Can a hands-off company president escape personal liability for withholding tax the company deducted but never paid over, by claiming he did not know and had reasonable cause?

Plain-English summary

The majority-shareholder president of an architecture firm was personally liable for the withholding taxes the firm deducted from employees but never remitted — and his claim that he did not know and had "reasonable cause" did not excuse him. Protest GRANTED IN PART and DENIED IN PART.

This is the companion case to co-owner Eugene Baker's protest (D&O 01-30), arising from the same audit of Dean/Krueger & Associates (DKA). Hal Dean owned over 50% of DKA and served as its president, focused mainly on design and marketing; Baker handled day-to-day operations and the books. Both men had check-signing authority, shared hiring and firing, and met regularly about the firm's finances. From 1991 on, DKA withheld tax from employee paychecks but stopped remitting it, using the money for other bills. After a 1999 audit, the Department assessed DKA and issued personal audit assessments to both owners for the withholding portion. It conceded the 1992 year was time-barred, leaving about $55,028 for January 1993 through April 1999 in dispute.

Dean was a liable "withholder"

Under Section 7-3-5, "every withholder" is liable for the withholding tax, and Section 7-3-2(C) defines a withholder/employer to include an officer with "control of the payment of wages." As majority shareholder and president who shared hiring/firing decisions, had check-signing authority, participated in deciding which creditors to pay, and had access to the books, Dean had that control — so he was personally liable (the hearing officer cited Winter v. United States and Benoit v. Commissioner of Revenue for the same principle).

The "reasonable cause" exception did not apply — twice over

Dean's central argument was the Section 7-3-5(B) exception: a withholder is not liable for amounts "not deducted and withheld" if the failure "was due to reasonable cause." The hearing officer rejected it on two independent grounds:

• It only covers a failure to withhold, not a failure to pay over. DKA did deduct and withhold the tax; it simply never remitted it. The exception is written for employers who fail to withhold, not those who withhold and keep the money. There is a logical reason for that limit: once tax is withheld, the employee gets a credit for it (Section 7-3-9) and it is treated as a collected tax (Section 7-3-4), so the state cannot collect it from the employee again. Extending "reasonable cause" to a failure to pay over would leave the state unable to collect legitimately owed revenue.
• There was no reasonable cause anyway. When Dean asked whether taxes were being paid, Baker told him they were paid or "on a schedule" — a clear signal of non-compliance that Dean never followed up on. He never reviewed the returns, never asked the accountant about the tax situation, and the accountant eventually told him directly that the withholding on his own W-2s had not been paid. As president and majority owner, he had no reasonable cause to remain unaware for eight years.

The remaining issues tracked the companion case

As in Baker's protest, the hearing officer held: (1) the assessment was valid under Section 7-1-17(B)(2) even though it reused DKA's assessment numbers, because numbering is only for the Department's convenience; (2) the seven-year period of Section 7-1-18(C) applies to the tax for unfiled periods and reached Dean as a responsible "taxpayer" under Section 7-1-3(W); and (3) the CPA's payroll records Dean produced overcame the Department's estimate for 1994–1996 (the Department's "surprise" and credibility objections were rejected), so those years were adjusted to the actual amounts. Dean provided no records for 1992, 1993, or 1999.

Result: protest GRANTED IN PART (1994–1996 estimate reduced to actual amounts) and DENIED IN PART (personal liability, no reasonable cause, valid assessment, and the seven-year period all upheld).

What this means for you

A hands-off title does not shield you from withholding liability

Being the "design and marketing" partner does not matter if you are an officer with control over the company's payments. Check-signing authority, a role in deciding which bills get paid, and access to the books make you a liable withholder — even if a co-owner actually ran the books.

"Reasonable cause" won't excuse spending withheld taxes

The reasonable-cause exception in Section 7-3-5(B) is narrow: it covers a failure to withhold tax in the first place, not a failure to pay over money that was withheld. Once you deduct tax from paychecks, it is the state's money, and keeping it is not excusable.

