Should guaranteed payments to a New Mexico LLC member for serving as CEO be allocated entirely to New Mexico or apportioned among the states where the LLC operated?

Plain-English summary

Guaranteed payments that Stuart Schoenmann received for serving as an LLC's CEO were allocated entirely to New Mexico rather than apportioned among the states where the LLC did business. The decision ordered the Department to grant the remaining 2009 and 2010 personal income tax refunds.

Schoenmann was a New Mexico resident and the LLC's CEO in both years. He began as CEO, later bought an ownership interest, and continued performing the CEO role after becoming a member.

His former salary was then categorized as guaranteed payments. He also received separate distributive shares as an LLC member.

On the New Mexico returns, the taxpayers:

• allocated and apportioned the distributive-share income among the states where the LLC operated;
• allocated all guaranteed payments to New Mexico as compensation; and
• claimed credits for taxes paid to other states.

The Department initially denied the refunds and assessed additional tax. It later abated the assessments and partially granted the claims, leaving $5,022 for 2009 and $1,937 for 2010 in dispute.

The CEO payments were for personal services

The taxpayers argued that the guaranteed payments compensated Schoenmann for his CEO services and belonged entirely in New Mexico. The Department argued that they did not meet the statutory definition of compensation because an LLC member was not technically an employee.

The decision agreed that LLC membership changed Schoenmann's technical status, but focused on the work producing the payments:

• he continued acting as CEO after buying into the LLC;
• the former CEO salary was simply recategorized as guaranteed payments; and
• the LLC could treat the payments as wages for its tax purposes under I.R.C. Section 707.

New Mexico's allocation regulation defined an employee by usual common-law rules and included corporate officers. Using that approach, the decision treated Schoenmann as the LLC's employee in his CEO capacity.

No law required apportionment of these payments

Section 7-2-11 allocated a New Mexico resident's compensation to New Mexico. Other income could be divided under the Uniform Division of Income for Tax Purposes Act.

But Section 7-4-3 excepted income from an individual's purely personal services from the Act's allocation-and-apportionment requirements. The decision found no statute or regulation that supplied another method for guaranteed payments made to an individual for personal services.

New Mexico generally taxed all net income of its residents. With no provision requiring these CEO-service payments to be apportioned elsewhere, allocating all of them to New Mexico was proper.

Result: protest granted. The 2009 and 2010 refund claims were valid, and the Department was ordered to grant the remaining amounts.

What this means for you

New Mexico residents who are LLC members

Do not assume every payment from a multistate LLC follows the same allocation method. This decision distinguished guaranteed payments for the member's own executive services from distributive-share income.

LLC executives who buy an ownership interest

Changing a salary to guaranteed payments did not change the underlying CEO work. The decision looked at the actual services and the common-law relationship, not only the member label.

Accountants handling multistate individual returns

Classify each income stream before applying an apportionment formula. Here the taxpayers apportioned distributive shares but allocated the CEO guaranteed payments entirely to their resident state.

Common questions

Q: Was Schoenmann technically an LLC employee?
A: The parties agreed that LLC membership meant he was not technically considered an employee, but the decision treated him as an employee in his CEO capacity under common-law rules.

Q: Were the guaranteed payments the same as his distributive share?
A: No. The decision described the guaranteed CEO payments and the member's distributive shares as separate income streams.

Q: Why were the CEO payments allocated to New Mexico?
A: They paid for Schoenmann's personal services, Section 7-4-3 excepted purely personal-service income from apportionment, and no other statute or regulation required a different method.

Q: How much remained in dispute?
A: $5,022 for 2009 and $1,937 for 2010 after the Department had already abated the assessments and partially granted the refunds.

Q: Did the taxpayers win?
A: Yes. The Department was ordered to grant the remaining refund claims.

