Did Mountain Liquors become liable as a successor when it took a defaulting tenant's inventory and continued the same grocery, liquor, and deli business?

Plain-English summary

Mountain Liquors became a successor in business when it took a defaulting tenant's inventory and continued the grocery, liquor-store, and deli operation at the same property. The AHO upheld $5,513.39 of successor tax but abated $1,334.56 of penalty and interest.

Mountain Liquors owned the Jemez commercial property and liquor license and leased them to Trail House Enterprises. The tenant agreed to pay all taxes but fell behind on rent, gross receipts tax, and liquor excise tax, then voluntarily ended the leases.

Mountain paid $4,000 for inventory with a wholesale value of $20,153.71, retook the liquor license, used the inventory and some existing signage, and ran the same businesses for at least ten months. It also paid some of the tenant's vendor, utility, and tax liabilities to preserve the operation.

Multiple successor factors were present

Regulation 3.1.10.16 listed eight indicators of a transferred business. The AHO found at least four:

• a substantial inventory transfer;
• a transfer outside Mountain's ordinary course of business;
• continuation of a substantial part of the same grocery, liquor, and deli operation; and
• payment of the predecessor's unpaid debts.

Any one factor could support a presumption of succession. Here, the tax liability followed the transferred business assets, up to their value.

The secured-creditor exclusion did not fit

Mountain argued that it merely enforced a security interest in the inventory. The AHO found it was not a bank, financial institution, government, or disinterested third-party purchaser at a commercially reasonable foreclosure sale.

Mountain had operated the businesses for eight years before the tenant took over and then resumed operations for ten months. That conduct did not resemble temporarily holding collateral for eventual resale.

Private agreements did not prevent Department collection

The leases and personal guarantee placed tax responsibility on Trail House Enterprises and its owners. Those contracts could support Mountain's separate claims against them, but they did not stop the Department from following the transferred assets under the Tax Administration Act.

Paying the tenant's liquor excise tax to preserve the liquor license also did not discharge the separate gross-receipts successor liability, and the record did not support Mountain's assertion that a Department employee said all liability was extinguished.

Penalty and interest did not transfer

Under Hi-Country Buick GMC, Inc. v. Taxation and Revenue Department, the predecessor's penalty and interest were not legally assessable against the successor. The AHO therefore removed those amounts while leaving principal tax due.

Result: protest PARTIALLY GRANTED AND PARTIALLY DENIED. Mountain owed $5,513.39 of successor tax; $1,334.56 of penalty and interest was abated.

Finding 6 dates the scheduled hearing as December 28, 2016, while the opening states the hearing occurred December 28, 2015 and the surrounding procedural dates are in 2015. This page follows the hearing date stated in the opening and preserves the original wording below.

What this means for you

Landlords retaking a tenant's operating business

Taking inventory, continuing the same operation, and paying predecessor debts can create successor liability even when the transfer results from lease default.

Buyers and secured creditors

Before taking business assets, determine the predecessor's tax status and whether a clearance certificate or trust arrangement is required. A claimed security interest does not automatically fit the regulation's narrow exclusions.

Parties using tax indemnities

A contract can allocate responsibility between private parties without limiting the Department's statutory collection rights. Preserve contractual remedies, but do not treat them as a tax clearance.

Common questions

Q: Why was Mountain treated as a successor?
A: It acquired substantial inventory, continued the same operation at the same site, and paid some predecessor debts outside its ordinary business course.

Q: Did paying only $4,000 for inventory avoid liability?
A: No. The inventory's established wholesale value was $20,153.71, and successor liability applied up to transferred asset value.

Q: Did the tenant's promise to pay taxes protect Mountain?
A: No. It did not bind the Department, though Mountain could pursue its contractual rights separately.

Q: Did paying liquor excise tax clear the gross-receipts liability?
A: No. The decision treated those as distinct liabilities.

Q: Why were penalty and interest abated?
A: The cited Hi-Country Buick decision held that those predecessor add-ons were not supported against a successor.

