Could the Department reconstruct a law firm's taxes from bank deposits and impose 50% penalties after years of known nonfiling and nonpayment?

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Plain-English summary

The Department could reconstruct The Behles Law Firm's tax liabilities from bank deposits after the firm failed to keep reliable records, and the evidence supported 50% penalties for willful intent to evade or defeat tax. The firm received only a limited adjustment for $71,405.54 of deposits the protest auditor verified as nontaxable.

The June 2018 assessments initially totaled $1,088,577.53: $663,716.14 of tax and fees, $92,453.08 of interest, and $332,388.31 of 50% civil penalties. They covered four obligations:

• $277,399 of corporate income tax;
• $361,375.97 of gross receipts tax;
• $24,450.97 of withholding tax; and
• $490.20 of workers' compensation fees.

The firm had filed gross receipts returns from 2002 through October 2010 and withholding returns through September 2010, then stopped. It reported no corporate income tax during the relevant years and no workers' compensation fees. Its office manager handled billing, accounting, records, and tax filings; both he and the firm's attorney-owner knew the business had tax obligations.

The Department could use bank deposits

New Mexico requires taxpayers to maintain records that permit accurate tax computation. The firm's records did not. Its payments register and Forms 1099 suggested about $1.96 million of income, while operating-account statements showed approximately $5.10 million of potential gross receipts. The gap made the payments register unreliable.

Regulation 3.1.5.8 allows alternative estimation when records are inadequate, including the bank-deposit method. The Department treated operating-account deposits as taxable unless available records showed that an amount was excluded, exempt, or deductible. It used the reconstructed receipts for gross receipts tax and, because income returns were also missing, for corporate income tax. The hearing officer found no demonstrated error in the withholding or workers' compensation calculations.

The firm argued that many deposits represented loans, services outside New Mexico, or other nontaxable sources. But it did not supply reliable source documents tracing most deposits. Lost or destroyed records did not transfer the recordkeeping burden to the Department, especially after the firm received requests and opportunities to substantiate adjustments.

The protest auditor did verify $71,405.54 of excludable deposits, including rejected payments and loan disbursements. The order required taxable receipts to be reduced by that amount and tax, penalty, and interest to be adjusted correspondingly.

Every assessment period was timely

The ordinary assessment period is three years, but Section 7-1-18 provided longer periods and waivers relevant here:

• seven years when a required return is not filed;
• six years when a filed return understates liability by more than 25%; and
• no ordinary limitation for periods covered by a signed waiver.

The firm became a nonfiler after 2010, never filed the relevant corporate returns, and did not dispute a waiver covering 2010. Because the limitations period runs from the end of the year when payment was due, the June 2018 assessments were timely for all periods at issue. Section 7-1-19 separately permitted collection activity after a timely assessment.

The 50% willful-evasion penalties remained

Section 7-1-69(D) imposes a 50% penalty when a taxpayer fails to pay with willful intent to evade or defeat tax. The Department carried the burden to prove it, and did so under the objective standard of conscious awareness plus reckless disregard or gross negligence.

The firm had years of prior filing experience and acknowledged its obligations. Sample settlement and billing records showed it continued charging clients amounts designated as gross receipts tax, yet the money was not remitted. The Department repeatedly mailed delinquency and nonfiler notices, but the firm neither responded effectively nor cured its status—even after the audit began.

The firm's representatives described serious health, family, technology, and record-loss problems. The hearing officer found those circumstances did not establish an inability to file, pay, obtain help, or take corrective measures over the many years involved. Continuing to operate with knowledge of the tax obligations while making no genuine correction supported the heightened penalty.

Result: protest GRANTED IN PART only for the $71,405.54 receipts adjustment and DENIED on all other issues. Taxable receipts had to be reduced and the tax, penalty, and interest recalculated; the remaining amounts continued to accrue as permitted by law until paid.

What this means for you

Inadequate records permit estimation

If business records cannot support an accurate return, the Department may use bank deposits or another reasonable alternative method. Unexplained deposits can remain taxable until the taxpayer proves otherwise.

The source of each deposit matters

Loan proceeds, bounced payments, and other nontaxable amounts need traceable documentation. General testimony or an internally prepared summary may not overcome bank records.

Missing records do not erase the burden

The taxpayer still must reconstruct or replace records where reasonably possible and respond to requests. A loss event does not automatically invalidate an assessment based on the best information available.

Nonfiling expands the assessment window

Failing to file a required return can extend New Mexico's assessment period to seven years. A substantial understatement and a signed waiver can also extend or remove the ordinary deadline.

Collecting tax and not remitting it is powerful penalty evidence

Invoices or settlement statements showing tax charged to customers can establish knowledge of the obligation and support willful-evasion findings when the business nevertheless stops filing and paying.

Common questions

Q: Why did the Department use the operating account instead of the firm's payments register?
A: The register and Forms 1099 showed about $1.96 million, while bank statements showed about $5.10 million of potential receipts. The hearing officer found the register too incomplete and unreliable.

Q: Were all bank deposits treated as permanently taxable?
A: No. The Department allowed exclusions that the evidence supported, and the order required a further $71,405.54 reduction for verified items such as loan disbursements and rejected payments.

Q: Did the firm prove that other deposits were loans or out-of-state receipts?
A: No. The evidence did not reliably trace or quantify most claimed nontaxable sources.

Q: Why were the older periods still open?
A: The firm was a nonfiler for the relevant programs, triggering the seven-year rule, and an undisputed waiver covered 2010. The ruling also discussed the six-year rule for understatements exceeding 25%.

Q: What supported the 50% penalty?
A: Prior filing history, admitted knowledge, client records showing gross receipts tax collected, repeated Department notices, continued business activity, and years without a meaningful effort to file or pay.

Q: What exactly did the firm win?
A: A $71,405.54 reduction in taxable receipts, with corresponding recalculation of tax, penalty, and interest. The ruling did not state the final recalculated dollar balance.

Citations and references

Statutes and regulations:

• NMSA 1978, §§ 7-9-4, 7-9-3.5(A)(1), and 7-9-5 — gross receipts tax and presumption that business receipts are taxable
• NMSA 1978, §§ 7-1-10(A), 7-1-17(C), and 7-1-3(X) — recordkeeping and assessment presumption
• NMSA 1978, § 7-1-18(A), (C), (D), (F) — ordinary, nonfiler, substantial-understatement, and waiver assessment periods
• NMSA 1978, § 7-1-19 — collection period after assessment
• NMSA 1978, §§ 7-1-69(D) and 7-1-78 — 50% willful-evasion penalty and the Department's proof burden
• Regulation 3.1.5.8(A)-(C) NMAC — adequate records and alternative methods, including bank deposits
• Regulations 3.1.6.12-.13 NMAC — assessment presumption and rebuttal
• Regulation 3.1.11.18(A)-(B) NMAC — objective standard and proof for willful evasion

Cases:

• New Mexico Taxation and Revenue Department v. Casias Trucking, 2014-NMCA-099 — taxpayer's burden to overcome an assessment
• MPC Ltd. v. New Mexico Taxation and Revenue Department, 2003-NMCA-021 — evidence required to rebut the assessment presumption
• Wing Pawn Shop v. Taxation and Revenue Department, 1991-NMCA-024 — deductions strictly construed and clearly established
• TPL, Inc. v. New Mexico Taxation and Revenue Department, 2003-NMSC-007 — strict construction of deductions

Source

• Listing: New Mexico Decisions & Orders
• Decision post: 20-18 The Behles Law Firm PC
• Decision PDF: D&O 20-18

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 THE BEHLES LAW FIRM PC
6 TO ASSESSMENTS ISSUED UNDER
7 LETTER ID NO. L1041624880, L0634339120 and L2115366704

8 v. Case Number 18.11-297A, D&O No. 20 - 18

9 NEW MEXICO TAXATION AND REVENUE DEPARTMENT

10 DECISION AND ORDER

11 Beginning on February 24, 2020 and concluding on February 25, 2020, Hearing Officer

12 Chris Romero, Esq., conducted a hearing on the merits of the protest of The Behles Law Firm,

13 P.C. (“Taxpayer”) pursuant to the Tax Administration Act and the Administrative Hearings

14 Office Act. Ms. Jennie D. Behles, Taxpayer’s employee, appeared representing Taxpayer. Ms.

15 Behles was accompanied by Mr. Robert Walley, also a Taxpayer employee.

16 Mr. Kenneth Fladager, Esq. appeared on behalf of the opposing party in the protest, the

17 Taxation and Revenue Department (“Department”), accompanied by Ms. Corini Sanchez and

18 Ms. Mary Griego.

19 Taxpayer called upon Ms. Behles, Mr. Walley, Ms. Sanchez, and Ms. Griego to testify

20 during its case in chief. The Department cross examined all witnesses.

21 Taxpayer Exhibits 1, 3, 4, 5, 7, 8, 10, 13, and 14, and Department Exhibits A, B, C, D, E, F,

22 G, H, and I were admitted into the evidentiary record without objection. Although the Department

23 did not object to Taxpayer Exhibit 8, it did request that the Hearing Officer note that some items

24 contained in that exhibit were not within the relevant period of time.

