If my employer wrongly treated me as an independent contractor on a 1099, can I avoid gross receipts tax as an employee — even though I reported the income as business income to the IRS?

Plain-English summary

A doctor whom his employer had treated as an independent contractor was really an employee — but he could not use the employee-wage exemption from gross receipts tax until he amended his income tax returns to report the pay as wages rather than business income. Protest GRANTED IN PART and DENIED IN PART.

In 1994 Dr. Thomas Strain took the job of State Medical Director for Correctional Medical Services (CMS), overseeing CMS's contract with New Mexico to provide medical care to inmates and to help meet the Duran consent decree on inmate care. His contract said he "agrees to be responsible for all applicable taxes"; when he asked, he was told this meant paying his own income and social security taxes. He understood he was a salaried employee and did not realize CMS was treating him as an independent contractor. CMS gave him an office and secretary, set his hours (a minimum of 40 and later 50 per week plus on-call), paid him an hourly wage, reimbursed his expenses, provided medical supplies, and gave him health and malpractice insurance through payroll deductions.

In early 1995 CMS sent him a W-2 for $4,131.44 and a 1099 for $106,279.21. His accountant reported the 1099 amount as business income on a federal Schedule C. Strain objected — he even wrote CMS asking "why the 1099 when I was your employee" — but ultimately signed the returns to avoid being late. He did not report or pay New Mexico gross receipts tax on that income. A 1997 audit led to a February 1998 assessment of $5,444.36 in gross receipts tax, plus penalty and interest, which he protested.

He was an employee under the right-to-control test

The central question in distinguishing an employee from an independent contractor is the right to control the manner and method of the work, not just the result (Burruss; Harger, adopting the Restatement (Second) of Agency; the ten factors in Benavidez; Regulation 3.2.105.7 NMAC). There was evidence both ways, but the totality favored employee status. CMS provided his office, secretary, supplies, and insurance; paid him hourly rather than for a completed job; could terminate him on 30 days' notice; controlled his schedule (little notice of assignments, required pager and cell phone, directed meetings and interviews, and forced him to cancel long-planned vacation); set the medical guidelines he had to follow (requiring him to call the St. Louis consultant for anything not covered); and controlled hiring and firing — Mr. Gaunce fired two doctors over Strain's objection.

The Department relied on Chin v. United States, where a malaria specialist advising Pakistan was an independent contractor. The hearing officer distinguished it: unlike Dr. Chin — who had his own office at the Pakistani ministry, set his own schedule, and was subject to no AID control — Strain's office, schedule, guidelines, and staffing decisions were all controlled by CMS. He was not given autonomy to run the New Mexico contract as he saw fit. On the totality of the circumstances, he was an employee.

But consistent reporting is required — he must amend his returns first

Being an employee did not automatically win him the exemption. New Mexico requires a taxpayer to treat a transaction the same way for all tax purposes. A taxpayer cannot report income as business income (with offsetting expenses) on the federal return and then recharacterize the same income as exempt employee wages for gross receipts tax (Co-Con; Stohr — the federal reporting method controls). Because Strain's 1994 federal return still reported the CMS pay as Schedule C business income, he could not yet claim the Section 7-9-17 employee-wage exemption. The remedy is to file amended federal and state returns reporting the CMS income as wages; once he does, he is entitled to the deduction.

The hearing officer noted that requiring amended returns prevents "double-dipping" — claiming business deductions as a contractor on Schedule C while also claiming the employee-wage exemption for gross receipts tax. (Strain did work as a genuine independent contractor after leaving CMS in late 1994, and any deductions for his CMS work would have to meet the IRS rules for unreimbursed employee expenses, not Schedule C business expenses.)

The outcome and the alternative NTTC argument

The assessment was ordered abated only if Strain provided proof, by July 30, 2001, that he had filed amended federal and state returns reporting the CMS income as employee wages. If he did not, he would be bound by his original reporting and owe the gross receipts tax, penalty, and interest. Because he was found to be an employee, the hearing officer did not need to reach his backup argument that a Type 5 (sale of service for resale) NTTC obtained from CMS in 2001 could support a Section 7-9-48 deduction.

Result: protest GRANTED IN PART and DENIED IN PART — employee status confirmed, but relief conditioned on filing amended returns.