Vague answers about taxes are a red flag you must chase down

Being told taxes are "on a schedule" is notice that something is wrong. A responsible officer who does not follow up — review the returns, ask the accountant, get the numbers — cannot later claim reasonable ignorance.

Records still matter at the hearing

Even when you lose on liability, producing the actual payroll records can reduce an estimated assessment. Dean and Baker both cut three years of the estimate this way. Raise the calculation challenge in your protest so the Department cannot claim surprise.

Common questions

Q: How is this different from the Baker case (D&O 01-30)?
A: It is the companion protest from the same audit. Both co-owners were held personally liable with the same partial outcome. Dean additionally raised the Section 7-3-5(B) "reasonable cause" defense (as the more hands-off president), which the hearing officer rejected.

Q: Why didn't "I didn't know" work as a defense?
A: First, Section 7-3-5(B) only excuses a failure to withhold, and here the tax was withheld and just not remitted. Second, there was no reasonable cause: Dean was told taxes were only "on a schedule," never followed up, and was eventually told outright by the accountant that the tax was unpaid.

Q: Was the assessment valid even though it shared DKA's number?
A: Yes. Under Section 7-1-17(B)(2), an assessment is effective when the notice is mailed to the taxpayer. Nothing requires a unique number, and using one number for parties jointly liable for the same tax prevents double collection.

Q: Why did the seven-year period apply to him?
A: Section 7-1-18(C) gives the Department seven years to assess the tax for periods with no return filed. That period runs against the tax and reaches any liable person, including a responsible officer, under Section 7-1-3(W).

Q: How did Dean win part of the case?
A: He produced the CPA's payroll records showing the actual withholding for 1994–1996, which was lower than the Department's estimate. Those records overcame the presumption of correctness, and the assessment for those years was reduced.

Citations and references

Statutes:

• NMSA 1978, § 7-3-5 — every withholder is liable for amounts required to be deducted and withheld
• NMSA 1978, § 7-3-5(B) — reasonable-cause exception, limited to a failure to deduct and withhold
• NMSA 1978, § 7-3-2(C) — "employer" (a withholder) includes an officer with control of the payment of wages
• NMSA 1978, § 7-3-2(N) — "withholder" includes an employer
• NMSA 1978, § 7-3-4 — amounts withheld are treated as a collected tax
• NMSA 1978, § 7-3-9 — the employee receives a credit for tax withheld
• NMSA 1978, § 7-1-17(B)(2) — an assessment is effective when the notice of assessment is mailed or delivered
• NMSA 1978, § 7-1-18(A) — general three-year assessment period
• NMSA 1978, § 7-1-18(C) — seven-year assessment period where a required return was not filed
• NMSA 1978, § 7-1-3(W) — "taxpayer" includes a person responsible for withholding and payment of tax

Cases cited:

• Winter v. United States, 196 F.3d 339 (2d Cir. 1999)
• Benoit v. Commissioner of Revenue, 453 N.W.2d 336 (Minn. 1990)

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Hal M. Dean
• Decision PDF: D&O 01-31

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
HAL M. DEAN No. 01-31
ASSESSMENT NOS. 2462271 and 2490193

DECISION AND ORDER

A formal hearing on the above-referenced protest was held August 29, 2001, before Margaret

B. Alcock, Hearing Officer. Hal M. Dean was represented by Wayne G. Chew, Esq. The Taxation

and Revenue Department ("Department") was represented by Bruce J. Fort, Special Assistant Attorney

General. At the end of the hearing, the parties agreed to submit closing argument in the form of written

briefs. The briefing scheduled ended October 22, 2001, at which time the matter was submitted for

decision. Based on the evidence and arguments presented, IT IS DECIDED AND ORDERED AS

FOLLOWS:

FINDINGS OF FACT

1. From January 1992 through April 1999, the audit period at issue in this case,

Dean/Krueger & Associates, Inc. (“DKA”) was engaged in the business of providing architectural

services in New Mexico.