25 Taxpayer presents numerous points of contention in its closing argument, which can be

26 categorized more broadly as follows: (1) whether the Department is entitled to a presumption of

In the Matter of the Protest of The Behles Law Firm, P.C.
Page 1 of 52
1 correctness of its assessments, or in the alternative, whether Taxpayer overcame the

2 presumption; (2) whether imposition of civil penalty was proper, and if so, whether

3 Taxpayer is entitled to any abatement; and (3) whether any portion of the assessment is

4 precluded by the statute of limitations. As explained in greater detail in the subsequent

5 discussion, the Hearing Officer determined that the Department is entitled to a presumption

6 of correctness that Taxpayer did not rebut; that the Department acted within its authority in

7 imposing penalty and that Taxpayer did not establish entitlement to any abatement; and that

8 no portion of the assessment is precluded by the statute of limitations. Underlying the

9 Hearing Officer’s conclusions in each of these areas was a palpable lack of credible and

10 trustworthy evidence in support of Taxpayer’s claims. Therefore, Taxpayer’s protest

11 should be denied. IT IS DECIDED AND ORDERED AS FOLLOWS:

12 FINDINGS OF FACT

13 Procedural History

14 1. On June 28, 2018, the Department issued a Notice of Assessment of Taxes

15 and Demand for Payment under Letter ID No. L1041624880 in the total amount of

16 $452,726.71 comprised of corporate income tax in the amount of $277,399.00, interest in

17 the amount of $36,603.21 in interest, and a civil fraud penalty in the amount of

18 $138,724.50 for the periods from December 31, 2010 through December 31, 2016.

19 [Administrative File]

20 2. On June 28, 2018, the Department issued a Notice of Assessment of Taxes

21 and Demand for Payment under Letter ID No. L0634339120 in the total amount of

22 $634,511.36 comprised of withholding tax in the amount of $24,450.97, withholding tax

23 interest in the amount of $3,320.51, gross receipts tax in the amount of $361,375.97,

In the Matter of the Protest of The Behles Law Firm, P.C.
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1 gross receipts tax interest in the amount of $52,450.10, and civil fraud penalty in the amount of

2 $192,913.81 for the periods from January 31, 2010 through June 30, 2017. [Administrative File]

3 3. On June 28, 2018, the Department issued a Notice of Assessment of Taxes and

4 Demand for Payment under Letter ID No. L2115366704 in the total amount of $1,319.46

5 comprised of workers compensation fee in the amount of $490.20, workers compensation fee

6 interest in the amount of $79.26, and a civil fraud penalty in the amount of $750.00 for the

7 periods from March 31, 2010 through June 30, 2017. [Administrative File]

8 4. The total amount of tax, interest, and penalty due under the assessments was

9 $1,088,577.53 comprised of $663,716.14 in tax, $332,388.31 in penalty, and $92,453.08 in

10 interest. [Administrative File]

11 5. On September 27, 2018, the Department received Taxpayer’s formal protest of all

12 the assessments accompanied by numerous attachments. [Administrative File]

13 6. On October 15, 2018, the Department acknowledged under Letter ID No.

14 L0988557488, the Taxpayer’s protest of the assessment issued under Letter ID No.

15 L1041624880. [Administrative File]

16 7. On October 15, 2018, the Department acknowledged under Letter ID No.

17 L1641664688, the Taxpayer’s protest of the assessment issued under Letter ID No.

18 L0634339120. [Administrative File]

19 8. On October 15, 2018, the Department acknowledged under Letter ID No.

20 L1054462128, the Taxpayer’s protest of the assessment issued under Letter ID No.

21 L2115366704. [Administrative File]

22 9. On November 30, 2018, the Department filed a request for a scheduling hearing

23 in reference to the protests of assessments L1041624880, L0634339120, and L2115366704.

In the Matter of the Protest of The Behles Law Firm, P.C.
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1 [Administrative File]

2 10. On December 4, 2018, the Administrative Hearings Office entered a

3 Notice of Telephonic Scheduling Hearing setting a scheduling hearing for December 19,

4 2018. [Administrative File]

5 11. On December 17, 2018, Taxpayer filed a Motion to Vacate Telephone

6 Hearing Scheduled for December 19, 2018. Taxpayer expressly and unconditionally

7 waived the 90-day hearing deadline under NMSA 1978, Section 7-1B-8 in order to

8 facilitate its request for a continuance.[Administrative File]

9 12. On December 19, 2018, the Administrative Hearings Office entered a

10 Continuance Order and Notice of Telephonic Scheduling Hearing. [Administrative File]

11 13. A Telephonic Scheduling Hearing was held on January 4, 2019. On

12 January 8, 2019, the Administrative Hearings Office entered a Notice of Second

13 Telephonic Scheduling Hearing which set a second scheduling hearing on June 14, 2019.

14 [Administrative File]

15 14. On June 14, 2019, the Administrative Hearings Office entered a

16 Scheduling Order and Notice of Administrative Hearing which in addition to establishing

17 various deadlines, set a hearing on the merits of Taxpayer’s protest for October 31 –

18 November 1, 2019. [Administrative File]

19 15. On September 19, 2019, Taxpayer submitted a request for hearing on a

20 Motion for an Order to Vacate Hearings [sic] Scheduled for October 29, 30, and 31, 2019

21 [sic]. The request was accompanied by a proposed notice, an unsigned motion bearing the

22 title provided in the request for hearing, and a police report in reference to an alleged

23 commercial burglary. [Administrative File]

In the Matter of the Protest of The Behles Law Firm, P.C.
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1 16. Taxpayer alleged in its request for continuance, filed September 19, 2019, that its

2 offices had been burglarized and that several computers containing relevant records had been

3 stolen. [Administrative File]

4 17. On October 18, 2019, the Administrative Hearings Office entered an Order

5 Vacating Hearing on Merits and Notice of Telephonic Scheduling Hearing which set a

6 scheduling hearing for October 30, 2019. [Administrative File]

7 18. On October 30, 2019, the Administrative Hearings Office entered a Second

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

9 deadlines, set a hearing on the merits of Taxpayer’s protest for February 24 – 26, 2020.

10 [Administrative File]

11 19. On December 4, 2019, the Administrative Hearings Office entered an Amended

12 Second Scheduling Order and Notice of Administrative Hearing which served to alert the parties

13 to a change in the location of the hearing. No other changes were made to the previously

14 established order. [Administrative File]

15 20. On February 3, 2020, Taxpayer filed Taxpayer Behles Law Firm PC’s Prehearing

16 Statement. [Administrative File]

17 21. On February 4, 2020, the Department filed its Prehearing Statement.

18 [Administrative File]

19 22. On February 6, 2020, Taxpayer filed its Motion to Enter Judgment Against the

20 New Mexico Taxation and Revenue Department [P]ursuant to Second Scheduling Order and

21 Notice of Administrative Hearing Entered on October 30, 2019. [Administrative File]

22 23. On February 14, 2020, the Department filed Department’s Response to

23 Taxpayer’s Motion to Enter Judgment. [Administrative File]

In the Matter of the Protest of The Behles Law Firm, P.C.
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1 24. On February 18, 2020, the Administrative Hearings Office entered an

2 Order Denying Taxpayer’s Motion Filed February 6, 2020. [Administrative File]

3 25. On February 19, 2020, the Department filed its Amendment to Prehearing

4 Statement. [Administrative File]

5 26. On February 19, 2020, Taxpayer filed Taxpayer[’]s Reply to Department

6 Response to Motion to Enter Judgment and Motion to Strike Amended Prehearing

7 Statement Served February 19, 2020. [Administrative File]

8 27. On February 20, 2020, the Department filed Department’s Response to

9 Taxpayer’s Motion to Strike. [Administrative File]

10 28. On February 20, 2020, Taxpayer filed Taxpayer[’]s Reply to TRD

11 Response to Motion to Strike. [Administrative File]

12 29. On February 21, 2020, the Administrative Hearings Office conducted a

13 hearing and entered an Order Denying Taxpayer’s Motion Filed February 19, 2020.

14 [Administrative File]

15 30. On February 25, 2020, the Administrative Hearings Office entered a Post

16 Hearing Scheduling Order setting the deadlines for the submission of written closing

17 arguments and late-filed exhibits. [Administrative File]

18 31. On March 26, 2020, Taxpayer filed its written closing argument.

19 [Administrative File]

20 32. On April 24, 2020, the Department filed The Department’s Closing

21 Argument. [Administrative File]

22 33. On May 8, 2020, Taxpayer filed its [Reply] to Department[’]s Closing

23 Response Argument. [Administrative File]

In the Matter of the Protest of The Behles Law Firm, P.C.
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1 Witnesses

2 34. Ms. Cabrini Sanchez is employed by the Department as a Tax Audit Supervisor.