What this means for you

A 1099 does not settle whether you are an employee

Whether you are an employee or an independent contractor turns on the right to control your work, judged on the totality of the circumstances — not on the form your payer issues or a contract clause about taxes. If the payer sets your schedule, provides your workplace and tools, supplies your guidelines, and controls hiring and firing, you may be an employee even with a 1099.

Employee wages are exempt from New Mexico gross receipts tax

Receipts of employees from wages, salaries, and other remuneration for personal services are exempt under Section 7-9-17. Independent-contractor receipts are not. That is why the employee/contractor line can decide a large gross receipts assessment.

You must report income consistently for federal and state purposes

You cannot treat the same income as business income federally and as exempt wages for New Mexico gross receipts tax. If you believe your income was mischaracterized, the fix is to file amended federal and state returns to report it correctly — reporting alone, done for convenience, is treated as binding.

Amending cuts off "double-dipping"

If you switch to reporting CMS-type pay as wages, you cannot also keep business deductions for it on Schedule C. Costs tied to that work would have to qualify as unreimbursed employee expenses under the federal rules, not as business expenses.

Common questions

Q: My employer put me on a 1099, but I think I was an employee. Does the 1099 control?
A: No. Employee status depends on the right to control your work under the totality of the circumstances. Here the doctor was an employee despite the 1099, because CMS controlled his schedule, workplace, guidelines, and staffing.

Q: I'm an employee — why do I still owe gross receipts tax?
A: You don't, once you report consistently. But you cannot claim the employee-wage exemption while the same income is reported as business income on your federal Schedule C. You must first amend your federal and state returns to report it as wages.

Q: Can I just tell the state to treat it as wages without changing my federal return?
A: No. New Mexico follows your federal reporting for consistency (Co-Con, Stohr). Until the federal return is amended, you are bound by how you originally reported the income.

Q: What happens to business deductions I took on that income?
A: You cannot keep Schedule C business deductions for income you now report as wages. Any related costs would have to meet the IRS rules for unreimbursed employee expenses instead.

Citations and references

Statutes and regulations:

• NMSA 1978, § 7-9-17 — exempts from gross receipts tax the receipts of employees from wages, salaries, commissions, or other remuneration for personal services
• NMSA 1978, § 7-9-48 — deduction for receipts from selling a service for resale (the doctor's unreached backup argument)
• NMSA 1978, § 7-1-17(C) — an assessment of tax is presumed correct
• Regulation 3.2.105.7 NMAC — factors for determining whether a worker is an employee (withholding, workers' comp, social security/unemployment obligations, whether the payer considers the worker an employee, and control over the means versus only the result)

Cases cited:

• Archuleta v. O'Cheskey, 84 N.M. 428, 504 P.2d 638 (Ct. App. 1972) — the taxpayer bears the burden of overcoming the presumption of correctness
• Wing Pawn Shop v. Taxation and Revenue Department, 111 N.M. 735, 809 P.2d 649 (Ct. App. 1991) — exemptions are strictly construed in favor of the taxing authority
• Burruss v. B.M.C. Logging Co., 38 N.M. 254, 31 P.2d 263 (1934) — control over the manner and method of work indicates employment
• Harger v. Structural Services, Inc., 121 N.M. 657, 916 P.2d 1324 (1996) — adopts the Restatement (Second) of Agency § 220(1) approach to employee status
• Benavidez v. Sierra Blanca Motors, 125 N.M. 235, 959 P.2d 569 (Ct. App. 1998) — the ten-factor, totality-of-the-circumstances control test
• Chin v. United States, 57 F.3d 722 (9th Cir. 1995) — distinguished; an autonomous consultant was an independent contractor
• Co-Con, Inc. v. Bureau of Revenue, 87 N.M. 118, 529 P.2d 1239 (Ct. App. 1974) — taxpayers must treat transactions uniformly for all tax purposes
• Stohr v. New Mexico Bureau of Revenue, 90 N.M. 43, 559 P.2d 420 (Ct. App. 1976) — federal reporting method controls the state characterization of income

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Thomas W. Strain, MD
• Decision PDF: D&O 01-03

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
THOMAS W. STRAIN, M.D. No. 01-03
ID NO. 02-262078-00 8
ASSESSMENT NO. 2215502

DECISION AND ORDER

A formal hearing on the above-referenced protest was held April 4, 2001, before Margaret B.

