Was Comfort Air's president personally liable for employee withholding tax the company collected but its bookkeeper failed to send to New Mexico?

Subject

Pete Sisneros as corporate officer of Comfort Air Systems, Inc. (D&O 98-25)

Plain-English summary

Pete Sisneros was president of Comfort Air Systems, Inc. and controlled the company's wage payments. Its office manager prepared the monthly CRS returns and checks, but Sisneros had to sign the checks. From July 1987 through July 1990, the manager filed returns reporting gross receipts and withholding tax but, for unknown reasons, did not send payment.

Comfort Air was solvent and had enough money to pay. It had withheld New Mexico tax from employee paychecks, yet the money was never remitted. The Department issued 37 assessments between 1988 and 1991, but Sisneros never saw them and remained unaware of the problem through the company's bankruptcy and liquidation. In 1995 the Department demanded $18,603.04 from him personally.

Hearing Officer Margaret B. Alcock held that Sisneros was an "employer" under Section 7-3-2(B) because, as president, he controlled wage payment. Section 7-3-5 made every employer liable for required withholding. The reasonable-cause exception did not apply: it addressed an employer's failure to deduct and withhold, while Comfort Air had actually taken the tax from employees and merely failed to pay it over.

That distinction protected the revenue already credited to employees. Once tax was withheld, employees received credit against their own state tax and the Department could not collect it from them again. Excusing the responsible employer would therefore prevent the state from collecting money legitimately due.

Sisneros also could not challenge the 37 underlying assessments. Comfort Air had not protested them within the statutory period, so the hearing's jurisdiction was limited to his responsible-officer liability. His belief that Arizona payroll may have inflated some returns was also unsupported by records. Finally, the 1995 demand came within the ten-year collection period. The protest was DENIED.

What this means for you

• A corporate officer controlling payroll can be personally treated as the employer. The company's separate legal existence did not shield Sisneros from this withholding liability.
• Reasonable cause for nonwithholding is not the same as reasonable cause for nonremittance. The statutory exception did not reach tax already deducted from employee checks.
• Withheld tax is treated as collected tax. Employees receive credit for it even when the employer fails to send it to the state.
• Reviewing accounts payable was not enough oversight. Sisneros signed large batches of checks but did not review the checkbook or bank statements and did not notice the missing tax payments.
• Underlying assessments must be protested on time. A later officer-liability protest did not reopen the corporation's old assessment amounts.

Key questions answered

Why was Sisneros personally an employer?
The statutory definition included a corporate officer who controlled payment of wages, which the decision found Sisneros did as president.

Why didn't reasonable cause excuse him?
Section 7-3-5(B) referred to failure to deduct and withhold. Comfort Air had deducted the tax; its failure was not paying the collected amounts to the Department.

Could Sisneros dispute whether the assessments included Arizona wages?
No. Comfort Air missed the protest deadlines, and the hearing lacked jurisdiction over the assessment calculations. He also had no payroll documents proving the alleged overstatement.

Was the Department too late to collect from him?
No. The demand came seven years after the first assessment and four years after the last, within the ten-year statutory collection period.

Verbatim citations

The responsible-officer definition:

"employer" means a person doing business in or deriving income from sources within the state who has control of the payment of wages to an individual for services performed for him by that individual or a person who is the officer, agent or employee of the person having control of the payment of wages.

Why the reasonable-cause exception did not apply:

Because there was no failure to deduct and withhold, but simply a failure to pay the withheld taxes to the Department, the exception in Section 7-3-5(B) does not apply.

The collection period:

No action or proceeding shall be brought to collect taxes administered under the provisions of the Tax Administration Act and due under an assessment or notice of the assessment of taxes after ten years from the date of such assessment or notice.

The holding:

As an employer, Mr. Sisneros is liable for Comfort Air’s unpaid withholding taxes for the period July 1987 through July 1990.