2. DKA was registered with the Department under taxpayer identification number 01-

775004-00-0 for payment of gross receipts, compensating and withholding taxes, which are required

to be paid monthly under the Department’s combined reporting system (“CRS”).

3. During the audit period, Hal M. Dean and Eugene K. Baker were the sole

shareholders and officers of DKA: Mr. Dean, who owned over 50 percent of DKA’s stock, served as

president; Mr. Baker served as vice-president, treasurer and secretary.

4. Mr. Dean was primarily responsible for the firm’s design work and marketing.
5. Mr. Baker was primarily responsible for the day-to-day business operations of DKA

and also worked on architectural drawings and specifications.

6. Mr. Dean and Mr. Baker shared the responsibility for hiring and firing employees.

7. As the majority shareholder, Mr. Dean had the final authority to make decisions on

behalf of DKA and could have fired Mr. Baker had he chosen to do so.

8. During the audit period, Mr. Dean and Mr. Baker were the only persons who had

signature authority on DKA’s bank accounts.

9. Mr. Baker was the person who routinely signed DKA’s tax returns and checks,

although Mr. Dean signed such documents on occasion.

10. During the 1990s, DKA had cash flow problems resulting from the cyclical nature of

the firm’s business.

11. At times, DKA had to reduce the number of employees working for the firm and both

Mr. Dean and Mr. Baker contributed their own funds to keep the business going.

12. Mr. Dean and Mr. Baker had regular status meetings at which they discussed DKA’s

income and the funds available to pay consultants and other creditors of the firm.

13. Mr. Dean had the authority to decide which bills would be paid first, although Mr.

Baker usually made such decisions in consultation with Mr. Dean.

14. Beginning in 1991, Mr. Baker stopped reporting and paying New Mexico CRS taxes,

including withholding taxes that had been deducted from the wages of DKA’s employees.

15. Mr. Baker used the amounts deducted as withholding taxes from employee

paychecks to cover other bills that Mr. Baker considered to be more urgent.

16. When Mr. Dean asked Mr. Baker whether taxes were being paid, Mr. Baker told him

that taxes were paid or were “on a schedule” for payment. Mr. Dean did not follow up to determine

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what taxes were behind in payment or how much was owed, nor did he ask to see copies of DKA’s

tax returns.

17. Most of DKA’s business records were kept at the office; some records were kept by

Charles W. Orr, DKA’s certified public accountant. All DKA’s financial records, whether kept at

the office or by Mr. Orr, would have been available to Mr. Dean if he had asked to see them.

18. Mr. Orr prepared annual financial statements for DKA’s shareholders that included a

line item showing DKA’s unpaid liabilities.

19. Mr. Dean received copies of DKA’s annual financial statements, but never asked Mr.

Orr or Mr. Baker for a breakdown of the firm’s unpaid liabilities, which would have revealed the

liability for unpaid CRS taxes.

20. In addition to acting as DKA’s accountant, Mr. Orr prepared Mr. Dean’s personal

income tax returns each year.

21. Although Mr. Orr knew DKA had not paid the state withholding taxes shown on Mr.

Dean’s W-2 forms, Mr. Orr claimed these taxes as a credit against Mr. Dean’s New Mexico income

tax liability when preparing Mr. Dean’s 1992-1998 tax returns.

22. At some point, Mr. Orr advised Mr. Dean that the withholding taxes shown on his W-

2 forms had not actually been paid to the state by DKA.

23. In July 1999, the Department began a field audit of DKA.

24. Because DKA had not filed CRS returns since 1991, the Department extended the

audit period back to January 1992 pursuant to the seven-year limitation period set out in Subsection

C of Section 7-1-18 NMSA 1978.

25. The only withholding tax records DKA provided to the auditors were for the 1997

and 1998 tax years. For the 1992-1996 and 1999 tax years, the Department estimated the

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withholding taxes due to be $8,688.69 per year, based on the average of the taxes due for 1997 and

1998.