Alcock, Hearing Officer. Thomas W. Strain, M.D. (“Taxpayer”) was represented by his attorney,

Timothy L. Garcia. The Taxation and Revenue Department ("Department") was represented by Gail

MacQuesten, Special Assistant Attorney General. Based on the evidence and arguments presented, IT

IS DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. From January through March 1994, the Taxpayer worked as an employee of

Lovelace, Inc., providing medical services to patients.

2. In March 1994, the Taxpayer accepted the job of State Medical Director with ARA

Health Services, Inc., doing business as Correctional Medical Services (“CMS”).

3. At the time he accepted the job with CMS, the Taxpayer understood he would be

working as a salaried employee to oversee CMS’ contract with the State of New Mexico to provide

medical services to inmates at New Mexico correctional facilities.

4. The contract the Taxpayer signed with CMS stated that the Taxpayer would be

responsible for all applicable taxes on fees earned under the contract.

5. When the Taxpayer asked what the language concerning taxes meant, he was told he

would be responsible for payment of his own state and federal income taxes and social security
taxes. The Taxpayer did not understand that this language indicated CMS was treating him as an

independent contractor rather than as a salaried employee.

6. CMS provided the Taxpayer with an office and a secretary in Albuquerque.

7. The Taxpayer was required to work 40 hours per week and to provide on-call

services as needed.

8. The Taxpayer was paid an hourly wage, plus a fee for on-call services. He

was also reimbursed for out-of-pocket expenses, including mileage and other travel expenses,

telephone calls, business meals, etc.

9. CMS provided health insurance and medical malpractice insurance, for which it

deducted a certain amount from the Taxpayer’s paychecks.

10. At the correctional facilities where medical services were provided, CMS medical

personnel had the use of an examining room and another, larger room where charts and other

paperwork could be completed.

11. With the exception of stethoscopes, CMS provided all medical supplies needed to

provide services to inmates.

12. Doctors, including the Taxpayer, generally wore street clothes and were not issued or

required to purchase uniforms.

13. When he started his employment, it was the Taxpayer’s understanding that his duties

were primarily administrative and included responsibility for overseeing CMS’ contract with the

State of New Mexico to provide medical services to inmates. Under the terms of that contract, CMS

was also responsible for insuring compliance with the Duran Consent Decree, a judicial order under

which New Mexico was required, among other things, to provide a certain level of medical care to

inmates at state correctional facilities.

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14. The Taxpayer was supervised by Jane Haddad, the regional director for CMS, and W.

C. Gaunce, another company administrator, neither of whom had medical training. Ms. Haddad and

Mr. Gaunce did not supervise the Taxpayer’s medical advice or decisions, but did control his

schedule and many of his administrative activities.

15. The Taxpayer reported on behalf of CMS to New Mexico’s Interim State Medical

Director of Corrections. In connection with the Duran Consent Decree, the Taxpayer met with

attorneys for inmates complaining of inadequate medical care and testified on behalf of the state in

various court proceedings.

16. The Taxpayer’s primary duty was to supervise the nine to eleven doctors and five

nurses working for CMS to insure they complied with CMS’ guidelines for providing medical

services. If a question arose concerning medical care that was not addressed in the guidelines, the

Taxpayer was required to contact the medical consultant at the company’s headquarters in St. Louis,

Missouri.

17. When one of the staff doctors was ill or otherwise unavailable, the Taxpayer was

expected to cover that person’s duties as a medical services provider to inmates.

18. CMS was chronically short of medical personnel and the Taxpayer was asked to

recruit other doctors to work for the company. Once someone expressed an interest, Mr. Gaunce

arranged for the Taxpayer to interview that person. Although the Taxpayer disagreed with Mr.

Gaunce’s practice of setting up interviews before a candidate’s medical credentials and licensing

status were reviewed, the Taxpayer was overruled and required to conduct the interviews according

to the schedule set by Mr. Gaunce.

19. Because CMS was understaffed, the Taxpayer began to spend more and more time

providing medical services and less time on administrative duties. He was also denied time off that

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the company had previously approved and had to forfeit the prepayment on a vacation he had

planned for May 1994.