Citations and references

Statutes and regulations:

• NMSA 1978, §§ 7-2-2(C) and 7-4-2(C) — definition of compensation
• NMSA 1978, § 7-2-11(A) — allocation of income taxable in New Mexico and another state
• NMSA 1978, § 7-4-3 — personal-service income and allocation/apportionment
• NMSA 1978, § 7-2-3 — taxation of New Mexico residents' net income
• Regulation 3.5.14.8(E) NMAC — common-law employee definition
• Regulations 3.3.11.8 through 3.3.11.14, 3.5.3.7 through 3.5.3.11, and 3.5.19.8 through 3.5.19.19 NMAC — allocation and apportionment provisions reviewed by the decision
• I.R.C. § 707 — federal treatment referenced for guaranteed payments

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Stuart Schoenmann and Charlotte Coulombe
• Decision PDF: D&O 12-12

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
STUART SCHOENMANN AND CHARLOTTE COULOMBE No. 12-12
TO THE DENIALS OF REFUND ISSUED UNDER
ID NOS. L0063812160 and L1136948800

DECISION AND ORDER

A formal hearing on the above-referenced protests was held March 8, 2012, before Dee

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

represented by Mr. Nelson Goodin, Chief Legal Counsel. Ms. Milagros Bernardo, Auditor, also

appeared on behalf of the Department. Mr. Stuart Schoenmann (Taxpayer) appeared for the

hearing and was represented by his accountants, Mr. John Grisham and Mr. Curt McGill. The

Hearing Officer took notice of all documents in the administrative file. Based on the evidence

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

FINDINGS OF FACT

1. The Taxpayer was a resident of New Mexico in 2009 and 2010. The Taxpayer was a

member of an LLC during those years and also served as the LLC’s Chief Executive

Officer (CEO) during those years.

2. The Taxpayer received guaranteed payments for his duties as CEO. The Taxpayer also

received distributive shares of income as a member of the LLC.

3. The Taxpayer filed personal income tax returns with New Mexico for 2009 and 2010.

The Taxpayer claimed refunds for 2009 and 2010. The Taxpayer allocated and

apportioned his income from the distributive shares to various states in which the LLC
does business. The Taxpayer allocated all of his income from the guaranteed payments to

New Mexico as compensation and applied for credit for taxes paid to other states.

4. The Department denied the Taxpayer’s claims for refund and assessed additional tax for

each year.

5. The Taxpayer filed timely protests.

6. The Department abated the assessments and partially granted the claims for refund. The

amount still at issue for the 2009 tax year is $5,022.00. The amount still at issue for the

2010 tax year is $1,937.00. The amounts in controversy arise from the allocation of all of

the guaranteed payments to New Mexico and the claim of credit for taxes paid to other

states.

7. On October 27, 2011, the Department filed a Request for Hearing asking that the

Taxpayer’s protest on the 2009 tax year be scheduled for a formal administrative hearing.

8. On March 2, 2012, the Department filed a Motion to Consolidate the hearings for the

2009 and 2010 tax years as they involved the same issues. The Request for Hearing for

the 2010 tax year was filed on the date of the hearing.

9. The Motion to Consolidate was unopposed and was granted.

10. The parties stipulated to the facts at the hearing.

DISCUSSION

The issue to be decided is whether the Taxpayer’s receipt of guaranteed payments for

acting as CEO of the LLC should be allocated entirely to New Mexico or should be allocated and

apportioned to the other states in which the Taxpayer conducts business.

Allocation of Income.

In the Matter of Stuart Schoenmann and Charlotte Coulombe, page 2 of 5
The Taxpayer argues that the guaranteed payments were compensation for his services as

CEO and should be allocated to New Mexico. The Department argues that the guaranteed

payments do not meet the statutory definition of compensation as the Taxpayer was not

technically considered to be an employee because he was a member of the LLC.

For income taxable in this state as well as in another, compensation of residents of this

state must be allocated to this state. See NMSA 1978, § 7-2-11 (A) (3). Compensation is

defined as “wages, salaries, commissions, and any other form of remuneration paid to employees

for personal services”. NMSA 1978, § 7-2-2 (C) (emphasis added). See also NMSA 1978, § 7-

4-2 (C). Other income is to be allocated and apportioned as required by the Uniform Division of

Income for Tax Purposes Act. See NMSA 1978, § 7-2-11 (A) (2). If that Act does not specify

how a certain type of income should be apportioned, then the income will be apportioned in

accordance with rulings, instructions, or regulations of the Department. See id.