Citations and references

Statutes and regulations:

• NMSA 1978, §§ 7-1-61 through 7-1-63 — transferred business property, successor trust duty, assessment, and liability limited by asset value
• NMSA 1978, § 7-1-17(C) — assessment presumption
• Regulation 3.1.10.16 NMAC — successor indicators and secured-creditor exclusions

Cases cited:

• Hi-Country Buick GMC, Inc. v. Taxation and Revenue Department, 2016-NMCA-027 — successor penalty and interest; regulatory exclusion
• Sterling Title Co. v. Commissioner of Revenue, 1973-NMCA-086 — business property secures tax and liability follows assets
• MPC Ltd. v. New Mexico Taxation and Revenue Department, 2003-NMCA-021 — unsupported assertions do not overcome an assessment

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Mountain Liquors LLC
• Decision PDF: D&O 16-15

Original ruling text

STATE OF NEW MEXICO
ADMINISTRATIVE HEARINGS OFFICE
TAX ADMINISTRATION ACT

IN THE MATTER OF THE PROTEST OF
MOUNTAIN LIQUORS LLC AS SUCCESSOR TO No. 16-15
TRAIL HOUSE ENTERPRISES LLC
TO ASSESSMENT ISSUED UNDER LETTER
ID NO. L1155313712

DECISION AND ORDER

A protest hearing occurred on the above captioned matter on December 28, 2015 before

Brian VanDenzen, Esq., Chief Hearing Officer, in Santa Fe. At the hearing, Jeremy Peck

appeared pro se for Mountain Liquors, LLC (“Taxpayer”). Staff Attorney Gabrielle Dorian

appeared representing the State of New Mexico Taxation and Revenue Department (“TRD”).

Protest Auditor Veronica Galewaler appeared as a witness for TRD. TRD Staff Attorney Marek

Grabowski also appeared as an observer. Taxpayer Exhibits #1-6 were admitted into the record.

Taxpayer Ex. #6 is a sealed record involving another taxpayer’s confidential information. TRD

Exhibits A1, A2, C, D & E were admitted into the record (TRD Ex. C was resubmitted on May

11, 2016 minus the handwritten notations that Taxpayer had objected to at hearing). All exhibits

are more thoroughly described in the Administrative Exhibit Coversheet. Based on the evidence

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

FINDINGS OF FACT

1. On September 9, 2015, under letter id. no. L1155313712, TRD assessed Taxpayer

as a successor in business to Trail House Enterprise LLC for $5,513.39 in tax, $1,183.26 in

penalty, and $151.30 in interest for a total assessment of $6,847.95.

2. TRD included with the assessment a detailed spreadsheet listing the tax, penalty

and interest for each tax reporting period.

3. On September 22, 2015, Taxpayer protested TRD’s assessment.

4. On September 29, 2015, TRD’s protest office acknowledged receipt of a valid

protest.

5. On November 5, 2015, TRD filed a request for hearing in this matter with the

Administrative Hearings Office (a separate agency from TRD under the Administrative Hearings

Office Act, NMSA 1978, Section 7-1B et seq (2015).

6. On November 6, 2015, the Administrative Hearings Office sent Notice of

Administrative Hearing, scheduling this matter for a merits hearing on December 28, 2016,

within 90-days of TRD’s acknowledgment of receipt of a valid protest.

7. Taxpayer is a limited liability company operated by its sole member Jeremy Peck.

8. Mr. Peck is also the sole member of Trail House, LLC, an entity also owning an

interest in the commercial property described in finding of fact #9. [Taxpayer Ex. #3].

9. Taxpayer, in conjunction with Trail House LLC, owns commercial property at

10902 Highway 4, Jemez Pueblo, New Mexico, 87024.

10. Taxpayer also possessed a liquor license used at that property.

11. Taxpayer, apparently in conjunction with Trail House LLC, operated a grocery

store, liquor store, and deli at that property it owned during the first eight of the eleven years that

Taxpayer owned the property.

12. Trail House Enterprise, LLC (a separate entity from Trail House, LLC) is a New

Mexico limited liability company operated by Nick and Ilie Spilca.

In the Matter of the Protest of Mountain Liquors, LLC, page 2 of 12

13. On February 22, 2012, Taxpayer entered into a lease agreement with Trail House

Enterprise LLC whereby Taxpayer leased its commercial property in Jemez to Trail House

Enterprise LLC. [Taxpayer Ex. #3].

14. Under the property lease agreement, Trail House Enterprise LLC was liable for

the payment of all federal, state, and local tax. Failure to timely pay these taxes was a grounds

for default under the agreement.