20. In June 1994, CMS terminated the services of two doctors and allowed a third doctor

to work part-time, all over the Taxpayer’s objections.

21. CMS gave the Taxpayer a pager and then required him to carry a cell phone so he

could be reached when he was providing medical services at one the state correctional facilities.

22. Instead of working an average of 40 hours per week or 160 hours per month as called

for in his contract, the Taxpayer found he was working 200 to 240 hours per month.

23. In late June or early July 1994, the Taxpayer renegotiated his contract with CMS.

Pursuant to the contract amendment, the Taxpayer received an increase in his hourly wage, but was

required to work “no less than” an average of 50 hours per week for 48 weeks per year and to

provide on-call services.

24. The contract amendment still contained the statement that “Physician agrees to be

responsible for all applicable taxes arising from all fees earned by Physician pursuant to this

Agreement.”

25. Because the Taxpayer was concerned about the number of miles he was putting on

his personal car, CMS agreed to reimburse the Taxpayer for renting a car to travel between

correctional facilities and later provided the Taxpayer with a leased vehicle.

26. In June 1994, a federal court determined that the State of New Mexico was not in

compliance with the Duran Consent Decree, largely because of inadequate medical staffing. The

State (and, therefore, CMS) was given until August 1994 to correct the deficiencies.

27. The Taxpayer spent the next two months working long hours to insure that inmates

were seen in a timely manner and that adequate medical care was being provided under the terms of

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the consent decree. At the subsequent hearing in August 1994, the Taxpayer’s efforts were

recognized as a major factor in bringing the state back into compliance with the terms of the decree.

28. On September 13, 1994, the Taxpayer submitted his resignation to CMS, effective

October 13, 1994.

29. After leaving CMS, the Taxpayer decided to work as an independent contractor and

went to the Department’s Albuquerque office to obtain a tax identification number for payment of

gross receipts tax.

30. In early 1995, the Taxpayer received two tax forms from CMS: a Form W-2

reporting $4,131.44 in employee wages, and a Form 1099 reporting $106,279.21 in nonemployee

compensation. The Taxpayer did not understand the difference between these forms and took

everything to the accountant who was preparing his 1994 income tax returns.

31. The Taxpayer’s accountant explained that the income shown on Form 1099 was

treated as business income earned by an independent contractor and had to be reported on Schedule

C (Profit or Loss From Business) to the Taxpayer’s federal income tax return.

32. The Taxpayer objected to this tax treatment of his income since he believed he was

an employee of CMS. On March 4, 1995, the Taxpayer sent a letter to Jane Haddad at CMS asking,

in part, “why the 1099 when I was your employee and worked as both a medical director and

provider simultaneously?” The Taxpayer also made the following observation:

Jane: I would like to remind you that for someone who was not supposed to
be an employee but yet a contractor based on what has come forth (1099). I
was denied the privilege to take my pre-paid vacation in May, attend a club-
sponsored competition in Aug ’94 which was announced Sept ’93, and spend
time with my child back East during the Summer ’94. This was because the
company needed me to be present or was short staffed and I was to fill in.

34. The Taxpayer never received a response from Ms. Haddad or anyone else at CMS.

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35. The Taxpayer’s accountant refused the Taxpayer’s request to report all of his

compensation from CMS as wages and reported the 1099 income as business income on Schedule C

to the Taxpayer’s 1994 federal income tax return.

36. The Taxpayer was concerned about being late with the payment of his state and

federal taxes and decided to go ahead and sign the income tax returns his accountant had prepared.

Because of his disagreement with the accountant’s method of reporting the 1099 income, the

Taxpayer changed accountants the following year.

37. It did not occur to the Taxpayer that reporting his compensation from CMS as

business income on his federal income tax return could result in a liability for New Mexico gross

receipts tax, and the Taxpayer did not report or pay gross receipts tax on this income.

38. On November 3, 1997, the Department mailed the Taxpayer a notice of limited scope

audit concerning the discrepancy between business income reported to the IRS on Schedule C of the

Taxpayer’s 1994 federal income tax return and business income reported to the Department for gross

receipts tax purposes.

39. The November 3, 1997 notice advised the Taxpayer that he must be in possession of

any nontaxable transaction certificates (“NTTCs”) needed to support deductions from gross receipts

within 60 days from the date of the notice or deductions relating to the NTTCs would be disallowed.

