Could the Whitehursts use their personal income tax refund to satisfy their LLC's late 2004 corporate tax and avoid penalty and interest?

Plain-English summary

The Whitehursts could not use their personal income tax refund to satisfy The Whitehurst Group's separate corporate income tax debt. The individual owners and the LLC were distinct taxpayers, so penalty and interest remained due on the company's late 2004 return and payment.

The official findings contain an impossible date sequence. Finding 20 says the Department issued its assessment on March 29, 2009, while finding 29 says the company protested that assessment on April 9, 2007. The final conclusion says only that the assessment was issued within the three-year limitation period. This summary does not choose an unstated correction; the conflicting dates remain visible in the original text.

The failed S-corporation election changed the 2004 filings

The Whitehurst Group was a New Mexico LLC that filed federal and state taxes as an S corporation. For 2004, the Whitehursts timely filed their personal return, included the business pass-through, and paid $2,942.

In early 2006, the IRS informed them that the company had not qualified as an S corporation for 2004 because the required form was not timely signed and submitted.

The Whitehursts then amended their personal return on November 16, 2006, producing a $1,937 personal refund. On the same day, The Whitehurst Group filed its first 2004 New Mexico corporate return, reporting $1,239 of corporate tax. That return had originally been due March 15, 2005.

Because of financial difficulties, the company said it would pay after the owners received their personal refund. The Department mailed the $1,937 refund on March 8, 2007, and the LLC paid the $1,239 corporate principal on March 21.

After crediting that payment and another $50, the decision says $425.83 of penalty and interest remained at the hearing.

Personal and corporate tax accounts could not be combined

The Whitehursts argued that the state already held enough money through their personal overpayment to cover the company's corporate debt.

The hearing officer rejected that premise. New Mexico personal income tax and corporate income tax were governed by separate statutes. The owners' personal account was tracked by Social Security number, while the company's corporate account used its federal identification number.

More fundamentally, the LLC was legally distinct from its officers. The liability shield gained from using a separate entity also meant that an individual's refund did not automatically become corporate property or payment. The decision found no Tax Code provision allowing the Department to credit the owners' personal refund against the LLC's corporate income tax.

Interest ran from the original corporate due date

The 2004 corporate return and tax were due March 15, 2005, but principal was not paid until March 21, 2007.

Section 7-1-67 made interest mandatory from the day after tax became due until payment. The understandable reason for the delayed corporate filing did not give the Department discretion to stop interest.

The mistaken filing status was negligence

The company had assumed it would again be accepted as an S corporation because it had been treated that way previously. The decision characterized that as an inadvertent error based on an erroneous belief, which fell within the negligence regulation.

The Whitehursts used an accountant to prepare the corrective amended personal return and corporate return. But the record did not show that an accountant advised the original 2004 S-corporation filing choice after full disclosure of all facts. Professional help to fix the error was not proof that professional advice caused it.

The 10% negligence penalty therefore remained due.

Result: protest DENIED. The Whitehurst Group remained liable for the assessed penalty and interest.

What this means for you

LLC owners making tax elections

Confirm that federal S-corporation election forms are timely and accepted. A failed election can change both the owners' personal return and the entity's separate corporate filing obligations.

Owners expecting refunds while the business owes tax

Do not assume the state will net an individual's refund against a business entity's debt. Separate taxpayers and account identifiers require separate payment or a legally authorized transfer process.

Businesses seeking accountant-reliance relief

Document the advice received before the filing error occurred. Hiring an accountant later to correct a return does not establish that the initial mistake resulted from reasonable professional advice.

Common questions

Q: Why couldn't the $1,937 personal refund cover the $1,239 corporate tax?
A: The owners and LLC were separate taxpayers under separate tax statutes and account numbers.

Q: When was the corporate return due?
A: March 15, 2005.

Q: When did the LLC pay the principal?
A: March 21, 2007, after the personal refund was mailed.

Q: Why did penalty apply if the S-election error was accidental?
A: The negligence rule included inadvertence and erroneous belief, and no nonnegligence factor was proven.

Q: Is the assessment date clear?
A: No. The findings list a 2009 assessment but a 2007 protest; the decision does not reconcile that chronology.