26. At the hearing on his protest, Mr. Dean introduced additional records that were in the

possession of Charles W. Orr, DKA’s accountant. These records, along with the records provided

during the audit, established that the withholding taxes deducted from employee paychecks during

each of the years 1994 through 1998 were as follows:

1994: $4,647.79
1995 $7,287.25
1996: $9,719.10
1997: $9,836.41
1998: $7,765.94

Mr. Dean did not provide any evidence concerning the withholding taxes due for tax years 1992,

1993 or 1999.

27. On December 16, 1999, the Department mailed Assessment No. 2462271 to DKA in

the total amount of $144,990.51, representing gross receipts tax, withholding tax, penalty and

interest for tax periods January through December 1992.

28. On February 18, 2000, the Department mailed Assessment No. 2490193 to DKA in

the total amount of $414,934.39, representing gross receipts tax, withholding tax, penalty and

interest for tax periods January 1993 through April 1999.

29. In February 2000, the Department mailed an assessment to Hal M. Dean in the total

amount of $112,043.62, representing the withholding tax portion (including related penalty and

interest) of Assessment Nos. 2462271 and 2490193.

30. The assessment issued to Mr. Dean was not assigned a new number, but reflected the

same numbers previously used in the assessments issued to DKA. The assessment issued to Mr.

Dean referenced both his social security number and DKA’s taxpayer identification number and

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included the following explanation: “Personal Audit Assessment: Withholding Tax Portion of

Assessment Numbers 2462271 and 2490193 for Dean\Kruger and Associates.”

31. The Department’s computer system is programmed in such a way that assessment

numbers can be assigned to only one taxpayer. In order to issue an assessment to a taxpayer using a

number already assigned to another taxpayer, the Department must generate the assessment manually

and that assessment will not be reflected in the Department’s computer system.

32. On February 28, 2000, Mr. Dean filed a written protest to the personal audit

assessment issued against him.

33. In its written closing argument, filed October 12, 2001, the Department conceded that

its assessment of withholding tax against Mr. Dean for the 1992 tax year, as reflected in Assessment

No. 2462271, was untimely and agreed to abate that portion of the assessment.

34. The amount remaining in dispute is the $55,028.36 of withholding tax (plus penalty

and accrued interest) assessed against Mr. Dean for tax periods January 1993 through April 1999.

DISCUSSION

The issue to be decided is whether Hal M. Dean is personally liable for withholding taxes

that were deducted from the wages of DKA’s employees during the period January 1993 through

April 1999 but were never reported or paid to the Department. Mr. Dean raises the following

arguments in support of his protest: (1) he had reasonable cause for failing to pay the withholding

taxes due to the state and should be excused from liability pursuant to Section 7-3-5(B) NMSA 1978;

(2) the manual assessment issued to him in February 2000 was not a valid assessment because it did

not have a unique assessment number that could be identified by the Department’s computer; (3)

Section 7-1-18 NMSA 1978 limits the period for which he can be assessed to three years because he

did not have the initial duty to file withholding tax returns and became a “taxpayer” only after he

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was assessed by the Department; and (4) the Department’s estimate of withholding taxes due should

be adjusted to reflect the actual withholding taxes shown on business records introduced at the

hearing.

Liability for Withholding Tax. Payment of withholding taxes is governed by the

Withholding Tax Act, Sections 7-3-1, et seq., NMSA 1978. Section 7-3-5 is the specific statute relied

upon by the Department to hold Mr. Dean liable for DKA’s unpaid withholding taxes. During the

period at issue, that section read 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 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.

Section 7-3-5 imposes liability for withholding taxes on "every withholder". A "withholder" is

defined in Section 7-3-2(N) to include an “employer”, which is defined in Section 7-3-2(C) as

follows:

C. "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 service as the employee of that person except that if the person
for whom the individual performs or performed the services does not have
control over the payment of the wages for such services, "employer" means the
person having control of the payment of wages.

