Could the buyer of a New Mexico restaurant avoid the seller's tax debt because some purchased equipment was repossessed and the buyer changed the employees, menu, and tax identification?

Plain-English summary

The buyer of a restaurant business became liable for the seller's New Mexico tax debt as a successor in business. The Administrative Hearings Office upheld the full $20,528.11 assessment against Tyler Carter's business, The Red Onion.

Carter signed a July 17, 2017 contract to purchase “the restaurant business” for $25,000. The contract transferred several pieces of furniture and equipment. The Red Onion then operated a restaurant at the same location under a substantially similar name.

The buyer did make changes: it hired new employees, developed its own menu, and obtained its own tax identification. It also discovered that some equipment listed in the sale did not belong to the seller; the actual owners repossessed that equipment after the restaurant's order volume fell below a required level. Carter argued that the seller's representations were fraudulent and that the acquired business was worth substantially less than the contract price.

Multiple successor factors applied

Regulation 3.1.10.16 said that even one listed factor could create a presumption of successor status. The AHO found several:

• the contract sold and purchased the restaurant business and included furniture and equipment;
• selling the business was outside the ordinary course of operating a restaurant;
• substantial equipment was transferred;
• the buyer continued the same kind of restaurant business; and
• goodwill followed the transaction because the buyer used a substantially similar name at the same location.

Three factors did not apply: The Red Onion did not prove that it honored the seller's outstanding business obligations, paid the seller's unpaid debts, or entered a noncompetition agreement. Those points did not overcome the other evidence that the business changed hands.

The decision emphasized that New Mexico's successor statute is broad. A buyer may become a successor without knowing or understanding the resulting tax exposure, and property used in a business can remain security for unpaid tax when the business changes hands.

Repossessed equipment did not reduce the proven value

Section 7-1-63 allowed liability to be satisfied by paying the full value of the transferred tangible and intangible property. Carter therefore argued that liability should be limited to the value of equipment that was not repossessed.

The AHO rejected that calculation because the contract did not assign individual values to the equipment, the evidence did not establish which items were repossessed or their value, and the $25,000 contract covered the restaurant business itself—not only listed equipment. That broader purchase included intangible property and goodwill whose values were also not separately stated.

Without better valuation evidence, the AHO presumed the $25,000 purchase price represented the value of the transferred tangible and intangible property. The assessment was lower than that cap.

The seller could remain liable too

Carter argued that the prior owner should pay and objected to the Department's handling of that owner's account. The AHO held that The Red Onion lacked standing to challenge the Department's treatment of another taxpayer. The seller's concurrent liability also did not prevent the Department from assessing the successor.

Result: protest DENIED. The Red Onion remained liable for $15,355.18 tax, $3,247.85 penalty, and $1,925.08 interest, totaling $20,528.11.

What this means for you

Buyers acquiring an operating business

Successor tax exposure can arise from an asset or business purchase even without acquiring the seller's entity. The same site, similar name, transferred equipment, and continued operations all mattered here.

Buyers who discover inaccurate asset representations

Document exactly which assets were promised, which transferred, which were repossessed, and each asset's value. A general claim that the deal was worth less did not overcome the contract price in this case.

Restaurants changing menus or staff after a purchase

Operational changes do not necessarily prevent successor status. The Red Onion's new employees, new menu, and separate tax ID did not outweigh its purchase and continuation of the restaurant business.

Accountants and transaction advisers

Investigate outstanding New Mexico tax before closing. The successor statute can preserve the predecessor's liability while also making the buyer responsible up to the applicable statutory amount.

Common questions

Q: Did The Red Onion become a successor in business?
A: Yes. It bought the restaurant business and equipment, continued restaurant operations at the same location, and used a substantially similar name.

Q: Did hiring new workers and creating a new menu prevent successor status?
A: No. The AHO acknowledged those changes but held that multiple regulatory successor factors still applied.

Q: Why was the $25,000 contract price used as the transferred-property value?
A: The contract did not separately value equipment, goodwill, or other tangible and intangible property, and the buyer did not supply sufficient evidence of a different value.

Q: What about equipment that was repossessed by its real owners?
A: The evidence did not establish which equipment had been repossessed or its value. The contract also purchased the broader restaurant business, including intangible property and goodwill.

