Was HMX Construction liable for its predecessor's tax, penalty, and interest as a successor in business?

Plain-English summary

HMX Construction was liable for $820,913.87 of its predecessor's tax as a successor in business, but it was not liable for the assessed penalty or interest. The business-continuity facts established successor status, while the version of the statute governing the September 2016 assessment did not include penalty and interest in successor liability.

HMX's owner and CEO, Keegan Clay, had also owned another construction company. That predecessor primarily built tract homes and some commercial projects on tribal lands. It owned no inventory or business property and kept its records on Clay's personal computer.

The predecessor encountered financial difficulty, was sued by suppliers and subcontractors, and was later enjoined from doing business. Clay formed HMX on September 29, 2014, shortly after the Department sent the predecessor an audit-selection letter.

The Department assessed HMX as successor for periods from March 2009 through August 2015. The original assessment contained:

• $820,913.87 tax;
• $166,254.95 penalty; and
• $101,284.29 interest.

A later Department statement kept the tax principal unchanged, adjusted penalty to $166,249.74, and increased accrued interest to $154,830.53.

HMX continued substantial parts of the same business

The successor regulation listed eight factors and created a presumption of successor status when even one was present.

Several factors favored the Department:

• both companies used the same recordkeeping system on Clay's computer;
• both primarily built homes, despite a shift from tract homes to custom homes and added solar-consulting and architectural-rendering work;
• HMX's website claimed the predecessor's projects and years of experience as its own;
• Clay's testimony repeatedly blended the two companies' accomplishments; and
• HMX wrote a check attempting to satisfy part of a predecessor liability, although the check was returned for insufficient funds.

The predecessor had no inventory or traditional equipment to transfer, and HMX did not complete its construction contracts or enter a noncompetition agreement. But the regulation required only one positive factor, and the continuity of records, homebuilding, goodwill, ownership, and at least one debt assumption established several.

The AHO therefore held that the business had changed hands within the broad successor statute. HMX failed to overcome the assessment presumption or the successor presumption.

The governing statute excluded penalty and interest

HMX protested the entire assessment, including penalty and interest, even though the parties did not separately develop those items at hearing.

The AHO applied Hi-Country Buick GMC, which held that the pre-2017 successor statute's specific definition of tax did not include penalty or interest. The Legislature amended Section 7-1-61 in June 2017 to add them, but the amendment contained no instruction to apply retroactively.

The assessment date fixed the governing version of the law. Because HMX was assessed in September 2016, the 1997 statute applied. The later amendment could not add penalty and interest to that earlier assessment.

Result: protest GRANTED IN PART and DENIED IN PART. HMX owed the $820,913.87 tax principal, while all assessed successor penalty and interest were abated.

What this means for you

Owners forming a second company

Changing the legal entity or market focus does not necessarily avoid successor liability. Shared ownership, records, business activity, reputation, and debt payments can show that the business continued.

Construction businesses without owned equipment

Successor analysis is not limited to hard assets. Record systems, goodwill, customer-facing history, and continuation of services may be intangible property or evidence that the business changed hands.

Buyers or continuers of troubled businesses

Review the predecessor's tax status before using its experience, reputation, records, or operations. The successor statute is broad and can apply when only one regulatory factor is present.

Taxpayers facing amended successor statutes

Identify the assessment date and the statutory version then in force. A later amendment expanding liability may apply only prospectively unless the Legislature clearly says otherwise.

Common questions

Q: Did HMX buy the predecessor's inventory or equipment?
A: No. The predecessor did not own inventory or conventional business property, but both companies used the same recordkeeping system.

Q: Were the two construction businesses identical?
A: Not entirely. The predecessor focused on tract homes on tribal lands, while HMX primarily built custom homes and added other services. Both still primarily built homes.

Q: Why did the website matter?
A: HMX presented the predecessor's years and projects as its own, showing that the earlier business's goodwill and achievements carried forward.

Q: Did HMX assume any predecessor debt?
A: It attempted to pay part of a predecessor liability in a lawsuit, although the check was returned for insufficient funds.

Q: Why was HMX not liable for penalty and interest?
A: The statute governing the 2016 assessment defined successor tax liability without including those amounts.

Q: Did the 2017 amendment change future cases?
A: It added penalty and interest to the successor statute, but the AHO held it did not apply retroactively to HMX's earlier assessment.

Q: What remained due?
A: $820,913.87 of tax principal. Penalty and interest were abated.

