Were a residential contractor's sales of three houses he built, briefly lived in, and sold exempt as isolated or occasional transactions?

Subject

M. L. Roush Construction (D&O 98-31)

Plain-English summary

Mark Roush was a licensed New Mexico residential contractor operating as a sole proprietor. Alongside projects for third parties, he sequentially built three houses in Carlsbad, moved into each once it had running water, and sold them for $107,500, $96,100, and $160,000. He treated the houses as personal investments on federal Schedule D and did not report the sales on his gross receipts tax returns.

The Department audited after comparing city building permits with Roush's reported receipts. It treated the sales price of each house, less the value of its land, as taxable construction receipts. It also treated unexplained business-account deposits above reported monthly receipts as taxable. The resulting assessment was $24,647.96 gross receipts tax, $2,713.41 penalty, and $9,493.79 interest.

Hearing Officer Margaret B. Alcock rejected Roush's isolated-or-occasional-sale defense for two independent reasons. First, continuously building and selling three houses in less than three years was regular, repeated activity. Roush admitted that he intended to sell at a profit and occupied the houses partly because a lived-in house could command more money. Second, his residential contractor's license meant he already held himself out as engaged in the same or similar construction services. Acting as general contractor on his own houses was an extension of that business.

Roush also argued that taxing the home sales would duplicate the gross receipts tax paid on materials and subcontractor services. The decision found separate taxable transactions by separate taxpayers: suppliers and subcontractors sold to Roush, and Roush sold completed construction projects. Sections 7-9-51 and 7-9-52 offered NTTC deductions to prevent tax pyramiding, but Roush generally chose not to give NTTCs for these houses.

Finally, Roush documented several bank and family loans but could not connect the draws to particular deposits in his business account. He did not know whether the loan funds went into personal or business accounts, and most loans were lines of credit drawn in small amounts. Without tracing evidence, he failed to overcome the assessment's presumption of correctness. The protest was DENIED.

What this means for you

• Repeated owner-built home sales can be a construction business even if you briefly live in each property. Frequency, continuity, profit intent, and the nature of the activity controlled here.
• A contractor's existing license can independently defeat the isolated-sale exemption. The exemption was unavailable because Roush regularly provided the same or similar construction services.
• Personal income-tax reporting does not decide gross receipts tax treatment. Roush used Schedule D, but the state looked at what he actually did.
• NTTCs are the statutory way to prevent pyramiding. Paying tax on inputs did not remove tax on the later sale of the completed project.
• Loan proceeds must be traceable. Proof that loans existed was not enough when Roush could not match them to the deposits the auditor treated as receipts.

Key questions answered

Why weren't the three sales isolated or occasional?
Roush continuously worked on one or more houses and sold all three within less than three years. That repeated pattern matched the Department's regulation describing regular home-selling activity.

Did living in each house make it a personal sale?
No. Roush moved in as soon as each house had water and acknowledged that occupancy helped the sale price. The profit-oriented construction and sales remained business activity.

Why did his contractor license matter?
Section 7-9-28 applied only when the seller was neither regularly engaged nor holding himself out as engaged in the same or similar business. Roush was already a licensed residential contractor.

Was taxing both the inputs and finished houses prohibited double taxation?
No. The taxes applied to separate receipts of separate taxpayers. Roush could have furnished NTTCs to suppliers and subcontractors for eligible construction inputs but generally did not.

Why weren't the unidentified deposits removed as loan proceeds?
Roush could not show which account received the borrowed money or match loan draws to specific business-account deposits, so he did not meet his burden of proof.

Verbatim citations

The isolated-or-occasional-sale exemption:

Exempted from the gross receipts tax are the receipts from the isolated or occasional sale of or leasing of property or a service by a person who is neither regularly engaged nor holding himself out as engaged in the business of selling or leasing the same or similar property or service.

The decision on the repeated sales:

Mr. Roush's repeated pattern of building a house, living in it for a brief period of time and then selling it disqualifies him for the exemption in Section 7-9-28.

The effect of his regular construction business:

Acting as his own general contractor to construct and sell houses is simply an extension of Mr. Roush's regular business activity.

The loan-proceeds holding:

Mr. Roush failed to meet his burden of proving that deposits made to his business account represented loan proceeds rather than taxable receipts.

Source

• Listing: New Mexico Decisions & Orders
• Decision post: M. L. Roush Construction
• Decision PDF: D&O 98-31

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 M. L. ROUSH CONSTRUCTION 98-31
ID. NO. 02-098728-00 5
ASSESSMENT NO. 2151440

DECISION AND ORDER

This matter came on for formal hearing on April 1, 1998, before Margaret B. Alcock,

Hearing Officer. M. L. Roush Construction, a proprietorship, was represented by Mark L.

