Could an assisted-living facility calculate its deductible real-property rent by subtracting service costs from bundled resident charges without proving fair rental value?

Plain-English summary

SSC Albuquerque Operating Company could deduct the part of its assisted-living charges attributable to leasing real property, but its calculation method was not reasonable. Because the method ignored fair market rental value, SSC did not prove entitlement to a $55,912.75 gross receipts tax refund.

SSC operated The Village at Alameda, an assisted-living residence. It charged residents a bundled monthly amount for residential space and services.

The refund applications listed monthly amounts from February 2014 through January 2016 totaling $55,912.75.

The monthly charge mixed rent and taxable services

Residents paid for living space of varying sizes plus services included in the rental price. The record identified meals, housekeeping, laundry, nursing, nursing administration, activities, snacks, utilities, trash removal, cable, and additional assistance based on a resident's level of need.

SSC allocated two hours of nursing care per resident per day to the bundled price. Some outsourced service costs could be identified directly from vendor bills.

Section 7-9-53 allowed a deduction for receipts from leasing real property. The Department agreed that SSC was entitled to some deduction; the dispute concerned how much of the bundled charge represented rent rather than taxable services.

SSC used a service-cost subtraction method

SSC subtracted its actual outsourced dietary, housekeeping, and laundry costs from resident charges. It also subtracted a calculated cost for two hours of nursing and nursing administration per day.

SSC treated everything left after those service-cost deductions as receipts from leasing real property.

That method produced an average monthly rental deduction exceeding $175,000.

A reasonable allocation had to relate to rental value

Department revenue rulings had allowed assisted-living facilities to separate bundled receipts using a reasonable basis. One approved method multiplied each apartment's square footage, including a share of common areas, by a comparable market rental rate.

The Department auditor researched ordinary residential rental property in the same general area and found an average rate of $1.25 per square foot. At full capacity, that indicated approximately $85,890 of monthly rental receipts.

SSC criticized the comparison because its facility might command more than an ordinary apartment, but it did not present its own market valuation or evidence explaining the basis for resident rents.

The AHO did not hold that the Department's estimate was necessarily the only permissible number. It held that SSC's method was unreasonable because it was indifferent to fair market rental value and simply assigned every dollar not equal to service cost to rent.

The real-property deduction needed to correlate in some way to the property's fair market value, with any justified deviations supported by evidence.

Result: protest DENIED. SSC did not establish entitlement to the $55,912.75 refund under Section 7-9-53.

Text note: Finding 1 describes the refund period as January 2014 through January 2016, but its itemized schedule begins with February 2014 and runs through January 2016. This summary follows the itemized monthly schedule.

What this means for you

Assisted-living operators with bundled pricing

Separate the real-property component from meals, care, housekeeping, utilities, and other services using a method tied to rental value, not only internal service costs.

Businesses claiming a real-property lease deduction

Support fair rental value with appraisals, comparable leases, square-foot market data, unit characteristics, common-area allocation, and documented adjustments for property quality.

Taxpayers applying a Department revenue ruling

Match the ruling's method to your facts and retain the underlying valuation evidence. A general statement that some reasonable allocation is allowed does not validate every formula.

Businesses seeking refunds based on a new methodology

The taxpayer bears the burden to prove the revised calculation. Reworking prior returns does not establish a refund when the allocation method itself is unsupported.

Common questions

Q: Was SSC entitled to any real-property deduction?
A: Yes. The Department did not dispute that receipts attributable to leasing real property were deductible.

Q: Why was the refund still denied?
A: SSC did not prove that its service-cost subtraction method reasonably measured the rental component.

Q: What services were bundled with residential space?
A: The record identified meals, housekeeping, laundry, nursing, nursing administration, activities, utilities, trash, cable, snacks, and level-of-care services.

Q: How did SSC calculate deductible rent?
A: It subtracted selected service costs from total bundled charges and treated the remainder as rent.

Q: What did the Department's comparison show?
A: About $1.25 per square foot, or approximately $85,890 of monthly rental receipts at full capacity.

Q: How large was SSC's claimed monthly deduction?
A: It averaged more than $175,000.