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Pete Sisneros as corporate officer of Comfort Air Systems, Inc.
• Decision PDF: D&O 98-25

Original ruling text

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

IN THE MATTER OF THE PROTEST OF
PETE SISNEROS, as Corporate Officer of
COMFORT AIR SYSTEMS, INC. 98-25
ID. NO. 01-828841-00 3
PROTEST TO DEMAND FOR PAYMENT
OF UNPAID WITHHOLDING TAXES

DECISION AND ORDER

This matter came on for formal hearing on April 16, 1998, before Margaret B. Alcock,

Hearing Officer. Pete Sisneros was represented by John Williams, his attorney. The Taxation and

Revenue Department ("Department") was represented by Bridget A. Jacober, Special Assistant

Attorney General. Based on the evidence in the record and the arguments presented, IT IS

DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. Pete Sisneros was the president of Comfort Air Systems, Inc. (“Comfort Air”), a

company that manufactured sheet metal products which it sold throughout the Southwest. Until

1988, the company also acted as a subcontractor on certain construction projects.

2. Mr. Sisneros worked out of an office in Albuquerque, New Mexico. The only other

person working in the office was an office manager/bookkeeper.

3. Prior to June 1987, Mr. Sisneros’ daughter acted as the office manager and handled

Comfort Air’s bookkeeping and tax reporting.

4. In June 1987, Terry Solano was hired as the new office manager/bookkeeper. Ms.

Solano received 4 to 5 weeks of training from Mr. Sisneros’ daughter.

5. Under the procedures established by Mr. Sisneros’ daughter, the person acting as

office manager/bookkeeper would prepare, sign and file the monthly CRS-1 returns used to report

Comfort Air’s gross receipts, compensating and withholding taxes.

6. The office manager was not given authority to sign checks on behalf of Comfort Air,

but would make out the check for payment of the company’s monthly CRS taxes and take it to Mr.

Sisneros for signature.

7. During the period July 1987 through July 1990, Ms. Solano prepared and filed

monthly CRS-1 returns reporting Comfort Air’s gross receipts and withholding taxes.

8. For unknown reasons, Ms. Solano either failed to make out monthly checks to pay

the CRS taxes reported or failed to include the check with the return, simply filing the monthly CRS-

1 returns without payment.

9. During the period at issue, Comfort Air was solvent and had sufficient funds to pay

the CRS taxes.

10. During the period at issue, Comfort Air deducted and withheld New Mexico

withholding tax from its employees’ paychecks, although the taxes were never paid over to the

Department.

11. In June 1988, the Department issued 14 assessments to Comfort Air for unpaid CRS

taxes. Additional assessments were issued in September 1988, August 1989, January 1990, February

1990, March 1990, April 1990, May 1990, June 1990, August 1990 and June 1991. See, Department

Exhibit 2, Lien/Levy Tax Schedule.

12. Mr. Sisneros never saw the assessments and was unaware that the company’s CRS

taxes were not being paid.

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13. Ms. Solano would typically prepare 120 to 150 checks for Mr. Sisneros to sign each

month, including the company’s weekly payroll checks. Mr. Sisneros did not notice whether the

checks he signed each month included a check to pay the company’s monthly CRS taxes.

14. Mr. Sisneros regularly reviewed the company’s accounts payable ledger but did not

review the company’s checkbook or bank statements.

15. In July 1990, Comfort Air filed for bankruptcy as a result of a stockholder suit. The

company was still able to pay its ongoing bills and was allowed to continue to operate during the

course of the bankruptcy proceeding.

16. Comfort Air’s assets were liquidated during the bankruptcy and were purchased by

Mr. Sisneros and two partners in order to establish a new business.

17. At the time the bankruptcy proceeding was closed in August 1992, Mr. Sisneros was

still unaware of Comfort Air’s outstanding liability for unpaid withholding taxes due to the State of

New Mexico for the period July 1987 through July 1990.

18. Mr. Sisneros subsequently sold his interest in the new business. Mr. Sisneros no

longer has access to the company’s records, nor does he know whether records pertaining to the

withholding tax periods at issue still exist.

19. On February 25, 1995, the Department sent Mr. Sisneros a letter notifying him that as

an employer under the New Mexico Withholding Tax Act, he was responsible for payment of

Comfort Air’s unpaid withholding taxes in the amount of $18,603.04.

20. On March 16, 1995, Mr. Sisneros filed a letter protesting the Department’s demand

for payment.