The parties agreed that the Taxpayer was not technically considered an employee of the

LLC because he had become a member of the LLC. The Taxpayer started out as the CEO and

later bought into the LLC. The Taxpayer continued to act as the CEO after he became a member

of the LLC. The Taxpayer’s salary was recategorized as guaranteed payments after he became a

member. The LLC was still able to treat the guaranteed payments as wages paid for its tax

purposes. See I.R.C. §707. The Taxpayer argues that he was still being compensated for acting

as CEO and that the guaranteed payments should be considered compensation for allocation

purposes. The Department argues that he was not technically an employee and that the statutory

definition should control what is considered to be compensation.

The statutes do not define the term “employee”. See NMSA 1978, § 7-2-2, and § 7-4-2.

See also NMSA 1978, § 7-1-3 (D) (defining “employee of the department” as any employee or

In the Matter of Stuart Schoenmann and Charlotte Coulombe, page 3 of 5
any person acting as agent or who is authorized to act on behalf of the department in any

capacity). The regulations governing allocation and apportionment actually seem to promote the

use of common-law rules in determining whether a person is an employee. See 3.5.14.8 (E)

NMAC (defining employee as “any officer of a corporation or any individual who, under the

usual common-law rules applicable in determining the employer-employee relationship, has the

status of an employee.”). Using a common-law approach, the Taxpayer was an employee of the

LLC in his capacity as CEO. Moreover, income that is from “the rendering of purely personal

services by an individual” is excepted from the requirement of allocation and apportionment. See

NMSA 1978, § 7-4-3 (emphasis added). This statute does not require that the individual be an

employee. See id. The Uniform Division of Income for Tax Purposes Act does not provide how

income derived from rendering personal services should be allocated or apportioned. See NMSA

1978, § 7-4-1, et seq. The regulations are also silent on this issue. See 3.3.11.8 through

3.3.11.14 NMAC. See also 3.5.3.7 through 3.5.3.11, and 3.5.19.8 through 3.5.19.19 NMAC.

Allocation and apportionment is a function of statutory and regulatory provisions. See NMSA

1978, § 7-2-11.

As there is not a statutory or regulatory provision governing how to allocate and

apportion a guaranteed payment that is made to an individual for the performance of a personal

service, the income should be allocated to New Mexico. See NMSA 1978, § 7-2-3 (providing

generally that all net income of residents of the state is subject to taxation). See also NMSA

1978, § 7-4-3 (specifically exempting income from personal service from the requirements of

allocation and apportionment). Consequently, the Taxpayer’s claims for refund were valid based

upon his allocation of the total amount of guaranteed payments to New Mexico.

CONCLUSIONS OF LAW

In the Matter of Stuart Schoenmann and Charlotte Coulombe, page 4 of 5

1. The Taxpayer filed a timely written protest to the denials of refunds for 2009 and

2010 issued under respective Letter ID numbers L0063812160 and L1136948800, and jurisdiction

lies over the parties and the subject matter of this protest.

2. The Taxpayer received guaranteed payments from the LLC for services rendered

in 2009 and 2010.

3. As there are not any statutory or regulatory provisions requiring allocation and

apportionment of guaranteed payments that are made for services rendered by an individual, the

Taxpayer appropriately allocated the entire amount of the guaranteed payments to New Mexico.

See NMSA 1978, § 7-4-3.

4. The Taxpayer’s claims for refund were valid and should have been granted.

For the foregoing reasons, the Taxpayer's protest is GRANTED and the Department is

hereby ordered to grant the remaining claims for refunds to the Taxpayer.

DATED: April 9, 2012.

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

In the Matter of Stuart Schoenmann and Charlotte Coulombe, page 5 of 5