Q: Did the AHO require one exact valuation formula?
A: No. It required a reasonable basis connected to fair market rental value and supported by evidence.

Citations and references

Statutes and regulation:

• NMSA 1978, §§ 7-9-3(E), 7-9-3.3, 7-9-3.5(A)(1), 7-9-4, and 7-9-5 — leasing, business activity, gross receipts, tax, and presumption of taxability
• NMSA 1978, § 7-9-53 — deduction for receipts from leasing real property
• NMSA 1978, §§ 47-8-1 through 47-8-51, including §§ 47-8-3(H) and 47-8-15(A) — fair rental value under the Uniform Owner-Resident Relations Act
• Regulation 3.2.1.7(C) NMAC — consideration

Department guidance discussed:

• Revenue Ruling 430-94-2 — reasonable apportionment of assisted-living rent and services
• Revenue Ruling 440-98-2 — comparable-market square-foot rental method
• Revenue Ruling 430-00-5 — reasonable allocation between deductible rent and taxable meals and services

Cases cited:

• Wing Pawn Shop v. Taxation and Revenue Department, 1991-NMCA-024 — strict proof of deductions
• TPL, Inc. v. New Mexico Taxation and Revenue Department, 2003-NMSC-007 — narrow construction of deductions
• CCA Correctional Corp. of America of Tennessee v. State, 2007-NMCA-148 — refund denial and presumption of correctness

Source

• Listing: New Mexico Decisions & Orders
• Decision post: SSC Albuquerque Operating Company LLC
• Decision PDF: D&O 18-16

Original ruling text

STATE OF NEW MEXICO
ADMINISTRATIVE HEARINGS OFFICE
TAX ADMINISTRATION ACT

IN THE MATTER OF THE PROTEST OF
SSC ALBUQUERQUE OPERATING COMPANY LLC
TO DENIAL OF REFUND ISSUED UNDER
LETTER ID NO. L1047049520

v. D&O No. 18-16

NEW MEXICO TAXATION AND REVENUE DEPARTMENT

DECISION AND ORDER

A formal hearing on the merits in the above-captioned protest was held on April 19, 2018

before Hearing Officer Chris Romero, Esq., in Santa Fe, New Mexico. The Taxation and Revenue

Department (Department) was represented by staff attorney, Mr. David Mittle, Esq. Protest auditor,

Ms. Mary Griego, appeared as a witness for the Department. Staff attorney, Mr. Ken Fladeger,

Esq., appeared to observe. Mr. Hai Pham, Director of General Accounting, appeared for SSC

Albuquerque Operating Company, L.L.C. (“Taxpayer”) and was accompanied by Ms. Laura

Glose, Manager of General Accounting, and Ms. Pam Forstell, Division Vice President for

Finance. Taxpayer appeared by telephone with the prior approval of the Hearing Officer. Taxpayer

Exhibit 1 and Department Exhibits B through H were admitted into the evidentiary record of the

hearing. A more detailed description of exhibits submitted at the hearing is included on the

Administrative Exhibit Coversheet. 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 or about November 16, 2016, Taxpayer submitted a sequence of Applications

for Refund asserting entitlement to refunds of gross receipts taxes purportedly overpaid for the
reporting periods from January 2014 through January 2016 in the total amount of $55,912.75. The

applications claimed refunds for the following periods and the corresponding amounts:

a. February 2014: $302.40
b. March 2014: $1,217.40
c. April 2014: $1,183.99
d. May 2014: $517.82
e. June 2014: $1,151.44
f. July 2014: $596.65
g. August 2014: $3,900.27
h. September 2014: $872.26
i. October 2014: $2,342.24
j. November 2014: $2,946.21
k. December 2014: $2,214.26
l. January 2015: $2,555.08
m. February 2015: $3,320.28
n. March 2015: $3,627.52
o. April 2015: $2,767.96
p. May 2015: $2,353.57
q. June 2015: $2,557.99
r. July 2015: $2,477.76
s. August 2015: $2,946.80
t. September 2015: $2,932.16
u. October 2015: $3,430.49
v. November 2015: $3,038.58
w. December 2015: $3,079.10
x. January 2016: $3,580.52

TOTAL: $55,912.75

[See Administrative File]

2. Taxpayer’s Applications were accompanied by amended CRS-1 reports, a sample

Admission Agreement, payment confirmations, and additional information describing the basis for

its Applications. [See Administrative File].

