Did Sol Bookkeeping become a successor to a related accounting firm when it retained shared software, employees, goodwill, and some former clients?

Plain-English summary

Sol Bookkeeping became a successor to a related accounting firm because intangible business property—software and goodwill—transferred when the older firm closed. The AHO upheld $5,488.19 of successor tax but abated $1,097.56 of penalty and $512.47 of interest.

Sol began in 2009 and provided mobile bookkeeping, payroll, training, and gross-receipts filing assistance mainly to small businesses. Its president also owned an older firm that primarily prepared corporate income tax returns.

The two businesses operated simultaneously and kept separate records, billing, bank accounts, clients, rates, and work. The older firm closed in 2012 after a manager failed to remit gross receipts tax and diverted funds.

Separate parallel businesses did not automatically create succession

The AHO emphasized that similar companies can operate separately with the same owner, employees, and address. One business's failure and the other's success, by themselves, do not mean the business changed hands.

Sol did not purchase inventory or equipment, assume the older firm's debts or obligations, take all its clients, or continue a substantial portion of its corporate-tax-return business.

Software and goodwill were enough under the regulation

Both companies had used the same billing software on the owner's personal computer while operating. After the older firm closed, Sol retained and continued using the program, which the AHO treated as a transfer of the older firm's interest in that software.

Sol also prepared a former client's corporate return immediately after the closure, later gained one or two other former clients, and retained employees whose reputations were associated with both businesses. Those facts supported transfer of goodwill.

Regulation 3.1.10.16 treated a direct or indirect parting with tangible or intangible business property as a transfer and allowed successor status when even one listed factor was present. The software and goodwill were sufficient.

Only principal tax followed the business

Under Hi-Country Buick GMC, Inc. v. Taxation and Revenue Department, successor liability did not include the predecessor's penalty or interest. Sol remained liable for principal gross receipts tax only.

Result: protest GRANTED IN PART AND DENIED IN PART. Sol owed $5,488.19 of tax; $1,610.03 of penalty and interest was abated.

What this means for you

Owners operating related service companies

Formal separation helps but is not the whole analysis. Software access, customer relationships, employee continuity, and transferred goodwill can show that business property changed hands.

Buyers of asset-light businesses

A service company may have little equipment or inventory, yet its software rights, customer relationships, workforce reputation, and goodwill can carry successor-tax exposure.

Successors reviewing an assessment

Separate principal tax from add-ons. Under the law applied here, the successor owed the predecessor's tax but not its penalty or interest.

Common questions

Q: Did Sol buy the older firm?
A: There was no conventional sale, but the regulation covered indirect transfers of business property.

Q: Did Sol take all the firm's clients or operations?
A: No. It served only a few former clients and generally performed different accounting work.

Q: What property transferred?
A: The older firm's interest in shared billing software and its goodwill connected to former clients and common employees.

Q: Can one successor factor be enough?
A: Yes. The regulation allowed a successor presumption when any listed factor was present.

Q: What amount remained due?
A: $5,488.19 of principal tax. Penalty and interest totaling $1,610.03 were abated.

Citations and references

Statutes and regulations:

• NMSA 1978, §§ 7-1-61 through 7-1-63 — transferred business property and successor liability
• NMSA 1978, § 7-1-17 — assessment presumption
• Regulation 3.1.10.16 NMAC — successor factors and broad definition of transfer

Cases cited:

• Hi-Country Buick GMC, Inc. v. Taxation and Revenue Department, 2016-NMCA-027 — successor liability excludes penalty and interest
• Sterling Title Co. of Taos v. Commissioner of Revenue, 1973-NMCA-086 — broad meaning of business changing hands and property securing tax
• El Centro Villa Nursing Center v. Taxation and Revenue Department, 1989-NMCA-070 — assessment presumption includes tax-related additions

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Sol Bookkeeping Services, Inc.
• Decision PDF: D&O 16-13

Original ruling text

STATE OF NEW MEXICO
ADMINISTRATIVE HEARINGS OFFICE
TAX ADMINISTRATION ACT

IN THE MATTER OF THE PROTEST OF
SOL BOOKKEEPING SERVICES, INC., No. 16-13
TO THE ASSESSMENT ISSUED UNDER
LETTER ID NO. L0055470128

DECISION AND ORDER

A formal hearing on the above-referenced protest was held on March 24, 2016 before

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

represented by Ms. Cordelia Friedman, Staff Attorney. Mr. Nicholas Pacheco, Auditor, also

appeared on behalf of the Department. Ms. Evangeline Alderete, President of Sol Bookkeeping

Services, Inc. (Taxpayer), appeared for the hearing with her attorney, Mr. Wayne Chew. 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. On October 23, 2015, the Department assessed the Taxpayer as a successor in business.

The assessment was for tax of $5,488.19, penalty of $1,097.56, and interest of $512.47.

