Was a farm-harvesting contractor entitled to attorney fees after the Department granted his gross-receipts-tax refund only after he protested?

Plain-English summary

Abelardo Ortiz was awarded $3,250.15 in attorney fees after the Department granted his $31,264.88 gross receipts tax refund before the protest hearing. The decision found that he substantially prevailed and that the Department did not establish a reasonable application of the law to his case.

Ortiz operated a picking and harvesting business in New Mexico in 2008 and paid gross receipts tax. After learning that his receipts were subject to a deduction under Section 7-9-59, he filed a timely refund claim on March 17, 2010.

The Department asked for statements from the farms and invoices. Ortiz promptly explained that his line of business did not commonly use invoices. He obtained farm statements and Forms 1099, mailed them to the Department, later carried copies to its Las Cruces office, and again explained the absence of invoices by telephone through a Spanish-speaking employee.

The Department did not identify the information it actually needed

After more correspondence and a refiled claim, the Department denied the refund on March 29, 2011. Its denial cited Section 7-9-59.

Ortiz protested and hired an attorney. Only after the protest did a newly assigned auditor request amended returns. Ortiz supplied them, and the Department granted a refund slightly larger than he originally claimed before the hearing.

At the hearing, the Department argued that Regulation 3.1.9.8(E) required amended returns and that its computer system could not process the refund without them. The decision found two problems with that position:

• before the protest, the Department repeatedly asked for invoices but never advised Ortiz that amended returns were missing; and
• the denial letter cited Section 7-9-59 even though the Department's actual reason was its refund regulation.

Section 7-1-26(A) allowed a written refund claim containing specified information, while Section 7-1-26(J) also allowed a return to serve as a claim. The decision read the statute as not requiring both. To the extent Regulation 3.1.9.8 added an amended-return requirement that produced a different result, the statute controlled under State v. Bowden.

Ortiz qualified as the prevailing party

Section 7-1-29.1 required reasonable administrative costs when a taxpayer substantially prevailed on the amount or issues, unless the Department established that its position reasonably applied the law to the facts.

Ortiz prevailed on both amount and issues because the Department conceded the matter and paid the refund. The failures to identify the necessary information and accurately explain the denial meant the Department did not carry its burden to show a reasonable position.

Ortiz had already paid $3,250.15 in attorney fees for work from March through July 2011. Although the invoices did not state hours or an hourly rate, they described the work performed over five months. The decision found the amount neither inherently unreasonable nor egregious. It was also below 20% of the $31,264.88 settlement.

Result: protest granted. The Department was ordered to remit $3,250.15 in administrative costs to Ortiz.

What this means for you

Businesses pursuing gross receipts tax refunds

Keep a record of every document submitted and every agency request. Ortiz repeatedly supplied the records he possessed and explained why invoices did not exist, which helped show that the later amended-return demand had not been communicated.

Taxpayers whose refund is granted after a protest

Receiving the refund does not necessarily end the administrative proceeding. This decision separately considered whether the taxpayer substantially prevailed and could recover reasonable costs incurred to obtain that result.

Tax professionals documenting fee requests

Detailed time and rate records are preferable. Here the award survived without them because the invoices described the work, covered five months, had been paid, and the total was not found inherently unreasonable.

Common questions

Q: Did Ortiz ultimately receive the tax refund?
A: Yes. Before the hearing, the Department granted $31,264.88, slightly more than he originally claimed.

Q: Why had the Department not granted it earlier?
A: The Department said amended returns were essential, but before the protest it asked Ortiz for farm statements and invoices and did not tell him amended returns were missing.

Q: Did the statute require both a written refund claim and amended returns?
A: The decision said no. Section 7-1-26 allowed a qualifying written claim and also allowed a return to serve as a claim; it did not require both.

Q: Why was Ortiz a prevailing party if the refund was paid before the hearing?
A: The Department conceded the disputed amount and issues after the protest, so he substantially prevailed. The Department also failed to establish that its earlier position was reasonable.

Q: How much did the decision award?
A: $3,250.15, equal to the attorney fees Ortiz had paid.