Citations and references

Statutes and regulation:

• NMSA 1978, §§ 7-1-61 and 7-1-63 — successor-in-business liability
• NMSA 1978, § 7-1-61 (1997) — governing pre-amendment definition of successor tax
• NMSA 1978, § 7-1-61 (2017) — later inclusion of penalty and interest
• NMSA 1978, § 7-1-17 — assessment presumption
• Regulation 3.1.10.16(A), (B), and (F)(2) NMAC — successor factors and definition

Cases cited:

• Sterling Title Co. of Taos v. Commissioner of Revenue, 1973-NMCA-086 — broad successor concept and business changing hands
• Hi-Country Buick GMC, Inc. v. Taxation and Revenue Department, 2016-NMCA-027 — former successor statute excluded penalty and interest
• GEA Integrated Cooling Technologies v. State Taxation and Revenue Department, 2012-NMCA-010 — assessment date fixes the penalty law applied
• Swink v. Fingado, 1993-NMSC-013 — prospective operation of statutory amendments

Source

• Listing: New Mexico Decisions & Orders
• Decision post: HMX Construction
• Decision PDF: D&O 18-19

Original ruling text

STATE OF NEW MEXICO
ADMINISTRATIVE HEARINGS OFFICE
TAX ADMINISTRATION ACT

IN THE MATTER OF THE PROTEST OF
HMX CONSTRUCTION, D&O No. 18-19
TO THE ASSESSMENT ISSUED UNDER
LETTER ID NO. L1709616688

v.

NEW MEXICO TAXATION AND REVENUE DEPARTMENT

DECISION AND ORDER

A formal hearing on the above-referenced protest was held on April 19, 2018 before

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

represented by Mr. David Mittle, Staff Attorney. Mr. Nicholas Pacheco, Auditor, and Mr. Ken

Fladager, Staff Attorney, also appeared on behalf of the Department. Mr. Keegan Clay, CEO for

HMX Construction (Taxpayer), appeared for the hearing with Mr. Tom Smidt, Attorney, and his

legal assistant, Ms. Vanessa Griego. The Hearing Officer took notice of all documents in the

administrative file. The Taxpayer’s exhibits 1 through 5 were attached to the prehearing

statement. The Department’s exhibits A, B, C, D, E, F, G, H, I, K, L, M, P, Q and R were

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

Administrative Exhibit Coversheet.

The parties requested additional time to confer on the issue of liability amount so that

they could confirm what, if any, other tribal sales had been included in the assessment. The

parties were given until May 19, 2018 to provide an update. However, since May 19, 2018 fell

on a weekend, the deadline was moved to May 21, 2018, which was the following business day.
The Department filed an updated statement on May 18, 2018. The parties were also given two

weeks after the update deadline to file any written closing arguments. Therefore, the deadline

for closing arguments was June 4, 2018. After the deadline, the Taxpayer filed its closing

argument on June 6, 2018. The Taxpayer’s final argument is essentially a reiteration of the

arguments previously made. The Department did not file a written closing argument. Based on

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

FINDINGS OF FACT

1. On September 14, 2016, the Department assessed the Taxpayer as a successor in business

for tax, penalty, and interest for the tax periods from March 31, 2009 through August 31,

2015. The assessment was for $820,913.87 tax, $166,254.95 penalty, and $101,284.29

interest.

2. On December 12, 2016, the Taxpayer filed a formal protest letter.

3. On February 6, 2017, the Department filed a Request for Hearing asking that the

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

4. On February 6, 2017, the Administrative Hearings Office issued a notice of telephonic

scheduling hearing.

5. On February 13, 2017, the Taxpayer filed a request to continue the telephonic scheduling

hearing. The Taxpayer also waived the 90-day requirement.

6. On February 23, 2017, the request was granted and an amended notice was issued.

7. The telephonic scheduling hearing was conducted on March 10, 2017. The hearing was

held within ninety days of the protest.

8. On March 13, 2017, the scheduling order and notice of hearing was issued.

9. On April 4, 2018, the parties filed their joint prehearing statement.

HMX Construction
Letter ID No. L1709616688
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10. Mr. Clay is the owner and CEO of the Taxpayer. The Taxpayer is a construction

company.

11. Mr. Clay was also the owner of another construction company (the first company), which

is the business for which the Taxpayer was assessed as a successor.

12. The first company primarily built tract homes on tribal lands. The first company also did

some commercial building on tribal lands because the tribes did not require a special

license.

13. The first company did not own any property or inventory. The first company contracted

with other parties to do the construction and to provide the materials. The first

company’s records were kept on Mr. Clay’s personal computer.

14. The first company began experiencing financial difficulty due to payment issues with the

tribes.

15. Mr. Clay wanted to bid on a contract for a commercial building, a retirement facility.

Since the commercial building was not on tribal land, a special license was required. Mr.