3 Ms. Sanchez did not directly perform the audit of Taxpayer, but supervised the work of the

4 auditor who did, Ms. Josefine Lucero. 1 She has been with the Department for more than 18

5 years. [Direct Examination of Ms. Sanchez]

6 35. Ms. Sanchez has a degree in accounting from the College of Santa Fe. [Direct

7 Examination of Ms. Sanchez]

8 36. Ms. Mary Griego is employed by the Department as a protest auditor. She has

9 been employed in that capacity since 2012 and has been involved in the protest from its

10 inception. [Direct Examination of Ms. Griego]

11 37. At all times relevant to the protest, Ms. Jennie Behles was an attorney licensed in

12 the State of New Mexico. [Direct Examination of Ms. Behles]

13 38. Mr. Robert J. Walley was an employee of Taxpayer. He managed the office and

14 performed all accounting tasks including reporting and payment of taxes. [Direct Examination of

15 Mr. Walley]

16 39. Mr. Walley does not possess any expertise in the areas of state or federal taxation.

17 [Cross Examination of Mr. Walley]

18 40. Ms. Behles and Mr. Walley are married. [Direct Examination of Ms. Behles;

19 Direct Examination of Mr. Walley]

20 41. Despite being knowledgeable regarding their obligations to report and pay taxes

21 [Direct Examination of Ms. Behles; Direct Examination of Mr. Walley], Mr. Walley and Ms.

1
As of the date of the hearing, Ms. Lucero had changed her surname to Salcido. However, in order to retain
consistency with the underlying facts and avoid potential for confusion, the Hearing Officer will continue to refer to
her as Ms. Lucero since all material facts involving Ms. Lucero refer to her by that name.

In the Matter of the Protest of The Behles Law Firm, P.C.
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1 Behles have not filed federal or state personal income tax returns since 2009. [Direct

2 Examination of Ms. Griego; Dept. Ex. D-010]

3 Taxpayer Business and Tax Filing History

4 42. At all relevant times, Taxpayer was a law firm established as a

5 professional corporation under the laws of the State of New Mexico. As of February 2,

6 2020, its corporate status remained active with the New Mexico Secretary of State.

7 [Taxpayer Ex. 13 (Business ID No. 2265395)]

8 43. Taxpayer registered for a CRS-1 identification number on August 23,

9 2002 and reported a business start date of August 15, 2002. Taxpayer subsequently

10 reported its gross receipts on CRS-1 reports filed from September 2002 through October

11 2010 and withholding tax from September 2002 through September 2010. [Dept. Ex. F-1]

12 44. Taxpayer’s mailing address at all relevant times has remained P.O. Box

13 7070, Albuquerque, NM 87194-7070. [Cross Examination of Mr. Walley]

14 45. Ms. Behles was primarily responsible for Taxpayer’s law practice. Mr.

15 Walley was primarily responsible for Taxpayer’s office management tasks, including

16 billing, accounting, recordkeeping, and tax reporting and payment. [Direct Examination

17 of Ms. Behles; Direct examination of Mr. Walley]

18 46. Ms. Behles was not involved with Taxpayer’s business operations,

19 including maintenance of books, records, or accounting. [Direct Examination of Mr.

20 Walley]

21 47. Mr. Walley had prior experience in the management of liquor serving

22 establishments, but not in businesses engaged in providing legal services. [Direct

23 Examination of Mr. Walley]

In the Matter of the Protest of The Behles Law Firm, P.C.
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1 48. Mr. Walley admitted that he had neither reported Taxpayer’s gross receipts nor

2 paid associated gross receipts tax since October 2010. [Direct Examination of Mr. Walley; Direct

3 Examination of Ms. Griego; Dept. Ex. A; Dept. Ex. D-001 – D-002]

4 49. There was similarly no record of Taxpayer reporting corporate income or paying

5 associated corporate income tax in any relevant year despite the fact that Taxpayer had been

6 registered with the Department since August 23, 2002 . [Direct Examination of Ms. Griego;

7 Dept. Ex. B; Dept. Ex. D-003 – D-005; Dept. Ex. F]

8 50. Taxpayer did not report employee withholdings from October 2010 through June

9 2017. [Direct Examination of Ms. Griego; Dept. Ex. D-005 – D-007]

10 51. There was similarly no record of Taxpayer paying worker’s compensation fees in

11 any relevant year. [Direct Examination of Ms. Griego; Dept. Ex. C; Dept. D-007 – D-008]

12 52. Although Taxpayer remained an active corporation as of February 2, 2020,

13 Taxpayer ceased conduct of business in April of 2018. It was succeeded by an entity called BLF,

14 LLC, a single member limited liability company in which Ms. Behles was the single member.

15 BLF, LLC was the entity through which Ms. Behles intended to practice law after Taxpayer

16 ceased operations. [Direct Examination of Ms. Behles; Taxpayer Ex. 13 (Business ID No.

17 5664578)]

18 53. Mr. Walley did not file anything that could be characterized as a final tax return

19 after Taxpayer ceased operating stating that he did not believe it would be necessary. [Direct

20 Examination of Mr. Walley]

21 54. Ms. Behles was under the impression that Subchapter S returns were being filed

22 since that would have been an expected requirement of Taxpayer’s creditors. [Direct

23 Examination of Ms. Behles; Taxpayer Ex. 10]

In the Matter of the Protest of The Behles Law Firm, P.C.
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1 55. As of the date of the hearing, Ms. Behles had been disbarred from the

2 practice of law in the State of New Mexico. [See In re Behles, 2019-NMSC-016, 450

3 P.3d 920; Dept. Ex. I; Taxpayer Ex. 14]

4 Attribution of Failure to Report or Pay Various Taxes

5 56. From 2010 through 2017, Ms. Behles did not spend very much time in her

6 office:

7 a. Ms. Behles underwent back fusion surgery in 2010 which required her to

8 travel to and from California for the procedure and for follow up. Ms. Behles estimated

9 that the surgery caused her to be absent from her office for at least six to eight months

10 and she endured at least 12 months in which her activities were substantially and

11 significantly limited; [Direct Examination of Ms. Behles]

12 b. Perhaps as a result of her back condition, Ms. Behles underwent knee

13 replacement surgery in 2014 which again limited her physical abilities and caused her to

14 be absent from her office for approximately six months for surgery and recovery; [Direct

15 Examination of Ms. Behles]

16 c. Ms. Behles underwent a second back fusion in 2015 which again caused

17 an extensive absence from her office. Ms. Behles estimated that she was absent from her

18 office for approximately six months before resuming an irregular schedule for a year

19 thereafter; [Direct Examination of Ms. Behles]

20 d. Ms. Behles underwent another knee replacement in 2016 which resulted in

21 another significant absence from her office that Ms. Behles estimated to be six months;

22 [Direct Examination of Ms. Behles]

23 e. The conditions affecting her back and her knees between 2010 and 2017

In the Matter of the Protest of The Behles Law Firm, P.C.
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1 were exacerbated by a bad ankle. [Direct Examination of Ms. Behles]

2 57. During the same period of time, Mr. Walley underwent treatment for prostate and

3 skin cancer, meaning that from 2010 through 2017 and even through 2019, Mr. Walley was

4 similarly absent from the office for substantial periods of time due to his health conditions.

5 [Direct Examination of Ms. Behles]

6 58. During the same period of time, in about 2011, Mr. Walley’s mother was

7 diagnosed with Alzheimer’s disease requiring institutionalization. Ms. Behles’ mother who lived

8 in Nebraska was similarly institutionalized around the same period of time and died in 2018.

9 [Direct Examination of Ms. Behles]

10 59. Despite various health and other personal issues effecting both Ms. Behles and

11 Mr. Walley during the audit period, Ms. Behles never sought assistance from a tax professional

12 because she assumed that Mr. Walley was appropriately handling all tax reporting and payment

13 responsibilities. [Cross Examination of Ms. Behles]

14 60. Despite her assumption that Mr. Walley was reporting income or receipts and

15 paying applicable tax, Ms. Behles also attributed Taxpayer’s lack of reporting and payment to

16 Mr. Walley’s asserted inability to comply with the Department’s electronic filing requirements.

17 [Direct Examination of Ms. Behles]

18 61. Mr. Walley admitted that CRS-1 reports were not made after 2010 attributing the

19 failure to file to two bouts of cancer and other “great trauma” he was experiencing at the time

20 including the deaths of a brother, a nephew, a sister-in-law, and his mother’s dementia. [Direct

21 Examination of Mr. Walley]

22 62. Mr. Walley also maintained that he was unable to electronically report income or

23 receipts and make payments of applicable tax because the systems necessary to do so were

In the Matter of the Protest of The Behles Law Firm, P.C.
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1 unavailable to him, whether at home or in the hospital, and that the Department was

2 nonresponsive to his requests for assistance. [Direct Examination of Mr. Walley]

3 63. Nevertheless well aware of Taxpayer’s tax obligations, Mr. Walley

4 asserted that he intended to file when he had the time. [Direct Examination of Mr.

5 Walley; Cross Examination of Mr. Walley]

6 64. Prior to November 2010, Mr. Walley filed CRS-1 reports in paper form.

7 He recalled the Department implementing mandatory electronic filing in 2010 or 2011

8 which caused further difficulties in filing reports or making payments. Assistance, he

9 perceived, was difficult to obtain and he had limited access to computers, particularly

10 when he was away from the office for medical reasons. [Direct Examination of Mr.

11 Walley]

12 65. The Department mailed non-filer letters to Taxpayer from November of

13 2010 through the end of the audit period. [Direct Examination of Ms. Sanchez; Dept. Ex.