Based on this statutory language, a corporate officer who has control of the payment of wages is

personally liable for payment of the corporation's withholding taxes. In this case, the evidence

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shows that Hal Dean was the majority shareholder and president of DKA, participated in hiring and

firing employees, participated in deciding which creditors of the corporation should be paid, had the

authority to sign tax returns and checks on behalf of DKA, and had access to DKA’s books and tax

records. Based on these facts, there is no question that Hal Dean had control of the payment of

wages on behalf of DKA. See, e.g., Winter v. United States, 196 F.3d 339 (2d Cir. 1999); Benoit v.

Commissioner of Revenue, 453 N.W.2d 336 (Minn. 1990).

Mr. Dean maintains he did not know withholding taxes were not being paid to the state and

claims the protection provided in Subsection B of Section 7-3-5, which states: “if the withholder’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.” (emphasis added). The problem with Mr. Dean’s argument is

that taxes were deducted and withheld from the paychecks of DKA’s employees. Because there was no

failure to deduct and withhold, but simply a failure to pay the withheld taxes over 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 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. Dean, one of the corporate officers in control of the

payment of wages, from liability for the taxes withheld by DKA would foreclose the Department’s

ability to collect tax revenues legitimately due to the state. There is nothing to indicate the legislature

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intended this result or intended to extend the very specific exception provided for an employer’s

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

from employees’ paychecks.

Even if the exception in Section 7-3-5(B) did apply, the evidence does not support Mr.

Dean’s contention that he had “reasonable cause” not to know that DKA was delinquent in the

payment of state withholding taxes. At the hearing, Mr. Dean testified that whenever he asked

Eugene Baker whether taxes were being paid, Mr. Baker told him that taxes were either paid or were

“on a schedule” for payment. This answer clearly signaled that DKA was not in full compliance

with its tax obligations. Nonetheless, Mr. Dean made no effort to determine exactly which taxes

were delinquent and being paid “on a schedule” or how much was owed. Nor did he ask to review

DKA’s tax returns or seek information from Charles Orr, DKA’s accountant, concerning the

corporation’s tax situation. At some point, Mr. Orr approached Mr. Dean with the information that

the withholding taxes shown on Mr. Dean’s W-2 forms had not been paid to the state. Based on this

evidence, and Mr. Dean’s position as majority shareholder and president of DKA, there could be no

“reasonable cause” for him to be unaware of DKA’s continued failure over a period of eight years to

pay withholding taxes due to the state.

Use of the Same Assessment Numbers to Assess Different Taxpayers. The assessment

the Department issued to Mr. Dean in his individual capacity was not assigned a new number, but

reflected the same numbers previously used in the assessments issued to DKA. The assessment

issued to Mr. Dean referenced both his social security number and DKA’s taxpayer identification

number and included the following explanation: “Personal Audit Assessment: Withholding Tax

Portion of Assessment Numbers 2462271 and 2490193 for Dean\Kruger and Associates.” The

Department’s computer system is programmed in such a way that assessment numbers can be

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assigned to only one taxpayer. In order to issue an assessment using a number already assigned to

another taxpayer, the Department must generate the assessment manually. Accordingly, the

assessment will not show up in the Department’s computer system. Based on these facts, Mr. Dean

argues that the manual assessment issued to him in February 2000 was not a valid assessment

because it did not have a unique assessment number that could be identified by the Department’s

computer.

Section 7-1-17(B)(2) NMSA 1978 provides that assessments of tax are effective:

when a document denominated “notice of assessment of taxes”, issued in the
name of the secretary, is mailed or delivered in person to the taxpayer against
whom the liability for tax is asserted, stating the nature and amount of the
taxes assertedly owed by the taxpayer to the state, demanding of the taxpayer
the immediate payment of the taxes and briefly informing the taxpayer of the
remedies available to the taxpayer;

The assessment mailed to Mr. Dean in February 2000 meets these statutory requirements. There is

nothing in Section 7-1-17—or any other section of the Tax Administration Act—that requires the

Department to assign numbers to the assessments it issues. The numbering of assessments is done

purely for the Department’s convenience. While an assessment number is usually identified to a

specific taxpayer, nothing prohibits the Department from identifying an assessment number to a

specific tax liability instead.

