Was an LLC owner and managing member personally liable for restaurant withholding tax when day-to-day managers failed to remit it?

Plain-English summary

J. Nold Midyette was personally liable for $5,428.13 of New Mexico withholding tax that Canyon Road Cantina LLC deducted from restaurant employees' paychecks but did not remit. He retained ultimate control over wage payments as the LLC's owner and managing member even though someone else ran the restaurant day to day.

Midyette and his wife formed Cantina LLC while arranging restaurant and gallery subleases at 731 Canyon Road in Santa Fe. Midyette initially planned to transfer the restaurant LLC to David Salazar after the business became profitable enough to repay his capital. When that failed, he made the same unwritten arrangement with executive chef Victoria Nulman.

No ownership transfer ever occurred. Taxes withheld from employees between June 2003 and May 2004 were diverted to other uses.

Cantina LLC remained the legal employer

Section 7-3-2(C) treated as an employer the person having control of wage payments. Cantina LLC held the legal right to occupy the restaurant premises and used its own tax identification number, bank account, books, and returns for restaurant operations.

The restaurant's income, expenses, and payroll taxes were reported on Cantina LLC's returns. Those returns passed all business losses equally to Midyette and his wife, not to Salazar or Nulman.

Midyette retained control despite delegation

The decision identified several facts showing control:

• Midyette signed the CRS registration and other Department filings as managing member.
• He supplied $25,000 when the first manager fell behind on taxes.
• He was a required signatory on the restaurant bank account.
• He instructed the bookkeeper to alert him about unpaid taxes and lien-producing bills.
• He directed financial information to his Colorado accountant and signed the LLC's tax returns.
• He and his wife remained the 100% owners and claimed the restaurant losses.

The verbal promise of a future buyout did not change the parties' legal status before an ownership transfer actually occurred. Midyette's decision not to exercise his control or ensure that withheld funds reached the State did not remove liability.

Result: protest DENIED. Midyette owed the withholding tax assessed for June 2003 through May 2004, plus penalty and interest.

What this means for you

LLC owners and managing members

Personal withholding liability can follow legal control over wage payments even when an operating manager handles payroll and daily business decisions.

Owners delegating a business under a future buyout

Document and complete the ownership transfer. An informal agreement that someone may buy the company later did not transfer the employer's legal control here.

Businesses with withheld payroll funds

Amounts taken from employee paychecks must be remitted to the State. Using those funds for operations can expose the people controlling payment to individual assessment.

Common questions

Q: Who was the employees' legal employer?
A: Canyon Road Cantina LLC.

Q: Why wasn't Victoria Nulman solely responsible as day-to-day operator?
A: She never became the LLC owner, and Midyette retained legal and financial control.

Q: Did Midyette have access to the bank account?
A: Yes. The bank required him, as managing member, to be a signatory.

Q: What tax period was assessed?
A: June 2003 through May 2004.

Q: How much withholding tax principal was involved?
A: $5,428.13, plus penalty and interest.

Citations and references

Statutes:

• NMSA 1978, §§ 7-3-1 through 7-3-6 — Withholding Tax Act
• NMSA 1978, §§ 7-3-3 and 7-3-6 — withholding and payment duties
• NMSA 1978, § 7-3-2(C) — employer includes the person controlling wage payments

Source

• Listing: New Mexico Decisions & Orders
• Decision post: J. Nold Midyette
• Decision PDF: D&O 07-13

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
J. NOLD MIDYETTE; ID NO. 03-056443-00 3 No. 07-13
TO ASSESSMENT OF WITHHOLDING TAX
ISSUED UNDER LETTER ID L0445292032

DECISION AND ORDER

A formal hearing on the above-referenced protest was held on July 16, 2007, before

Margaret B. Alcock, Hearing Officer. The Taxation and Revenue Department (“Department”)

was represented by Susanne Farr, Special Assistant Attorney General. J. Nold Midyette

(“Taxpayer”) represented himself. Based on the evidence and arguments presented, IT IS

DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. In 2001, J. Nold Midyette (“JNM”) and his wife, Mary K. Midyette, formed a

New Mexico limited liability company known as “731 Canyon Road LLC” for the purpose of

acquiring improved real estate in Santa Fe, New Mexico.

2. Patricia Sherwood, the owner of the real estate, was unwilling to sell the property,

but agreed to lease the property to the Midyettes’ LLC with a first right of refusal to purchase the

property in the event she decided to sell in the future.

3. The leased premises included a large building formerly used as a restaurant. The

lease terms required the lessee to split the space, subleasing one portion as a restaurant and the

other as a gallery. Ms. Sherwood retained the right to approve any sublessees of the premises.

4. In order to keep track of remodeling and set-up expenses, JNM and Mary K.

Midyette formed two additional limited liability companies: one to sublease the restaurant and

one to sublease the gallery.