Citations and references

Statutes and regulations:

• NMSA 1978, Chapter 7, Article 2 — Personal Income Tax Act
• NMSA 1978, Chapter 7, Article 2A — Corporate Income and Franchise Tax Act
• NMSA 1978, § 7-1-17(C) (2007) — presumption that an assessment is correct
• NMSA 1978, § 7-1-67 (2003) — mandatory interest
• NMSA 1978, § 7-1-69(A) (2003) — negligence penalty and 10% cap
• NMSA 1978, § 7-1-18 — assessment limitation period
• Regulation 3.1.11.10 NMAC — definition of negligence
• Regulation 3.1.11.11 NMAC — nonnegligence factors

Cases cited:

• El Centro Villa Nursing Center v. Taxation and Revenue Department, 108 N.M. 795, 779 P.2d 982 (Ct. App. 1989)
• State v. Lujan, 90 N.M. 103, 560 P.2d 167 (1977)

Source

• Listing: New Mexico Decisions & Orders
• Decision post: The Whitehurst Group
• Decision PDF: D&O 10-02

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 THE WHITEHURST GROUP No. 10-02
TO ASSESSMENT OF PENALTY AND
INTEREST ISSUED UNDER LETTER
ID NO. L0480377472

DECISION AND ORDER

An administrative hearing on the above-referenced protest was held on December 10,

2009 at 9:00 AM, before Brian VanDenzen, Hearing Officer. The Taxation and Revenue

Department (“Department”) was represented by Tonya Noonan Herring, Special Assistant Attorney

General. Mr. Charles Whitehurst and Mrs. Jean Whitehurst appeared (“Whitehursts”). Mr.

Whitehurst, as President of the Whitehurst Group, represented the Whitehurst Group (“Taxpayer

Whitehurst Group”) pro se. Exhibits Department A-H are admitted into the record by stipulation.

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

FOLLOWS:

FINDINGS OF FACT

1. Taxpayer Whitehurst Group registered in New Mexico as an LLC in 2001.

2. Charles Whitehurst is registered as the corporate President of the Whitehurst

Group.

3. Ms. Jean Whitehurst is a corporate officer in the Whitehurst Group

4. The Whitehursts moved to New Mexico permanently in 2003 from Baton Rouge.

5. Mr. Whitehurst made the decision to organize the Taxpayer Whitehurst Group as

an LLC in order to protect the partners from personal liability.

6. Taxpayer Whitehurst Group filed both federal taxes and state taxes as an S-

Corporation.

7. For tax year 2004, the Whitehursts filed a Federal income tax return where they

requested that Taxpayer Whitehurst Group be given S-Corporation status.

8. For tax year 2004, the Whitehursts timely filed personal income tax returns,

including a pass-through for their S-Corporation Whitehurst Group, with the State of New

Mexico.

9. As part of that 2004 New Mexico personal income tax return, the Whitehursts

timely submitted a payment of $2,942.00.

10. At some point in early 2006, the Internal Revenue Service (“IRS”) informed the

Whitehursts that Taxpayer Whitehurst Group did not qualify in the tax year of 2004 as an S-

Corporation for failure to timely sign and submit the correct form.

11. As a result of personal income tax ramifications of the Taxpayer Whitehurst

Group not being granted S-Corporation status for the tax-year 2004, the Whitehursts filed an

amended New Mexico personal income tax return on November 16, 2006.

12. As a result of that amended personal income tax return for tax year 2004, the

Whitehursts was entitled to a $1,937.00 refund.

13. As a result of not being granted S-Corporation status for the tax-year 2004, on

November 16, 2006, Taxpayer Whitehurst Group for the first time filed a tax-year 2004 New

Mexico corporate income tax return for the Whitehurst Group.

14. New Mexico corporate income tax returns for the tax year 2004 were originally

due on March 15, 2005.

In the Matter of the Whitehurst Group, page 2 of 9

15. Taxpayer Whitehurst Group’s New Mexico corporate income tax return for tax

year 2004 filed on November 16, 2006, indicated that the Taxpayer Whitehurst Group owed the

State $1,239.00 in tax principle.

16. On November 16, 2006, the Whitehursts also submitted a cover letter explaining

the reason for their amended personal income tax return and the late filing of Taxpayer

Whitehurst Group’s corporate income tax returns.

17. In that letter, the Whitehursts informed the Department that because of financial

difficulties, the Taxpayer Whitehurst Group would not be able to pay its outstanding corporate

income tax until the Whitehursts received their personal income tax refund.

18. On March 8, 2007, the Department issued by mail a tax year 2004 personal

income tax refund in the amount of $1,937.00 to the Whitehursts.

19. On March 21, 2007, Taxpayer Whitehurst Group remitted the outstanding

corporate income tax of $1,239.00 to the Department.

20. On March 29, 2009, the Department issued the Taxpayer Whitehurst Group a

Notice of Assessment for unpaid tax, penalty, and interest in the amount of $1,736.28.

21. Ms. Andrea Umpleby is a Protest Auditor for the Department.

22. Ms. Umpleby audited the file of both the Taxpayer Whitehurst Group and the

personal income tax returns of the Whitehursts.

23. In addition to crediting the $1,239.00 payment of taxes made by Taxpayer

Whitehurst Group and adjusting the outstanding interest as a result of that payment, Ms.