40. On February 5, 1998, the Department issued Assessment No. 2215502 to the

Taxpayer for tax periods January-December 1994 in the amount of $5,444.36 gross receipts tax,

$544.44 penalty and $2,824.27 interest.

41. On February 19, 1998, the Taxpayer filed a written protest to the Department’s

assessment.

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42. On February 19, 2001, at the request of the Taxpayer’s attorney, CMS issued a Type

5 NTTC (Sale of Service for Resale) to the Taxpayer.

DISCUSSION

The Taxpayer has raised two alternative arguments in support of his protest to the

Department’s assessment of gross receipts tax: (1) the Taxpayer was an employee of CMS during

1994 and is entitled to claim the deduction for employee wages provided in Section 7-9-17 NMSA

1978; and (2) in the event the Taxpayer is found to be an independent contractor, the NTTC issued to

the Taxpayer in February 2001 should be accepted to support the deduction for selling services for

resale provided in Section 7-9-48 NMSA 1978.

Burden of Proof. Section 7-1-17(C) NMSA 1978 states that any assessment of taxes made

by the Department is presumed to be correct, and it is the taxpayer's burden to overcome this

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

an exemption or deduction from tax is claimed, the statute must be construed strictly in favor of the

taxing authority, the right to the exemption or deduction must be clearly and unambiguously expressed

in the statute, and the right must be clearly established by the taxpayer. Wing Pawn Shop v. Taxation

and Revenue Department, 111 N.M. 735, 740, 809 P.2d 649, 654 (Ct. App. 1991). Accordingly, it is

the Taxpayer’s burden to come forward with evidence and legal arguments to show that he is entitled to

the deductions claimed and that the Department's assessment is incorrect.

Employee v. Independent Contractor. The Taxpayer maintains he worked for CMS as an

employee, rather than as independent contractor, and is therefore entitled to the exemption from gross

receipts found in Section 7-9-17 NMSA 1978, which states:

Exempted from the gross receipts tax are the receipts of employees
from wages, salaries, commissions or from any other form of
remuneration for personal services.

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The Department contends that the Taxpayer was an independent contractor whose self-employment

income did not qualify for the exemption provided in Section 7-9-17. The Department further argues

that the Taxpayer is required to treat his income in a consistent manner: he cannot report his

compensation from CMS as business income for income tax purposes while reporting the same

income as employee wages for gross receipts tax purposes.

In determining whether a person is an employee or an independent contractor, the principal

consideration is the right to control. The relationship of employer and employee usually results

where there is control over the manner and method of performance of the work to be performed.

Where there is only control over the results, and not the details of the performance, the worker is

usually considered to be an independent contractor. Burruss v. B.M.C. Logging Co., 38 N.M. 254,

31 P.2d 263 (1934). A more recent pronouncement of this rule can be found in Harger v. Structural

Services, Inc., 121 N.M. 657, 663, 916 P.2d 1324, 1330 (1996). In that case, the New Mexico

Supreme Court adopted the approach set out in the Restatement (Second) of Agency § 220(1) to

determine a worker’s status as an employee or an independent contractor:

The important distinction is between service in which the actor’s
physical activities and his time are surrendered to the control of the
master, and service under an agreement to accomplish results or to
use care and skill in accomplishing results. Those rendering service
but retaining control over the manner of doing it are not servants.

Among the factors to be considered are: (1) direct evidence of control; (2) the right to terminate the

employment at will, by either party, without liability; (3) the right to delegate the work or to hire and

fire assistants; (4) the method of payment, whether by time or by the job; (5) whether the party

employed engages in a distinct occupation or business; (6) whether the work is part of the

employer’s regular business; (7) the skill required in the particular occupation; (8) whether the

employer supplies the instrumentalities, tools or the place of work; (9) the duration of a person’s

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employment and whether that person works full-time or regular hours; and (10) whether the parties

believe they have created the relationship of employer and employee, insofar as this belief indicates

an assumption of control by one and submission to control by the other. Benavidez v. Sierra Blanca

Motors, 125 N.M. 235, 238, 959 P.2d 569, 572 (Ct. App. 1998). While all of the above factors may

be considered, it is the totality of the circumstances that should determine whether the employer has

the right to exercise essential control over a particular worker.