14 F]

15 66. From 2003 to 2013, the Department also sent Taxpayer “non-filer,

16 recomputation notice, assessment, statement of account with non-filers, return

17 assessment, lien and levy, return assessment, abatement, and compliance letters” which

18 should have alerted Taxpayer to its state of noncompliance. [Dept. Ex. F]

19 67. At no relevant time did Mr. Walley ever contact the Department’s

20 taxpayer advocate in reference to issues he was experiencing that may have been

21 contributing to Taxpayer’s failure to report and pay taxes. [Cross Examination of Mr.

22 Walley]

23 68. At some point amid the period of time under protest, there was at least one

In the Matter of the Protest of The Behles Law Firm, P.C.
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1 occasion in which Mr. Walley contacted the Department to explain that he was having difficulty

2 with the electronic filing process and required assistance. [Direct Examination of Ms. Sanchez]

3 69. Ms. Behles admitted to having knowledge of Taxpayer’s tax reporting and

4 payment obligations, including CRS-1 reports. [Direct Examination of Ms. Behles]

5 The Underlying Audit and
6 Post-Assessment Reviews

7 70. The Department commenced an audit of Taxpayer on July 31, 2017. [Dept. Ex. E-

8 001]

9 71. At the onset of the audit, the Department made several unsuccessful attempts to

10 communicate with Ms. Behles before Mr. Walley became involved as Taxpayer’s primary point

11 of contact. [Direct Examination of Ms. Sanchez; Dept Ex. G (Page B4.1 B4.2 - Date Range:

12 7/10/17 – 8/1/2017)]

13 72. Ms. Behles denied ever receiving messages from the Department, perhaps

14 because at least one message was left for an employee who was assertedly no longer employed

15 by Taxpayer at the time a message would have been left. [Direct Examination of Ms. Behles;

16 Dept. Ex. G (Page B4.1 – Date 7/24/2017)]

17 73. Mr. Walley denied recollection of any communications from the Department that

18 could be interpreted as conveying a desire or need to speak with Ms. Behles. [Direct

19 Examination of Mr. Walley]

20 74. Ms. Behles had minimal involvement with the audit, recalling that her only

21 substantial interaction with the Department occurred on one occasion when she arrived at her

22 office from the airport to be greeted by three individuals from the Department, one of whom was

23 a revenue agent. The other Department employees present were Ms. Lucero and Ms. Sanchez.

24 [Direct Examination of Ms. Behles]

In the Matter of the Protest of The Behles Law Firm, P.C.
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1 75. At the time of the visit recalled by Ms. Behles, Taxpayer was no longer in

2 operation and Ms. Behles was practicing law under BLF, LLC because Taxpayer

3 assertedly ceased operations toward the end of 2016 or in 2017. [Direct Examination of

4 Mr. Walley]

5 76. Mr. Walley recalled being informed during the same meeting that the

6 Department intended to audit Taxpayer. A revenue officer was in attendance and that

7 allegedly caused Taxpayer’s staff to become anxious. [Direct Examination of Mr.

8 Walley]

9 77. Because the presence of a revenue agent raised concerns among

10 Taxpayer’s staff, Ms. Behles requested that the Department refrain from going to her

11 office and instructed that it would compile and provide records relevant to the

12 Department’s audit. [Direct Examination of Ms. Behles]

13 78. Despite Ms. Behles’ instructions that the Department refrain from visiting

14 her office and that her office would instead compile documents responsive to the

15 Department’s requests, Ms. Behles asserted that she did not fully comprehend the

16 Department’s intentions. [Direct Examination of Ms. Behles]

17 79. At the meeting, Ms. Lucero provided a list of documents the Department

18 was requesting, although Mr. Walley could not recall whether he was provided with

19 anything in writing. [Direct Examination of Mr. Walley; Dept. Ex. G (Page B4-18 –

20 B4.21 (Date 1/8/2018)]

21 80. According to the Taxpayer Contact Log, the only in-person meeting

22 occurred on or about January 8, 2018. However, the Department had initiated

23 communications with Mr. Walley and informed him of its audit as early as August 7,

In the Matter of the Protest of The Behles Law Firm, P.C.
Page 14 of 52
1 2017, after receiving a Taxpayer Information Authorization from Taxpayer permitting

2 communications with Mr. Walley. [Dept. Ex. G (Page B4.4 (Date 8/7/2017); Page B4-18 –

3 B4.21 (Date 1/8/2018)]

4 81. Mr. Walley suggested that he and Ms. Behles did not communicate regarding the

5 audit, or the fact that Taxpayer had neglected to file tax returns, including CRS since 2010, until

6 the first set of work papers were available for review at or about the same time as the meeting

7 occurring on January 8, 2018. [Direct Examination of Mr. Walley; Dept. Ex. G (Page B4-18 –

8 B4.21 (Date 1/8/2018))]

9 82. Although the Department attempted to maintain communications with Mr.

10 Walley, he asserted there were frequent interruptions in communications due to the Department’s

11 alleged addressing errors and other circumstances. [Dept. Ex. G; Direct Examination of Mr.

12 Walley]

13 83. Mr. Walley recalled frequent indications from Ms. Lucero that the Department

14 could obtain documents that Taxpayer might not be able to obtain, including CRS-1 returns,

15 income tax returns, and bank records. [Direct Examination of Mr. Walley]

16 84. Despite Mr. Walley’s recollection of communications with Ms. Lucero, the

17 Taxpayer Contact Log recorded the substance of communications between the Department and

18 Taxpayer and the sorts of records the Department requested that Taxpayer provide. [Dept. Ex. G

19 (B4.6 – B4.8 (Date 8/11/2017))]

20 85. Ms. Sanchez attended at least two meetings with Ms. Lucero and Mr. Walley. She

21 had no recollection of Ms. Lucero suggesting in her presence that the Department would obtain

22 Taxpayer’s financial records through its own internal sources, thereby alleviating the burden

23 placed on Taxpayer to compile and provide its records. [Direct Examination of Ms. Sanchez]

In the Matter of the Protest of The Behles Law Firm, P.C.
Page 15 of 52
1 86. Ms. Sanchez did not observe any indication from her records, particularly

2 the Taxpayer Contact log, that the Department assertedly suggested that it would obtain

3 Taxpayer’s financial records through its own independent sources. [Direct Examination

4 of Ms. Sanchez]

5 87. For reasons assertedly beyond its control, Taxpayer’s effort to produce

6 records in response to the Department’s requests was severely impaired due to

7 circumstances to be addressed separately. Taxpayer did provide the following documents

8 from which the Department attempted to compute its outstanding tax liabilities: (1) bank

9 statements for periods January 2011 – June 2017; (2) payments register for February

10 2010 through December 2015; (3) W-2 Forms for 2014; (3) ES903A Forms for 2015 –

11 2016. [Dept. Ex. D]

12 88. The Department also requested the following summary of documents

13 which Taxpayer did not, or could not provide: (1) federal individual income tax returns

14 for years 2010 – 2016; (2) invoices or purchase orders from 2010 through March 2017;

15 (3) customer contracts or agreements from 2010 through 2017; (4) bank statements for

16 2010; (5) relevant federal and state income tax returns; (6) financial statements; (7) W-2

17 Forms for 2010, 2011, 2013, 2015, 2016, and 2017; (8) ES903A Forms for 2010, 2011,

18 2012, 2013, 2014, and 2017. [Direct Examination of Ms. Sanchez; Dept. Ex. D]

19 89. The Department also referenced its internal sources as well as third-party

20 sources including: (1) internally prepared workpapers, including gross receipts audit

21 workpapers; (2) GenTax history; and (3) Department of Workforce Solutions data.

22 [Direct Examination of Ms. Sanchez; Dept. Ex. D]

23 90. Because New Mexico is a self-reporting state, the audit relevant to the

In the Matter of the Protest of The Behles Law Firm, P.C.
Page 16 of 52
1 assessments relied heavily and primarily on Taxpayer’s records with secondary reference to the

2 Department’s internal records. [Cross Examination of Ms. Sanchez]

3 91. Taxpayer was notified of the categories of records which would be essential to the

4 computation of Taxpayer’s purported liability. [Cross Examination of Ms. Sanchez]

5 92. The Department also reviewed and considered loan documents and attorney-client

6 records produced by Taxpayer, but ultimately determined that the documents were not sufficient

7 for computation of Taxpayer’s tax liability in the period under audit. [Direct Examination of Ms.

8 Sanchez]

9 93. Mr. Walley denied having any recollection of the Department informing him of

10 how the documents would be utilized to compute Taxpayer’s tax liability during its audit. [Direct

11 Examination of Mr. Walley]

12 94. For the purpose of auditing and computing Taxpayer’s gross receipts liability, Ms.

13 Lucero reviewed: (1) operating account 2 bank statements from January 2011 to June 2017; and

14 (2) a payments register from February 2010 to December 2015. [Direct Examination of Ms.

15 Sanchez]

16 95. A comparison of records available from the Taxpayer, particularly the payments

17 register, to its bank statement revealed such a large discrepancy that the Department determined

18 that the payments register was not a reliable or trustworthy record. [Direct Examination of Ms.