15. Nick and Ilie Spilca executed a personal guarantee to Taxpayer for any debt of

Trail House Enterprise LLC under the lease agreement with Taxpayer. This guarantee also

granted Taxpayer a security hold against any of Nick and Ilie Spilca assets against a debt under

the lease. [Taxpayer Ex. #1].

16. Taxpayer leased its liquor license to Trail House Enterprise LLC. [Taxpayer Ex.

2].

17. Under the liquor license lease, Trail House Enterprise LLC was liable for the

payment of all federal, state, and local tax, including penalty and interest. Failure to pay such

taxes was grounds to default the liquor license lease.

18. After entering into the various leases in 2012, Trail House Enterprise LLC took

over the operation of the grocery store, liquor store, and deli commercial business located in

Jemez.

19. With the assistance of Taxpayer, Trail House Enterprise LLC made or attempted

to make improvements to the store, liquor store and deli. Taxpayer would provide credit against

rent for some of these improvements, although in retrospect Trail House Enterprise LLC did not

always fully complete the improvement projects.

In the Matter of the Protest of Mountain Liquors, LLC, page 3 of 12

20. Trail House Enterprise LLC fell significantly behind on the payment of its gross

receipts tax obligations (Taxpayer was seven reporting periods behind) from the commercial

businesses operated at the rented property and the liquor excise tax associated with the liquor

license it was renting from Taxpayer.

21. Trail House Enterprise LLC also fell significantly behind on the payments under

the leases to Taxpayer.

22. Sometime on or before February 16, 2015, Taxpayer met with Nick and Ilie

Spilca of Trail House Enterprise LLC about the rental payment delinquencies. At the time, Nick

and Ilie Spilca informed Mr. Peck that they had fallen behind financially and wished to

voluntarily terminate the lease agreements.

23. At that meeting, Taxpayer provided Nick and Ilie Spilca with three-days notice of

eviction based on their default under the lease.

24. On February 16, 2015, Illie Spilca of Trail House Enterprise LLC informed in

writing Taxpayer that it was breaking the lease with Taxpayer. [Taxpayer Ex. #4].

25. As part of the termination of the lease agreements, Taxpayer and Trail House

Enterprise LLC agreed to conduct a full inventory of all merchandise at the property.

26. The inventory of the all of Trail House Enterprise LLC’s inventory contained on

the property revealed a total wholesale value of the inventory of $20,153.71. [TRD Ex. A-1].

27. About 46% of the inventory amounted to liquor and beer of the on-site liquor

store while about 53% was general merchandise attributable to on-site grocery store. [TRD Ex.

C].

In the Matter of the Protest of Mountain Liquors, LLC, page 4 of 12

28. It originally cost Taxpayer over $200,000.00 for the liquor license it leased to

Trail House Enterprise LLC, and Taxpayer rented that liquor license out for $2,000.00 per

month.

29. Upon termination of the leases, Taxpayer took possession of its property in

Jemez, the liquor license that Trail House Enterprise LLC had previously leased, and Trail House

Enterprise LLC’s inventory at the property.

30. Taxpayer paid Trail House Enterprise LLC $4,000.00 for the inventory. This

inventory total included grocery items transferred to Trail House LLC, and liquor items that

transferred to Mountain Liquors, LLC. [TRD Ex. A-1].

31. This transfer of inventory did not occur in the regular course of Taxpayer’s

business, but rather as a mechanism for Taxpayer to preserve the value of the commercial

businesses located at the property and to collect on some of Trail House Enterprise LLC’s debts

Taxpayer.

32. Using Trail House Enterprises LLC’s inventory and the liquor license obtained

upon the termination of the leases, Taxpayer operated the established grocery store, liquor store,

and deli located on Taxpayer’s commercial property for at least ten-months.

33. Taxpayer used some of the same signage as when Trail House Enterprises LLC’s

operated the business. [TRD Ex. E & D].

34. In order to protect the value of the businesses, Taxpayer paid off some of Trail

House Enterprise LLC’s outstanding liabilities to National Distributing, Windstream, and TRD.

[TRD Ex. A-1].