Department Regulation 3.2.105.7 NMAC sets out the following questions to be asked in

determining whether a worker qualifies as an employee: is income tax withheld from the worker’s

paychecks; is the worker covered by worker’s compensation insurance; is the “employer” obligated

to pay social security taxes and make unemployment insurance contributions on behalf of the

worker; does the “employer” consider the worker to be an employee; and does the “employer” have

a right to exercise control over the means of accomplishing a result or only over the result?

In this case, there is evidence supporting both parties’ positions. The following facts support

the Taxpayer’s contention that he was an employee of CMS:

CMS was in the business of providing medical services.

The Taxpayer was hired to perform medical services for CMS on an hourly basis and was paid an
hourly wage. The Taxpayer’s compensation was not based on his completion of a particular job
or project and his employment could be terminated by either party on 30 days’ notice.

The Taxpayer was required to work a minimum of 50 hours per week and provide on-call
services. The Taxpayer was required to carry a pager or cell phone so that CMS personnel could
contact him at any time. The job monopolized all of the Taxpayer’s time, effectively denying
him the option of contracting to perform services for another employer.

The Taxpayer could set his own work schedule, but Mr. Gaunce, a CMS administrator, had
authority to override the Taxpayer’s schedule and require his attendance at meetings and
interviews set by Mr. Gaunce. The Taxpayer was denied vacation time CMS had verbally agreed
to at the time the Taxpayer was hired.

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The Taxpayer was provided an office and secretary at CMS’ Albuquerque location. When the
Taxpayer and other doctors worked on-site at state correctional facilities, CMS arranged for them
to have the use of an examining room and provided all necessary medical supplies.

All of the Taxpayer’s out-of-pocket expenses were reimbursed by CMS, including travel
expenses, meals and telephone charges. At the Taxpayer’s request, CMS provided him with a
leased vehicle to use in traveling between correctional facilities.

CMS provided the Taxpayer with health insurance and medical malpractice insurance, to which
the Taxpayer contributed through payroll deductions.

One of the Taxpayer’s primary duties was to insure that the medical personnel hired by CMS
complied with company guidelines for providing medical services. If a question arose
concerning medical care that was not addressed in the guidelines, the Taxpayer could not
exercise his own judgment in dealing with the problem, but was required to contact the
medical consultant at the company’s headquarters in St. Louis, Missouri.

CMS issued the Taxpayer a Form W-2 reporting at least some of the payments it made to the
Taxpayer as employee wages.

The Department points to the the following facts to support its position that the Taxpayer was an

independent contractor:

The Taxpayer was hired to oversee CMS’s contract with the State of New Mexico and reported
directly to New Mexico’s Interim State Medical Director of Corrections. The Taxpayer was
not given any training on how to carry out his duties.

The Taxpayer was a doctor and his medical decisions were not subject to the control of CMS
administrators who had no medical training.

Both the original contract and the amended contract the Taxpayer entered into with CMS stated
that the Taxpayer “agrees to be responsible for all applicable taxes arising from all fees earned”
pursuant to the contract.

CMS did not withhold state, federal or social security taxes from the Taxpayer’s paychecks,
nor did it contribute to unemployment insurance for the Taxpayer.

CMS issued the Taxpayer a Form 1099, reporting most of its payments to the Taxpayer as
nonemployee compensation.

The Taxpayer reported the income shown on the Form 1099 as business income on Schedule C
to his 1994.

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With regard to the issue of control, the Department relies on Chin v. United States, 57 F.3d 722 (9th

Cir. 1995) to argue that CMS hired the Taxpayer to achieve a specific result, i.e., to insure CMS was

in compliance with its contract with the State of New Mexico, and that CMS did not control the

means the Taxpayer used to accomplish this result. The facts in this case are significantly different

than those in Chin, however, and do not support the conclusion that the Taxpayer was given

autonomy to administer the New Mexico contract as he saw fit or was free from the control of CMS.

The taxpayer in Chin was a medical doctor and a world renowned specialist in malariology.