Citations and references

Statutes and regulation:

• NMSA 1978, § 7-9-59 — deduction underlying the harvesting-business refund
• NMSA 1978, § 7-1-26(A) and (J) — required refund-claim information and returns serving as claims
• NMSA 1978, § 7-1-29.1(A), (B)(3), and (C) — administrative costs, attorney fees, and prevailing-party test
• NMSA 1978, § 7-1-4.2 — taxpayer rights to assistance and an explanation of a refund denial
• Regulation 3.1.9.8(E) and (F) NMAC — refund-claim requirements and treatment of missing information

Case:

• State v. Bowden, 2010-NMCA-070, ¶¶ 10, 12, 148 N.M. 850, 242 P.3d 417 — a statute controls over an inconsistent regulation

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Abelardo Ortiz
• Decision PDF: D&O 12-11

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
ABELARDO ORTIZ, No. 12-11
TO THE DENIAL OF REFUND ISSUED UNDER
ID NO. L1245073984

DECISION AND ORDER

A formal hearing on the above-referenced protest was held February 16, 2012, before Dee

Dee Hoxie, Hearing Officer. The Taxation and Revenue Department (Department) was

represented by Mr. Nelson Goodin, Chief Legal Counsel. Mr. Tom Dillon, Auditor, also appeared

on behalf of the Department. Mr. Abelardo Ortiz (Taxpayer) appeared for the hearing with his

attorney, Ms. Katharine Fishman. The Hearing Officer took notice of all documents in the

administrative file. Taxpayer’s exhibits #1 through #8 were admitted. Based on the evidence

and arguments presented, IT IS DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. The Taxpayer was engaged in a picking and harvesting business in New Mexico 2008.

2. The Taxpayer paid gross receipts tax to the Department for 2008.

3. The Taxpayer learned that his gross receipts were subject to a deduction under Section 7-

9-59.

4. The Taxpayer filed a timely claim for refund on March 17, 2010.

5. The Department sent the Taxpayer a letter on April 14, 2010. The letter requested

statements from each farm with details of the duties performed, and requested invoices.

6. The Taxpayer responded to the letter the next day and explained to the Department

employee that he did not have any invoices. In May 2010, the Taxpayer acquired
statements and 10-99 forms from the farms where he had worked, and sent them in to the

Department.

7. On July 7, 2010, the Department sent the Taxpayer another letter asking for invoices.

8. The Taxpayer then went in person the Department’s office in Las Cruces and again

explained that he did not have invoices. The Taxpayer also took copies of the farms’

statements and 10-99 forms. The personnel at the Las Cruces office tried to reach the

auditor assigned, but were not able to speak to him. The personnel at the Las Cruces

office took the documents from the Taxpayer and indicated that they would send the

documents to the auditor in Santa Fe to ensure that he received them.

9. The Taxpayer finally spoke to the assigned auditor on the phone. The auditor had the

Taxpayer speak to another employee, who spoke Spanish, because the auditor said he was

having a hard time understanding the Taxpayer. The Taxpayer again explained that he

did not have invoices and that it was not common practice for invoices to be done in his

line of business.

10. On January 10, 2011, the Department sent the Taxpayer a letter explaining that the

Department could not take any action on the claim for refund because of the time that had

elapsed.

11. The Taxpayer signed the bottom of the January 10, 2011 letter to indicate that he was re-

filing his claim for refund.

12. The Taxpayer felt that he would be unable to achieve satisfaction of his claim on his own.

The Taxpayer hired an attorney and timely refiled his claim for refund.

13. On March 2, 2011, the Department issued another letter to the Taxpayer which indicated

that the claim for refund had been received and again requested invoices.

In the Matter of Abelardo Ortiz, page 2 of 8

14. On March 29, 2011, the Department issued the denial of claim of refund to the Taxpayer.

The Department indicated that the denial was issued because of the statute 7-9-59.

15. On April 19, 2011, the Taxpayer filed a formal protest letter. The Taxpayer also

requested that he be awarded costs and fees.