35. Taxpayer retook possession of its liquor license as part of the default under the

lease. In order to preserve the liquor license and in order to continue operating, Taxpayer paid off

In the Matter of the Protest of Mountain Liquors, LLC, page 5 of 12
the outstanding Liquor Excise Tax liability that Trail House Enterprise LLC had accrued with

TRD.

36. Although Mr. Peck asserted at hearing that when Taxpayer paid off the

outstanding Liquor Excise Tax liability associated with the liquor license it was informed that

extinguished all liability, there is no evidence that a TRD employee in fact told Mr. Peck that the

outstanding tax liability was extinguished when Taxpayer paid the outstanding liquor excise tax

to clear the liquor license. [Taxpayer Ex. #5].

37. Because there was no clean copy of TRD Ex. C in the administrative file without

the handwritten notes that Taxpayer objected to, on May 6, 2016 AHO’s legal assistant emailed

both Taxpayer’s representative Mr. Peck and TRD’s Representative Ms. Dorian directing that the

exhibit be resubmitted. With no objection noted, on May 11, 2016, TRD provided a clean copy

of TRD Ex. C.

DISCUSSION

The issue in this case is whether Taxpayer was a successor in business of Trail House

Enterprises LLC and thus liable for the assessed successor in business tax. Although TRD

assessed penalty and interest and continued to argue that penalty and interest was appropriate in

this matter, such argument is not consistent with the recent clear holding by the Court of Appeals

in Hi-Country Buick GMC, Inc. v. Taxation and Revenue Dep’t, 2016-NMCA-027, ¶20, cert

denied, March 15, 2016, No. S-1-SC-35647, 2016 N.M. Lexis 67. As such, as a threshold matter,

the protest of penalty and interest in this matter is granted and that portion of the assessment is

abated.

In the Matter of the Protest of Mountain Liquors, LLC, page 6 of 12
Presumption of Correctness.

Under NMSA 1978, Section 7-1-17 (C) (2007), the assessment issued in this case is

presumed correct. Consequently, Taxpayer has the burden to overcome the assessment. See

Archuleta v. O'Cheskey, 1972-NMCA-165, ¶11, 84 N.M. 428. Accordingly, it is Taxpayer’s

burden to present some countervailing evidence or legal argument to show that it is entitled to

abatement, in full or in part, of the assessment issued against it. See N.M. Taxation & Revenue

Dep't v. Casias Trucking, 2014-NMCA-099, ¶8. “Unsubstantiated statements that the assessment

is incorrect cannot overcome the presumption of correctness." See MPC Ltd. v. N.M. Taxation &

Revenue Dep't, 2003 NMCA 21, ¶13, 133 N.M. 217; See also Regulation 3.1.6.12 NMAC. When a

taxpayer presents sufficient evidence to rebut the presumption, the burden shifts to TRD to show

that the assessment is correct. See MPC Ltd., 2003 NMCA 21, ¶13.

Successor in Business.

NMSA 1978, Section 7-1-61 (B) (1997) establishes that the “tangible and intangible

property used in any business remains subject to liability for payment of the tax due on account

of that business to the extent stated herein, even though the business changes hands.” Section 7-

1-61 (C) requires the successor to place into a trust account sufficient money to cover the

outstanding tax liability until TRD either issues a clearance certificate or makes a demand or

assessment for the outstanding liability. Under Section 7-1-63 (C), the successor can “discharge

as assessment made… by paying to the Department the full value of the transferred tangible and

intangible property.”

Regulation 3.1.10.16 NMAC (1/15/01) addresses what constitutes a successor in

business for the purposes of the TAA. See Chevron U.S.A., Inc. v. State ex rel. Dep't of Taxation &

Revenue, 2006-NMCA-50, ¶16, 139 N.M. 498, 503 (agency regulations interpreting a statute are

In the Matter of the Protest of Mountain Liquors, LLC, page 7 of 12
presumed proper and are to be given substantial weight). Regulation 3.1.10.16 (A) NMAC

establishes eight indicia in determining whether a business is a successor:

(1) Has a sale and purchase of a major part of the materials, supplies,
equipment, merchandise or other inventory of a business enterprise
occurred between a transferor and a transferee in a single or limited
number of transactions?
(2) Was a transfer not in the ordinary course of the transferor's business?
(3) Was a substantial part of both equipment and inventories transferred?
(4) Was a substantial portion of the business enterprise that had been
conducted by the transferor continued by the transferee?
(5) By express or implied agreement did the transferor's goodwill follow
the transfer of the business properties?
(6) Were uncompleted sales, service or lease contracts of the transferor
honored by the transferee?
(7) Was unpaid indebtedness to suppliers, utility companies, service
contractors, landlords or employees of the transferor paid by the
transferee?
(8) Was there an agreement precluding the transferor from engaging in a
competing business to that which was transferred?

