Could a sole proprietor defeat a gross receipts tax assessment by arguing that income reported on federal Schedule C was not necessarily business income?

Plain-English summary

Marduk Consultants could not overturn a gross receipts tax assessment merely by arguing that federal Schedule C income is not always New Mexico business income. Its owner withheld the actual source of the receipts and supplied no records showing that they were nontaxable.

Thomas Watts registered Marduk as a New Mexico sole proprietorship in 2008. The business registration described it as a consultant, and Watts said it originally performed computer repair. He believed the business had closed in 2010 but presented no evidence of closure.

For 2012 through 2016, Watts reported income on federal Schedule C but filed no New Mexico CRS-1 gross receipts tax returns. The Department matched the federal and state records and issued an October 2019 assessment totaling $4,877.66:

• $3,492.64 of gross receipts tax;
• $698.52 of penalty; and
• $686.50 of interest.

Marduk protested that the Schedule C amounts did not come from selling goods or services. Yet Watts left the business-description line blank on the federal schedules, declined to say what generated the income, and supplied no documents after the protest auditor requested support. He also admitted that less than $200 per year was taxable gross receipts.

Schedule C was evidence, not an automatic legal rule

The hearing officer did not hold that every amount ever reported on Schedule C is subject to New Mexico gross receipts tax. Federal guidance recognizes various kinds of income, and the specific facts still matter.

But Schedule C is titled “Profit or Loss From Business” and is designed for business income. Marduk was registered as a consulting business, had performed services for hire, reported similar amounts on Schedule C for five consecutive years, and admitted that part of each year's amount was taxable business revenue. On those facts, the Department reasonably connected the Schedule C amounts to business receipts.

The annual Schedule C income was:

• $9,587 in 2012;
• $9,991 in 2013;
• $9,235 in 2014;
• $9,827 in 2015; and
• $12,986 in 2016.

Watts offered a hypothetical about found money to show that unusual nonbusiness income can exist. He did not claim that found money was his actual source, and federal instructions did not direct taxpayers to report found property on Schedule C. A hypothetical exception did not explain Marduk's recurring receipts.

Marduk had to rebut the assessment

New Mexico assessments are presumed correct, and “tax” includes principal, penalty, and interest. Once Marduk admitted that it had some taxable business receipts, Section 7-9-5's presumption applied to the receipts of the person engaging in business.

Marduk then needed countervailing evidence or legal argument showing that the remaining amounts were not taxable or qualified for a deduction or exemption. Refusing to identify the sources and relying on unsupported statements did not meet that burden.

Result: protest DENIED. The original assessment was upheld. With later accruals, Marduk owed $5,028.06 as of the hearing, and interest continued until payment.

What this means for you

Federal reporting can create a state-tax mismatch

Reporting business income on Schedule C while filing no New Mexico gross receipts tax returns can prompt a Department comparison and assessment.

Explain the actual source of disputed income

It is not enough to show that Schedule C might theoretically include an unusual receipt. Records must connect the taxpayer's own income to a nontaxable source.

Closing a business should be documented

An owner's belief that a registered business stopped operating did not rebut later business-income indicators. Preserve closure filings and records showing what happened after operations ended.

The presumption covers penalty and interest

Because New Mexico defines “tax” to include civil penalty and interest for this purpose, a taxpayer must also produce a basis for reducing those parts of an assessment.

Common questions

Q: Did the AHO rule that all Schedule C income is gross receipts?
A: No. It said the answer depends on the taxpayer's facts, but Marduk offered no evidence of a different income source.

Q: Why did Marduk's admission matter?
A: Admitting that some yearly income was taxable showed it was engaging in business and supported the statutory presumption that its business receipts were taxable.

Q: What evidence was missing?
A: Marduk did not identify the income sources, document that the business closed, or provide records showing that any amount was exempt, deductible, or unrelated to business.

Q: How much was ultimately due?
A: $5,028.06 as of the August 3, 2020 hearing, with interest accruing until paid.

