiar with adopting or referencing federal tax law, yet it chose not to do so
with respect to the failure to pay withholding taxes. For these reasons, I find that the
Internal Revenue Code and the cases decided under the code are not applicable to the
determination of the issue in this case.
In the absence of a statutory or regulatory definition of control, the term will be
given its plain and ordinary meaning. Control is defined in Webster's Third New
International Dictionary as "the act or fact of controlling: power or authority to guide or
manage: directing or restraining domination". Thus, the power to control is the power or
authority to guide, manage or direct an activity.
Using this definition of control, both Mr. De La Rosa and Mr. Potts had control
over the payment of wages. Both were directors of the corporation at all relevant times
with respect to the liability at issue.4 The corporate bylaws provide that the Board of
Directors have “control and management of the affairs and business of the Corporation.”
14
They were also officers. Both held the office of President during portions of the time that
taxes were unpaid. The bylaws vest the president with the “general and active
management and control of the business and affairs of the Corporation, subject to the
control of the Board of Directors.” Even during the times that each held a different
office, they still had the power to oversee the activities of the officer manager. When Mr.
Mahan held the office of Treasurer, an office later held by Mr. Potts, he directed the
office manager with respect to the financial affairs of the corporation, including which
creditors to pay. Mr. Potts acknowledged in his testimony that all three directors had the
power to supervise the office manager. This testimony was not rebutted by Mr. De La
Rosa. It was apparent from the testimony, that ACR’s office was primarily managed by
the office manager, but that any director and officer could give directions to the office
manager, whoever she was. After all, these were the individuals who owned and directed
the corporation.
Admittedly, imposing liability for unpaid withholding taxes based upon authority
to control or technical control under circumstances such as this case where the person to
whom the responsibility for paying withholding taxes was delegated was dishonest in
both her words and actions makes for a difficult case in which to impose liability. While
I have no doubt as to the dishonest and deceitful behavior of Ms. Langwell, however, a
number of other factors make me question whether the parties should have known more
or done more than they claim should be expected with respect to the payment of these
taxes.
4
As noted earlier, the Department has stipulated that Mr. Potts should not be held responsible for
withholding taxes which were unpaid after he resigned as a director and officer of the corporation and
15
Foremost is the fact that even with respect to the unpaid withholding taxes which
the parties had actual knowledge of, those which Celina Salazar revealed had not been
paid, the corporation continued to exist, do business, pay other creditors, etc. for over four
more years without ever paying those taxes. This occurred even after their CPA told the
officers that they were personally liable for those taxes. Mr. De La Rosa offered no
testimony as to why that liability was never paid. Mr. Potts acknowledged that he knew
there was a problem with unpaid withholding taxes, but could only say that he thought it
was being taken care of. Neither offered any testimony as to what actions they took with
regard to the taxes which Celina Salazar failed to pay to assure that they were paid.
Even with regard to the unpaid taxes which Theresa Langwell lied to Mr. De La
Rosa about, a number of things remain unexplained or unexplainable by any other
explanation other than gross mismanagement, even given the limited business
sophistication of the parties. It remains difficult to understand how Ms. Langwell’s
failure to pay not only withholding taxes, but also far more significant amounts of gross
receipts taxes could have gone undetected for so many years. This was a business which
at least in the early years for which liability is asserted grossed over $1 million a year and
Ms. Langwell’s check signing authority did not exceed $500. While Mr. De La Rosa
explained that he thought that withholding taxes were reported and paid separately for
each employee, and thus the $500 limit would not have been exceeded, this explanation
does not jibe with Mr. De La Rosa’s claim of virtual ignorance of all matters relating to
corporate finance and taxes, including his claim that he was so unaware of how gross
receipts taxes were calculated that he never questioned why no checks over $500 were
needed to pay those taxes. It is also difficult to square the parties claim of reliance upon
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Meyners + Company to alert them to any problems with the factual record which
indicates that Meyners + Company was not really overseeing the corporate accounts and
taxes during Ms. Langwell’s tenure. Mr. De La Rosa and Mr. Potts claimed that that they
assumed that Meyners + Company was regularly receiving and reviewing the financial
reports of the company. Yet, the factual record indicates that the last year for which
Meyners + Company prepared a corporation income tax return was 1991. Mr. De La
Rosa testified that he was aware that corporate income tax returns were filed after the end
of the year. Mr. Potts testified that as President, he signed the corporate income tax
returns. If their accountant was not preparing corporate income tax returns as they had
always done previously, shouldn’t at least the President have noticed that those returns
were not being prepared and doesn’t it throw into question whether Meyners + Company
was receiving financial information from which to prepare such returns? This
discrepancy remains unexplained.
I also find it difficult to conceive that the corporate officers of a company which
was in difficult financial condition for years, apparently, and whose own paychecks were
delayed for extended periods of time would never ask to look at the corporate books,
bank statements or the company checkbook. These same directors adopted a plan of
action which included cutting corporate expenses, but they never examined the expenses
to prioritize, reduce or eliminate them, leaving it solely to the discretion of the office
manager to make those decisions. In essence, the record indicates that the corporate
directors and officers delegated their entire corporate responsibility to manage the affairs
of the corporation to a bookkeeper. Section 7-3-5 does not prohibit such a delegation of
corporate duties. Because the corporate directors and officers had the power to control
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the payment of wages and to otherwise direct the affairs of the corporation, however, it
continues to hold liable those whose oversight of corporate activities fails to assure that
payroll taxes which were withheld and deducted from employee paychecks and held by
the corporation are not remitted to the taxing authority. For these reasons, the protests of
Mr. Potts and Mr. De La Rosa are denied, except with respect to Mr. Potts for periods
after he was no longer a corporate director or officer.
CONCLUSIONS OF LAW
- Both Mr. Potts and Mr. De La Rosa filed timely, written protests to the
Department’s letters notifying them that they were being held responsible, as employers
pursuant to § 7-3-2(C) NMSA 1978, for unpaid withholding taxes of Associated Court
Reporters, Inc.,(“ACR”), and jurisdiction lies over both the parties and the subject matter
of this protest.
- During all relevant times, Mr. John De La Rosa, as a corporate officer and
director of ACR, had control over the payment of wages of the employees of ACR. He
thus meets the definition of “employer” pursuant to § 7-3-2(C) NMSA 1978.
- During all relevant times except for periods on or after October 8, 1993, Mr.
Jerry Potts, as a corporate officer and director of ACR, had control over the payment of
wages of the employees of ACR. He thus meets the definition of “employer” pursuant to
§ 7-3-2(C) NMSA 1978.
- As “employers” under § 7-3-2(C) NMSA 1978, Mr. Potts and Mr. De La Rosa
were also “withholders” pursuant to § 7-3-2(J) NMSA 1978.
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- As withholders under § 7-3-5 NMSA 1978, Mr. Potts and Mr. De La Rosa are
liable for amounts deducted and withheld by ACR, but which amounts were not paid to
the Department.
- Because ACR deducted and withheld withholding taxes from the paychecks of
its employees, the reasonable cause exception to liability pursuant to § 7-3-5(B) NMSA
1978 does not apply herein.
For the foregoing reasons, the protest of Mr. De La Rosa is denied. The protest of
Mr. Potts is granted with respect to periods on or after October 8, 1993, and is otherwise
denied.
Done, this 10th of December, 1997.
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