If any of these eight indicia are present, then TRD “may presume that ownership of a business

enterprise has transferred to a successor in business.” See Regulation 3.1.10.16 (B) NMAC.

In this case, at least four of the factors under Regulation 3.1.10.16 (B) NMAC are met. A

substantial portion of the grocery and liquor inventory of Trail House Enterprises, LLC

transferred to Taxpayer when the leases were terminated. Taxpayer needed that inventory to try

to keep the businesses afloat and pay off outstanding liabilities accrued by Trail House

Enterprises, LLC. The transfer did not occur in the regular course of Taxpayer’s business but as

part of a default on the various lease agreements. Taxpayer continued the grocery, liquor store,

and deli operation at the same location in Jemez. Taxpayer paid the unpaid indebtedness of Trail

House Enterprises LLC to suppliers and TRD. Thus, for the purposes of the Tax Administration

Act, Taxpayer was presumed to be a successor in business of Trail House Enterprises LLC.

In the Matter of the Protest of Mountain Liquors, LLC, page 8 of 12
The purpose of the successor in business statute is “to make tangible and intangible

property security for payment of the tax.” Sterling Title Co. v. Comm'r of Revenue, 1973-

NMCA-086, ¶23, 85 N.M. 279. In other words, the tax liability of the predecessor business

follows the tangible and intangible assets to the successor business. According to Judge Sutin’s

concurring opinion in Sterling Title Co., ¶28, under the successor in business statutory scheme,

“[t]he burden is placed on the purchaser, at the time of the purchase of tangible and intangible

property used in a business, to determine whether a gross receipts tax is due and payable by the

seller.” Although Mr. Peck was understandably frustrated and questioned why the state pursued

him rather than the Spilcas who collected the tax but failed to remit it to the state, the answer to

that complaint is found in the structure and purpose of the statute: the state follows the assets of

the defunct business to collect on the outstanding liability.

Taxpayer argued that he was simply perfecting a credit interest on the seized inventory

and thus was not a successor pursuant to Regulation 3.1.10.16(F)(2) NMAC. Under Regulation

3.1.10.16 (F) (2) NMAC, a successor means “any transfer of a business or property of a business,

except to the extent it would be materially inconsistent with the rights of secured creditors that

have perfected security interests or perfected liens on the business or property of the business.”

Excluded from the definition of a successor in business under Regulation 3.1.10.16 (F) (2)

NMAC is “a disinterested third party who purchases property at a commercially reasonable

foreclosure sale, a bank or other financial institution or government that acquires and operates a

business for a limited period of time in order to protect its collateral for eventual resale in a

commercially reasonable manner…” Taxpayer is not bank, other financial institution, or

government, and thus this provision does not appear to apply to the facts of this case. See Hi-

Country Buick GMC, Inc., 2016-NMCA-027, ¶17. Nor was Taxpayer a disinterested third party,

In the Matter of the Protest of Mountain Liquors, LLC, page 9 of 12
as Taxpayer had operated the businesses at the commercial property for eight years before Trail

House Enterprises LLC took over the property and businesses under the leases. Although Mr.

Peck expressed an interest in eventually selling the property, at the time of the hearing Taxpayer

had already been operating the commercial businesses at the property for ten-months.

Considering he had previously operated these businesses for eight years, this subsequent

operation of the businesses is not consistent with the type of disinterested party mentioned in

Regulation 3.1.10.16 (F) (2) NMAC or the purpose of that regulation. See id.

In this case, Taxpayer cited numerous agreements that required Trail House Enterprises,

LLC to pay the tax obligations of the business. However, while Taxpayer is certainly free to

pursue a contractual legal action against Trail House Enterprises, LLC, agreements between third

parties regarding taxes do not prohibit TRD from pursuing a tax liability under the Tax

Administration Act. As discussed above, under the structure and purpose of the successor in

business provision of the Tax Administrative Act, TRD follows the assets of a business, which in

this case it is undisputed that the assets transferred to Taxpayer. But that does not preclude

Taxpayer from subsequently enforcing its own legal rights against Trail House Enterprises, LLC

and/or the Spilcas.