Citations and references

Statutes and regulations:

• NMSA 1978, §§ 7-9-1 through 7-9-117 — Gross Receipts and Compensating Tax Act
• NMSA 1978, §§ 7-9-3.3, 7-9-3.5, 7-9-4, and 7-9-5(A) — engaging in business, gross receipts, tax imposition, and presumption of taxability
• NMSA 1978, §§ 7-1-17(C) and 7-1-3(Z) — assessment presumption and inclusion of interest and penalty in “tax”
• Regulations 3.1.1.16, 3.1.6.12(A), and 3.1.6.13 NMAC — definition of tax and proof needed to overcome an assessment

Cases:

• New Mexico Taxation and Revenue Department v. Casias Trucking, 2014-NMCA-099 — countervailing evidence and factfinder's role
• MPC Ltd. v. New Mexico Taxation and Revenue Department, 2003-NMCA-021 — unsupported statements do not overcome an assessment
• Security Escrow Corp. v. State Taxation and Revenue Department, 1988-NMCA-068 — strict proof of exemptions and deductions
• Chevron U.S.A., Inc. v. State ex rel. Department of Taxation and Revenue, 2006-NMCA-050 — weight given to agency regulations

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Marduk Consultants
• Decision PDF: D&O 20-13

Original ruling text

1 STATE OF NEW MEXICO
2 ADMINISTRATIVE HEARINGS OFFICE
3 TAX ADMINISTRATION ACT

4 IN THE MATTER OF THE PROTEST OF
5 MARDUK CONSULTANTS
6 TO ASSESSMENTS ISSUED UNDER
7 LETTER ID NO. L1963573936
8 v. AHO Case Number 20.05-071A
9 Decision and Order No. 20-13
10 NEW MEXICO TAXATION AND REVENUE DEPARTMENT

11 DECISION AND ORDER

12 On August 3, 2020, Hearing Officer Ignacio V. Gallegos, Esq., conducted an

13 administrative hearing on the merits of the matter of the tax protest of Marduk Consultants

14 (Taxpayer) pursuant to the Tax Administration Act and the Administrative Hearings Office Act.

15 At the hearing, Mr. Thomas E. Watts, Jr., owner of Taxpayer, appeared representing himself and

16 as Taxpayer’s sole witness. Staff Attorney Cordelia Friedman appeared, representing the

17 opposing party in the protest, the Taxation and Revenue Department (Department). Department

18 protest auditor Angelica Rodriguez appeared as a witness for the Department. Taxpayer offered

19 Exhibits 1 through 7 at the hearing. Taxpayer’s exhibits 1, 5, 6 and 7 were admitted over

20 Department’s objection. Department Exhibits A, B and C were admitted into the record, with

21 limitations. After sharing an exhibit with the Taxpayer, Department submitted a late-filed exhibit

22 by email following the hearing, without explanation, and without marking. As Taxpayer had an

23 opportunity to object but no objection was made to the late-filed exhibit, the Hearing Officer will

24 mark the exhibit as Department Exhibit D and allow its admission. Exhibits are more fully

25 described in the Exhibit Log. The administrative file is considered part of the record.

26 In quick summary, this protest involves Taxpayer’s claim that income reported over five

27 years on a federal form Schedule C is not taxable as gross receipts income. The Department

In the Matter of the Protest of Marduk Consultants, page 1 of 15.
1 compared the federal form to the CRS-1 returns and found that they did not match, and an

2 assessment followed. Taxpayer protested the assessment, and without providing evidence of a

3 source of income argued that the assessment should have never been issued because the Schedule

4 C does not create a presumption that the income reported thereon is business income as defined

5 by the Gross Receipts and Compensating Tax Act. Ultimately, after making findings of fact and

6 discussing the issue in more detail throughout this decision, the hearing officer finds that Taxpayer’s

7 claim is not based in law and Taxpayer has failed to prove that the Department’s assessment was

8 erroneous. The protest is denied. IT IS DECIDED AND ORDERED AS FOLLOWS:

9 FINDINGS OF FACT

10 Procedural Findings

11 1. On October 9, 2019, under Letter Id. No. L1963573936, the Department issued a

12 Notice of Assessment of Taxes and Demand for Payment to Taxpayer Under the Assessment

13 letter, Taxpayer owed Project Gross Receipts Tax of $3,492.64, penalty of $698.52, and interest

14 of $686.50 for a total assessment of tax due of $4,877.66 for tax reporting periods from January

15 1, 2012 to December 31, 2016. [Administrative File].

