How much of Charles Becknell's gross receipts tax assessment was abated when his tax return mixed his own consulting receipts with income and subcontractor payments of his nonprofit organization?

Plain-English summary

Charles E. Becknell received a partial abatement because he proved that $10,010 reported on his individual Schedule C had actually been paid by his nonprofit organization to three outside subcontractors. He remained liable on the rest because the nonprofit's exemption did not cover his own service receipts and his records did not substantiate further reductions.

Becknell worked as a University of California employee and also served as executive director of The Success Institute of America, Inc., a nonprofit he created to assist children and young people. The Institute contracted to provide training and other services and used both Becknell and outside subcontractors.

A bookkeeper who was not a trained accountant mixed the Institute's receipts with Becknell's individual receipts. His 1999 federal Schedule C reported $65,303 of business income, closely matching the Institute's $65,891 of contract income.

The Department assessed $5,854.25 of gross receipts tax, penalty, and interest after learning through federal information sharing that Becknell had not reported gross receipts tax on the Schedule C income.

The nonprofit and Becknell were separate taxpayers

The Institute had initially paid gross receipts tax and later obtained a refund based on its nonprofit status under the exemption Becknell cited.

That did not exempt Becknell's individual receipts. The decision treated him and the corporation as separate taxable entities, so income he received for personally performing services remained subject to his own tax analysis.

Documented subcontractor payments were removed

After the first hearing, Becknell documented $4,000 of income from services performed outside New Mexico. The Department abated the tax, penalty, and interest on that amount before the final decision.

He also produced three Forms 1099 showing Institute payments of $5,710, $1,300, and $3,000 to outside subcontractors—a total of $10,010.

The decision credited Becknell's testimony and the Institute's contracts, finding that the bookkeeper had mistakenly included the Institute's full income on his individual return. Because the three 1099s proved he did not receive the $10,010, the related tax, penalty, and interest had to be abated.

Becknell claimed other subcontractor payments but could not document them. Section 7-1-10(A) required records permitting accurate computation of tax, and Section 7-1-17(C) presumed the assessment correct. Unsupported amounts therefore remained assessed.

Hearing delay did not remove charges

Becknell also argued that the nearly two-year delay before his hearing increased penalty and interest.

The negligence penalty had already reached its statutory 10% maximum before the assessment, so the protest delay added no penalty.

Interest was mandatory from the tax due date until payment. The Department had warned Becknell that interest would continue during the protest and that he could pay the disputed principal to stop additional accrual, then seek a refund if he won. He chose not to pay.

The cited Court of Appeals decision rejected the idea that lack of a prompt hearing relieved a taxpayer of the underlying obligation.

Result: protest GRANTED IN PART and DENIED IN PART. Tax, penalty, and interest on $10,010 were abated; the remaining assessment stayed due.

What this means for you

Founders working through a nonprofit corporation

Keep the organization's receipts and payments separate from personal consulting income. An entity-level exemption does not automatically extend to the founder's own receipts.

Businesses using subcontractors

Retain Forms 1099, contracts, invoices, and payment records linking each subcontractor amount to the income under audit. Only the documented payments were removed here.

Taxpayers protesting while interest accrues

Consider the Department's stated option to pay disputed principal and pursue a refund later. Waiting for the hearing left interest running on amounts ultimately upheld.

Taxpayers alleging agency delay

Identify what actually increased during the delay. Here, the penalty was already capped, while mandatory interest continued because principal remained unpaid.

Common questions

Q: Did the nonprofit exemption cover Becknell personally?
A: No. The decision treated Becknell and the Institute as separate taxable entities.

Q: What subcontractor amount was proven?
A: $10,010 across three Forms 1099.

Q: What other amount had the Department already removed?
A: $4,000 for services performed outside New Mexico.

Q: Why were additional claimed subcontractor payments rejected?
A: Becknell and the Institute lacked records proving those amounts.

Q: Did the hearing delay eliminate interest?
A: No. Interest remained mandatory, and Becknell had been told he could pay principal to stop it.

Citations and references

Statutes:

• NMSA 1978, § 7-1-10(A) — tax recordkeeping requirement
• NMSA 1978, § 7-1-17(C) — presumption that an assessment is correct
• NMSA 1978, § 7-1-67(A) — interest from tax due date until payment
• NMSA 1978, § 7-1-69(A) — negligence penalty
• NMSA 1978, § 7-9-29 — nonprofit gross receipts tax exemption claimed by the organization

Cases cited:

• Archuleta v. O'Cheskey, 84 N.M. 428, 504 P.2d 638 (Ct. App. 1972)
• State v. Lujan, 90 N.M. 103, 560 P.2d 167 (1977)
• In re Ranchers-Tufco Limestone Project Joint Venture, 100 N.M. 632, 674 P.2d 522 (Ct. App. 1983)

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Charles E. Becknell
• Decision PDF: D&O 04-14

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
CHARLES E. BECKNELL No. 04-14
ID NO. 02-417311-00 8
ASSESSMENT NOS. 3936950-3936951

DECISION AND ORDER

A formal hearing on the above-referenced protest was held on July 1, 2004, before

Margaret B. Alcock, Hearing Officer. After listening to the evidence presented, the Hearing

Officer continued the hearing until September 16, 2004 to give Charles Becknell (“Taxpayer”)

time to provide the Department with additional documentation. At both hearings, the

Taxation and Revenue Department ("Department") was represented by Susanne Roubidoux,

Special Assistant Attorney General, and the Taxpayer represented himself. Based on the

evidence and arguments presented by the parties, IT IS DECIDED AND ORDERED AS

FOLLOWS:

FINDINGS OF FACT

1. The Taxpayer is a New Mexico resident.

2. During the 1999 tax year, the Taxpayer performed consulting services as an

employee of the University of California.