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DISCUSSION

Mr. Sisneros makes three arguments in support of his protest to the Department’s demand for

payment of Comfort Air’s unpaid withholding taxes: (1) Mr. Sisneros had reasonable cause for not

knowing that the withholding taxes were unpaid and comes within the exception to liability provided

in Subsection B of Section 7-3-5 NMSA 1978; (2) Some of the CRS reports on which the Department’s

assessments were based were incorrect and overstated the tax due; and (3) the Depart-ment failed to

notify Mr. Sisneros of his liability in a timely manner.

I. REASONABLE CAUSE EXCEPTION UNDER SECTION 7-3-5(B).

This protest is governed by the version of the Withholding Tax Act in effect between July 1987

and July 1990. Sections 7-3-1 through 7-3-10 NMSA 1978 (1988 Repl. Pamp.)1 Section 7-3-5 is the

specific statute relied upon by the Department to hold Mr. Sisneros responsible for Comfort Air’s

unpaid withholding taxes. It provides as follows:

Every employer 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 employer fails to deduct and withhold the required amounts
and if the tax against which the required amounts would have been credited is
paid, the employer shall not be liable for those amounts not deducted and
withheld; or

B. if the employer’s failure to deduct and withhold the required
amounts was due to reasonable cause he shall not be liable for amounts not
deducted and withheld.

The statute imposes liability upon “every employer”. The term "employer" is defined in Section 7-3-

2(B) as follows:

B. "employer" means a person doing business in or deriving income from
sources within the state who has control of the payment of wages to an
individual for services performed for him by that individual or a person who is

1
All statutory references are to the version of the Withholding Tax Act found in the 1988 replacement pamphlet.

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the officer, agent or employee of the person having control of the payment of
wages. (Emphasis added.)

In this case, Mr. Sisneros does not dispute that he is an “employer” liable for payment of

Comfort Air’s unpaid withholding taxes. Mr. Sisneros maintains, however, that he comes within the

scope of Subsection B of Section 7-3-5, which provides that “if the employer’s failure to deduct and

withhold the required amounts was due to reasonable cause he shall not be liable for amounts not

deducted and withheld.” The problem with Mr. Sisneros’ argument is that taxes were deducted and

withheld from the paychecks of Comfort Air’s employees. Because there was no failure to deduct and

withhold, but simply a failure to pay the withheld taxes to the Department, the exception in Section 7-3-

5(B) does not apply.

There is a logical reason for not extending the exception in Section 7-3-5(B) to an employer’s

failure to pay over taxes actually withheld from employee paychecks. An employee whose employer

has failed to withhold tax from the employee’s paycheck remains personally liable for any tax due on

his income. In contrast, an employee whose employer has withheld tax receives a credit of this amount

against any tax the employee owes to the state. Section 7-3-9. By statute, the withheld amount is

treated as a collected tax. Section 7-3-4. The Department cannot collect the tax from the employee a

second time, even when the employer has failed to pay over the amount of tax withheld. Applying the

“reasonable cause” provision in Section 7-3-5(B) to excuse Mr. Sisneros, as the person in control of the

payment of wages, from liability for the taxes withheld by Comfort Air would foreclose the

Department’s ability to collect tax revenues legitimately due to the state. There is nothing to indicate

that the legislature intended this result or intended to extend the exception provided for an employer’s

“failure to deduct and withhold” to an employer’s failure to pay over collected taxes actually withheld

from its employees’ paychecks.

II. ACCURACY OF THE ASSESSMENTS.

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Mr. Sisneros testified that some of the CRS reports on which the Department’s assessments

were based overstated the amount of withholding tax due to New Mexico. Mr. Sisneros testified that

between July 1987 and September 1988, Comfort Air was working as a subcontractor on a project in

Arizona. Based on the amounts reported, Mr. Sisneros believes that his office manager incorrectly

included the payroll for the company’s Arizona employees in the wage base used to calculate New

Mexico withholding tax.