3. On June 5, 2017, the Department issued a denial of Taxpayer’s refund request in

the amount of $55,912.75 under Letter ID No. L1047049520. Although a notation on the

In the Matter of SSC Albuquerque Operating Company, L.L.C.
Page 2 of 18
correspondence indicated that the address utilized was incorrect, Taxpayer’s protest was timely

and neither party raised any issues with respect to the notation. [See Administrative File].

4. On July 31, 2017, Taxpayer executed a Formal Protest of the refund denial issued

under Letter ID No. L1047049520. The Formal Protest was received in the Department’s Protest

Office on August 3, 2017. [See Administrative File].

5. On August 29, 2017, the Department acknowledged the receipt of Taxpayer’s

protest under Letter ID No. L1310911792. [See Administrative File].

6. On October 10, 2017, the Department submitted a Hearing Request to the

Administrative Hearings Office in which it requested that Taxpayer’s protest be scheduled for a

scheduling hearing. [See Administrative File].

7. On October 10, 2017, the Administrative Hearings Office entered a Notice of

Telephonic Scheduling Conference which set a scheduling hearing to occur on October 27, 2017, a

date within 90 days of Taxpayer’s protest. [See Administrative File].

8. On October 30, 2017, the Administrative Hearings Office entered a Scheduling

Order and Notice of Administrative Hearing which in addition to establishing various other

deadlines, set a hearing on the merits of Taxpayer’s protest to occur on December 4, 2017. [See

Administrative File].

9. On November 1, 2017, Taxpayer submitted a request to appear telephonically for

the hearing on the merits of Taxpayer’s protest. The Department did not oppose the request. [See

Administrative File].

10. On November 9, 2017, the Administrative Hearings Office entered an Order

Allowing Telephonic Appearance or Testimony. [See Administrative File].

In the Matter of SSC Albuquerque Operating Company, L.L.C.
Page 3 of 18

11. On November 14, 2017, the Department filed an Unopposed Motion for

Continuance. [See Administrative File].

12. On November 15, 2017, Taxpayer filed its pre-marked exhibits in anticipation of a

telephonic scheduling hearing. The Hearing Officer did not review the exhibits prior to their

admission as Taxpayer Exhibit 1 at the hearing occurring on April 19, 2018. [See Administrative

File].

13. On November 20, 2017, the Administrative Hearings Office entered a Continuance

Order, Amended Scheduling Order and Amended Notice of Administrative Hearing, which in

addition to establishing various deadlines, set the date of April 19, 2018 for a hearing on the merits

of Taxpayer’s protest. [See Administrative File].

14. On April 2, 2018, Taxpayer requested permission by email to appear by telephone

for the hearing on the merits of its protest scheduled to occur on April 19, 2018. On April 3, 2018,

the Department indicated by email that it did not oppose Taxpayer’s request. The request and

response were submitted as part of a lengthier email chain which was not relevant to the Hearing

Officer’s consideration of the request, and which the Hearing Officer did not review. [See

Administrative File].

15. On April 3, 2018, the parties filed their Joint Prehearing Statement. [See

Administrative File].

16. On April 9, 2018, the Administrative Hearings Office entered an Order Permitting

Telephonic Appearance in which the Taxpayer was permitted to appear by telephone for the

hearing of April 19, 2018. [See Administrative File].

In the Matter of SSC Albuquerque Operating Company, L.L.C.
Page 4 of 18

17. Taxpayer operates The Village at Alameda which is an assisted living residence at

8810 Horizon Blvd NE in Albuquerque, New Mexico (hereinafter “TVA”). [Testimony of Mr.

Pham; See Department Ex. C].

18. Taxpayer acquired TVA and assumed its operation in 2014. [See Administrative

File, Joint Prehearing Statement, Taxpayer’s Statement of Facts, No. 1; Testimony of Mr. Pham].