Mike Giles, an auditor in the Department’s protest office, explained that the same assessment

number is used to assess different taxpayers in situations where more than one taxpayer is liable for

the same tax. Assigning one assessment number to taxpayers who are jointly and severally liable for

the same tax liability insures that all payments received are credited to that liability and prevents the

possibility of collecting the tax more than once. The fact that the Department’s computer system is

programmed in such a way that assessments to additional taxpayers must be manually created off-

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line is irrelevant. The validity of an assessment is determined by statute, not by the constraints of the

Department’s computer system. In this case, the February 2000 assessment issued to Mr. Dean met

all the requirements of Section 7-1-17 and was a valid assessment.

Limitation Periods for Issuing Assessments. Mr. Dean argues that Subsection A of

Section 7-1-18 NMSA 1978 limits the period within which the Department could issue an

assessment to him in his individual capacity to three years from the end of the calendar year in which

DKA’s withholding taxes were due. The Department contends that the seven-year period provided

in Subsection C of Section 7-1-18 is applicable to Mr. Dean and to all persons who qualify as

“withholders” under the Withholding Tax Act. The pertinent portions of Section 7-1-18 read as

follows:

A. Except as otherwise provided in this section, no assessment of tax
may be made by the department after three years from the end of the calendar
year in which payment of the tax was due,....
B. ...
C. In case of failure by a taxpayer to complete and file any required
return, the tax relating to the period for which the return was required may be
assessed at any time within seven years from the end of the calendar year in
which the tax was due,....

There is no dispute that DKA failed to file CRS returns from 1991 through 1999 and that the

Department had seven years from the end of the calendar year in which taxes for that period were

due to issue an assessment to DKA. Mr. Dean maintains that the seven-year limitation period in

Subsection C does not apply to him in his individual capacity because he was not a “taxpayer”

required to file CRS returns and did not become a taxpayer until after he was assessed by the

Department.

Mr. Dean’s reading of the statute is too narrow. Section 7-1-18(C) gives the Department

seven years to assess “the tax” relating to any period for which required returns were not filed. The

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seven-year limitation period applies to the assessment of tax, not to the assessment of a particular

taxpayer. Any taxpayer liable for tax relating to a nonfiled period may be assessed within seven

years from the end of the calendar year in which the tax was originally due. Section 7-1-3(W)

NMSA 1978 defines a “taxpayer” as:

a person liable for payment of any tax, a person responsible for withholding
and payment or for collection and payment of any tax or a person to whom an
assessment has been made, if the assessment remains unabated or the amount
thereof has not been paid.

Mr. Dean focuses on the last part of Subsection W, which defines a taxpayer to mean a person to

whom an assessment of tax has been made. He ignores the preceding language which defines a

taxpayer to include “a person responsible for withholding and payment or for collection and payment

of any tax.” Mr. Dean also confuses the meaning of “delinquent taxpayer” in Section 7-1-16 NMSA

1978 with the meaning of “taxpayer” in Section 7-1-3(W) NMSA 1978. Whether a taxpayer is

“delinquent” is relevant only in the context of collection actions. At the present time, Mr. Dean is

not a delinquent taxpayer and cannot become one until after this protest is finally resolved. This has

no bearing, however, on whether he qualified as a “taxpayer” liable for payment of DKA’s

withholding taxes during the nonfiled periods at issue. Pursuant to Sections 7-1-3(W) and 7-3-5,

Dean was a taxpayer personally liable for payment of withholding tax deducted from the paychecks

of DKA’s employees but never reported or paid to the Department. Accordingly, the Department

correctly assessed Mr. Dean under the seven–year limitation period set out in Section 7-1-18(C).