Umpleby credited a $50.00 payment against the amount originally listed in the Notice of

Assessment.

In the Matter of the Whitehurst Group, page 3 of 9

24. As of the date of the hearing, penalty and interest in the amount of $425.83

remained outstanding against Taxpayer Whitehurst Group.

25. Ms. Umpleby testified that the Department distinguishes between individual

personal income tax returns and corporate income tax returns.

26. Ms. Umpleby testified that personal income tax returns are a separate account

with a separate name based on an individual’s social security number.

27. Ms. Umpleby testified that corporate income tax returns are a separate account

with a separate name, based on a federal identification number issued to the corporation.

28. Taxpayer Whitehurst Group is a separate and distinct legal entity from the

Whitehursts.

29. On April 9, 2007, Taxpayer Whitehurst Group timely filed a written protest to the

assessment of interest and penalty.

DISCUSSION

The Whitehursts challenges the imposition of penalty and interest against the Taxpayer

Whitehurst Group for the tax year 2004. The Whitehursts point out that they timely filed their

personal income tax returns (including remittance of outstanding tax) for the tax year 2004

relying on the fact that the Taxpayer Whitehurst Group had always been accepted as an S-

Corporation. Only after the IRS indicated that the Taxpayer Whitehurst Group had to file as a C-

Corporation in 2006 did Taxpayer Whitehurst Group file corporate income tax returns.

However, the Whitehursts argue that the outstanding amount of tax refund owed to them on their

amended New Mexico 2004 personal income tax return was more than enough to meet the

outstanding 2004 corporate income tax owed to the State by the Taxpayer Whitehurst Group.

Taxpayer Whitehurst Group argues that since the State possessed the money necessary to satisfy

In the Matter of the Whitehurst Group, page 4 of 9
its outstanding 2004 corporate tax with the refund money owed personally to the Whitehursts as

part of their 2004 personal income tax refund, the Taxpayer Whitehurst Group should not be

charged penalty and interest.

Burden of Proof. NMSA 1978, §7-1-17(C) (2007) provides that any assessment of tax

by the Department is presumed to be correct. NMSA 1978, §7-1-3 (2003) defines tax to include

not only the amount of tax principal imposed but also, unless the context otherwise required, “the

amount of any interest or civil penalty relating thereto." See El Centro Villa Nursing Center v.

Taxation and Revenue Department, 108 N.M. 795, 779 P.2d 982 (Ct. App. 1989). Accordingly,

the assessment issued to the Taxpayer is presumed to be correct, and it is the Taxpayer’s burden

to present evidence and legal argument to show that they are entitled to an abatement of the

penalty and interest.

Distinction between Corporate Income Tax and Personal Income Tax. The Whitehursts

argue that the Department should have credited the refund owed to them under their amended

2004 personal income tax return against the money owed to the State by the Taxpayer Whitehurst

Group for 2004 corporate income taxes.

In New Mexico, personal income tax and corporate income tax are governed by two

separate statutes. NMSA 1978, Sec. 7-2 governs the imposition of Personal Income Tax.

NMSA 1978, Sec. 7-2A governs the imposition of Corporate Income and Franchise Tax. Each

tax is a separate and distinct tax by law, with it own unique legal requirements and obligations.

For the purposes of the Tax Code, Taxpayer Whitehurst Group and the Whitehursts are two

separate and distinct taxpayers. No provision under the Tax Code allows the Department to

credit a refund due from personal income tax against corporate income tax.

In the Matter of the Whitehurst Group, page 5 of 9
In addition to the Tax Code distinction between personal and corporate income tax, as a

matter of execution of collection of those unique taxes, the Department treats personal income

tax and corporate income tax as entirely distinct and separate accounts. According to Ms.

Umpleby, each form of tax is tracked by a separate and distinct account number. Personal

income tax is categorized by the individual’s social security number, while corporate income tax

is categorized by the federal identification number issued to the corporation.

Finally, it is a basic tenant of the law of corporations that a corporation is a legally

distinct and separate entity from any of the individuals comprising the corporate structure. As

Mr. Whitehurst acknowledged in his testimony, one of the benefits of forming a LLC is to shield

the individual officers of the corporation from personal liability for corporation obligations. Yet,

the Whitehursts’ suggestion of credit between personal income tax accounts and corporate

income tax accounts would defeat this personal-liability shield benefit that the Whitehursts’

sought when forming the LLC. To credit the refund of an individual’s personal income tax, even

if that individual happens to be a corporate office, against the outstanding corporate income taxes

of the corporation would not only be contrary to the clear statutory structure of income tax in

New Mexico, but would also be contrary to fundamental tenants of corporate law. Consequently,

the fact that the Whitehursts as individuals were due a personal income tax refund for the year

2004, and that the State possessed that money, has no bearing on the separate and distinct

corporate income tax liabilities and obligations of the Taxpayer Whitehurst Group.