19. Prior to its acquisition, Taxpayer’s predecessor calculated gross receipts taxes

based on the prior-year’s receipts from leasing real property and total gross receipts to arrive at a

percentage representing the amount of the total receipts that should be deducted. [See

Administrative File, Joint Prehearing Statement, Taxpayer’s Statement of Facts, No. 4; Testimony

of Mr. Pham].

20. Taxpayer retained the method of calculation employed by its predecessor and

reported and paid taxes in reliance on that method in all periods now subject of its protest. [See

Administrative File, Joint Prehearing Statement, Taxpayer’s Statement of Facts, No. 3; Testimony

of Mr. Pham].

21. In August of 2016, Taxpayer evaluated the method by which it had been

calculating and determining the amount of the deduction to which it was entitled for the lease of

real property. It determined that the calculation was unreliable and inaccurate, and proposed, in

lieu thereof, the method underlying its claims for refund. [See Administrative File, Joint

Prehearing Statement, Taxpayer’s Statement of Facts, Nos. 5 – 6; Testimony of Mr. Pham].

22. TVA charges residents for the lease of residential space of varying sizes and

various services which are included in the rental price. [Testimony of Mr. Pham; See Department

Ex. C].

In the Matter of SSC Albuquerque Operating Company, L.L.C.
Page 5 of 18

23. Services included in the price of any given apartment regardless of size include

housekeeping, laundry, and meal preparation. [Testimony of Mr. Pham; See Department Ex. C-

00003 – C-00004].

24. Included services, consisting of housekeeping, laundry, and meal preparation are

outsourced which permit the Taxpayer to identify the value of those services merely by referring

to the costs it incurs in contracting with third parties to provide those services. [Testimony of Mr.

Pham].

25. In addition to the services of housekeeping, laundry, and meal preparation,

Taxpayer also includes, within the cost of rent, a portion of services for nursing and nursing

administration. Taxpayer has determined that the rental price should include two hours of nursing

care per day. Taxpayer calculates that portion of services by dividing the total cost of nursing per

month by the total number of patient days per month. Patient days represent one patient per day

per month, such that, for example, one resident residing at TVA for 30 days would represent 30

patient days. The patient day cost is then multiplied by the total number of patient days in that

month, divided by 24 hours to provide an hourly cost, multiplied by 2 to determine the cost for

nursing services of two hours per day. The result represents the portion of rent allocation to

nursing services per day. [Testimony of Mr. Pham; See Taxpayer Ex. 1].

26. TVA provides a variety of other services as well, such as cosmetology services, but

receipts from those services are not included as part of the rental price, and are not in dispute.

[Testimony of Mr. Pham].

27. With respect to separating receipts from services, from receipts for residential

space, Taxpayer modified its method from that previously utilized by its predecessor to separate

In the Matter of SSC Albuquerque Operating Company, L.L.C.
Page 6 of 18
rental receipts by subtracting the costs of outsourced services incurred for housekeeping, meal

preparation, and laundry, plus two hours of nursing per day, from the total receipts from rental

units. The difference between the total receipts and the receipts after the reductions for those

specific services are the receipts Taxpayer asserts should be deductible as receipts from leasing

real property. [Testimony of Mr. Pham].

28. Taxpayer has not evaluated the market value of the rent charged based on

comparables within the market. [Testimony of Mr. Pham].

29. Taxpayer relied on its interpretation of Revenue Ruling 430-00-5 to evaluate and

establish the method by which it should calculate its tax liability. [Testimony of Mr. Pham].

30. Ms. Mary Griego is the protest auditor responsible for Taxpayer’s protest. She

reviewed the protest, Taxpayer’s documents, and engaged in additional research to evaluate the

reasonableness of Taxpayer’s method for calculating its tax obligations, and specifically, its

entitlement to a deduction for the lease of real property. [Testimony of Ms. Griego].

31. Relying on Revenue Ruling 440-98-2, deductible gross receipts should be

calculated by engaging in a comparable market analysis which consists of determining the fair

market value of residential space and common area per square foot. [Testimony of Ms. Griego].

32. Ms. Griego’s market research concluded that Taxpayer’s deduction from rent was

overstated based on comparable rates in the local market. [Testimony of Ms. Griego; See

Department Exs. B; C; D; E; F; G].