16 2. On November 1, 2019, Taxpayer submitted a Formal Protest letter, alleging that

17 the Department was incorrect in its assessment of tax because the income shown on federal

18 Schedule C was not derived “from sale of goods or services.” [Administrative File].

19 3. On November 26, 2019, under Letter Id. No. L1376936624 the Department issued

20 a letter informing the Taxpayer that the Department acknowledged receipt of Taxpayer’s protest

21 of Combined Reporting System (CRS) taxes for tax periods beginning January 1, 2012 through

22 December 31, 2016. [Administrative File].

In the Matter of the Protest of Marduk Consultants, page 2 of 15.
1 4. On May 20, 2020, the Department submitted a Request for Hearing to the

2 Administrative Hearings Office, requesting a hearing on the merits of Taxpayer’s protest. The

3 Request for Hearing stated that the total at issue was $4,877.66. [Administrative File].

4 5. On May 20, 2020, the Department submitted its Answer to Protest to the

5 Administrative Hearings Office, claiming that the Taxpayer reported income on a federal form

6 Schedule C without reporting the income as gross receipts. The Department argued that the

7 Taxpayer’s use of the Schedule C is inconsistent with the Taxpayer’s claim that the income was

8 non-business income. [Administrative File].

9 6. On May 21, 2020, the Administrative Hearings Office mailed a Notice of

10 Telephonic Scheduling Hearing to the parties, by email, setting the matter for a telephonic

11 scheduling hearing on June 11, 2020. [Administrative File].

12 7. At the telephonic scheduling hearing of June 11, 2020, the parties appeared. Mr.

13 Thomas E. Watts, Jr., owner, appeared on behalf of Taxpayer Marduk Consultants. Attorney

14 Cordelia Friedman appeared on behalf of the Department. The parties did not object that

15 conducting the scheduling hearing satisfied the 90-day hearing requirements of Section 7-1B-8

16 (F) (2019) while still allowing meaningful time for completion of the other statutory

17 requirements under Section 7-1B-6 (D) (2015). See also Regulation 22.600.3.8 (E) NMAC. A

18 recording was made of the hearing. [Administrative File].

19 8. On June 11, 2020, the Administrative Hearings Office mailed a Scheduling Order

20 and Notice of Administrative Hearing to the parties, setting various deadlines, and scheduling the

21 matter for a hearing on the merits of Taxpayer’s protest on August 3, 2020 by telephone

22 conference, upon request of the parties and due to the ongoing COVID-19 pandemic response.

23 [Administrative File].

In the Matter of the Protest of Marduk Consultants, page 3 of 15.
1 9. Prior to the hearing of August 3, 2020, the parties shared their labeled, proposed

2 exhibits in electronic format with the Administrative Hearings Office. The proposed exhibits

3 were sequestered in a sub-file before the hearing. [Administrative File].

4 10. The undersigned Administrative Hearing Officer Ignacio V. Gallegos conducted

5 the merits hearing on August 3, 2020 with the parties and witnesses present by telephone

6 conference from various points in New Mexico. The Administrative Hearings Officer preserved

7 a recording of the hearing (“Hearing Record” or “H.R.”). [Administrative File].

8 Substantive Findings

9 11. Taxpayer Marduk Consultants is a business registered in New Mexico in 2008 by

10 sole proprietor, Thomas E. Watts, Jr. (also referred to as Taxpayer). Originally, the business was

11 engaged in computer repair. Mr. Watts believed the business was closed in 2010.

12 [Administrative File; Taxpayer Exhibit 1, page 3; Department Exhibit A; Direct examination of

13 Thomas Watts, H.R. 33:55-34:40].

14 12. The business filed a business tax registration certificate in 2008. Taxpayer’s CRS

15 registration indicated Taxpayer was a “consultant.” The Department considers consulting as a

16 type of service. [Department Exhibit A; Direct examination of Thomas Watts, H.R. 33:55-34:40;

17 Direct examination of Angelica Rodriguez, H.R. 46:45-47:30; Cross examination of Angelica

18 Rodriguez, H.R. 1:14:45-1:15:30; Re-Cross examination of Angelica Rodriguez, H.R. 1:19:45-

19 1:20:50; AHO examination of Angelica Rodriguez, H.R. 1:22:55-1:23:10].