16. After the protest was filed, Mr. Dillon was assigned to the Taxpayer’s case. In May 2011,

Mr. Dillon requested amended returns for the tax periods in question.

17. The amended returns were provided, and the Department granted the refund prior to the

hearing. The appropriate amount of the refund was found to be slightly in excess of the

amount originally claimed by the Taxpayer.

18. The Taxpayer substantially prevailed with respect to the amount and to the issues.

19. The Department failed to establish that its position was based upon a reasonable

application of the law to the facts of this case.

20. The Taxpayer is the prevailing party.

DISCUSSION

The issue to be decided is whether the Taxpayer is entitled to an award of reasonable

administrative costs as the prevailing party.

Awarding of costs and fees.

When a taxpayer is the prevailing party in an administrative proceeding, “the taxpayer

shall be awarded a judgment or a settlement for reasonable administrative costs incurred in

connection with an administrative proceeding”. NMSA 1978, §7-1-29.1 (A) (emphasis added).

Reasonable administrative costs include attorney’s fees. See NMSA 1978, §7-1-29.1 (B) (3).

Prevailing party.

In the Matter of Abelardo Ortiz, page 3 of 8
To be a prevailing party, a taxpayer must substantially prevail with respect to the amount

in controversy or with respect to the issues involved. See NMSA 1978, §7-1-29.1 (C) (1). It was

undisputed that the Taxpayer was the prevailing party as to the amount and as to the issues since

the Department conceded the matter and issued the refund prior to the hearing. However, a

taxpayer who is a prevailing party shall not be treated as such if the Department can establish that

its position “in the proceeding was based upon a reasonable application of the law to the facts of

the case.” NMSA 1978, §7-1-29.1 (C) (2).

The Department argues that its position in this matter was a reasonable application of the

law because the refund could not be granted until the amended returns had been filed, pursuant to

Regulation 3.1.9.8. See 3.1.9.8 (E) NMAC. Mr. Dillon explained that the Department’s

computer system could not process a refund claim until amended returns are entered into the

system. Mr. Dillon also explained that the regulation was enacted to facilitate the system process

and that it is common knowledge among accounting professionals that amended returns be filed

on claims for refund.

The Taxpayer argues that the Department did not follow its applicable published

guidelines in this matter and that its position was, therefore, unreasonable. See NMSA 1978, §7-

1-29.1 (C) (2). The Taxpayer argues that when a claim does not satisfy the regulation, the

Department must either return an invalid claim or advise the taxpayer of what information is

missing and that the claim is invalid without the missing information. See 3.1.9.8 (F) NMAC.

The Taxpayer argues that the Department opted to advise the Taxpayer of missing information,

but failed to properly advise the Taxpayer of what information was missing. The Taxpayer also

argues that the Department violated the Taxpayer’s right to prompt and courteous assistance and

In the Matter of Abelardo Ortiz, page 4 of 8
the right to be provided with an explanation of the basis for denial of refund. See NMSA 1978,

§7-1-4.2.

The Department did contact the Taxpayer and advised that his claim was missing

information, farm statements and invoices. Prior to the protest being filed, the Department never

advised the Taxpayer that his claim was missing amended returns. Mr. Dillon explained that

some other unspecified information was received after the protest, but that the crux for granting

the return was the filing of the amended returns. The Taxpayer also argued that filing amended

returns should not be required because the claim for refund form promulgated by the Department

does not advise of such a requirement and the statute does not require it.

A claim for refund must be in writing and must include specific information. See NMSA

1978, §7-1-26 (A). Filing a return may also serve as a claim for refund. See NMSA 1978, §7-1-

26 (J). The statute does not require that both be filed. See NMSA 1978, §7-1-26. The regulation

essentially reiterates the information required by the statute in a written return. See id. See also

3.1.9.8 (E) (1-5) NMAC. However, the regulation imposes the additional requirement of the

filing of an amended return. See 3.1.9.8 (E) (6) NMAC. When a statute and a regulation address

the same issue, they are in conflict if following one would reach a different result than following

the other. See State v. Bowden, 2010-NMCA-070, ¶10, 148 N.M. 850, 242 P.3d 417. In this

case, the statute allows a refund to be claimed when it is made in writing and includes specific

information. See NMSA 1978, §7-1-26 (A). However, the regulation only allows a refund to be

claimed when it is made in writing and includes the same specific information required by the

statute, and when an amended return is filed. See 3.1.9.8 NMAC. Therefore, the statute and

regulation are in conflict as they impose different requirements on the same issue. See Bowden,

In the Matter of Abelardo Ortiz, page 5 of 8
2010-NMCA-070, ¶ 10. When a statute and a regulation are inconsistent, the statute prevails.