33. Based on average market rates at the time she conducted her research, Ms. Griego

identified an average rental rate of $1.25 per square foot for residential living space in the same

In the Matter of SSC Albuquerque Operating Company, L.L.C.
Page 7 of 18
general geographic area as TVA. [Testimony of Ms. Griego; See Department Exs. B; C; D; E; F;

G].

34. Relying on that average, Ms. Griego determined that at full capacity, TVA might

expect receipts from rentals to approximate $85,890.00 per month, would would also represent a

reasonable deduction under NMSA 1978, Section 7-9-53. [Testimony of Ms. Griego; See

Department Exs. B; C; D; E; F; G].

35. In contrast, Taxpayer’s average rental deduction per month surpassed $175,000.00,

exceeding what might be considered reasonable by comparables in the local residential rental

market. [Testimony of Ms. Griego].

36. In performing her review and research, Ms. Griego relied on Revenue Ruling 440-

98-2 because it was more specific than Revenue Ruling 430-00-5, although Taxpayer provided

both rulings for her consideration. [Testimony of Ms. Griego].

37. Ms. Griego’s market analysis focused primarily on determining the fair market rate

of residential rental property based on the rates charged by apartment complexes within the same

general geographic area, and did not consider the rates charged by other facilities similar to TVA

because those entities also bundle services with rent similar to TVA. In contrast, Ms. Griego’s

purpose was to determine a reasonable fair market rate of residential property alone, not including

services. [Testimony of Ms. Griego].

DISCUSSION

The single issue before the Hearing Officer concerns the method Taxpayer proposes to

apportion and distinguish receipts eligible for deduction under NMSA 1978, Section 7-9-53, from

total gross receipts including receipts from the sale of goods and services. The parties expressed no

In the Matter of SSC Albuquerque Operating Company, L.L.C.
Page 8 of 18
meaningful dispute with the material facts or with the application or interpretation of the law. Rather,

the dispute in this protest concentrated on the reasonableness of the method proposed by Taxpayer to

determine that portion of its receipts that should be deductible as receipts deriving from the lease of

real property, and whether it should be entitled to a refund of previously-paid taxes based on its new

method of calculation.

Because Taxpayer’s claim for refund is premised on a deduction from gross receipts tax,

specifically NMSA 1978, Section 7-9-53, “the statute must be construed strictly in favor of the

taxing authority, the right to the exemption or deduction must be clearly and unambiguously

expressed in the statute, and the right must be clearly established by the taxpayer.” See Wing Pawn

Shop v. Taxation & Revenue Dep’t, 1991-NMCA-024, ¶16, 111 N.M. 735, 809 P.2d 649 (internal

citation omitted); See also TPL, Inc. v. N.M. Taxation & Revenue Dep’t, 2003-NMSC-007, ¶9, 133

N.M. 447, 64 P.3d 474; See also CCA Corr. Corp. of Am. of Tenn. v. State, 2007-NMCA-148, ¶17 &

¶29, 142 N.M. 779, 170 P.3d 1017 (Court of Appeals reviewed a refund denial through “lens of

presumption of correctness” and applied the principle that deductions underlying the claim for refund

are to be construed narrowly). In this protest, the Department does not dispute Taxpayer’s entitlement

to a deduction. However, it does dispute that Taxpayer has established the right to the deduction

because it perceives the method by which Taxpayer determines the amount to be unreasonable.

Deductions from Gross Receipts Tax

For the privilege of engaging in business, New Mexico imposes a gross receipts tax on the

receipts of any person engaged in business. See NMSA 1978, Section 7-9-4 (2002). Under NMSA

1978, Section 7-9-3.5 (A) (1) (2007), the term “gross receipts” is broadly defined to mean:

the total amount of money or the value of other consideration received from
selling property in New Mexico, from leasing or licensing property

In the Matter of SSC Albuquerque Operating Company, L.L.C.
Page 9 of 18
employed in New Mexico, from granting a right to use a franchise employed
in New Mexico, from selling services performed outside New Mexico, the
product of which is initially used in New Mexico, or from performing
services in New Mexico.