20 13. The Department detected a discrepancy or mismatch between the Taxpayer’s

21 federal Schedule C filings and the Taxpayer’s gross receipts tax filings on CRS-1 returns

In the Matter of the Protest of Marduk Consultants, page 4 of 15.
1 between January 1, 2012 and December 31, 2016, leading to the assessment of gross receipts tax.

2 [Direct Examination of Angelica Rodriguez, H.R. 47:35-52:40; Department Exhibit B and C].

3 14. Mr. Watts filed Schedule C forms as part of his federal personal income tax

4 reporting in 2012, 2013, 2014, 2015 and 2016. On the Schedule C form there is a line available

5 to describe the source of income, this line was left blank. [Cross examination of Thomas Watts,

6 H.R. 42:40-43:30; Re-Direct examination of Angelica Rodriguez, H.R. 1:17:00-1:19:25].

7 15. Mr. Watts did not file New Mexico form CRS-1 returns, to report and pay gross

8 receipts tax. [Direct examination of Thomas Watts, H.R. 33:00-33:35].

9 16. Taxpayer declined to state what the source or sources of the income reported on

10 his Schedule C filings in fact was. [Direct examination of Thomas Watts, H.R. 23:00-25:00].

11 17. Taxpayer claimed, without substantiation, that the income reported on Schedule C

12 did not fall into any category of income subject to New Mexico gross receipts tax. [Direct

13 examination of Thomas Watts, H.R. 24:15-24:30, 35:45-36:25].

14 18. Taxpayer admitted that some (less than $200 per tax year) of the income he

15 reported on Schedule C would have been subject to gross receipts tax. [Administrative File

16 (Protest letter); Taxpayer Exhibit 1, page 3].

17 19. Tax auditor Angelica Rodriguez, upon receipt of the protest, requested

18 documentary support of the Taxpayer’s claims, but Taxpayer provided none. [Administrative

19 File; Direct examination of Angelica Rodriguez, H.R. 46:00-46:35].

20 DISCUSSION

21 During the timeframes at issue, Taxpayer Marduk Consultants’ owner and sole proprietor

22 Thomas E. Watts, Jr. filed Schedule C forms as part of his federal personal income tax returns

23 for tax years 2012, 2013, 2014, 2015, and 2016. The Taxpayer did not file gross receipts tax

In the Matter of the Protest of Marduk Consultants, page 5 of 15.
1 returns, CRS-1 forms to the State of New Mexico during the same time-frame. Taxpayer was a

2 business registered within the State of New Mexico in 2008, initially conducting business as an

3 independent contractor for computer repair. Taxpayer claimed the computer repair business

4 closed in 2010 but provided no evidence of its closure. Taxpayer claimed that it is an

5 unreasonable leap of logic to consider his Schedule C filings as proof of business income,

6 taxable by New Mexico as gross receipts. However, in New Mexico it is Taxpayer’s

7 responsibility to prove that the income is not taxable, not the Department’s responsibility to

8 prove it is taxable.

9 Presumption of correctness

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

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

12 Archuleta v. O'Cheskey, 1972-NMCA-165, ¶11, 84 N.M. 428. Unless otherwise specified, for the

13 purposes of the Tax Administration Act, “tax” is defined to include interest and civil penalty. See

14 NMSA 1978, Section 7-1-3 (Z) (2019); see also Regulation 3.1.1.16 (12/29/2000). Under

15 Regulation 3.1.6.13 NMAC, the presumption of correctness under Section 7-1-17 (C) extends to

16 the Department’s assessment of penalty and interest. See Chevron U.S.A., Inc. v. State ex rel. Dep't

17 of Taxation & Revenue, 2006-NMCA-50, ¶16, 139 N.M. 498, 503 (agency regulations interpreting

18 a statute are presumed proper and are to be given substantial weight). Accordingly, it is a

19 taxpayer’s burden to present some countervailing evidence or legal argument to show that they

20 are entitled to an abatement, in full or in part, of the assessment issued in the protest. See N.M.