Roush, its owner. The Taxation and Revenue Department ("Department") was represented by Gail

MacQuesten, Special Assistant Attorney General. At the close of the hearing, the record was kept

open and Mr. Roush was given until May 1, 1998 to provide additional documentation in support of

his protest. The Department filed its response on May 20, 1998, at which time the matter was

submitted for decision. Based on the evidence in the record and the arguments presented, IT IS

DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. Mr. Roush is a licensed residential contractor who has been in business in New

Mexico since 1988.

2. At the time Mr. Roush started his business, which is a sole proprietorship, he

opened a business account that was kept separate from his personal accounts.

3. During the audit period January 1993 through December 1996, Mr. Roush

reported gross receipts tax on his receipts from construction projects he performed for third
parties. Mr. Roush used nontaxable transaction certificates when purchasing supplies and

subcontractor services for these projects.

4. Mr. Roush did not report gross receipts tax on receipts from selling three houses

that he sequentially built and briefly lived in before they were sold. For the most part, Mr. Roush

did not use nontaxable transaction certificates when purchasing supplies and subcontractor

services for these houses.

5. The first house Mr. Roush built was located at 602 Winged Foot in Carlsbad, New

Mexico. Work began in January 1991; the house was sold in June 1993 for $107,500.

6. The second house was located at 606 Winged Foot in Carlsbad, New Mexico.

Work began in April 1993; the house was sold in May 1994 for $96,100.

7. The third house was located at 201 Raymond in Carlsbad, New Mexico. Work

began in February 1993; the house was sold in September 1995 for $160,000.

8. Mr. Roush does not remember how long he lived in each house. He would

usually move into a house as soon as there was running water. During periods when none of the

houses was livable, he and his family lived with his wife's mother.

9. Mr. Roush could sell a house that was being lived in for more than he could sell

an empty house.

10. Mr. Roush obtained the following loans to cover the costs of construction and his

living expenses:

Source Amount Date

United New Mexico Bank: $ 76,000.00 09/92
United New Mexico Bank $ 36,000.00 04/93
United New Mexico Bank: $ 74,880.00 04/93
United New Mexico Bank $153,087.56 06/94

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Mae Anderson $ 40,000.00 11/94
Mae Anderson $ 25,000.00 1996

Each of the United New Mexico Bank loans, except the April 1993 loan for $36,000, was made

in the form of a line of credit, rather than a lump sum, and funds were drawn out in small

amounts at various times.

11. Mr. Roush does not know and does not have any records indicating whether he

deposited the loan money to a personal account or to his business account.

12. Mr. Roush treated the three houses he built and sold as personal investments, not

as part of his construction business. For income tax purposes, Mr. Roush reported receipts from

the sale of each house on Schedule D (Capital Gains and Losses) to his federal Form 1040.

Receipts from his construction work for third parties were reported on Schedule C (Profit and

Loss from Business) to federal Form 1040.

13. Because Mr. Roush did not believe his receipts from selling the houses were

business receipts, he did not report them on his state gross receipts tax returns.

14. In November 1996, Mr. Roush was audited by the Department. The audit was

initiated to investigate the discrepancy between the amounts listed on Mr. Roush's building

permits with the city of Carlsbad and the amounts listed on his gross receipts tax returns.

15. The auditor determined that Mr. Roush's receipts from selling the houses located

at 602 Winged Foot, 606 Winged Foot and 201 Raymond were taxable receipts on which Mr.

Roush should have paid gross receipts tax. The auditor calculated these receipts by taking the

sales price of each house shown on Mr. Roush's Schedule D to his Federal Forms 1040 and

subtracting the value of the real estate on which the house was built.

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16. The auditor made a list of all the deposits made to Mr. Roush's business account.

The source of most of the deposits could not be identified. The auditor determined that the

amount of monthly deposits that exceeded the amount of gross receipts Mr. Roush reported for

that month were underreported gross receipts subject to tax.

17. The auditor did not examine Mr. Roush's personal accounts. None of the deposits

to those accounts were treated as taxable receipts and no gross receipts tax was assessed on the

funds in those accounts.

18. On July 2, 1997, the Department mailed Mr. Roush Assessment No. 2151440 in

the amount of $24,647.96 gross receipts tax, $2,713.41 penalty and $9,493.79 interest.

19. On August 1, 1997, Mr. Roush requested a 60-day extension of time to file a

protest, which was granted. On September 27,1997, Mr. Roush filed a written protest to the

Department's assessment.