3. The Taxpayer also worked as the executive director of The Success Institute of

America, Inc. (“Institute”), a nonprofit organization he set up to assist children and young

people.

4. The Institute entered into several contracts to perform training and other

services for other nonprofit organizations involved in working with children.

5. The Taxpayer performed some of the services required under those contracts;

the Institute hired outside subcontractors to perform other services.

6. At the end of each tax year, the Institute issued federal 1099s to its

subcontractors reporting the amount of income paid to them during the year.

7. The Institute initially paid New Mexico gross receipts taxes on its receipts

from performing services for other entities.

8. When the Taxpayer subsequently learned that the Institute was exempt from

gross receipt tax, he applied for and received a refund of the taxes previously paid.

9. The Taxpayer was not aware that his individual business receipts were subject

to New Mexico’s gross receipts tax, and he did not report or pay gross receipts tax on this

income.

10. The Taxpayer hired a bookkeeper who was not a trained accountant to prepare

his 1999 personal income tax returns.

11. The bookkeeper did not understand the distinction between income the

Taxpayer received on behalf of the Institute and income the Taxpayer received in his

individual capacity.

12. As a result, the $65,303 of business income reported on Schedule C of the

Taxpayer’s 1999 federal income tax return included receipts of the Institute as well as the

Taxpayer’s individual receipts.

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13. The income the Taxpayer earned as an employee of the University of

California was not included on his Schedule C, but was correctly listed as wage income on his

Form 1040.

14. As part of an information-sharing program with the Internal Revenue Service,

the Department was notified of the business income reported on the Taxpayer’s 1999 federal

income tax return. When the Department investigated, it found the Taxpayer had not reported

or paid gross receipts tax on this income.

15. On September 20, 2002, the Department issued Assessment Nos. 3936950 &

3936951 in the total amount of $5,854.25, representing gross receipts tax, penalty, and interest

on the business income reported on the Taxpayer’s 1999 federal return.

16. On October 17, 2002, the Taxpayer filed a written protest to the Department’s

assessments.

17. On November 1, 2002, the Department’s protest office sent a letter to the

Taxpayer acknowledging receipt of his protest. The letter advised the Taxpayer that interest

on the amount of tax principal in dispute would continue to accrue during the protest and

advised the Taxpayer as follows: “You may make payment on a protested assessment to stop

the accrual of interest and penalty. Upon resolution of the protest, you may claim a refund for

any portion of the protested assessment resolved in your favor.”

18. The Taxpayer did not make any payment of the tax principal assessed in order

to stop the accrual of additional interest.

19. Following the initial hearing on his protest in July 2004, the Taxpayer provided

documentation to establish that $4,000 of the income reported on his Schedule C was income

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from performing services outside New Mexico, and the Department abated the tax, penalty,

and interest assessed on this amount.

20. The Taxpayer also provided copies of three 1099s the Institute issued to

outside subcontractors for the 1999 tax year: one for $5,710; one for $1,300; and one for

$3,000. The Department refused to accept the 1099s as evidence that this amount of income

should be deducted from the business receipts shown on the Taxpayer’s 1999 Schedule C.

DISCUSSION

The issue presented is whether the Taxpayer is liable for gross receipts tax, interest and

penalty on the business income reported on Schedule C of his 1999 federal income tax return.

The Taxpayer argues that he is entitled to an abatement of all or part of the assessment because:

(1) The Success Institute of America, his nonprofit organization, was exempt from gross receipts

tax and had received a refund of the gross receipts taxes it erroneously paid to the Department;

(2) a portion of the work performed under the Institute’s contracts was performed by outside

subcontractors and not by the Taxpayer; and (3) the Department took too long to schedule a

hearing on the Taxpayer’s protest, resulting in the accrual of additional penalty and interest.

Taxation of the Institute’s Gross Receipts. The Taxpayer argues that he should not be

liable for gross receipts tax because his nonprofit organization was exempt from tax under

NMSA 1978, § 7-9-29. Although the Institute initially paid gross receipts taxes on its receipts,

the Department subsequently refunded those taxes. The Taxpayer questions why the

Department has now assessed him on those same receipts. What the Taxpayer fails to realize is

that he and his nonprofit organization are separate taxable entities. The fact that the Institute is

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exempt from gross receipts tax on its receipts does not mean that the Taxpayer is exempt from

tax on income he receives from performing services in his individual capacity.