21 Taxation & Revenue Dep't v. Casias Trucking, 2014-NMCA-099, ¶8. When a taxpayer presents

22 sufficient evidence to rebut the presumption, the burden shifts to the Department to show that the

In the Matter of the Protest of Marduk Consultants, page 6 of 15.
1 assessment is correct. See MPC Ltd. v. N.M. Taxation & Revenue Dep't, 2003-NMCA-21, ¶13, 133

2 N.M. 217.

3 The burden is also on taxpayers to prove that they are entitled to an exemption or

4 deduction, if one should potentially apply. See Pub. Serv. Co. v. N.M. Taxation & Revenue Dep't,

5 2007-NMCA-050, ¶141 N.M. 520, 157 P.3d 85; See also Till v. Jones, 1972-NMCA-046, 83

6 N.M. 743, 497 P.2d 745. “Where an exemption or deduction from tax is claimed, the statute must

7 be construed strictly in favor of the taxing authority, the right to the exemption or deduction must

8 be clearly and unambiguously expressed in the statute, and the right must be clearly established

9 by the taxpayer.” See Sec. Escrow Corp. v. State Taxation & Revenue Dep't, 1988-NMCA-068,

10 ¶8, 107 N.M. 540, 760 P.2d 1306. See also Wing Pawn Shop v. Taxation & Revenue Dep't, 1991-

11 NMCA-024, ¶16, 111 N.M. 735, 809 P.2d 649. See also Chavez v. Comm'r of Revenue, 1970-

12 NMCA-116, ¶7, 82 N.M. 97, 476 P.2d 67.

13 Receipts under the Gross Receipts and Compensating Tax Act.

14 The assessment in this protest arises from an application of the Gross Receipts and

15 Compensating Tax Act, NMSA 1978, Sections 7-9-1 through 7-9-117, which imposes a tax for the

16 privilege of engaging in business, on the receipts of any person engaged in business in New Mexico.

17 See NMSA 1978, Section 7-9-4 (2010). The definition of “engaging in business” under Section 7-

18 9-3.3(2019), is relevant: “‘engaging in business’ means carrying on or causing to be carried on any

19 activity with the purpose of direct or indirect benefit.” There is a statutory presumption that all

20 receipts of a person engaged in business activities are taxable. See NMSA 1978, Section 7-9-5(A)

21 (2019). Yet, despite the general presumption of taxability, a taxpayer may qualify for the benefits

22 of various deductions and exemptions.

In the Matter of the Protest of Marduk Consultants, page 7 of 15.
1 Taxpayer claims the income was not derived from the sale of goods or services, using the

2 definition of “gross receipts.” The statutory definition of “gross receipts” under Section 7-9-3.5

3 (2019) states, in pertinent part: “‘gross receipts’ means the total amount of money or the value of

4 other consideration received from selling property in New Mexico, from leasing or licensing

5 property employed in New Mexico, from granting a right to use a franchise employed in New

6 Mexico, from selling services performed outside New Mexico, the product of which is initially used

7 in New Mexico, or from performing services in New Mexico.” Taxpayer argued but presented no

8 evidence that he did not sell goods or services. Despite Taxpayer’s adamant assertion, Taxpayer

9 admitted that some of the income (approximately $200 per year) was gross receipts taxable. With

10 this admission, it is clear that at least a portion of the activity was “engaging in business” which

11 triggers the statutory presumption that all receipts of a person “engaging in business” are taxable.

12 See Section 7-9-3.3(2019) and Section 7-9-5(A) (2019).

13 Was the Department unreasonable in connecting Schedule C reporting to gross receipts?

14 Taxpayer’s primary claim is that the Department made a sort of leap of faith in its

15 determination that income reported on Schedule C filings necessarily entailed liability for gross

16 receipts. The Taxpayer’s claim was of a general nature, not specific as to his own income-

17 generating ventures (if any), which he neither described nor provided documentary evidence of their

18 origin. Taxpayer referenced IRS Publication 17,1 which provides the guidance for the use of federal

1
Prior year Publication 17 instructions are available on the IRS website. See Publication 17 (2012) at
https://www.irs.gov/pub/irs-prior/p17--2012.pdf (last visited 8/18/20); see also Publication 17 (2013) at
https://www.irs.gov/pub/irs-prior/p17--2013.pdf (last visited 8/18/20); see also Publication 17 (2014) at
https://www.irs.gov/pub/irs-prior/p17--2014.pdf (last visited 8/18/20); see also Publication 17 (2015) at
https://www.irs.gov/pub/irs-prior/p17--2015.pdf (last visited 8/18/20); see also Publication 17 (2016) at
https://www.irs.gov/pub/irs-prior/p17--2016.pdf (last visited 8/18/20). Chapter 12 references “Other income,”
which can include a variety of income sources, including but not limited to: bartering, cancelled debt,
unemployment benefits, welfare and public assistance benefits, jury duty payments, gambling winnings, prizes,
kickbacks, bribes, found property, union strike benefits, and proceeds from illegal activity.