“Engaging in business” is defined as “carrying on or causing to be carried on any activity

with the purpose of direct or indirect benefit.” See NMSA 1978, Section 7-9-3.3 (2003). Under the

Gross Receipts and Compensating Tax Act, there is a statutory presumption that all receipts of a

person engaged in business are taxable. See NMSA 1978, Section 7-9-5 (2002). Despite the general

presumption of taxability of an entity engaged in business in New Mexico, taxpayers may avail

themselves of the benefits of various deductions. The relevant deduction in this protest, permits

taxpayers to deduct from gross receipts those amounts derived from the lease of real property. NMSA

1978, Section 7-9-53 provides:

7-9-53. Deduction; gross receipts tax; sale or lease of real property
and lease of manufactured homes.

A. Receipts from the sale or lease of real property and from the lease
of a manufactured home as provided in Subsection B of this section,
other than receipts from the sale or lease of oil, natural gas or mineral
interests exempted by Section 7-9-32 NMSA 1978, may be deducted
from gross receipts. However, that portion of the receipts from the sale
of real property which is attributable to improvements constructed on
the real property by the seller in the ordinary course of his construction
business may not be deducted from gross receipts.

Taxpayer is engaged in the business of leasing real property and is entitled to deduct from

its gross receipts those amounts deriving from that business activity. However, unlike the landlord

of a customary apartment complex, whose rent usually compensates the landlord for the right to

occupy the premises and common areas, Taxpayer’s rent also includes various services unique to

the population it serves.

In the Matter of SSC Albuquerque Operating Company, L.L.C.
Page 10 of 18
In Revenue Ruling 440-98-2, which will be addressed below, the Department

acknowledged that:

Assisted living facilities occupy a middle position on a continuum
extending from apartment buildings at one end and nursing homes
on the other. In a typical lease of an apartment unit, little if any
personal service is provided by the landlord. Nursing homes provide
care for the individual, who is more a patient than a resident; nursing
home receipts are predominantly from providing services.

Although Mr. Pham testified that the rent charged by TVA included only two hours of

nursing per day, meals, housekeeping, and laundry services. A review of the sample admission

agreement contained in the administrative file suggests the prospect that compensation for

additional services may also be included in the rental rate charged, including activities, snacks

(separate and apart from meals), utilities, trash removal, cable services, and fees associated with a

resident’s level of required assistance. Additional fees based on a resident’s level of need range

from $200 to $2,100 per month and appear to be bundled into the monthly rental rate. See

Administrative File, Contract Sampler, Section IV, Paragraph 1.

The sample admission agreement also suggests that the total monthly rate for the real

property and integrated services includes associated gross receipts taxes. Section IV, Paragraph 1.a

states “[r]esident shall be charged the basic room and board rate (which includes the current NM

Gross Receipts tax) set forth below[.]”

In 1994, the Department recognized that assisted living facilities garner receipts from

blending a leasehold interest in real property with various services, and has provided guidance in

the form of revenue rulings to taxpayers seeking the benefit of NMSA 1978, Section 7-9-53.

When presented with similar facts in Revenue Ruling 430-94-2, the Department determined:

In the Matter of SSC Albuquerque Operating Company, L.L.C.
Page 11 of 18
The receipts from the rental of real property are deductible and the
receipts from meals, housekeeping and other services are taxable.
Separate stating of taxable and nontaxable items is not required. To
clarify its billings and reporting, X may separately state the amount
of taxable and nontaxable items in its billings and accounts.
Alternatively, without separately stating taxable and nontaxable
items in its billings, X may apportion its receipts using some
reasonable basis to determine the portion attributable to the lease of
real property and the portion attributable to the sale of meals,
housekeeping and other services.

(Emphasis Added)

The Department, refraining from imposing any specific method for apportioning receipts,

only required that a taxpayer employ some reasonable basis for its apportionment.

Approximately four years later on December 17, 1998, the Department took a comparable

approach under similar facts. In Revenue Ruling 440-98-2, a taxpayer sought a ruling on the

propriety of the method it intended to utilize to distinguish taxable gross receipts from deductible

receipts from leasing real property. The Department approved the taxpayers methodology which it

summarized as follows:

R calculates the value of the rental portion of the monthly charge by
multiplying the square footage of each apartment (adjusted for a
proportionate share of the square footage of the common areas) by a
square footage rental rate that is comparable for the market. The
computed rental amount is then subtracted from the total monthly
charge to determine R’s gross receipts from the services component.