19 Sanchez; Taxpayer Ex. 4]

20 96. Taxpayer’s payments register for the periods of January 2010 through December

21 2015 suggested total receipts in the amount of $970,988.46 in addition to other income reported

2
The record refers to “general account” and “operating account.” For the purpose of consistency and to avoid
potential confusion, the Hearing Officer will use the term “operating account” which describes the account Taxpayer
utilized to deposit earned fees and to pay its operating expenses. In this protest, it is the account the Department
relied upon to compute Taxpayer’s asserted liabilities.

In the Matter of the Protest of The Behles Law Firm, P.C.
Page 17 of 52
1 on Forms 1099 in the amount of $987,252.00 for a total income of $1,958,240.46. [Dept.

2 Ex. E-042] In contrast, Taxpayer’s bank statements revealed potential gross receipts in

3 the amount of $5,099,904.77. [Dept. Ex. E-042]

4 97. Because the discrepancy between the two methods was so large, it was

5 reasonable for the Department to rely on what it perceived as the more trustworthy bank

6 statements and provide Taxpayer the opportunity to come forward with documentation

7 which would establish the portion of deposits that should not be included in the

8 computation either because they were excludable, exempt, or deductible. [Direct

9 Examination of Ms. Sanchez; Direct Examination of Ms. Griego]

10 98. Mr. Walley could not recall ever being informed that the payments register

11 was not sufficient to computing Taxpayer’s tax liability or that the Department would

12 utilize alternative means to compute Taxpayer’s liability. [Direct Examination of Mr.

13 Walley]

14 99. Taxpayer Exhibit 4 purportedly represents Taxpayer receipts from January

15 1, 2010 through December 31, 2015 (not encompassing the entire audit period) and

16 served as the basis for the preparation of CRS-1 reports that would have been filed until

17 filing ceased after October 2010. [Direct Examination of Mr. Walley; Taxpayer Ex. 4]

18 100. Despite indication otherwise, Mr. Walley estimated that Taxpayer

19 generated approximately $14,000.00 per month, or a total income of approximately

20 $1,200,000.00 over the course of the audit period. [Direct Examination of Mr. Walley]

21 101. The Department did not rely on a survey of attorney compensation in New

22 Mexico to compute Taxpayer’s income or to evaluate the reliability or accuracy of

23 Taxpayer’s records. [Direct Examination of Ms. Griego]

In the Matter of the Protest of The Behles Law Firm, P.C.
Page 18 of 52
1 102. Ms. Behles asserted that having a better understanding of how the Department

2 intended to compute Taxpayer’s liability would have permitted Taxpayer to better identify

3 records to assure an accurate computation. [Direct Examination of Ms. Behles]

4 103. Ms. Behles disputed that totaling Taxpayer’s deposits in its operating account was

5 an accurate or reliable method of computing Taxpayer’s income for the purpose of also

6 computing its tax liability. [Direct Examination of Ms. Behles]

7 104. Taxpayer contended that the following categories of deposits were erroneously

8 included in the Department’s computations of income: (1) disbursements from loans; (2) receipts

9 generated from performance of services outside of New Mexico; (3) funds that were

10 subsequently distributed to third parties, such as clients or other counsel; and (4) client funds that

11 should have been but were not deposited to Taxpayer’s trust account. [Direct Examination of Mr.

12 Walley; Direct Examination of Ms. Behles]

13 105. Taxpayer’s operating account would be expected to contain deposits of earned

14 fees, but could also receive deposits from other sources, including loan proceeds. [Direct

15 Examination of Ms. Sanchez]

16 106. Mr. Walley estimated that Taxpayer borrowed approximately $600,000.00 from

17 First National Bank of New Mexico, as well as from Mr. Walley’s mother. [Direct Examination

18 of Mr. Walley]

19 107. Taxpayer provided a number of loan documents to the auditor, but not all loan

20 documents could be matched to deposits in the operating account, nor did Taxpayer establish

21 through reliable testimony or documentation the amount in deposits from loan proceeds that

22 should have been excluded from gross receipts. [Direct Examination of Ms. Sanchez]

23 108. The Department presumed that deposits to Taxpayer’s operating account

In the Matter of the Protest of The Behles Law Firm, P.C.
Page 19 of 52
1 represented fees for services provided unless Taxpayer presented documentation to

2 establish otherwise. [Direct Examination of Ms. Sanchez]

3 109. Mr. Walley recalled Taxpayer providing some international and out-of-

4 state services but observed as well that Taxpayer had “tons of in-state clients.” If

5 additional details were essential, Mr. Walley indicated that he “could try to look it up.”

6 [Direct Examination of Mr. Walley]

7 110. There was insufficient documentation provided by Taxpayer to establish

8 what portion of Taxpayer’s income may have been derived from providing services

9 outside the state of New Mexico. [Direct Examination of Ms. Griego]

10 111. Taxpayer also asserted that deposits to Taxpayer’s operating account

11 would include funds which were subsequently redistributed to third parties, such as

12 clients, parties, and other counsel, as illustrated in Taxpayer Ex. 7, but there was

13 insufficient documentation to compute what portion of those deposits should be

14 excludable, exempt, or deductible. [Direct Examination of Ms. Behles; Direct

15 Examination of Ms. Sanchez; Direct Examination of Ms. Griego]

16 112. Another circumstance that might inaccurately increase the sum of deposits

17 can be attributed to occasions where settlement funds intended for deposit in Taxpayer’s

18 attorney trust account were erroneously deposited to Taxpayer’s operating account. Mr.

19 Walley on occasion would then transfer money from Taxpayer’s operating account to

20 Taxpayer’s attorney trust account. [Direct Examination of Mr. Walley] There was no

21 evidence presented to establish the frequency or amounts of such errors.

22 113. The Department did not include as part of its audit any funds contained in

23 Taxpayer’s trust account since it acknowledges that attorney trust accounts are prohibited

In the Matter of the Protest of The Behles Law Firm, P.C.
Page 20 of 52
1 from containing fees earned by the attorney and are not receipts or income. [Direct Examination

2 of Ms. Sanchez]

3 114. Disbursements from Taxpayer’s attorney trust account to Taxpayer’s operating

4 account were rarely made in lump sum but were sometimes made in partial disbursements for a

5 variety of reasons, explaining it was not unusual “to withhold some of the money back,”

6 including amounts that would have comprised Taxpayer’s fees. [Direct Examination of Mr.

7 Walley]

8 115. Although the Department attempted to recognize all applicable exemptions,

9 exclusions, and deductions, it also relied on Taxpayer to alert it to any errors in its computations

10 accompanied by supporting documentation which might, for example, include loan proceeds

11 erroneously characterized as fees derived from engaging in business in New Mexico. [Direct

12 Examination of Ms. Sanchez]

13 116. Taxpayer provided no records relevant to income tax. Accordingly, the

14 calculation of income tax relied on the computation of Taxpayer’s gross receipts as computed in

15 the Department’s gross receipts tax audit work papers. [Direct Examination of Ms. Sanchez]

16 117. The assessment of withholding tax and the worker’s compensation fee relied on:

17 (1) 2014 IRS Forms W-2; (2) Forms ES903A for 2015 through 2016; (3) operating account bank

18 statements from January 2011 to June 2017; (4) GenTax history of PIT returns; (5) third party

19 verification through the records of the Department of Workforce Solutions. [Direct Examination

20 of Ms. Sanchez]

21 118. Mr. Walley recalled making worker’s compensation reports and payments on

22 paper [Direct Examination of Mr. Walley], but no records were provided to establish when they

23 would have been prepared or with whom or on what date they were filed.

In the Matter of the Protest of The Behles Law Firm, P.C.
Page 21 of 52
1 119. Ms. Sanchez performed her final review of the audit prior to the exit

2 conference occurring on or about March 23, 2018, which consisted of reading the audit

3 narrative and comparing it to the workpapers. [Direct Examination of Ms. Sanchez]

4 120. Ms. Sanchez’s review included examination of all the documents

5 referenced in the audit together with documents provided by Taxpayer and information

6 available to the Department through its internal systems, including GenTax. [Direct

7 Examination of Ms. Sanchez]

8 121. Neither Ms. Sanchez nor Ms. Lucero had any involvement with the audit

9 after the assessment and subsequent protest of the assessment. [Direct Examination of

10 Ms. Sanchez]

11 122. The Department did not perceive any involvement or participation from

12 Ms. Behles during the underlying audit of Taxpayer. Mr. Walley was Taxpayer’s only

13 point of contact despite unsuccessful attempts to communicate directly with Ms. Behles.

14 [Direct Examination of Ms. Sanchez]

15 123. Records provided during the audit were fully considered by the auditor,

16 peer review, supervisor review, and ATSS review. [Cross Examination of Ms. Sanchez]

17 124. The Department followed all applicable policies and procedures. Failure to

18 adhere to a policy or procedure would have been detected during any one of the several

19 reviews to which the audit was subjected prior to assessment. [Cross Examination of Ms.