In the Matter of the Protest of Marduk Consultants, page 8 of 15.
1 forms. While it may be true that at times reported Schedule C income does not require gross

2 receipts tax reporting, the question and its corresponding answer must be tailored to the tax situation

3 at hand. And, since the Department is entitled to the presumption that all receipts of a person

4 “engaging in business” are taxable, it is Taxpayer’s burden to present some evidence or legal

5 argument to show that the Taxpayer is entitled to an abatement, in full or in part, of the

6 assessment issued in the protest. See Section 7-9-3.3(2019) and Section 7-9-5(A) (2019); see also

7 N.M. Taxation & Revenue Dep't v. Casias Trucking, 2014-NMCA-099, ¶8. Mr. Watts refused to

8 provide evidence of the origin of a substantial portion of his income reported on Schedule C,

9 instead, he attempted to shift the burden to the state to prove his Schedule C income was business-

10 related.

11 In this particular situation, the Department was not unreasonable in concluding that the

12 Schedule C income Taxpayer reported was business income. Taxpayer Marduk Consultants was

13 established in 2008 by Thomas E. Watts, Jr. Mr. Watts is listed as the sole proprietor of the

14 business on the State of New Mexico Taxation and Revenue Department Registration Certificate for

15 the business. Mr. Watts testified that he was engaged at that time as a computer repairman.

16 Whether “consulting” or repairing computers, there is no doubt that the Taxpayer was engaged in

17 providing services to customers for hire when the business originated.

18 Mr. Watts testified that part of the income ($200 per year) would indeed be taxable as gross

19 receipts. If true, even this small portion of the income reported would establish a foothold (as stated

20 above) for the presumption that all business receipts of the person are taxable, pursuant to Section 7-

21 9-5(A).

22 Likewise, the use of Schedule C is tailored to personal business income, and the use thereof

23 creates a strong likelihood that the income is business income. On each page of the Schedule C

In the Matter of the Protest of Marduk Consultants, page 9 of 15.
1 instructions, the fact that the schedule is tailored to business income is made clear. On the first

2 page, in big, bold letters, is the title “Profit or Loss From Business.” In the IRS’s 2012 Instructions

3 for Schedule C, the word “business” appears in 151 instances over 13 pages.2 In the instructions for

4 years 2013, 2014, 2015, and 2016, at issue here, the word “business” appears in the instructions a

5 similar number of times. 3 The very first paragraph of the instructions inform potential Schedule C

6 users that “to report income from a nonbusiness activity, see the instructions for Form 1040, Line

7 21, or Form 1040 NR, line 21.” Since Taxpayer asserts, without proof, that his income was non-

8 business income, we turn to the IRS 1040 instructions.

9 Turning to the IRS 1040 instructions for Line 21 for reporting “Other income,” they confirm

10 that the Schedule C is the form needed for business income. See IRS 1040 Instructions (2012), p 28.

11 The Line 21 instructions indicate that prizes and earnings from gambling, jury duty pay, Alaska

12 Permanent Fund dividends, and some other taxable distributions may be placed on Line 21. None

13 of these appear applicable in this instance. None give the option of reporting either on Line 21, or

14 on the Schedule C. The Line 21 instructions require that the Taxpayer list the “type and amount of

15 income.”4 The Taxpayer gave the hypothetical of finding a bag of money on the roadside, which he

2
Prior year Schedule C instructions and forms are available on the IRS website. See 2012 Schedule C instructions,
https://www.irs.gov/pub/irs-prior/i1040sc--2012.pdf (last visited 8/20/2020).
3
Prior year Schedule C instructions and forms are available on the IRS website. See 2016 Schedule C instructions
(237 instances) https://www.irs.gov/pub/irs-prior/i1040sc--2016.pdf (last visited 8/20/2020); see also 2015 Schedule
C instructions (243 instances) https://www.irs.gov/pub/irs-prior/i1040sc--2015.pdf (last visited 8/20/2020); see also
2014 Schedule C instructions (232 instances) https://www.irs.gov/pub/irs-prior/i1040sc--2014.pdf (last visited
8/20/2020); see also 2013 Schedule C instructions (224 instances) https://www.irs.gov/pub/irs-prior/i1040sc--
2013.pdf (last visited 8/20/2020).