The Department, approved the proposed methodology and explained it was more

appropriate than alternative methods which might consist of characterizing all “receipts as

deriving totally from leasing of real property versus providing services based on whether the

calculated value of the real property lease exceeds the calculated value of the services provided[.]”

In the Matter of SSC Albuquerque Operating Company, L.L.C.
Page 12 of 18
On August 14, 2000, the Department again considered similar facts in Revenue Ruling

430-00-5, and maintained that a taxpayer “may apportion its receipts using some reasonable basis

to determine the portion attributable to the deductible receipts from the lease of real property and

the portion attributable to the taxable receipts from the sale of meals and services.”

According to Mr. Pham’s testimony, Revenue Ruling 430-00-5 represents the basis for

Taxpayer’s methodology, which ultimately served as the foundation for its refund applications.

Taxpayer’s methodology reduces apartment rental receipts by actual amounts the Taxpayer incurs

for dietary, housekeeping and laundry services because those services are completely outsourced.

Taxpayer further reduces the apartment rental receipts by an amount equivalent to the cost of two

hours of nursing and nursing administration expenses per day. The remainder of receipts after

those reductions represents the amount for which Taxpayer asserts the deduction.

The Department claims that Taxpayer’s methodology is not reasonable because it fails to

consider the fair market value of the real property, which should be the principal variable to which

Taxpayer’s methodology is fixed. Instead, Taxpayer’s methodology is fixed to the cost of services

which it subtracts from its rental receipts with the difference representing the deduction claimed.

Ms. Griego testified that based on her research, the fair market value of residential rental

property is approximately $1.25 per square foot. Relying on that estimate, she testified that

Taxpayer’s receipts from leasing property would be approximately $85,890.00 at Taxpayer’s full

capacity. In contrast, the Taxpayer’s methodology has resulted in a claim for a deduction which on

average, exceeds $175,000.00 per month. Of course, Taxpayer asserts that Ms. Griego’s research

should be rejected for a variety of reasons, but failed to offer any alternatives for establishing a fair

market value of the rental property, similar to that method endorsed in Revenue Ruling 440-98-2.

In the Matter of SSC Albuquerque Operating Company, L.L.C.
Page 13 of 18
Of course, the Hearing Officer acknowledges the possibility that the value of residential

property at TVA may be higher than average, justifying a deduction in the amounts Taxpayer

seeks. However, giving any weight whatsoever to that possibility would require the Hearing

Officer to engage in impermissible speculation because the Taxpayer presented no evidence to

establish the basis for the rents it charges its residents. If Taxpayer asserts that its property is more

valuable than other property in the area, thereby enabling it to demand a higher rate and a higher

corresponding deduction, then Taxpayer should be required to establish that fact. It did not do so.

The Hearing Officer is also unable to find, based on the evidence presented, that

Taxpayer’s methodology is reasonable. Tax is imposed on Taxpayer’s gross receipts less any

applicable deductions or exemptions. When asserting a deduction under NMSA 1978, Section 7-9-

53, the calculation for determining the amount of the deduction should correlate in some fashion

to the fair market value of the real property subject of the deduction, subject to any deviations that

may be supported by the evidence.

In reaching this conclusion, the Hearing Officer considered the statutory definition of

“leasing” which “means an arrangement whereby, for a consideration, property is employed for or

by any person other than the owner of the property, except that the granting of a license to use

property is licensing and is not a lease[.]” See NMSA 1978, Section 7-9-3 (E). The Department, in

defining “consideration” for the purposes of the Gross Receipts and Compensating Tax Act, states

“‘Consideration’ is any benefit, interest, gain or advantage to one party, usually the seller, or any

detriment, forbearance, prejudice, inconvenience, disadvantage, loss of responsibility, act or

service given, suffered, or undertaken by the other party, usually the buyer.” See Regulation

3.2.1.7 (C) NMAC.