Tax Base Used to Assess Withholding Tax. During the audit of DKA, the only withholding

tax records provided to the Department’s auditors were for the 1997 and 1998 tax years. For the

1992-1996 and 1999 tax years, the Department estimated the withholding taxes at $8,688.69 per

year, based on the average of the taxes due for 1997 and 1998. At the August 29, 2001 hearing on

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his protest, Mr. Dean introduced general ledger pages, payroll earnings statements and W-2s that had

been in the possession of Charles W. Orr, the company’s certified public accountant. Mr. Orr

testified that these were true and accurate copies of business records he maintained on behalf of

DKA. These records, together with the records produced during the audit, established that the

following taxes were deducted from employee paychecks during the years 1994 through 1998:

1994: $4,647.79
1995 $7,287.25
1996: $9,719.10
1997: $9,836.41
1998: $7,765.94

No evidence was provided concerning withholding tax for the years 1992, 1993 or 1999.

In its written closing argument, the Department objected to the admission of the additional

records on two grounds: (1) that Charles Orr was not a credible witness; and (2) that Mr. Dean

should not be allowed to introduce “last-minute evidence” at the hearing. With regard to the

Department’s first argument, I reject the suggestion that Mr. Orr fabricated the documents

introduced as Taxpayer’s Exhibit D. I accept Mr. Orr’s testimony that these were records kept in the

regular course of DKA’s business and reflect the actual amount of DKA’s withholding tax for the

years at issue. With regard to the Department’s second argument, there is simply no legal authority

for excluding the taxpayer’s exhibit. Mr. Dean’s February 28, 2000 protest letter clearly stated that

he was challenging the “erroneous calculation of the taxes due and assessed.” If the Department

wished to determine the basis for Mr. Dean’s challenge, it had eighteen months to conduct discovery

and request production of documents the taxpayer intended to introduce to dispute the correctness of

the Department’s assessment. There is no indication that the Department conducted any formal

discovery prior to the date of the hearing. That being the case, the Department is in no position to

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claim prejudicial surprise or ask the hearing officer to prohibit the taxpayer from introducing

additional evidence to support the issues raised in his protest.

CONCLUSIONS OF LAW

1. Hal M. Dean filed a timely, written protest to Assessment No. 2490193, issued to him

in his individual capacity as a corporate officer of DKA on February 18, 2000, and jurisdiction lies over

the parties and the subject matter of this protest.

2. Mr. Dean was both a “withholder” and an “employer” as defined in New Mexico’s

Withholding Tax Act and was personally liable for DKA’s unpaid withholding taxes for the period

January 1993 through April 1999.

3. The “reasonable cause” exception provided in Section 7-3-5(B) NMSA 1978 does

not apply to the facts of this case and does not excuse Mr. Dean from liability for DKA’s

withholding taxes.

4. The February 2000 assessment issued to Mr. Dean met all the requirements of

Section 7-1-17 NMSA 1978 and was a valid assessment.

5. Mr. Dean was a taxpayer personally liable for payment of DKA’s withholding taxes

during periods when no returns were filed, and the Department correctly assessed Mr. Dean for these

taxes under the seven–year limitation period set out in Section 7-1-18(C) NMSA 1978.

6. The additional withholding tax records Mr. Dean introduced at the administrative

hearing were sufficient to overcome the presumption of correctness of the Department’s estimate of

taxes due for 1994, 1995 and 1996 and provide a reasonable basis for adjusting the Department’s

assessment for those years.

For the foregoing reasons, Mr. Dean’s protest IS GRANTED IN PART AND DENIED IN

PART. Mr. Dean’s protest is granted with respect to the Department’s estimate of tax for the 1994,

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1995 and 1996 tax years, and the Department is ordered to adjust the assessment for those years to

reflect the amount of withholding tax shown on Taxpayer Exhibit D. With regard to all other issues,

Mr. Dean’s protest is denied.

DATED November 1, 2001.

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