4
Prior year 1040 instructions are available on the IRS website. See https://www.irs.gov/pub/irs-prior/i1040gi--
2012.pdf (p.28) (last visited 8/27/20); see also https://www.irs.gov/pub/irs-prior/i1040gi--2013.pdf (p.28)
(last visited 8/27/20); see also https://www.irs.gov/pub/irs-prior/i1040gi--2014.pdf (p.28)
(last visited 8/27/20); see also https://www.irs.gov/pub/irs-prior/i1040gi--2015.pdf (p.29)
(last visited 8/27/20); see also https://www.irs.gov/pub/irs-prior/i1040gi--2016.pdf (p.29)
(last visited 8/27/20).

In the Matter of the Protest of Marduk Consultants, page 10 of 15.
1 in no way suggested was actually the source of his income, suggesting that such an exception

2 justified a general rule. In fact, Schedule C instructions do not contain instructions on how to report

3 found money on Schedule C forms, 5 despite the Taxpayer’s suggestion that Publication 17 advises 6

4 to place the income stemming from found property (treasure-trove) on Schedule C. Cf. Cesarini v.

5 United States, 296 F. Supp. 3 (1969) (treasure trove discovered hidden in a used piano purchased at

6 auction is taxable in the year possession of the treasure became undisputed). To broadly interpret

7 the instructions in the manner Taxpayer proposes would be to allow the exception to justify the

8 Taxpayer’s interpretation of the rule. This is contrary to existing rules of interpretation, which

9 require narrow interpretation of exceptions, for the very purpose the exception does not swallow the

10 rule. See First Nat’l Bank v. Woods (In re Woods), 743 F.3d 689, 698. Nevertheless, it is highly

11 unlikely that this Taxpayer would find a bag of money every year over five years, in roughly similar

12 amounts: for 2012, Taxpayer reported $9,587.00; for 2013, Taxpayer reported $9,991.00; for 2014,

13 Taxpayer reported $9,235.00; for 2015, Taxpayer reported $9,827.00, and for 2016, Taxpayer

14 reported $12,986.00. The purported exception for reporting found money on Schedule C does not

15 create the presumption that the use of Schedule C does not imply business income.

16 Conclusion.

17 The fact that the Taxpayer refused to provide testimony about the income source and

18 provided no records to support his contention that the lion’s share of the income reported on

19 Schedule C was not business related is the salient feature of this protest. It is the Taxpayer’s duty to

20 prove with substantial evidence that the assessment was in error by proving that the income was not

5
Prior year Schedule C instructions are available on the IRS website. See https://www.irs.gov/pub/irs-
prior/i1040sc--2016.pdf (last visited 8/20/2020); see also https://www.irs.gov/pub/irs-prior/i1040sc--2015.pdf (last
visited 8/20/2020); see also https://www.irs.gov/pub/irs-prior/i1040sc--2014.pdf (last visited 8/20/2020); see also
https://www.irs.gov/pub/irs-prior/i1040sc--2013.pdf (last visited 8/20/2020).
6
See FN 1; 2012 (p. 94); 2013 (p. 95); 2014 (p. 96); 2015 (p. 96); 2016 (p.96). In fact, Publication 17 does not
actually advise placing income gained as a result of discovering a treasure-trove on Schedule C, although it was
clear Taxpayer interpreted it this way.

In the Matter of the Protest of Marduk Consultants, page 11 of 15.
1 taxable or that the Taxpayer was entitled to deductions or exemptions. “Substantial evidence is

2 relevant evidence that a reasonable mind might accept as adequate to support a conclusion.” State

3 v. Largo, 2012-NMSC-015, ¶ 30, 278 P.3d 532 (internal quotation marks and citation omitted).