DISCUSSION

Mr. Roush raises the following arguments in support of his protest: (1) construction of

the three houses at issue were isolated or occasional transactions entitled to the exemption

provided in Section 7-9-28 NMSA 1978; (2) because Mr. Roush paid gross receipts tax on the

materials and services he purchased to build the houses, taxing his receipts from the sale of the

houses would be double taxation; (3) some of the unidentified deposits the auditor included as

taxable receipts were actually loan proceeds not subject to gross receipts tax.

I Exemption for Isolated or Occasional Sales.

Section 7-9-4 NMSA 1978 imposes an excise tax on the gross receipts of any person

engaging in business in New Mexico. The definition of “engaging in business” is quite broad

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and includes “carrying on or causing to be carried on any activity with the purpose of direct or

indirect benefit.” Section 7-9-3(E) NMSA 1978. In this case, Mr. Roush built houses intending

to sell them at a profit. He testified that one reason for moving into each house prior to sale was

that a house that was being lived in would sell for more than an empty house. Mr. Roush's

activity of building and selling houses meets the statutory definition of engaging in business.

Mr. Roush argues that his receipts from selling houses are exempt from gross receipts tax

under Section 7-9-28 NMSA 1978, which states:

Exempted from the gross receipts tax are the receipts from the isolated or
occasional sale of or leasing of property or a service by a person who is
neither regularly engaged nor holding himself out as engaged in the
business of selling or leasing the same or similar property or service.

Mr. Roush fails to qualify for this exemption for two reasons: first, because the construction and

sale of three houses within a period of less than three years cannot be characterized as either

isolated or occasional transactions; and second, because Mr. Roush is regularly engaged in

business as a licensed residential contractor.

Mr. Roush limited his work on his houses to evenings and weekends when he was not

engaged in construction projects for third parties. Nonetheless, he was continuously working on

one or more houses during the period in question and sold all three houses in less than three

years' time. The facts of this case are very similar to those in Regulation 3 NMAC 2.28.9.2,

Example 5 (formerly GR 28:2):

K purchases vacant land, builds a home, lives in it for a few months, sells
it, and then repeats the process three months later. K's activity is not an
isolated or occasional transaction. K is regularly engaged in the business
of selling homes because of the frequency of the sales. Therefore, K's
receipts from the sale of the improvements are subject to gross receipts
tax. Such regular and repeated activity does not meet the requirements of
Section 7-9-28.

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Mr. Roush's repeated pattern of building a house, living in it for a brief period of time and then

selling it disqualifies him for the exemption in Section 7-9-28.

Even if Mr. Roush's activities met the definition of isolated or occasional, his receipts

from the construction and sale of houses still would not qualify for the exemption. Regulation 3

NMAC 2.28.9.1 (formerly GR 28:2) provides that any person who holds a license to carry on

services is engaged in the business of selling the same or similar services. In this case, Mr.

Roush holds a residential contractor's license. He is in the business of performing construction

services as a general contractor for third parties. Acting as his own general contractor to

construct and sell houses is simply an extension of Mr. Roush's regular business activity. The

exemption in Section 7-9-28 is limited to "a person who is neither regularly engaged nor holding

himself out as engaged in the business of selling or leasing the same or similar property or

service." Because Mr. Roush is regularly engaged in the residential construction business, he

cannot claim an exemption for receipts from constructing and selling residential houses.

II. Double Taxation.

When engaged in construction work for third parties, Mr. Roush used nontaxable

transaction certificates ("NTTCs") to purchase materials and services without having to pay the

passed-on gross receipts tax. When engaged in construction work for himself, Mr. Roush did not

use NTTCs, but paid gross receipts tax on his purchase of materials and services incorporated into

the houses he built. Mr. Roush argues that assessing him for gross receipts tax on his receipts from

sale of the completed houses results in double taxation.

It is a popular misconception that double taxation is inherently illegal or unconstitutional.

Almost 80 years ago, in Ft. Smith Lumber Co. v. Arkansas, 251 U.S. 532 (1920), the United States

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Supreme Court summarily disposed of the plaintiff's argument that the federal constitution prohibits

a state from taxing the same transaction twice. As stated by Justice Oliver Wendell Holmes,

writing for the majority:

The objection to the taxation as double may be laid on one side.
That is a matter of State law alone. The Fourteenth Amendment no
more forbids double taxation than it does doubling the amount of a
tax....