Q: Could the Department also pursue the prior owner?
A: The decision said the prior owner's concurrent liability did not prevent assessment of the successor. The Red Onion could not challenge how the Department handled another taxpayer's account.

Q: Was the assessment greater than the liability cap?
A: No. The assessment totaled $20,528.11, which was less than the $25,000 value presumed from the purchase contract.

Citations and references

Statutes and regulations:

• NMSA 1978, §§ 7-1-61 and 7-1-63 — successor liability and transferred business property
• NMSA 1978, § 7-1-17 — presumption that an assessment is correct
• NMSA 1978, § 7-1-3 — tax includes related interest and civil penalty
• NMSA 1978, §§ 7-1-16 and 7-1-17 — predecessor's continuing liability discussed
• Regulation 3.1.10.16(A), (B), and (F) NMAC — successor factors and definitions
• Regulation 3.1.6.10 NMAC — Department assessment authority discussed

Case cited:

• Sterling Title Co. of Taos v. Commissioner of Revenue, 1973-NMCA-086 — the broad meaning of a business changing hands and transferred property as tax security

Source

• Listing: New Mexico Decisions & Orders
• Decision post: The Red Onion
• Decision PDF: D&O 18-25

Original ruling text

STATE OF NEW MEXICO
ADMINISTRATIVE HEARINGS OFFICE
TAX ADMINISTRATION ACT

IN THE MATTER OF THE PROTEST OF
TYLER D. CARTER
THE RED ONION
TO THE ASSESSMENT ISSUED UNDER
LETTER ID NO. L1862703920

v. AHO Case No. 18.04-091A, D&O No. 18-25

NEW MEXICO TAXATION AND REVENUE DEPARTMENT

DECISION AND ORDER

A formal hearing on the above-referenced protest was held on July 20, 2018 before

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

represented by Mr. Kenneth Fladager, Staff Attorney. Mr. Nicholas Pacheco, Auditor, also

appeared on behalf of the Department. Mr. Tyler Carter, owner of the Red Onion (Taxpayer),

appeared for the hearing with his father, who was present for the hearing based upon the

Taxpayer’s request. Mr. Carter and Mr. Pacheco testified. The Hearing Officer took notice of

all documents in the administrative file. The Department’s exhibits A, B, and C were admitted.

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

Administrative Exhibit Coversheet.

Based on the evidence and arguments presented, IT IS DECIDED AND ORDERED AS

FOLLOWS:
FINDINGS OF FACT

1. On February 5, 2018, the Department assessed the Taxpayer as a successor in

business for tax, penalty, and interest. The assessment was for $15,355.18 tax, $3,247.85

penalty, and $1,925.08 interest, for a total of $20,528.11.

2. On February 26, 2018, the Taxpayer filed a formal protest letter.

3. On April 23, 2018, the Department filed a Request for Hearing asking that the

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

4. On April 23, 2018, the Administrative Hearings Office issued a notice of

telephonic scheduling hearing.

5. On May 9, 2018, a telephonic scheduling hearing was conducted. The hearing

was held within ninety days of the protest.

6. On May 11, 2018, the scheduling order and notice of hearing was issued.

7. On June 20, 2018, the Taxpayer filed a letter that was treated as its prehearing

statement.

8. On June 29, 2018, the Department filed its prehearing statement.

9. Mr. Carter is the owner of the Taxpayer. The Taxpayer purchased a restaurant

business from the previous owner. [Testimony of Mr. Carter and Exhibit A]

10. The Taxpayer and the previous owner entered into a contract on July 17, 2017,

which enabled the Taxpayer to purchase “the restaurant business”. [Exhibit A]

11. Pursuant to the purchase of the business, the contract included the transfer of

several pieces of furniture and equipment. [Exhibit A and Testimony of Mr. Carter]

12. The Taxpayer purchased the restaurant business for $25,000.00. [Testimony of

Mr. Carter and Exhibit A]

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Case No. 18.04-091A
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13. The Taxpayer continued operating the restaurant business in the same location,

with a very similar name. However, the Taxpayer hired new employees, developed its own

menu, and obtained its own tax identification. [Testimony of Mr. Carter and prehearing

statement]

14. The Taxpayer discovered that some of the equipment sold to it in the contract did

not actually belong to the previous business. The equipment was repossessed by its owners

when the Taxpayer’s order volume dropped below an obligatory amount. [Testimony of Mr.