Assessment of Interest. When a taxpayer fails to make timely payment of taxes due to the

state, “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.” NMSA 1978, §7-1-67 (2003). Under the statute, the

Department has no discretion in the imposition of interest, as the statutory use of the word “shall”

In the Matter of the Whitehurst Group, page 6 of 9
makes the imposition of interest mandatory regardless of the explanation provided by a taxpayer.

See State v. Lujan, 90 N.M. 103, 105, 560 P.2d 167, 169 (1977). The language of the statute also

makes it clear that interest begins to run from the original due date of the tax.

In this case, Taxpayer Whitehurst Group’s corporate income tax return for the tax year 2004

was due on March 15, 2005. Although the Whitehursts have a perfectly understandable explanation for

why no corporate income tax returns were filed or paid by that date, Taxpayer Whitehurst Group’s

corporate income tax still remained due and unpaid until March 21, 2007. Consequently, even though

the problems in this case were not intentional, the statute mandates the imposition of interest for the

time that the 2004 corporate income tax was due and unpaid until the time that Taxpayer Whitehurst

Group remitted payment on March 21, 2007.

Assessment of Penalty. When a taxpayer fails to pay taxes due to the State as a result of

negligence or disregard of rules and regulations, NMSA 1978, § 7-1-69(A) (2003) imposes a

penalty of two percent per month “from the date the tax was due,” not to exceed ten percent of

the outstanding tax liability. Again, the statute’s use of the word “shall” makes the imposition of

penalty mandatory in all instances where a taxpayer’s failure to act timely meets the legal

definition of “negligence.”

The term “negligence” is defined in Regulation §3.1.11.10 NMAC (1/15/01) to include

“inadvertence, indifference, thoughtlessness, carelessness, erroneous belief or inattention.” In this

case, based on a past history of acceptance of the Whitehurst Group as an S-Corporation, Taxpayer

Whitehurst Group was under the erroneous belief that the Whitehurst Group again would be

recognized by the IRS as an S-Corporation during tax year 2004. The efforts of the Whitehursts to

follow up with the IRS indicate that the Whitehursts were genuinely concerned with remedying the

inadvertent and unintentional error. Nevertheless, inadvertent error based on an erroneous belief

In the Matter of the Whitehurst Group, page 7 of 9
meets the legal definition of “negligence” under the penalty statute. See El Centro Villa Nursing

Center v. Taxation and Revenue Department, 108 N.M. 795, 799, 779 P.2d 982, 986 (Ct. App.

1989).

Taxpayer Whitehurst Group presented no convincing evidence under Regulation

§3.1.11.11 NMAC (1/15/01) to demonstrate indicators of nonnegligence. Although Taxpayer

Whitehurst Group did refer to using an accountant, there is no further evidence to demonstrate

that Taxpayer Whitehurst Group reasonably relied on the accountant’s advice after full disclosure

of all relevant facts. In fact, Taxpayer Whitehurst Group presented no evidence that the

accountant played any role in making the initial inadvertent mistake. The Whitehursts did file an

amended personal income tax return and new corporate income tax return on behalf of Taxpayer

Whitehurst Group based on the advice of their accountant, but by that point the inadvertent error

had already occurred based on the Taxpayer’s previous decision to file as an S-Corporation. In

other words, rather than the source of the initial inadvertent error, the advice of the accountant

that the Taxpayer Whitehurst Group relied on was merely to remedy the previously-made

inadvertent error. Based on the Taxpayer Whitehurst Group’s numerous statements that they filed

as an S-Corporation in 2004 because that is how they had filed in the past, the decision to file as

an S-Corporation seems to be based on the Taxpayer’s own personal past history rather than on

any specific professional advice of an accountant.

Because inadvertent error based on an erroneous belief meets the statutory and regulatory

definition of negligence, and because the Taxpayer failed to demonstrate any indications of

nonnegligence, the Department is mandated by statute to impose penalty on the Taxpayer in this

case for failure to timely pay corporate income tax.

In the Matter of the Whitehurst Group, page 8 of 9
CONCLUSIONS OF LAW

A. The Taxpayer filed a timely protest to the Department’s assessment of interest and

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

B. The Department’s assessment was issued within the three-year limitations period

provided in NMSA 1978, § 7-1-18.

C. Pursuant to NMSA 1978, § 7-1-67, the Taxpayer is liable for interest for late

payment of 2004 corporate income tax.

D. Pursuant to NMSA 1978, § 7-1-69, the Taxpayer is liable for penalty for late

payment of 2004 corporate income tax.

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

DATED: February 10, 2010.

In the Matter of the Whitehurst Group, page 9 of 9