20 Sanchez]

21 125. The Department does not limit information that may be submitted by a

22 taxpayer for consideration, nor is an auditor permitted to refuse such documents. [Cross

23 Examination of Ms. Sanchez]

In the Matter of the Protest of The Behles Law Firm, P.C.
Page 22 of 52
1 126. Ms. Sanchez detected no errors or discrepancies in the audit, which was provided

2 in full to Taxpayer prior to the assessment with a copy of a ten-day letter. [Direct Examination of

3 Ms. Sanchez; Dept. Ex. E]

4 127. Ms. Griego reviewed the assessment, formal protest, and other documents and

5 contacted Mr. Walley to follow up and request additional documents, particularly any records

6 that might show the source of revenue deposited into Taxpayer’s operating account. [Direct

7 Examination of Ms. Griego]

8 128. Mr. Walley recalled Ms. Griego making a request for deposit slips and correlating

9 checks within the first few months of the protest being initiated. [Direct Examination of Mr.

10 Walley]

11 129. Taxpayer, through Mr. Walley, informed Ms. Griego that documents had either

12 been lost or destroyed. [Direct Examination of Ms. Griego; Direct Examination of Mr. Walley]

13 130. In total, Ms. Griego reviewed the protest including all documents prepared,

14 acquired, and received up to the protest in addition to additional documents Mr. Walley provided

15 in response to her inquiries subsequent to the protest. [Direct Examination of Ms. Griego]

16 131. Ms. Griego was similarly unable to trace the source of the majority of funds into

17 Taxpayer’s operating account. Therefore, there was no way of determining whether the source of

18 a deposit was from engaging in business or from a loan or other source. [Direct Examination of

19 Ms. Griego; Taxpayer Ex. 7; Taxpayer Ex. 8]

20 132. Ms. Griego did identify some adjustments in Taxpayer’s favor. However, Ms.

21 Griego did not make any changes to the actual assessment in anticipation that more adjustments

22 could be warranted based on the evidence presented at the hearing on the merits of the protest.

23 [Direct Examination of Ms. Griego]

In the Matter of the Protest of The Behles Law Firm, P.C.
Page 23 of 52
1 133. As of the date of the hearing, Ms. Griego had identified a total of

2 $71,405.54 in receipts that should be excluded from taxation, including the sum listed on

3 Department Ex. E-040. Excludable receipts included deposits which were rejected due to

4 insufficient funds and loan disbursements, but final adjustments had not been calculated

5 as of the date of the hearing upon the documents available to the Department at that time.

6 [Direct Examination of Ms. Griego; Dept. Ex. E-040 (Grand Total, Column B)]

7 134. Ms. Griego’s research failed to identify or acquire from Taxpayer other

8 records that might be helpful for computing Taxpayer’s tax liability such as federal or

9 state tax returns. [Direct Examination of Ms. Griego]

10 135. Mr. Walley suggested he could have acquired records establishing the

11 amount of deposits into Taxpayer’s operating account that derived from loans as

12 distinguished from receipts from services. [Direct Examination of Mr. Walley]

13 136. Ms. Griego did not audit Taxpayer’s attorney trust account. The audit

14 concentrated on the Taxpayer’s operating account since that would be the account

15 receiving earned fees for services. [Direct Examination of Ms. Griego]

16 137. The records Ms. Griego requested, but which were not provided, could

17 have been used to reduce the Taxpayer’s liability by identifying receipts that should have

18 been exempt, excludable, or deductible from taxation. [Direct Examination of Ms.

19 Griego]

20 138. The Department received minimal cooperation from the Taxpayer in

21 providing documents. [Cross Examination of Ms. Griego]

22 139. Mr. Walley did provide Ms. Griego with some documents in response to

23 her follow up inquiries, but several of those documents were outside the relevant audit

In the Matter of the Protest of The Behles Law Firm, P.C.
Page 24 of 52
1 period. [Direct Examination of Ms. Griego]

2 140. Mr. Walley denied having any understanding of the Department’s intention to

3 identify non-taxable receipts by tracing the source of the receipts to the source of the deposits to

4 the operating account. Accordingly, Mr. Walley perceives that he could have acquired

5 supporting documents had the Department’s requests been clearer. [Direct Examination of Mr.

6 Walley]

7 141. Mr. Walley was able to acquire bank statements, but did not recall the Department

8 requesting, during the audit, deposit slips or the checks that may have accompanied those deposit

9 slips. [Direct Examination of Mr. Walley]

10 142. Taxpayer utilized QuickBooks accounting software throughout the audit period in

11 addition to other attorney billing software, including Sage and Time Matters. [Direct

12 Examination of Mr. Walley]

13 143. Mr. Walley was capable of generating reports from QuickBooks that would have

14 provided information regarding receipts from providing legal services. [Direct Examination of

15 Mr. Walley]

16 144. Fee application orders refer to amounts to be paid to Taxpayer including an

17 amount for payment of gross receipts tax, but there was no way of knowing whether Taxpayer

18 was actually paid under the terms of any of those orders. [Direct Examination of Ms. Sanchez]

19 145. Taxpayer further explained that the Department was prohibited from being at

20 Taxpayer’s place of business during normal business hours and that Taxpayer was attempting to

21 acquire duplicate records from its bank. [Direct Examination of Ms. Griego]

22 Destruction of Records

23 146. Taxpayer’s ability to produce records was assertedly impaired by an unintentional

In the Matter of the Protest of The Behles Law Firm, P.C.
Page 25 of 52
1 destruction of documents. Ms. Behles recalled that the janitor hired by Taxpayer’s

2 landlord employed a janitor from Nepal. The janitor spoke only Nepalese and allegedly

3 misunderstood the significance of some bins of documents, and “he took them out and he

4 burned them.” [Direct Examination of Ms. Behles]

5 147. Despite the landlord purportedly agreeing to compensate Taxpayer for

6 reacquiring the records, Mr. Walley was unable to reproduce the records that had

7 assertedly been destroyed over a “fairly long amount of time.” [Direct Examination of

8 Mr. Walley]

9 148. Although some records could potentially be replaced or reproduced, a

10 second incident rendered that task more onerous. Taxpayer’s place of business was

11 reportedly burglarized during the pendency of the protest at which time computers

12 containing Taxpayer’s financials were stolen along with the systems to which those

13 records were backed up. [Direct Examination of Ms. Behles]

14 149. The burglary occurred on or about July 31, 2020. Mr. Walley recalled

15 three or four computers, including the backup system being stolen or damaged before the

16 burglar was apparently scared away. [Direct Examination of Mr. Walley]

17 150. Mr. Walley suggested that it would have been a massive undertaking to

18 reproduce records that were lost as a result of Taxpayer’s burglary. [Direct Examination

19 of Mr. Walley]

20 151. The Department did not independently investigate Taxpayer’s assertions

21 that its records had been lost or destroyed or that the records could not be reproduced.

22 [Direct Examination of Ms. Griego]

23 Additional Findings Regarding Imposition of Penalty
24 and Potential Abatement

In the Matter of the Protest of The Behles Law Firm, P.C.
Page 26 of 52
1 152. At no time during the audit, particularly after the Taxpayer was alerted to its non-

2 filing status under the relevant tax programs, did it ever seek to cure it status by filing an

3 appropriate return. [Cross Examination of Ms. Sanchez]

4 153. In January of 2018, Ms. Lucero noted that Mr. Walley had disclosed having

5 health issues which had delayed his ability to provide records relevant to the audit. However,

6 there were no communications recorded in the contact log to suggest that health issues played

7 any part in the failure to report, file, or pay taxes during the periods subject of the audit. [Direct

8 Examination of Ms. Sanchez]

9 154. Ms. Sanchez did not note any communications from Taxpayer in reference to any

10 health issues Ms. Behles may have been experiencing during the period under audit or during the

11 actual audit. [Direct Examination of Ms. Sanchez]

12 155. Ms. Behles and Mr. Walley have participated in various business activities which

13 have, or should have, alerted them to the various tax obligations associated with engaging in

14 business in New Mexico. In addition to Taxpayer, Ms. Behles has also been associated with:

15 Behles, Ottinger, O’Reilly, Daniels & Ball, P.A.; J.D. Behles & Associates, A Commercial Law

16 Firm, P.C.; J.D. Behles & Associates, P.C.; B.L.F., L.L.C.; BLF Imports, L.L.C.; BLFM, L.L.C.;

17 and AhMahr Nahr, Inc. [Taxpayer Ex. 13]

18 156. During the relevant period of time, Mr. Walley and Ms. Behles also operated a

19 corporation called Ahmahr Nahr, Inc. which breeds and sells Basenjis 3 and derives income

20 relating to that activity. However, the income of Ahmahr Nahr, Inc. has never been substantial in

21 light of its expenses, which have been reported on Schedule K-1. [Direct Examination of Ms.