The Department’s counsel objected to Mr. Sisneros’ testimony, arguing that the accuracy of the

assessments is not at issue in this protest. The Department’s objection is valid. Section 7-1-24 NMSA

1978 provides that a taxpayer may dispute an assessment by filing a written protest within 30 days of

the date of mailing of the notice of assessment. In certain circumstances, the period within which to file

a protest may be extended by an additional 60 days. In this case, the Department’s 37 assessments were

mailed to Comfort Air over a period of three years: the first assessments were mailed in June 1988 and

the last assessment was mailed in June 1991. No protest was filed within the period allowed by Section

7-1-24, and this hearing officer does not have jurisdiction to consider the validity of the assessments

themselves. The only matter at issue in this protest is Mr. Sisneros’ liability for payment of the

assessments under Section 7-3-5.

I would note, nonetheless, that the information provided by Mr. Sisneros would not justify an

adjustment to the assessments in any event. Although Mr. Sisneros believes that Ms. Solano incorrectly

included the wages of Arizona employees when calculating New Mexico withholding tax, he is not able

to establish the amount of the overreporting. There is a statutory presumption that the Department’s

assessment of gross receipts taxes is correct. Section 7-1-17(C) NMSA 1978. In order to overcome

this presumption of correctness, Mr. Sisneros would have to produce his payroll records to establish the

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amounts erroneously included in the New Mexico wage base. Without some documentary evidence to

support the claim of overreporting, no adjustment could be made.

III. THE DEPARTMENT’S DELAY IN TAKING COLLECTION ACTION.

Mr. Sisneros argues that the Department should have notified him of Comfort Air’s unpaid

withholding taxes in a more timely manner. The Department sent notification of the unpaid taxes in the

form of 37 separate assessments issued during the months of June 1988, September 1988, August

1989, January 1990, February 1990, March 1990, April 1990, May 1990, June 1990, August 1990

and June 1991. The fact that these assessments were apparently intercepted by the office manager

and never brought to Mr. Sisneros’ attention is not the fault of the Department.

The New Mexico Legislature has given the Department ten years after the date an assessment

is issued to collect the taxes due. Section 7-1-19 NMSA 1978 provides:

No action or proceeding shall be brought to collect taxes administered under
the provisions of the Tax Administration Act and due under an assessment or
notice of the assessment of taxes after ten years from the date of such
assessment or notice.

In this case, the Department’s February 1995 letter notifying Mr. Sisneros of his liability for payment

of the Department’s assessments was sent seven years after the date of the first assessment and four

years after the date of the last assessment. Mr. Sisneros has not cited to any authority that would

preclude the Department from seeking to enforce payment of an assessment that is still within the

ten-year period the legislature has provided for pursuing collection activities.2

CONCLUSIONS OF LAW

1. Mr. Sisneros filed a timely, written protest to the Department’s demand for payment

of the unpaid withholding taxes of Comfort Air. Accordingly, jurisdiction lies over the parties and

2
It should be noted, however, that the time within which the Department can enforce collection of the 14
assessments issued on June 21, 1988 will expire June 21, 1998.

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the subject matter of this protest, which is limited to Mr. Sisneros’ liability for withholding taxes

under Section 7-3-5(B) NMSA 1978 (1985 Repl. Pamp.).

2. The Department’s hearing officer does not have jurisdiction to consider whether the

withholding tax assessments issued to Comfort Air between July 1990 and July 1991 accurately

reflected the company’s withholding tax liability.

3. During all relevant times, Mr. Sisneros, as president of Comfort Air, had control over

the company’s payment of wages and came within the definition of an “employer” under Section 7-

3-2(B) NMSA 1978 (1988 Repl. Pamp.).

4. As an employer, Mr. Sisneros is liable for Comfort Air’s unpaid withholding taxes

for the period July 1987 through July 1990.

5. The reasonable cause exception to liability provided in Section 7-3-5(B) NMSA 1978

(1985 Repl. Pamp.) does not apply to excuse Mr. Sisneros from liability for Comfort Air’s unpaid

withholding taxes.

6. The Department’s delay in sending the demand letter to Mr. Sisneros does not excuse

Mr. Sisneros from liability for Comfort Air’s unpaid withholding taxes.

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

DONE, this 24th day of April 1998.

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