Carter and prehearing statement]

15. The Taxpayer feels that the value of the restaurant business that it purchased is

actually substantially less than the $25,000.00 purchase price because of the fraudulent

representations about the equipment. [Testimony of Mr. Carter and prehearing statement]

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. See also NMSA 1978, § 7-1-61 (A) (2017) (including penalty and interest

against successors in business). 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.

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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.

Several factors are 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

Taxpayer agreed to purchase “the restaurant business” for $25,000.00, and the contract included

several items of equipment and furniture. See Exhibit A. This factor weighs 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. Selling off the business and its equipment

was not in the ordinary course of operating a restaurant. This factor weighs in favor of finding

that the Taxpayer is a successor in business.

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Case No. 18.04-091A
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The third factor is whether “a substantial part of both equipment and inventories” was

transferred. 3.1.10.16 (A) (3) NMAC. The Taxpayer purchased several items of furniture and

equipment. This factor weighs 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 is operating a restaurant business, as was the seller of the business. This factor weighs

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. Although goodwill was not mentioned in the

purchase contract, the Taxpayer continues to use a substantially similar name and operate in the

same location. Therefore, the goodwill followed the transfer of the business 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

business obligations of the seller. 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. There was no evidence that the Taxpayer assumed any unpaid

debts of the seller. This factor weighs in favor of finding that the Taxpayer is a not 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 in the contract. This factor weighs in favor of

finding that the Taxpayer is not a successor in business.

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The Taxpayer acknowledges that many of the criteria for finding a successor in business

are present in its case. However, the Taxpayer argues that the statute is too broad because it

imposes liability on someone who only purchases the property of another 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 statute is broad and imposes liability on successors even when they do not know

or understand that they are successors. See NMSA 1978, § 7-1-61. 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 that there is a successor in business. See

3.1.10.16 (B) NMAC. In this case, numerous factors were present. The Taxpayer failed to

overcome the presumption of correctness and failed to overcome the presumption that it was a

successor in business.

The Taxpayer argues that its liability should be limited to the value of the equipment that

was transferred that was not subsequently repossessed by another party. The Taxpayer argues

that the transfer was fraudulent because the equipment was not actually owned by the restaurant,

but was represented in the contract as if it were. A successor’s liability may be satisfied once it

pays “the full value of the transferred tangible and intangible property.” NMSA 1978, § 7-1-63.

However, property used in the business includes anything transferred that is “reasonably

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Case No. 18.04-091A
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necessary for the business’s continued operations, whether or not the property is actually owned

by the business.” 3.1.10.16 (F) (4) NMAC. Although several tangible pieces of furniture and

equipment were included in the purchase, they were not assigned any individual values in the

contract. See Exhibit A. There was not sufficient evidence to establish what equipment had

been repossessed or what its value was. Moreover, the contract was for the purchase of “the

restaurant business” for $25,000.00. The purchase of “the restaurant business” includes an

element of intangible property and goodwill, which is also not valuated in the contract. Without

other evidence, the purchase price of the contract will be presumed to be the value of the tangible

and intangible property transferred to the Taxpayer. Therefore, the Taxpayer’s liability is limited

to the $25,000.00 purchase price in the contract. However, the amount assessed was less than

$25,000.00.

The Taxpayer argues that the previous business owner should be liable for the tax. The

Taxpayer argues that the Department has refused to enter into a payment plan and to accept

payments from the previous business owner. The Taxpayer has no standing to object to the

Department’s treatment of another taxpayer. Moreover, the previous business owner’s

concurrent liability for the tax does not preclude the Department from assessing a successor in

business. See NMSA 1978, § 7-1-61. To find otherwise would render the statute useless, as

previous owners always remain liable for outstanding tax. See id. See also NMSA 1978, § 7-1-

16 and § 7-1-17. See also 3.1.6.10 NMAC (2001).

CONCLUSIONS OF LAW

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

number L1862703920, and jurisdiction lies over the parties and the subject matter of this protest.

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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.

C. 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.

DATED: August 2, 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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Case No. 18.04-091A
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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:

First Class Mail Interoffice Mail

INTENTIONALLY BLANK

John D. Griego
Legal Assistant
Administrative Hearings Office
Post Office Box 6400
Santa Fe, NM 87502
PH: (505)827-0466
FX: (505)827-9732

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Case No. 18.04-091A
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