Dr. Chin entered into a contract with AID, an agency of the United States, to serve as the malaria

control advisor to the country of Pakistan. The primary factors the court looked at in concluding that

Dr. Chin was an independent contractor were:

(1) Dr. Chin’s office was located at Pakistan’s Ministry of Health, and the government of

Pakistan, not AID, provided Dr. Chin with office furniture and a secretary. Dr. Chin went to the AID

office only to collect his mail, cash checks and attend an occasional meeting.

In this case, the Taxpayer’s office and secretary were provided by CMS and his office

was located in the same building as the offices of other CMS employees in Albuquerque.

(2) Dr. Chin spent approximately one-third of his time in the field and set his own

schedule, which was different than the schedule followed by other AID workers.

While it is true that the Taxpayer spent a large portion of his time on-site at

correctional facilities, his control over his schedule was limited. He usually received very little

notice of the need to travel to one of the state facilities to fill in for a doctor who was ill. His

movement between facilities was often directed by CMS, which required the Taxpayer to carry a

pager or cell phone so he could be reached at all times. CMS also directed the Taxpayer’s

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attendance at meetings and interviews and even required the Taxpayer to cancel long-standing

vacation plans.

(3) Dr. Chin received policy and program guidance from the Pakistani ministry and

reported to the Chief of the Pakistani Department of Health. Although Dr. Chin submitted quarterly

reports to AID and attended monthly meetings at the AID office, the doctor in charge testified that

AID exercised no control over Dr. Chin.

In the present case, the Taxpayer acted as a liaison between CMS and New Mexico’s

Interim State Medical Director of Corrections, but the policy and program guidelines he was

required to follow came from CMS. If a question arose concerning medical care that was not

addressed in the guidelines, the Taxpayer was required to contact the medical consultant at the

company’s headquarters in St. Louis, Missouri. In addition, the Taxpayer had no control over the

hiring or firing of doctors and nurses needed to carry out the program he was supposed to administer.

Mr. Gaunce fired two doctors over the Taxpayer’s objection and implemented interview procedures

the Taxpayer believed were inappropriate. The Taxpayer was not given a specific goal with payment

dependent on completion of the goal, but was required to work a specified number of hours per week

and was paid an hourly wage. The Taxpayer’s employment could be terminated by either party upon

30 days’ notice.

Unlike Dr. Chin, the Taxpayer was not given autonomy to administer the New Mexico

contract as he saw fit, but was subject to the direction and supervision of CMS. Based on the totality

of the circumstances, the Taxpayer was an employee of CMS and not an independent contractor.

Consistency in Reporting. Having determined that the Taxpayer was an employee of CMS,

the next question is whether the Taxpayer may claim a deduction against gross receipts for employee

wages when he reported the same income as business income on his state and federal income tax

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returns. New Mexico law holds that a taxpayer must treat transactions uniformly for all purposes

within the tax laws. A taxpayer may not report business income (with offsetting expenses) on his

income tax returns and then recharacterize the income as nontaxable employee wages for purposes of

the gross receipts tax.

The first case to address the requirement of consistency in state tax reporting was Co-Con, Inc.

v. Bureau of Revenue, 87 N.M. 118, 529 P.2d 1239 (Ct App., 1974), cert. denied, 87 N.M. 111, 529

P.2d 1232 (1974). Co-Con, Inc. was a wholly owned subsidiary of Universal Constructors, Inc.

During the audit period, construction equipment was used in common by both companies. Each

corporation attributed a value to the other corporation's use of the equipment and reflected that value

as “gross rentals” for federal income tax purposes. The Department treated the rental income

reported on the federal returns as receipts from leasing property in New Mexico and assessed gross

receipts tax on this amount. The corporations maintained the federal returns were incorrect and tried

to recharacterize the income reported on those returns. The court of appeals upheld the assessments,

finding that the corporations' treatment of the transactions as rentals for federal income tax purposes

was binding for state tax purposes. As the court stated: “Taxpayers must treat transactions

uniformly for all purposes within the tax scheme and not attempt to show, first, a lease for federal

purposes and second, a non-taxable event for state tax purposes.” Id., 87 N.M. at 121-122, 529 P.2d

at 1242-1243.