Clay created the Taxpayer, got the special license, and bid on the project.

16. The Department mailed the first company an audit selection letter on September 5, 2014.

17. On September 29, 2014, the Taxpayer was created.

18. The Taxpayer primarily builds custom homes.

19. Like the first company, the Taxpayer does not own property or inventory, and its business

records are kept on Mr. Clay’s personal computer.

20. The first company was sued by several of its suppliers and subcontractors. The first

company was enjoined from doing business in an agreement with the Department as of

March 7, 2016.

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Letter ID No. L1709616688
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21. The Taxpayer has advertised on its website that it has been in business for a period of

time and on projects that encompass the first company’s business ventures. Mr. Clay

explained that the business accomplishments are attributable to him personally as the

owner and driving force behind both the first company and the Taxpayer.

22. During the course of at least one lawsuit, the Taxpayer attempted to pay part of the

liability owed by the first company.

23. The Department’s updated statement indicates that the tax principal owed is the same as

the amount assessed. However, penalty was reduced slightly to $166,249.74, and interest

increased to $154,830.53. Interest continues to accrue on any unpaid tax principal.

DISCUSSION

The issue to be decided is whether the Taxpayer is liable for 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.

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

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Letter ID No. L1709616688
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(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 (emphasis added). “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 is 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

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. The first

company did not have any inventory or supplies, but the first company’s record-keeping system

was also used for the Taxpayer, although they were both apparently on Mr. Clay’s personal

computer without remuneration to him. This factor weighs slightly in favor of finding that the

Taxpayer is a successor in business.

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

transferor’s business. See 3.1.10.16 (A) (2) NMAC. Providing use of the record-keeping

computer and system was not in the ordinary course of the first company’s business. This factor

weighs in favor of finding that the Taxpayer is a successor in business.

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

transferred. 3.1.10.16 (A) (3) NMAC. Again, the Taxpayer did not have inventory, and its only

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Letter ID No. L1709616688
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equipment was arguably the record-keeping system on Mr. Clay’s computer. This factor weighs

slightly in favor of finding that the Taxpayer is a successor in business.

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

Taxpayer argues that the change in focus from tract homes to custom homes means that the

Taxpayer was not conducting a substantial portion of the same business as the first company.

The Taxpayer also argues that its expansion into solar consulting and architectural rendering is

sufficiently divergent from the first company’s business. Nevertheless, the Taxpayer and the

first company were both engaged primarily in building homes. Therefore, the Taxpayer

continued to conduct a substantial portion of the same business as the first company. This factor

weighs heavily in favor of finding that the Taxpayer is a successor in 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 argues that there was no goodwill

to transfer since many of the first company’s creditors actually sued the first company.

However, the Taxpayer continues to treat the first company’s achievements as its own on its

website, clearly soliciting business based on the reputation of the first company as well as its

owner. Mr. Clay in his testimony also repeatedly confused the first company and its business

with the Taxpayer and its business. Consequently, it does appear that whatever goodwill the first

company had was transferred to the Taxpayer. This factor weighs in favor of finding that the

Taxpayer was a successor in business.

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

transferee. See 3.1.10.16 (A) (6) NMAC. There was no evidence that the Taxpayer satisfied any

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Letter ID No. L1709616688
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contract for construction of the first company. This factor weighs in favor of finding that the

Taxpayer is not a successor in business.

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 denied assuming any liability of the first company.

However, Exhibit I shows that a check was drawn on the Taxpayer’s account to satisfy part of

the liability owed by the first company. Even though the check was returned for insufficient

funds, this clearly demonstrates that the Taxpayer did assume liability for at least some of the

first company’s unpaid debts. This factor weighs in favor of finding that the Taxpayer is a

successor in business.

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 first company. No

such agreement was necessary since the first company was enjoined from doing business.

Nevertheless, this factor weighs in favor of finding that the Taxpayer is not a successor in

business.

When a business changes hands, its tangible and intangible property remain subject to

liability for the payment of tax, and the successor may be assessed and liable for the tax of a

business that it takes over. See NMSA 1978, § 7-1-61. See also Sterling Title, 1973-NMCA-

086, ¶ 23. 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. If a single factor is present, there is a presumption

HMX Construction
Letter ID No. L1709616688
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that there is a successor in business. See 3.1.10.16 (B) NMAC. In this case, numerous factors

were present. The Taxpayer used the first company’s record-keeping system, assumed part of

the first company’s liability in at least one lawsuit, and the Taxpayer continues to laud the first

company’s achievements as its own. The Taxpayer failed to overcome the presumption of

correctness and failed to overcome the presumption that it was a successor in business to the first

company.