See id. at ¶ 12.

Based upon the totality of the circumstances, the Department failed to establish that its

position was based upon a reasonable application of the law to the facts of this case. The

Department imposed a condition on the claim for refund that was not required by statute, and the

Department failed to properly advise the Taxpayer of what information was missing from the

claim for refund pursuant to its regulation. See NMSA 1978, §7-1-26 and 3.1.9.8 NMAC. The

Department also failed to properly explain the reason the claim for refund was denied. See

NMSA 1978, §7-1-4.2. The Department’s letter stated that the claim was denied under Section

7-9-59, but the Department’s actual reason for denying the claim was under Regulation 3.1.9.8.

Therefore, the Taxpayer is the prevailing party and should be treated as such. See NMSA 1978,

§7-1-29.1. Consequently, administrative costs shall be awarded. See id.

Reasonableness of attorney’s fees.

The Department argues that Taxpayer #1 does not establish that the attorney’s fees are

reasonable because the invoices do not show how much time was spent on the case and do not

indicate what the attorney’s hourly rate was. Taxpayer #1 and the Taxpayer’s testimony reflect

that the Taxpayer incurred attorney’s costs for five months, from March 2011 through July 2011.

The Taxpayer did not know his attorney’s hourly rate or how many minutes or hours were spent

working on his case. However, the Taxpayer did testify that he had spoken to his attorney for

many hours regarding the case and that he felt that the attorney’s fees were reasonable for his

case. The Taxpayer indicated that he was very happy with his attorney because he was finally

granted his refund after he secured her services.

In the Matter of Abelardo Ortiz, page 6 of 8
Taxpayer #1 details several different actions taken by the attorney over the course of the

case, but does not specify the time spent or the hourly rate. The total bill for the work done over

the course of five months was $3,250.15, which the Taxpayer has already paid. An award of

administrative costs will be limited to 20% of the amount of settlement or $50,000, whichever is

less. See NMSA 1978, §7-1-29.1. The Taxpayer’s total bill is less than 20% of the amount of

the settlement, which was $31,264.88. Mr. Dillon explained that this amount was ultimately

found to be the correct refund amount, and that the amount refunded was slightly more than the

amount originally claimed. The refund was granted in June, but the Taxpayer did not receive

anything until July. Given the facts of this case, including the details provided in Taxpayer #1

and provided by the Taxpayer, I do not find the attorney’s fees claimed to be inherently

unreasonable or egregious. The award of administrative costs shall be the amount of attorney’s

fees detailed in Taxpayer #1.

CONCLUSIONS OF LAW

1. The Taxpayer filed a timely written protest to the Denial of Refund issued under

respective Letter ID number L1245073984, and jurisdiction lies over the parties and the subject

matter of this protest.

2. The Taxpayer was the prevailing party, and the Department failed to establish that

its position was a reasonable application of the law to these facts.

3. The Taxpayer shall be awarded administrative costs.

4. The attorney’s fees submitted in Taxpayer #1 are not inherently unreasonable. The

amount of the award shall be the $3,250.15 that the Taxpayer paid to his attorney.

In the Matter of Abelardo Ortiz, page 7 of 8
For the foregoing reasons, the Taxpayer's protest is GRANTED and the Department is

hereby ordered to remit administrative costs to the Taxpayer.

DATED: March 21, 2012.

DEE DEE HOXIE
Hearing Officer
Taxation & Revenue Department
Post Office Box 630
Santa Fe, NM 87504-0630

In the Matter of Abelardo Ortiz, page 8 of 8