2. On December 7, 2015, the Taxpayer filed a formal protest letter.

3. On January 11, 2016, the Department filed a Request for Hearing asking that the

Taxpayer’s protest be scheduled for a formal administrative hearing.

4. On January 13, 2016, the Hearings Office issued a notice of hearing. The hearing date

was set within ninety days of the protest.

5. On February 4, 2016, the Taxpayer requested a continuance of the hearing.
6. On February 5, 2016, the amended notice of hearing granting the request for continuance

was sent, and the delay of the hearing was attributable to the Taxpayer.

7. On March 4, 2016, a telephonic scheduling hearing was conducted. The date for the

hearing on the merits was selected and announced. The parties requested a fast setting.

8. On March 7, 2016, the scheduling order and notice of hearing was issued.

9. The Taxpayer began doing business in 2009. The Taxpayer was started and owned by

Ms. Alderete and two other individuals.

10. The Taxpayer provides accounting and bookkeeping services to its clients. The Taxpayer

primarily deals with small business owners.

11. The Taxpayer sends its employees to its clients’ locations, provides help and support for

general office bookkeeping, and trains its clients on how to do their bookkeeping

themselves. The Taxpayer also assists its clients in their payroll and filing of gross

receipts taxes.

12. The Taxpayer’s business is almost purely service-oriented. It does not maintain a

physical office, does not have inventory, and does not have supplies or equipment.

13. The Taxpayer uses a computer software program for its billing, but does not own the

computer on which the software is located. The computer is owned by Ms. Alderete.

The software program was also used by another business while it was operating at the

same time as the Taxpayer.

14. In 2002, seven years prior to the Taxpayer’s inception, Ms. Alderete started and wholly

owned another business. That business was also engaged in providing accounting

services. That business will be referred to throughout this decision as “the Firm”.

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Letter ID No. L0055470128
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15. The Firm’s clients consisted mainly of corporate entities. The Firm’s business consisted

mainly of providing tax services to its clients. The Firm mostly reviewed and prepared

corporate income tax returns for its clients.

16. The Firm operated out of Ms. Alderete’s home, but did not have any property or supplies.

The Firm also used the software program for billing that was located on Ms. Alderete’s

personal computer.

17. In 2004, Ms. Alderete was injured in a car accident. Ms. Alderete suffered complications

for several years as a result of her injuries. Consequently, she was unable to manage the

Firm for several years.

18. Ms. Alderete turned over the day-to-day operations to another person (the manager).

19. The manager failed to keep the Firm’s gross receipts taxes current.

20. In 2010, the year after the Taxpayer’s inception, Ms. Alderete was healthy enough to take

a more active role in the Firm and discovered the tax issue.

21. Ms. Alderete worked with the Department and set up a payment plan for the Firm to get

caught up on its taxes. The manager was still working for the Firm at that time. Ms.

Alderete explained the payment plan to the manager and was assured that she understood

and would comply.

22. Somewhere in this time frame, Ms. Alderete also granted a 25% ownership stake in the

Firm to another individual because the Firm was unable to pay that person’s wages.

23. In 2012, Ms. Alderete discovered that the manager had failed to make the Firm’s gross

receipts tax payments as required. The manager was indicating in the books that the

payments were made and filing reports, but was diverting the funds to herself rather than

sending them to the Department.

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Letter ID No. L0055470128
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24. Further investigation by Ms. Alderete, the IRS, and the Department revealed that there

might have been other embezzlement and that the Firm’s books were a mess.

25. The Department’s employee and the IRS’s employee doubted that the manager’s

activities would be able to be sorted out and advised Ms. Alderete to shut down the Firm.

26. Ms. Alderete shut down the Firm, and it ceased all operations as of September 2012,

approximately three years after the Taxpayer was in existence.

27. The shutdown of the Firm did not interrupt the Taxpayer’s operations.

28. The Firm and the Taxpayer had very few employees, but most of the employees who

worked for one have also worked for the other. Ms. Alderete explained that she

frequently hires the same people in all of her businesses because she has gotten to know

their skills and trusts in their abilities.

29. The Taxpayer’s address on its business and tax registrations was also Ms. Alderete’s

home address and later a P.O. Box, but the Taxpayer was not operated out of Ms.

Alderete’s home. The Taxpayer was a mobile business that went to the clients’ locations

to perform its services.

30. Ms. Alderete maintained the Taxpayer and the Firm as completely separate entities.

They kept separate records, did separate billing, had different clients, had separate bank

accounts, had different billing practices and rates, and did different types of accounting

work.

31. The Taxpayer and the Firm operated simultaneously, but separately, from the Taxpayer’s

inception in 2009 until the Firm’s shutdown in 2012.

32. After the Firm ceased operations, only one of its clients approached the Taxpayer and

requested that the Taxpayer file a corporate income tax return for the client that year.