In Stohr v. New Mexico Bureau of Revenue, 90 N.M. 43, 559 P.2d 420(Ct. App. 1976), cert.

denied, 90 N.M. 254, 561 P.2d 1347 (1977), the court of appeals upheld an assessment of gross

receipts tax against Mr. Stohr's compensation from performing carpentry work for various

individuals. Mr. Stohr argued that these amounts were wages exempt from gross receipts tax. In

responding to these arguments, the court noted that during the audit period Mr. Stohr filed self-

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employment tax returns for social security purposes and filed federal Schedule C's reporting his

compensation as business income. In determining Mr. Stohr liable for gross receipts tax, the court

first examined the indicia of employment found in the Department’s regulations, and then stated:

The controlling factor, however, is that the taxpayer must treat
transactions uniformly for all purposes within the tax laws. The
taxpayer must not attempt to show one scheme for federal tax
purposes and a nontaxable event for purposes of state gross receipts
taxes. (citations omitted, emphasis added).

Thus, the court found that the manner in which Mr. Stohr reported his compensation for federal

purposes controlled the determination of whether that compensation could be considered wages

exempt from gross receipts taxes.

In this case, the Taxpayer reported most of the income he received from CMS as business

income on Schedule C to his 1994 federal income tax return. While it is true that the Taxpayer

believed this income should have been treated as employee wages and tried to get CMS to correct

the situation, the Taxpayer ultimately acceded to his accountant’s advice and reported the income

reported on Form 1099 as business income. As the Co-Con and Stohr decisions establish, when

there is a conflict between the way a taxpayer reports a transaction for federal and state tax purposes,

the taxpayer is bound by the manner in which he reported for federal purposes. If a taxpayer’s

method of reporting does not reflect the true nature of a transaction, the taxpayer has the option—if

not the obligation—to file amended federal returns. Tax reporting, even when it does not distort

income or result in tax savings, is not a matter of convenience. Tax returns should accurately reflect

that which is being reported.

At the April 4, 2001 hearing, the Taxpayer stated that he was willing to file amended 1994

income tax returns, but was still waiting to obtain his file of 1994 tax information from his New

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York accountant.1 The parties agreed that if the Taxpayer were determined to be an employee, he

should be given a specified period of time to correct his returns. Once amended returns are filed to

report the Taxpayer’s income from CMS as employee wages, rather than as business income, he will

be entitled to deduct those wages from gross receipts under Section 7-9-17 NMSA 1978.

NTTC Issue. Having found that the Taxpayer was an employee of CMS, there is no need to

address the Taxpayer’s alternative issue concerning NTTCs.

CONCLUSIONS OF LAW

1. The Taxpayer filed a timely, written protest to Assessment No. 2215502, and

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

2. Although CMS treated the Taxpayer as an independent contractor, because of the

degree of control CMS exercised over the Taxpayer, the Taxpayer was an employee of CMS.

3. The Taxpayer is not entitled to claim the gross receipts tax deduction provided in

Section 7-9-17 NMSA 1978 as long as his 1994 federal income tax return reflects this income as

business income on Schedule C to Form 1040.

4. The Taxpayer will be entitled to claim the gross receipts tax deduction provided in

Section 7-9-17 NMSA 1978 if the Taxpayer files amended 1994 state and federal income tax returns

to report his income from CMS as employee wages.

For the foregoing reasons, the Taxpayer's protest is DENIED IN PART AND GRANTED IN

PART. The Department is ordered to abate Assessment No. 2215502 if the Taxpayer provides the

Department with proof, on or before July 30, 2001, that he has filed amended state and federal income

1
The primary reason for requiring amended returns is to prevent a taxpayer from “double-dipping” by
simultaneously claiming to be an independent contractor entitled to business deductions on Schedule C of his federal
income tax return and an employee entitled to gross receipts tax deductions on his New Mexico CRS-1 returns. In
this case, the Taxpayer did work as an independent contractor after leaving CMS and may have a number of
legitimate deductions for the period October-December 1994. To the extent deductions were claimed for expenses

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tax returns to report his 1994 income from CMS as employee wages. In the event the Taxpayer does

not provide the required proof of filing by July 30, 2001, the Taxpayer shall be bound by his original

method of reporting his income from CMS and shall be liable for payment of the gross receipts, tax,

penalty and interest assessed against him.

DATED April 17, 2001.

related to the Taxpayer’s work for CMS, however, those deductions must meet IRS requirements for unreimbursed
employee expenses and may not be deducted as business expenses on Schedule C.

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