251 U.S. at 533. New Mexico courts have also held, on numerous occasions, that there is no

constitutional prohibition against double taxation. New Mexico State Board of Public Accountancy

v. Grant, 61 N.M. 287, 299 P.2d 464 (1956); Amarillo-Pecos Valley Truck Lines, Inc. v. Gallegos,

44 N.M. 120, 99 P.2d 447 (1940); State ex rel. Attorney General v. Tittmann, 42 N.M. 76, 75 P.2d

701 (1938).

It should also be noted that in construing the New Mexico Gross Receipts and

Compensating Tax Act, the New Mexico courts have held that there is no double taxation where

the two taxes complained of are imposed on the receipts of different taxpayers. See, e.g., House of

Carpets, Inc. v. Bureau of Revenue, 84 N.M. 747, 507 P.2d 1078 (Ct. App. 1973); New Mexico

Sheriffs & Police Association v. Bureau of Revenue, 85 N.M. 565, 514 P.2d 616 (Ct. App. 1973).

That is the case here. Mr. Roush and his suppliers and subcontractors are all separate taxpayers,

each of which is engaged in business in New Mexico. The gross receipts tax is imposed—once—

on the supplier's or subcontractor's receipts from selling materials and services to Mr. Roush. The

gross receipts tax is also imposed—once—on Mr. Roush's receipts from selling the completed

construction project. Under these facts, there is no double taxation.

Even though taxing successive transactions is not double taxation, the New Mexico

legislature has been careful to provide a number of statutory deductions to prevent the pyramiding

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or stacking of the gross receipts tax. Thus, it has provided a deduction for the sale of tangible

personal property and construction services to persons who are engaged in the construction business

and provide the seller with an NTTC. Sections 7-9-51 and 7-9-52 NMSA 1978. These deductions

would have been available to Mr. Roush's suppliers and subcontractors if he had given them an

NTTC when he purchased supplies and services incorporated into the houses he built. He did not

do so. Mr. Roush's misunderstanding of the law and his decision not to use NTTCs when

purchasing materials and services does not excuse him from payment of the gross receipts tax on

his receipts from selling the completed houses.

III Gross Receipts Tax on Loan Proceeds.

Mr. Roush argues that the auditor's calculation of underreported gross receipts included

bank deposits that represented loan proceeds rather than taxable receipts from performing

construction services. Although Mr. Roush did not discuss the existence of the loans with the

auditor, he has now provided documentation to establish that he obtained several bank and family

loans to finance the construction of the houses he built. Unfortunately, Mr. Roush is unable to

trace the loan proceeds to specific deposits made to his business account. The problem is

compounded by the fact that most of the loans were made in the form of a line of credit with

funds drawn out in small amounts rather than in a lump sum. Accordingly, it is not possible to

review the record of deposits to Mr. Roush's business account and match the amount and date of

a specific loan to a corresponding deposit.

There is a statutory presumption that the Department’s assessment of gross receipts taxes is

correct. Section 7-1-7, NMSA 1978; Mears v. Bureau of Revenue, 87 N.M. 240, 241, 531 P.2d

1213, 1214 (Ct. App. 1975). In order for the taxpayer to be successful, he must clearly overcome

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this presumption. Archuleta v. O'Cheskey, 84 N.M. 428, 431, 504 P.2d 638, 641 (Ct. App. 1972).

In this case, Mr. Roush has failed to meet his burden of establishing that deposits on which gross

receipts tax was assessed were the proceeds of loans rather than taxable receipts. As set out in the

auditor's report, most of the deposits into the business account were unidentified. Mr. Roush

maintained more than one bank account and testified that he did not know which account he used

to deposit the loan proceeds. Since Mr. Roush treated the houses he built as personal

investments, rather than as part of his construction business, it would be logical to assume that he

deposited the funds borrowed to build the houses into one of his personal accounts. Given the

absence of any records or other evidence that loan proceeds were deposited to Mr. Roush's

business account, there is no basis for adjusting the Department's assessment.

CONCLUSIONS OF LAW

1. Mr. Roush filed a timely, written protest to Assessment No. 2151440, and

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

2. Mr. Roush, as a licensed residential contractor, was regularly engaged in the

construction business and cannot claim the exemption provided in Section 7-9-28 NMSA 1978 for

receipts from constructing and selling houses.

3. Mr. Roush's sales of three houses during a period of less than three years do not

qualify as isolated or occasional transactions qualifying for the exemption provided in Section 7-9-

28 NMSA 1978.

4. Mr. Roush's decision not to use NTTCs when purchasing construction materials and

services incorporated into the houses he built does not excuse him from payment of gross receipts

tax on his receipts from selling those houses.

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5. Mr. Roush failed to meet his burden of proving that deposits made to his business

account represented loan proceeds rather than taxable receipts.

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

DONE, this 27th day of May 1998.

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