In the Matter of SSC Albuquerque Operating Company, L.L.C.
Page 14 of 18
Neither the Gross Receipts and Compensating Tax Act nor the regulations implementing it

appear to provide additional guidance on determining a fair, adequate, or sufficient consideration

with respect for the lease of real property, or for establishing the reasonableness of a

corresponding deduction. However, the Hearing Officer finds particular provisions in the Uniform

Owner-Resident Relations Act, NMSA 1978, Sections 47-8-1 through – 51 to be informative. For

example, NMSA 1978, Section 47-8-15 (A) provides “[t]he resident shall pay rent in accordance

with the rental agreement. In the absence of an agreement, the resident shall pay as rent the fair

rental value for the use of the premises and occupancy of the dwelling unit.” (Emphasis Added).

NMSA 1978, Section 47-8-3 (H) provides that “fair rental value is that value that is comparable

to the value established in the market place[.]” (Emphasis Added). Accordingly, at least with

respect to other enactments addressing the issue of consideration within the framework of leasing

real property for residential purposes, the Legislature has recognized that fair rental value is

synonymous with fair market value, which is similarly consistent with what might be considered

fair or adequate consideration. See Black’s Law Dictionary, 347 (9th ed. 2009) (“adequate

consideration” is “[c]onsideration that is fair and reasonable under the circumstances of the

agreement.”); Black’s Law Dictionary, 348 (9th ed. 2009) (“fair consideration” is “[c]onsideration

that is roughly equal in value to the thing being exchanged[.]”)

Taxpayer’s methodology, in contrast, is unreasonable because it is indifferent to the fair

market value of the receipts from leasing property. Rather, it relies solely on the cost of services

for determining the amount of the claimed deduction by subtracting the cost of those services from

gross receipts, and asserting the balance as the deduction for the lease of real property.

In the Matter of SSC Albuquerque Operating Company, L.L.C.
Page 15 of 18
Accordingly, Taxpayer’s methodology lacks the reasonable basis to which the Department has

consistently referred while providing guidance to taxpayers under similar facts.

Taxpayer’s protest should be DENIED. The evidence failed to establish that Taxpayer was

entitled to any refund based on the method it claimed was reasonable for calculating a deduction

under NMSA 1978, Section 7-9-53.

CONCLUSIONS OF LAW

A. Taxpayer filed a timely, written protest to the Department’s denial of its claims for

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

B. A hearing was timely set and held within 90-days of Taxpayer’s protest under NMSA

1978, Section 7-1B-8 (2015).

C. Taxpayer did not establish entitlement to a refund under NMSA 1978, Section 7-9-53

for the periods subject of the protest.

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

DATED: May 30, 2018

Chris Romero
Hearing Officer
Administrative Hearings Office
P.O. Box 6400
Santa Fe, NM 87502

In the Matter of SSC Albuquerque Operating Company, L.L.C.
Page 16 of 18
NOTICE OF RIGHT TO APPEAL

Pursuant to NMSA 1978, Section 7-1-25 (2015), the parties have the right to appeal this

decision by filing a notice of appeal with the New Mexico Court of Appeals within 30 days of the

date shown above. If an appeal is not timely filed with the Court of Appeals within 30 days, this

Decision and Order will become final. Rule of Appellate Procedure 12-601 NMRA articulates the

requirements of perfecting an appeal of an administrative decision with the Court of Appeals.

Either party filing an appeal shall file a courtesy copy of the appeal with the Administrative

Hearings Office contemporaneous with the Court of Appeals filing so that the Administrative

Hearings Office may begin preparing the record proper. The parties will each be provided with a

copy of the record proper at the time of the filing of the record proper with the Court of Appeals,

which occurs within 14-days of the Administrative Hearings Office receipt of the docketing

statement from the appealing party. See Rule 12-209 NMRA.

In the Matter of SSC Albuquerque Operating Company, L.L.C.
Page 17 of 18
CERTIFICATE OF SERVICE

On May 30, 2018, a copy of the foregoing Decision and Order was mailed to the parties listed

below in the following manner:

First Class Mail Interoffice Mail

In the Matter of SSC Albuquerque Operating Company, L.L.C.
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