22 Behles]

3
“The Basenji is a small, short haired hunting dog from Africa.” See https://www.akc.org/dog-breeds/basenji/
(accessed December 3, 2020)

In the Matter of the Protest of The Behles Law Firm, P.C.
Page 27 of 52
1 157. Ahmahr Nahr Inc. is not registered with the Department but reported

2 significant loss on its Schedule K1 to Ms. Behles in 2007-2009 and 2011. [Direct

3 Examination of Ms. Sanchez]

4 158. Mr. Walley was not involved with preparation or payment of tax returns or

5 payments for Ahmahr Nahr, Inc. which have always been handled by Ms. Behles. [Direct

6 Examination of Mr. Walley]

7 159. At all times relevant to the period under audit, a sampling of Taxpayer’s

8 settlement disbursements, invoices, retainer agreements, and hourly fee agreements

9 demonstrated a consistent custom of charging gross receipts tax associated with any

10 compensation to Taxpayer. [See e.g. Taxpayer Ex.7.0 (2011); 7.14 (2013); 7.34 (2015);

11 7.38 (2015); 7.54 (2013); 7.58 (2015); 7.63 (2012); 7.71 (2016); 7.95 (2015); 7.100

12 (2013); 7.105 (2017); 7.107 (2014); 7.117 (2015); 7.123 (2011)]

13 160. Mr. Walley asserted that he never discussed a civil fraud penalty with the

14 Department, although he was aware that the Department was contemplating such penalty

15 as early as January 8, 2018. [Direct Examination of Mr. Walley; Direct Examination of

16 Ms. Sanchez]

17 161. Ms. Lucero determined that it was appropriate to assess a fraud penalty

18 which was subsequently approved by supervisory personnel. [Direct Examination of Ms.

19 Sanchez; Dept. Ex. F]

20 162. Mr. Walley was again notified of a civil fraud penalty on March 22, 2018.

21 [Direct Examination of Ms. Sanchez]

22 163. Imposition of civil fraud penalty relied heavily on the fact that Taxpayer

23 was knowledgeable of its tax obligations under New Mexico law but ceased self-

In the Matter of the Protest of The Behles Law Firm, P.C.
Page 28 of 52
1 reporting. [Direct Examination of Ms. Griego]

2 164. Ms. Griego reviewed the assessment of the civil fraud penalty and concurred that

3 its imposition was appropriate in this case. [Direct Examination of Ms. Griego; Dept. Ex. F]

4 165. Ms. Griego did not recall any communications with Taxpayer regarding medical

5 issues of Mr. Walley or Ms. Behles. [Direct Examination of Ms. Griego]

6 166. Taxpayer did not file corporate income tax returns from the period ending

7 December 31, 2010 through December 31, 2016. [Cross Examination of Ms. Griego]

8 DISCUSSION

9 Taxpayer’s closing argument presented numerous points of contention which the Hearing

10 Officer generally categorized in support of the following assertions: (1) whether the Department is

11 entitled to a presumption of correctness, or in the alternative, whether Taxpayer overcame the

12 presumption; (2) whether imposition of penalty was proper, and if so, whether Taxpayer is entitled

13 to any abatement; and (3) whether any portion of the assessment is precluded by the statute of

14 limitations.

15 Presumption of Correctness

16 Pursuant to NMSA 1978, Section 7-1-17 (C) (2007), the assessments of tax issued in this

17 case are presumed correct and unless otherwise specified, for the purposes of the Tax

18 Administration Act, “tax” includes interest and civil penalty. See NMSA 1978, Section 7-1-3 (X)

19 (2013). Therefore, under Regulation 3.1.6.13 NMAC, the presumption of correctness under

20 Section 7-1-17 (C) also extends to the Department’s assessment of penalty and interest. See

21 Chevron U.S.A., Inc. v. State ex rel. Dep’t of Taxation & Revenue, 2006-NMCA-050, ¶16, 139

22 N.M. 498, 134 P.3d 785 (agency regulations interpreting a statute are presumed proper and are to be

23 given substantial weight).

In the Matter of the Protest of The Behles Law Firm, P.C.
Page 29 of 52
1 As a result, the presumption of correctness in favor of the Department requires that

2 Taxpayer carry the burden of presenting countervailing evidence or legal argument to show that

3 it is entitled to abatements of the assessments. See N.M. Taxation & Revenue Dep’t v. Casias

4 Trucking, 2014-NMCA-099, ¶8, 336 P.3d 436. “Unsubstantiated statements that [an] assessment

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

6 Revenue Dep’t, 2003-NMCA-021, ¶13, 133 N.M. 217, 62 P.3d 308; See also Regulation 3.1.6.12

7 NMAC. If a taxpayer presents sufficient evidence to rebut the presumption, then the burden

8 shifts to the Department to re-establish the correctness of the assessment. See MPC, 2003-

9 NMCA-021, ¶13.

10 In circumstances where a taxpayer’s claim for relief relies on the application of an

11 exemption or deduction, then “the statute must be construed strictly in favor of the taxing

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

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

14 Taxation and Revenue Department, 1991-NMCA-024, ¶16, 111 N.M. 735, 809 P.2d 649

15 (internal citation omitted); See also TPL, Inc. v. N.M. Taxation & Revenue Dep’t, 2003-NMSC-

16 007, ¶9, 133 N.M. 447, 64 P.3d 474.

17 This protest also presents the issue of whether the Department properly assessed a 50-

18 percent penalty for conduct it perceived as willful intent to evade or defeat a tax. See NMSA

19 1978, Section 7-1-69 (D). With concern for this distinct issue, the Department carries the burden

20 of proving by a preponderance of evidence that the greater penalty should be imposed. See

21 Regulation 3.1.11.18 (B) (1) & (2) NMAC (placing the burden on the Department to prove tax

22 evasion by preponderance of evidence). See also NMSA 1978, Section 7-1-78 (placing the

23 burden on the Department in cases involving fraud or corruption). While Section 7-1-69 (D) does

In the Matter of the Protest of The Behles Law Firm, P.C.
Page 30 of 52
1 not refer to “fraud,” it imposes a greater penalty for the “willful intent to evade or defeat a tax.”

2 Id. “The issue of whether the taxpayer or other person exercised gross negligence or willful

3 disregard for whether taxes were paid is an objective standard to be determined by the facts and

4 circumstances.” See Regulation 3.1.11.18 (B) (3) NMAC.

5 Computing Gross Receipts and Associated Taxes

6 The evidence established that the first substantive step in the audit was to gather documents

7 relevant to compute the amount of Taxpayer’s gross receipts over the course of the entire audit

8 period. Not only did the Department intend to rely on those figures for the computation of gross

9 receipts tax, but because of the overall lack of records relevant to other tax programs, the

10 Department would come to rely on those figures for computing Taxpayer’s income tax as well.

11 The computation of gross receipts begins with their definition under the law. For the

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

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

14 7-9-3.5 (A) (1) (2007), “gross receipts” is defined to mean:

15 the total amount of money or the value of other consideration
16 received from selling property in New Mexico, from leasing or
17 licensing property employed in New Mexico, from granting a right to
18 use a franchise employed in New Mexico, from selling services
19 performed outside New Mexico, the product of which is initially
20 used in New Mexico, or from performing services in New Mexico.

21 Under the Gross Receipts and Compensating Tax Act, all gross receipts of a person engaged

22 in business are presumed taxable. See NMSA 1978, Section 7-9-5 (2002). Conversely, receipts

23 which are not derived from one of the listed activities are excluded from gross receipts, and not

24 taxable under the Gross Receipts and Compensating Tax Act. For example, funds derived on

25 credit are not derived from any of the listed activities and are excludable.

26 Despite the general presumption of taxability, taxpayers may also avail themselves of the benefits of

In the Matter of the Protest of The Behles Law Firm, P.C.
Page 31 of 52
1 various deductions or exemptions, if applicable, in addition to asserting that its receipts are

2 excludable from taxation under NMSA 1978, Section 7-9-3.5 as in the example provided for funds

3 derived on credit. If a taxpayer’s claim for relief relies on the application of an exemption or

4 deduction, then “the statute must be construed strictly in favor of the taxing authority, the right to

5 the exemption or deduction must be clearly and unambiguously expressed in the statute, and the

6 right must be clearly established by the taxpayer.” See Wing Pawn Shop v. Taxation and Revenue

7 Department, 1991-NMCA-024, ¶16, 111 N.M. 735, 809 P.2d 649 (internal citation omitted); See

8 also TPL, Inc. v. N.M. Taxation & Revenue Dep’t, 2003-NMSC-007, ¶9, 133 N.M. 447, 64 P.3d

9 474.

10 In this case, the Department’s computations would rely wholly on Taxpayer’s records

11 pursuant to NMSA 1978, Section 7-1-10 (A) (2007) which provides in relevant part that, “every

12 taxpayer shall maintain books of account or other records in a manner that will permit the accurate

13 computation of state taxes or provide information required by the statute under which the person is

14 required to keep records.”

15 The statute permits discretion to a taxpayer in that it does not specify precisely what records

16 must be retained, so long as the records will permit an accurate computation. The Department,

17 although providing some guidance, has similarly refrained from mandating the specific methods

18 taxpayers utilize for its accounting and record keeping requirements. Regulation 3.1.5.8 (A) NMAC

19 explains that “[b]ooks of account, documents and other records shall be kept and maintained by a

20 taxpayer in a manner that will permit the accurate computation of state taxes[.]” It goes on to

21 provide that, “[t]he adequacy or inadequacy of taxpayer records is a matter of fact to be determined

22 by the secretary or secretary’s delegate.”