Payments to Subcontractors. The $65,303 of business income reported on the

Taxpayer’s 1999 Schedule C closely corresponds to the $65,891 of income represented by the

contracts the Institute entered into to perform services for other nonprofit entities. The testimony

of the Taxpayer, who was a credible witness, together with the contracts themselves, support the

conclusion that the Taxpayer’s bookkeeper mistakenly included the full amount of the Institute’s

1999 income on the Taxpayer’s individual federal income tax return. That being the case, the

Taxpayer is entitled to an abatement of any gross receipts tax assessed on income the Institute

paid for the services of independent contractors other than the Taxpayer.

At the July 1, 2004 hearing, the Taxpayer acknowledged that he performed the work

required under at least some of the Institute’s contracts, including its May 25, 1999 and

November 1, 1999 contracts with New Mexico Advocates for Children & Families, which

represented total receipts of $33,470. The Taxpayer also provided copies of 1099s showing that

the Institute paid $10,010 to three outside subcontractors during 1999, and the Taxpayer is

entitled to an abatement of tax on this amount. Although the Taxpayer maintains that additional

payments were made to other subcontractors hired to perform services for the Institute, he has

been unable to provide any evidence of those payments.

NMSA 1978, § 7-1-10(A) requires every person to "maintain books of account or

other records in a manner that will permit the accurate computation of state taxes...." In this

case, neither the Taxpayer’s nor the Institute’s 1999 financial records were sufficient to

establish how much the Institute paid to outside subcontractors, with the exception of the

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$10,010 reflected on the three 1099s. In the absence of such evidence, the Taxpayer has not

met his burden of overcoming the presumption of correctness that attaches to the

Department’s assessments. See, NMSA 1978, § 7-1-17(C); see also, Archuleta v. O'Cheskey,

84 N.M. 428, 431, 504 P.2d 638, 641 (Ct. App. 1972).

Delay in Scheduling a Hearing. The Taxpayer points out that he requested a hearing

on his liability for the gross receipts tax assessed by the Department in his original protest

letter, which was filed on October 17, 2002. The Taxpayer believes that the almost two-year

delay between the date of that letter and the date of the administrative hearing entitles him to

an adjustment of the penalty and interest that have accrued since October 2002.

NMSA 1978, § 7-1-69(A) imposes a negligence penalty of two percent per month, up

to a maximum of ten percent, for a taxpayer’s failure to pay taxes in a timely manner. Based

on this statutory formula, penalty stops accruing five months after the due date of the tax.

Here, the penalty assessed against the Taxpayer reached its maximum of ten percent prior to

the date of the Department’s assessment, and no additional penalty accrued as a result of the

Department’s delay in handling the Taxpayer’s protest.

NMSA 1978, § 7-1-67(A) provides that if a tax is not paid on or before the due date,

“interest shall be paid to the state on that amount from the first day following the day on

which the tax becomes due...until it is paid.” The legislature’s use of the word “shall”

indicates that the assessment of interest is mandatory rather than discretionary. State v. Lujan,

90 N.M. 103, 105, 560 P.2d 167, 169 (1977). The assessment of interest is not designed to

punish taxpayers, but to compensate the state for the time value of unpaid revenues. In this

case, the Taxpayer failed to pay gross receipts taxes due to the state. Although this failure was

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clearly not intentional, the fact remains that the state has been denied the use of funds to

which it is legally entitled.

In In re Ranchers-Tufco Limestone Project Joint Venture, 100 N.M. 632, 635, 674

P.2d 522, 525 (Ct. App.), cert. denied, 100 N.M. 505, 672 P.2d 1136 (1983), the New Mexico

Court of Appeals rejected the argument that a taxpayer who does not receive a prompt hearing

is relieved of his tax obligations to the state. It should also be noted that the Department’s

November 1, 2002 letter acknowledging receipt of the Taxpayer’s protest specifically advised

him that interest would continue to accrue during the pendency of the protest and gave him the

option of making a payment of tax principal to stop the accrual of interest. The Taxpayer

decided not to make such a payment, preferring to wait for the outcome of the hearing. Given

these facts, there is no basis for abating the interest imposed by NMSA 1978, § 7-1-67(A).

CONCLUSIONS OF LAW

1. The Taxpayer filed a timely, written protest to Assessment Nos. 3936950 &

3936951, and jurisdiction lies over the parties and the subject matter of this protest.

2. The Department’s refund of gross receipts taxes paid by the nonprofit

organization established by the Taxpayer has no bearing on the Taxpayer’s individual liability

for gross receipts tax.

3. The Taxpayer met his burden of proving that he did not receive $10,010 of the

income on which he was assessed, and he is entitled to an abatement of the gross receipts tax,

penalty and interest assessed on that amount.

4. The Taxpayer failed to meet his burden of proving that he is entitled to an

abatement of the remaining tax, penalty, and interest assessed against him.

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

DENIED IN PART. The Department is ordered to abate the gross receipts tax, penalty, and

interest assessed on the $10,010 paid to outside subcontractors performing services for the

Taxpayer’s nonprofit organization. The Taxpayer remains liable for the remaining tax, penalty,

and interest assessed against him.

DATED September 21, 2004.

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