5. Because JNM had a prospective tenant who wanted to open a cantina in the

restaurant space, he named one of the LLCs “Canyon Road Cantina LLC” (Cantina LLC).

6. On April 17, 2001, JNM applied to the New Mexico Taxation and Revenue

Department (Department) for a CRS tax identification number for Cantina LLC, which was used

to report the LLC’s monthly gross receipts, compensating and withholding taxes.

7. The application was signed by JNM as the “managing member” of Cantina LLC

and indicated that he was opening a new business at 731 Canyon Road which would operate as a

restaurant and bar. The anticipated start date shown on the application was June 1, 2001.

8. Patricia Sherwood refused to approve JNM’s prospective tenant as a sublessee of

the restaurant space, and the opening of the restaurant was delayed.

9. On November 6, 2001, JNM responded to a Department inquiry as to why no

CRS returns had been filed for Cantina LLC, explaining:

Canyon Road Cantina is not currently in business and therefore does not have any
employees. The earliest projected date of business is January 2002. We will send
another letter at that time to inform of business status and number of employees.

10. David Salazar, who owned another restaurant on Canyon Road, subsequently

expressed an interest in opening a restaurant in the space subleased by Cantina LLC.

11. Because JNM was unable to obtain Ms. Sherwood’s approval for a further

sublease of the premises, JNM decided to have Cantina LLC operate the restaurant, with the

intention of transferring ownership of the LLC to David Salazar at a later date.

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12. JNM and David Salazar agreed that Mr. Salazar would be in charge of the day-to-

day operation of the restaurant, although JNM would contribute additional capital needed to

cover the lease payments on the property. Once the business generated sufficient profits for JNM

to recover his capital contributions, ownership of the LLC would be transferred to Mr. Salazar.

13. JNM’s agreement with David Salazar was a verbal understanding and was never

reduced to writing.

14. In April 2002, David Salazar opened a bank account under the name “Cantina

LLC d/b/a The Canyon” and used this account to pay the day-to-day operating expenses of the

restaurant.

15. In November 2002, JNM discovered that David Salazar had fallen behind on the

payment of taxes owed by Cantina LLC.

16. In late 2002, JNM sent Mr. Salazar $25,000 to pay Cantina LLC’s tax liability.

17. In early 2003, Mr. Salazar told JNM that the restaurant was not making a profit

and he would not be able to buy out JNM’s interest in Cantina LLC.

18. JNM then allowed Victoria Nulman, the restaurant’s executive chef, to take over

the day-to-day operation of the restaurant under the same verbal agreement he had with David

Salazar, i.e., once the business generated sufficient profits to enable JNM to recover his capital

contributions, ownership of the LLC would be transferred to Ms. Nulman.

19. David Salazar was removed and Victoria Nulman was added as a signor on

Cantina LLC’s bank account. The bank also required JNM, as the LLC’s managing member, to

be a signor on the account.

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20. Cantina LLC paid David Salazar’s bookkeeper to transfer the LLC’s books to Jan

Marie DuBois, the bookkeeper selected by Victoria Nulman.

21. At the time Ms. DuBois was hired in early 2003, JNM instructed her to notify him

immediately if taxes or other bills that could create a lien on the property were not paid.

22. At JNM’s direction, Ms. DuBois sent financial information concerning the

income and expenses from the restaurant, including payroll taxes, to JNM’s accountant in

Colorado, who used this information to prepare Cantina LLC’s income tax returns.

23. On October 13, 2003, JNM signed Cantina LLC’s 2002 New Mexico Income and

Information Return for Pass-Through Entities (2002 PTE) reporting a loss of $263,938. The

attached Schedule PTE-D and Federal Form 1065 show that this loss was passed through one-

half to JNM and one-half to his wife, Mary K. Midyette.

24. Cantina LLC reported similar losses for the 2003 and 2004 tax years. In each

case, the LLC’s returns were signed by JNM as the managing member and the losses generated

by the LLC were passed through one-half to JNM and one-half to Mary K. Midyette. No income

or losses of Cantina LLC were passed through to David Salazar or Victoria Nulman.

25. In early 2004, Jan Marie DuBois notified JNM that she was receiving tax liens

from the Internal Revenue Service.

26. JNM subsequently learned that Victoria Nulman had not mailed the checks that

Jan Marie DuBois prepared to pay Cantina LLC’s tax obligations and that back taxes were due.

27. In June 2004, Victoria Nulman’s husband sent JNM an e-mail representing that

the Nulmans had paid Cantina LLC’s back taxes.

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28. On June 30, 2004, the Nulmans notified JNM that they had closed the restaurant

located at 731 Canyon Road.