The final issue raised after closing argument was whether TRD issued the assessment to

the correct successor entity: Taxpayer or the other entity that Mr. Peck is a member of, Trail

House LLC. While initially there was some argument about this point, the record clearly

established that Taxpayer took control of the liquor and beer inventory and the liquor license

from Trail House Enterprises, LLC and used these assets to continue to operate the liquor store.

The successor factors under Regulation 3.1.10.16 (A) NMAC were equally present for the liquor

portion of the business. The transferred liquor and beer assets amounted to approximately 46%

In the Matter of the Protest of Mountain Liquors, LLC, page 10 of 12
percent of the $20,153.71 in inventory that Taxpayer took possession of in this case. That value

of the inventory exceeds the assessed successor tax liability. While Taxpayer had to pay TRD the

outstanding Liquor Excise Tax liability to maintain the liquor license, that is a distinct tax

different separate from the assessed successor tax liability associated with the unpaid gross

receipts tax. While Mr. Peck argued that he was told paying the Liquor Excise Tax would

extinguish his liability, the emails exchanges he had with Department employees in Taxpayer

Ex. #5 do not support that assertion. See MPC Ltd. v. N.M. Taxation & Revenue Dep't, 2003

NMCA 21, ¶13 (“Unsubstantiated statements that the assessment is incorrect cannot overcome

the presumption of correctness."). Taxpayer did not overcome the presumption of correctness

that attached to the assessment with regard to the successor liability tax. Thus, with the exception

of penalty and interest, TRD’s assessment was appropriate.

CONCLUSIONS OF LAW

A. Taxpayer filed a timely, written protest to TRD’s assessment, and jurisdiction lies

over the parties and the subject matter of this protest.

B. The hearing was timely set and held within 90-days of protest under NMSA 1978,

Section 7-1B-8 (2015).

C. The assessment of penalty and interest against Taxpayer as a successor in business

of Trail House Enterprises LLC is not legally supported in light of the clear contrary holding of Hi-

Country Buick GMC, Inc. v. Taxation and Revenue Dep’t, 2016-NMCA-027, ¶20, cert denied,

March 15, 2016, No. S-1-SC-35647, 2016 N.M. Lexis 67. Therefore, Trail House Enterprises

LLC’s penalty and interest assessed against Taxpayer must be abated.

In the Matter of the Protest of Mountain Liquors, LLC, page 11 of 12
D. The liability of a defunct business follows the tangible and intangible assets

transferred to a different business. Sterling Title Co. v. Comm'r of Revenue, 1973-NMCA-086,

¶23, 85 N.M. 279.

E. Because four of the eight factors articulated under Regulation 3.1.10.16 (A) NMAC

were present, it was presumed under that regulation that Taxpayer was a successor in business

under NMSA 1978, Sections 7-1-61 through 63 up to the value of the transferred assets.

F. Taxpayer did not overcome the presumption of correctness under the assessment.

See NMSA 1978, Section 7-1-17 (C) (2007) and Archuleta v. O'Cheskey, 1972-NMCA-165, ¶11,

84 N.M. 428.

G. Taxpayer was not a bank, a financial institution, or a government institution, and

thus not excluded from the definition of successor in business under Regulation 3.1.10.16 (C) (2)

NMAC. See Hi-Country Buick GMC, Inc., 2016-NMCA-027, ¶17.

For the foregoing reasons, the Taxpayers’ protest IS PARTIALLY GRANTED AND IS

PARTIALLY DENIED. IT IS ORDERED that TRD abate the assessed penalty and interest

totaling $1,334.56 pursuant to the holding in Hi-Country. IT IS ORDERED that the Taxpayer is

liable for the remaining successor in business tax liability of $5,513.39.

DATED: May 11, 2016.

Brian VanDenzen
Chief Hearing Officer
Administrative Hearings Office
P.O. Box 6400
Santa Fe, NM 87502

In the Matter of the Protest of Mountain Liquors, LLC, page 12 of 12