4 Without reliable and relevant supporting documents offered into evidence, we are left with Mr.

5 Watt’s word alone. “It is the sole responsibility of the trier of fact to weigh the testimony,

6 determine the credibility of the witnesses, reconcile inconsistencies, and determine where the truth

7 lies.” N.M. Taxation & Revenue Dep’t v. Casias Trucking, 2014-NMCA-099, ¶ 23. Taxpayer was

8 unable to overcome the presumption of correctness. Although he was cordial and composed, Mr.

9 Watts’ unsubstantiated statements are insufficient to overcome the presumption of correctness that

10 attached to the assessment. See MPC Ltd. v. N.M. Taxation & Revenue Dep’t, 2003-NMCA-021,

11 ¶13, 133 N.M. 217, 62 P.3d 308; see also Regulation 3.1.6.12 (A) NMAC (1/15/2001). The

12 assessment will be upheld.

13 CONCLUSIONS OF LAW

14 A. The Taxpayer filed a timely written protest to the Notice of Assessment of Tax and

15 Demand for Payment issued under Letter ID number L1963573936, and jurisdiction lies over the

16 parties and the subject matter of this protest. See NMSA 1978, Section 7-1-24 (D) (2017).

17 B. A scheduling hearing was timely set and held within 90-days of protest under

18 NMSA 1978, Section 7-1B-8 (2019). Parties did not object that the scheduling hearing satisfied

19 the 90-day hearing requirement of Section 7-1B-8. See also Regulation 22.600.3.8 (E) NMAC

20 (02/01/2018).

21 C. Any assessment of tax made by the Department is presumed to be correct.

22 Therefore, it is the taxpayer’s burden to come forward with evidence and legal argument to establish

In the Matter of the Protest of Marduk Consultants, page 12 of 15.
1 that the Department’s assessment should be abated, in full or in part. See NMSA 1978, Section 7-1-

2 17 (C) (2007).

3 D. “Tax” is defined to include not only the tax program’s principal, but also interest and

4 penalty. See NMSA 1978, Section 7-1-3 (Z) (2019); see also Regulation 3.1.1.16 (12/29/2000).

5 Assessments of penalties and interest therefore also receive the benefit of a presumption of

6 correctness. See Regulation 3.1.6.13 NMAC (1/15/01).

7 E. Taxpayer’s admission that a portion of his income was business income triggered

8 the statutory presumption that all receipts of a person “engaging in business” are taxable. See

9 NMSA 1978, Section 7-9-3.3 (2019) and Section 7-9-5(A) (2019).

10 F. Unsubstantiated statements are insufficient to overcome the presumption of

11 correctness that attached to the assessment. See MPC Ltd. v. N.M. Taxation & Revenue Dep’t,

12 2003-NMCA-021, ¶13, 133 N.M. 217, 62 P.3d 308; see also Regulation 3.1.6.12 (A) NMAC

13 (1/15/01).

14 G. Taxpayer failed to meet his burden to show that he was entitled to receive the

15 benefit of any deductions or exemptions to taxable business income. See NMSA 1978, Section 7-

16 1-17 (C) (2007).

17 For the foregoing reasons, the Taxpayer’s protest IS DENIED. IT IS ORDERED that the

18 Department’s issuance of the Assessment was proper, and Taxpayer is responsible for payment of

19 the underlying tax, penalty, and interest for a total of $5,028.06, as of the date of the hearing.

20 Interest accrues until fully paid.

21 DATED: September 9, 2020.

In the Matter of the Protest of Marduk Consultants, page 13 of 15.
1

2
3 Ignacio V. Gallegos
4 Hearing Officer
5 Administrative Hearings Office
6 P.O. Box 6400
7 Santa Fe, NM 87502

8 NOTICE OF RIGHT TO APPEAL

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

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

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

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

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

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

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

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

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

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

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

20 CERTIFICATE OF SERVICE

21 On September 9, 2020, a copy of the foregoing Decision and Order was submitted to the

22 parties listed below in the following manner:

23 First Class Mail and Email Interdepartmental Mail and Email

24 INTENTIONALLY BLANK

In the Matter of the Protest of Marduk Consultants, page 14 of 15.
1
2 John Griego
3 Legal Assistant
4 Administrative Hearings Office
5 P.O. Box 6400
6 Santa Fe, NM 87502

In the Matter of the Protest of Marduk Consultants, page 15 of 15.