29. After the restaurant closed, JNM discovered that Cantina LLC still had substantial

past-due tax liabilities.

30. In November 2004, JNM notified the Department that Cantina LLC was no longer

in business.

31. At the same time, JNM provided the Department with a Corporate Financial

Information Statement for Cantina LLC, which is a document the Department requires taxpayers

to complete before entering into an installment agreement for payment of back taxes.

32. JNM subsequently decided not to enter into a payment agreement.

33. On December 2, 2005, the Department assessed JNM individually, in his capacity

as owner and managing member of Cantina LLC, for $5,428.13 of withholding taxes, plus

penalty and interest, due from Cantina LLC for the period June 2003 through May 2004.

34. On January 3, 2006, pursuant to an extension of time granted by the Department,

JNM filed a written protest to the assessment of withholding taxes.

DISCUSSION

New Mexico’s Withholding Tax Act (NMSA 1978, § 7-3-1, et seq.) requires “every

employer” who deducts and withholds federal income tax from an employee’s wages to also deduct

and withhold state income tax and pay that amount over to the state. NMSA 1978, §§ 7-3-3 and 7-

3-6. The term “employer” is defined in NMSA 1978, § 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

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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.

In this case, there is no dispute that taxes were deducted and withheld from the paychecks of the

employees working in the restaurant located at 731 Canyon Road. Instead of being paid over to the

state, however, the taxes withheld for the period June 2003 through May 2004 were diverted to

other uses. The issue to be decided is whether J. Nold Midyette (JNM), the owner and managing

member of Canyon Road Cantina LLC (Cantina LLC), meets the definition of “employer” set out

in § 7-3-2(C) and is liable for payment of these taxes.

JNM argues that he is not an “employer” under the Withholding Tax Act because he did

not have control of the payment of wages. It is his position that Victoria Nulman was effectively

operating the restaurant at 731 Canyon Road as a sole proprietor and that the restaurant workers

were her employees and not the employees of Cantina LLC. The facts do not support this

position. To the contrary, the facts show that:

Cantina LLC, as sublessee, was the entity with the legal right to occupy the premises at
731 Canyon Road;

JNM, as managing member of Cantina LLC, signed the application for the New Mexico
tax identification number used to report the restaurant’s gross receipts and payroll taxes,
and was the signatory on other forms and correspondence filed with the Department in
connection with the restaurant;

Upon learning that the restaurant’s first manager had fallen behind on the payment of
taxes owed on the restaurant’s operations, JNM provided the funds needed to pay those
taxes;

When Victoria Nulman took over as manager, she used a bank account held in the name
Cantina LLC, on which JNM was also a signatory, for the day-to-day operation of the
restaurant;

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Although Victoria Nulman selected Jan Marie DuBois as the bookkeeper for the
restaurant, JNM gave Ms. DuBois direction, advising her to notify him immediately if
taxes or other bills that could create a lien on the property were not paid;

At JNM’s direction, Ms. DuBois regularly provided financial information concerning the
restaurant’s income and expenses to JNM’s accountant in Colorado, who used this
information to prepare Cantina LLC’s income tax returns;

The income and expenses from the restaurant, including payroll taxes, were reported on
the tax returns of Cantina LLC, which were signed by JNM as managing member; and

As 100 percent owners of Cantina LLC, JNM and his wife—not Victoria Nulman—
claimed the tax benefit of the losses generated by the restaurant.

Based on these facts, JNM, as owner and managing member of Cantina LLC, had legal control

over the restaurant business located at 731 Canyon Road. The fact that he delegated authority to

manage the restaurant to Victoria Nulman, with the verbal understanding that she could buy him

out at some time in the future, did not change the legal status of the parties during the period at

issue in this protest. Until ownership of Cantina LLC actually changed hands, JNM was the

person with ultimate control over the operation of the restaurant, including the payment of wages

to the restaurant’s employees. His decision not to exercise that control or to insure that the taxes

withheld from employee paychecks were paid to the state does not relieve him of liability.

CONCLUSIONS OF LAW

A. J. Nold Midyette filed a timely, written protest to the assessment of withholding tax

issued under Letter ID L0445292032, and jurisdiction lies over the parties and the subject matter of

this protest.

B. During the period June 2003 through May 2004, Cantina LLC was the sublessee of

the property located at 731 Canyon Road in Santa Fe, New Mexico, and was the legal employer of

the employees working in the restaurant operating at that location.

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C. As the owner and managing member of Cantina LLC and a signatory on the bank

account used for the operation of the restaurant business, J. Nold Midyette had control over the

payment of wages to Cantina LLC’s employees.

D. J. Nold Midyette is liable for the unpaid withholding taxes assessed against him for

the period June 2003 through May 2004.

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

DATED July 27, 2007.

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