Penalty and Interest.

The Taxpayer specified in its protest that it was protesting the “entire amount” of the

assessment, “including all penalties and interest.” See Protest letter. Neither party further

addressed the issue of penalty and interest. However, a hearing officer is required to decide cases

based on the facts and the law, but is not limited to a word-for-word consideration of the parties’

arguments. See TPL, Inc. v. N.M. Taxation and Revenue Dep’t., 2000-NMCA-083, ¶ 19, 129 N.M.

539, 10 P.3d 863, rev’d on other grounds TPL, Inc. v. N.M. Taxation and Revenue Dep’t., 2003-

NMSC-007, 133 N.M. 447, 64 P.2d 474 (filed December 19, 2002).

A statute is presumed to operate prospectively, but may be applied retroactively if an

amendment serves to clarify the law that was in existence at the time if the amendment does not

contravene previous constructions of the law. See Swink v. Fingado, 1993-NMSC-013, ¶ 35, 115

N.M. 275. An amendment may only serve to clarify the law if the original statute was unclear or

ambiguous. See N.M. Real Estate Comm’n v. Barger, 2012-NMCA-081, ¶ 18. A clarification

does not operate to effect a change; rather it is to clarify what was previously implicit in the law.

See Wood v. State Educ. Ret. Bd., 2011-NMCA-020, ¶ 25, 149 N.M. 455.

The statute under which the Taxpayer was assessed was not ambiguous. See NMSA

1978, § 7-1-61 (1997). The statute provided a specific definition of “tax” that did not include

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Letter ID No. L1709616688
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penalty and interest. See Hi-Country Buick GMC, Inc. v. Taxation and Revenue Dep’t, 2016-

NMCA-027, ¶ 20, cert. denied, No. 35,647 (NMSC, March 15, 2016). The decision noted that

the legislature could have easily stated in the statute that a successor in business was also liable

for penalty and interest, but had more narrowly defined tax in that statute. See id. at ¶ 22. The

definition of tax in regards to a successor in business now includes penalty and interest. See

NMSA 1978, § 7-1-61 (2017). Nothing in the amended statute indicates that it should be given a

retroactive effect. See id. Absent a clear indication otherwise, changes in the law should be

given only a prospective effect. See Swink, 1993-NMSC-013, ¶ 28. Moreover, the time of the

assessment locks in what statute’s version of the penalty applies. See Gea Integrated Cooling

Tech. v. State Taxation and Revenue Dep’t, 2012-NMCA-010. Penalty is added to the amount

assessed by the Department, and “assessment is the specific point in time that the statutory

penalty is triggered and thereby applied.” Id. at ¶ 9. The statute was amended in June 2017. See

NMSA 1978, § 7-1-61 (2017). The Taxpayer was assessed in September 2016. Therefore, the

previous version of the statute applied to the Taxpayer’s assessment. See NMSA 1978, § 7-1-61

(1997). See also Gea Integrated Cooling Tech., 2012-NMCA-010. Accordingly, the assessment

of penalty and interest was inappropriate, as the statutory definition of tax did not include penalty

and interest at that time. See Hi-Country, 2016-NMCA-027.

CONCLUSIONS OF LAW

A. The Taxpayer filed a timely written protest to assessment issued under Letter ID

number L1709616688, and jurisdiction lies over the parties and the subject matter of this protest.

B. The Taxpayer is a successor in business. See NMSA 1978, § 7-1-61 and § 7-1-63.

See also 3.1.10.16 NMAC. See also Sterling Title, 1973-NMCA-086.

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Letter ID No. L1709616688
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C. The Taxpayer is not liable for penalty and interest assessed. See NMSA 1978, §

7-1-61 (1997). See Hi-Country, 2016-NMCA-027.

D. The Taxpayer failed to overcome the presumption that the assessment of tax was

correct. See NMSA 1978, § 7-1-17.

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

IN PART.

DATED: June 29, 2018.

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

NOTICE OF RIGHT TO APPEAL

Pursuant to NMSA 1978, § 7-1-25, 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. See Rule 12-601 NMRA. If an appeal is not filed within 30 days, this Decision

and Order will become final. A copy of the Notice of Appeal should be mailed to John Griego,

P. O. Box 6400, Santa Fe, New Mexico 87502. Mr. Griego may be contacted at 505-827-0466.

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Letter ID No. L1709616688
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CERTIFICATE OF SERVICE

I hereby certify that I mailed the foregoing Order to the parties listed below this _ day of
___, 2018 in the following manner:

HMX Construction
Letter ID No. L1709616688
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