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Letter ID No. L0055470128
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The Taxpayer agreed to file that client’s return in 2013 for the 2012 tax year even though

it was not generally in the business of filing those types of returns.

33. The Taxpayer might currently have one or two clients who were also clients of the Firm.

34. The Taxpayer’s gross receipts have increased and its deductions have decreased since the

Firm stopped operating.

35. The Taxpayer did not take over all of the Firm’s clients, did not take possession of its

inventory or equipment, and did not assume its liabilities.

36. The Firm’s goodwill transferred to the Taxpayer when some of the Firm’s clients

switched over to do business with the Taxpayer, and the Taxpayer provided at least one

client with the same services as the Firm.

37. The Taxpayer continues to use the billing software that was also used by the Firm.

DISCUSSION

The issue to be decided is whether the Taxpayer is liable under the assessment as a

successor in business.

Burden of Proof.

Assessments by the Department are presumed to be correct. See NMSA 1978, § 7-1-17.

Tax includes, by definition, the amount of tax principal imposed and, unless the context

otherwise requires, “the amount of any interest or civil penalty relating thereto.” NMSA 1978, §

7-1-3. See also El Centro Villa Nursing Ctr. v. Taxation and Revenue Department, 1989-NMCA-

070, 108 N.M. 795. Therefore, 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 it is entitled

to an abatement.

Successor in Business Liability.

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Letter ID No. L0055470128
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A successor in business is required to pay the tax for which the acquired business was

liable. See NMSA 1978, § 7-1-61 (C) (1997). See also NMSA 1978, § 7-1-63 (1997). A

successor in business is charged with certain responsibilities in discerning what tax is owed when

the business or its assets are acquired. See NMSA 1978, § 7-1-61 (requiring the successor to set

aside an amount in trust for payment of tax) and § 7-1-62 (1997) (allowing the successor to apply

for a certificate from the Department). The Department argued that a successor in business is

also liable for the penalty and interest if the successor is a “mere continuation” of the previous

business. However, a successor in business is liable only for the tax itself and is not liable for

any penalty or interest. See Hi-Country Buick GMC, Inc. v. Taxation and Revenue Dep’t, 2016-

NMCA-027, ¶ 20 (holding that the definition of tax in the successor in business statute does not

include penalty or interest), cert. denied, No. 35,647 (NMSC, March 15, 2016). The assessment

of penalty and interest is abated.

Determination of a successor.

A successor in business is “any transferee of a business or property of a business, except

to the extent it would be materially inconsistent with the rights of secured creditors”. 3.1.10.16

(F) (2) NMAC (2001). “The tangible and intangible property used in any business remains

subject to liability for payment of the tax…even though the business changes hands.” NMSA

1978, § 7-1-61. “If, after any business is transferred to a successor, any tax…remains due, the

successor shall pay the amount due”. NMSA 1978, § 7-1-63.

There are several factors to be used in determining a successor in business. See 3.1.10.16

(A) NMAC. If a single one of these factors are present, there is a presumption that there is a

successor in business. See 3.1.10.16 (B) NMAC. Purchasing tangible assets, assuming a lease,

keeping one part-time employee, and assuming a note are sufficient to establish one as a

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successor in business, even when the prior business was defunct. See Sterling Title Co. of Taos

v. Comm’r of Revenue, 1973-NMCA-086, ¶ 9-11, 85 N.M. 279.

The first factor in determining whether there is a successor in business is whether there

was “a sale and purchase of a major part of the materials, supplies, equipment, merchandise or

inventory…in a single or limited number of transactions”. 3.1.10.16 (A) (1) NMAC. There was

no sale and purchase between the Firm and the Taxpayer. The Firm had no major materials,

supplies, equipment, merchandise or inventory to transfer as it was largely a service business.

However, there was one software program that the Firm used in its business that the Taxpayer is

still using. The Taxpayer was also using the software program in its business for years prior to

the Firm’s cessation of operations. Nevertheless, a transfer includes “every mode, direct or

indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with the

property of a business”. 3.1.10.16 (F) (3) NMAC. The Firm’s interest in the software program

was transferred to the Taxpayer when the Firm ceased its operations because the Taxpayer

retained the program and continued to use it.

The second factor is whether there was a transfer that was not in the ordinary course of

the transferor’s business. See 3.1.10.16 (A) (2) NMAC. The Firm’s software program and

goodwill transferred to the Taxpayer. See NMSA 1978, § 7-1-61 (including all tangible and

intangible property used in the business). These transfers were not in the ordinary course of the

Firm’s business.

The third factor is whether “a substantial part of both equipment and inventories” was

transferred. 3.1.10.16 (A) (3) NMAC. As there was no transfer of equipment and inventories,

this element is not met.

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Letter ID No. L0055470128
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The fourth factor is whether a substantial portion of the business conducted by the

transferor continued to be conducted by the transferee. See 3.1.10.16 (A) (4) NMAC. The Firm

primarily prepared and filed corporate income tax returns for its clients. The Taxpayer primarily

provides bookkeeping services, payroll services, training, and assistance with gross receipts taxes

for its clients. The Taxpayer admitted that one former client of the Firm approached it and

requested that the Taxpayer prepare and file its corporation income tax return in the year after the

Firm ceased its operations, which the Taxpayer did that year. However, a one-time service does

not constitute a substantial portion of the business conducted by the Taxpayer. The Taxpayer has

not continued to conduct a substantial portion of the Firm’s business.

The fifth factor is whether “the transferor’s goodwill follow[ed] the transfer of the

business properties”. 3.1.10.16 (A) (5) NMAC. The Taxpayer has retained many employees

who were also working for the Firm. Although most of these employees were employed by both

simultaneously, the reputations of the employees would necessarily be associated with both the

Firm and the Taxpayer. The Taxpayer immediately engaged with at least one of the Firm’s

clients immediately after the Firm’s shutdown. The Taxpayer performed the same service for

that client that the Firm had performed. The Taxpayer has acquired a couple of other clients

since then who were also originally clients of the Firm. Consequently, it does appear that the

Firm’s goodwill was transferred to the Taxpayer.

The sixth factor is whether the business obligations of the transferor were honored by the

transferee. See 3.1.10.16 (A) (6) NMAC. The Taxpayer did not assume or honor any

obligations of the Firm.

The seventh factor is whether unpaid debts of the transferor were paid by the transferee.

See 3.1.10.16 (A) (7) NMAC. The Taxpayer did not assume or pay any unpaid debts of the

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Letter ID No. L0055470128
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Firm. The final factor is whether there was an agreement precluding competition. See 3.1.10.16

(A) (8) NMAC. There was no such agreement between the Taxpayer and the Firm.

It is possible for two businesses to be operated simultaneously, but completely separately,

even while doing similar work, with the same owners, same employees, and same mailing

address. Just because one of those businesses fails while the other succeeds does not

automatically make the successful business a successor. There must evidence that the businesses

changed hands. See NMSA 1978, § 7-1-61.

The statute indicates that when a business changes hands, it can involve the transfer of

tangible and intangible property. See NMSA 1978, § 7-1-61. See also Sterling Title, 1973-

NMCA-086, ¶ 23. Goodwill is an example of intangible property that could be transferred to a

successor. The term “business changes hands” is meant to be a broad, all-inclusive expression

and is used in the statute for the purpose of maintaining the personalty as security for the

payment of tax. See Sterling Title, 1973-NMCA-086, ¶ 25. A transfer of any property used in

the business, tangible or intangible, is sufficient to show that the business changed hands for

purposes of the successor statute. See NMSA 1978, § 7-1-61. See also 3.1.10.16 NMAC. See

also Sterling Title, 1973-NMCA-086, ¶ 25. There is evidence that the software program and the

goodwill of the Firm transferred to the Taxpayer. The Taxpayer retained the software program

and continued to use the software in its business. The Taxpayer was hired by one of the Firm’s

clients to perform the same services, the Taxpayer has gained a couple of other clients that used

to be served by the Firm, and the Taxpayer maintains the same employees who worked for the

Firm. If a single factor is present, there is a presumption that there is a successor in business.

See 3.1.10.16 (B) NMAC. Therefore, the Taxpayer is presumed to be a successor in business to

the Firm.

Sol Bookkeeping Services, Inc.
Letter ID No. L0055470128
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CONCLUSIONS OF LAW

A. The Taxpayer filed a timely written protest to the Notice of Assessment issued

under Letter ID number L0055470128, and jurisdiction lies over the parties and the subject matter

of this protest.

B. The Firm’s goodwill transferred to the Taxpayer when it was hired by a few of the

Firm’s clients and performed some of the same services for at least one of those clients. The

Taxpayer retained and continued to use a software program that was also used in the Firm’s

business. The Taxpayer maintained the same employees who worked for the Firm. Therefore,

the Taxpayer was a successor in business to the Firm. See 3.1.10.16 NMAC. See also NMSA

1978, § 7-1-61. See also Sterling Title, 1973-NMCA-086.

C. Even though the Taxpayer is a successor in business, it is not liable for penalty and

interest. See Hi-Country Buick, 2016-NMCA-027. The assessment for penalty and interest is

HEREBY ABATED.

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

IN PART.

DATED: May 9, 2016.

Dee Dee Hoxie
DEE DEE HOXIE
Hearing Officer
Administrative Hearings Office
Post Office Box 6400
Santa Fe, NM 87502

Sol Bookkeeping Services, Inc.
Letter ID No. L0055470128
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