23 Moreover, “[t]axpayers have a duty to provide the secretary or secretary’s delegate, upon

In the Matter of the Protest of The Behles Law Firm, P.C.
Page 32 of 52
1 request, with books of account and other records upon which to establish a basis for taxation.”

2 Regulation 3.1.5.8 (B) NMAC goes on to provide that “[f]ailure of a taxpayer to keep adequate

3 books of account or other records will cause the department to use alternative methods to determine

4 or estimate taxes due.” Regulation 3.1.5.8 (C) NMAC specifies a variety of alternative methods

5 available to the Department in such circumstances, the first of which is the “bank deposit method.”

6 See Regulation 3.1.5.8 (C) (1) NMAC.

7 The bank deposit method was the method utilized by the Department in the present case, but

8 only after the Department determined that the records provided by Taxpayer did not “permit the

9 accurate computation of state taxes.” Thus, it would be appropriate to now address the adequacy of

10 Taxpayer’s records, and the reasonableness of the Department’s determination to employ alternate

11 methods of computing tax.

12 Sufficiency of Taxpayer’s Records and the Determination to Employ Alternate Methods

13 In summary, the Hearing Officer found that the Department’s determination of insufficiency

14 and unreliability of Taxpayer’s records was reasonable. The majority of records provided by

15 Taxpayer were grossly inadequate for accurately computing Taxpayer’s liability. Ultimately, the

16 most complete and reliable source of information derived from Taxpayer’s operating account

17 statements. Yet, when the figures contained in the bank statements were compared to the figures in

18 other records Taxpayer provided, there was such a large discrepancy between the figures that the

19 Department determined it was reasonable to rely entirely on the bank statements to compute gross

20 receipts. The Department would then permit applicable exclusions, exemptions, and deductions as

21 corroborated by Taxpayer’s records. However, even that task proved difficult for Taxpayer due to

22 its overall lack of adequate records.

23 Taxpayer disclaimed responsibility for its lack of records, attributing the insufficiency to a

In the Matter of the Protest of The Behles Law Firm, P.C.
Page 33 of 52
1 non-English speaking custodian who allegedly disposed of the records Taxpayer intended to

2 provide to the Department for evaluation. Then, to the extent there was any possibility of those lost

3 records being reproduced or replaced, that opportunity vanished. Taxpayer’s office was assertedly

4 burglarized and every computer or backup file was stolen.

5 The Hearing Officer regrettably found Taxpayer’s evidence on these incidents to be

6 unreliable and lacking credibility. The Hearing Officer observed that although the first asserted

7 incident involving the non-English speaking custodian occurred during the underlying audit, there

8 was no apparent reference to such incident in any contemporaneously-prepared documents from

9 inception of the audit in August 2017 through the final exit conference in March 2018. Such

10 incident would have represented a significant setback for a reasonable taxpayer which would

11 promptly bring it to the Department’s attention. For that reason, the Hearing Officer would expect

12 that the Taxpayer Contact Log or some other communication contemporaneous to the audit would

13 make some minimal reference to the incident. There was none. The earliest reference to the alleged

14 incident which the Hearing Officer observed occurred in September of 2019, well after the

15 assessments were issued and while the protest was already pending.

16 The Hearing Officer perceived the allegation of a subsequent burglary with the same degree

17 of skepticism. Although Taxpayer’s account of that incident is accompanied by a police report

18 (contained in the Administrative File as an exhibit to a motion for a continuance), the Hearing

19 Officer does not find that the police report lends any credence or weight to Taxpayer’s testimony.

20 With respect to both incidents and their asserted detriment to Taxpayer’s position, the

21 Hearing Officer personally observed the demeanor of the witnesses, particularly the manner of Ms.

22 Behles and Mr. Walley while testifying, and when viewing their interests, biases, and prejudices

23 together with the reasonableness of their testimony, the Hearing Officer was simply not persuaded

In the Matter of the Protest of The Behles Law Firm, P.C.
Page 34 of 52
1 that the incidents were the genuine cause of its inability to produce records.

2 The Hearing Officer observed that the Department had been seeking records since the

3 inception of the audit in August of 2017. If the records had not been provided by the time of the exit

4 conference approximately seven months later in March of 2018, then it was highly unlikely they

5 were ever to be provided. The Taxpayer Contact Log (Dept. Ex. G) revealed more than 25 instances

6 in which the Department contacted Taxpayer to request, follow-up, or make further inquiry

7 concerning Taxpayer’s records.

8 It was evident to the Hearing Officer that Taxpayer exercised unsatisfactory recordkeeping

9 practices, but rather than acknowledge that, Taxpayer attributed its lack of records to a series of

10 unfortunate events which the Hearing Officer found questionable. The Hearing Officer was

11 persuaded that Taxpayer’s poor recordkeeping and accounting practices were the primary cause of

12 Taxpayer’s inability to provide adequate or sufficient records, and that required the Department to

13 resort to alternative methods of computing Taxpayer’s liability. For that reason, it was necessary

14 and reasonable for the Department to employ the bank deposit method which is expressly and

15 explicitly permitted by regulation.

16 The Bank Deposit Method

17 In this case, the Department calculated the sum of all deposits from Taxpayer’s bank

18 account to identify a starting point for computing its gross receipts. Unlike records prepared and

19 provided by Taxpayer, bank records are maintained by banks whose primary task is to provide an

20 accurate accounting of deposits and withdrawals to the account. The Department then requested

21 records from Taxpayer that it could then use to identify, and therefore subtract, sums of deposits

22 which should not count as gross receipts because they were excludable, deductible, or exempt. Non-

23 taxable deposits might include funds from loan disbursements, fees generated from performing

In the Matter of the Protest of The Behles Law Firm, P.C.
Page 35 of 52
1 services outside of New Mexico, or even amounts from checks deposited but later reversed due to

2 insufficient funds. These were the types of non-taxable events which the Department relied on

3 Taxpayer to establish.

4 Both Ms. Sanchez and Ms. Griego credibly testified that Taxpayer received appropriate

5 reductions for amounts that Taxpayer demonstrated through trustworthy documentation should be

6 excludable, deductible, or exempt. But, in the absence of documentation to show otherwise, deposits

7 were presumed taxable and included in the sum of Taxpayer’s taxable receipts consistent with

8 Section 7-9-5 (receipts presumed taxable). The Hearing Officer cannot find that the Department’s

9 methods were erroneous. In contrast, they were wholly authorized by law and necessary in light of

10 Taxpayer’s poor record keeping.

11 For example, Taxpayer argued that it was inappropriate for the Department to “gross up” all

12 of the Taxpayer deposits to compute income. Instead, Taxpayer argued the Department should have

13 used prior CRS-1 returns from 2010, the final year Taxpayer filed returns, to estimate gross receipts

14 for every subsequent year under audit. Taxpayer provides no evidence to establish how that method

15 would be more accurate than the method actually used; how ten months of reported gross receipts in

16 2010 were more reliable than contemporaneous bank statements.

17 In the alternative, or perhaps as a supplement to ten months of CRS-1 returns from 2010,

18 Taxpayer argued that gross receipts could be derived from its payments register (Taxpayer Ex. 4)

19 which purportedly summarized Taxpayer’s taxable transactions, totaling 161 transactions, from

20 February 12, 2010 through December 31, 2015. It also referred to a collection of settlement

21 disbursement sheets (Taxpayer Ex. 7). These documents, Taxpayer asserts, are useful to computing

22 its gross receipts.

23 However, having carefully reviewed the exhibits, the Hearing Officer did not agree that they

In the Matter of the Protest of The Behles Law Firm, P.C.
Page 36 of 52
1 were reliable at all. Taxpayer Ex. 7 contains a variety of documents, some of which are dated

2 settlement disbursement documents. A cursory review reveals that they contain the names of clients,

3 dates, and the amount of funds that Taxpayer would have expected to receive for its services in a

4 particular case. One would expect, at a minimum, that a disbursement to Taxpayer, as detailed in a

5 settlement disbursement, should be reflected in Taxpayer’s payments register. Accordingly, one

6 would expect that information from any given disbursement could easily be crosschecked against a

7 corresponding entry in the payments register. Yet, when such comparison is made, there is minimal

8 correlation between the exhibits. Taxpayer explains that disbursements may not have always

9 occurred in lump sums, so perhaps the amount provided in the disbursement sheet would not match

10 what was detailed in the payments register or bank accounts. However, even if the disbursement

11 were accomplished in more than one payment, one would still expect to trace the source of receipts

12 to a client name or some other consistent identifier.

13 For example, Taxpayer Ex. 7.54 reflects a settlement distribution dated October 1, 2013.

14 Crosschecking that document to Taxpayer Ex. 4 reveals no transactions in the corresponding date

15 range in the name of the client whose signature appeared on the distribution sheet. This example is

16 not isolated. A similar observation is made when comparing the information contained in the

17 disbursement statement at Taxpayer Ex. 7.58 to the payments register in Taxpayer Ex. 4. Once

18 more, there is no entry in the payments register that corresponds with the date or which matches the

19 name of the client whose signature appeared on the distribution sheet.

20 These observations illustrate why Taxpayer’s disbursement sheets (Taxpayer Ex. 7) and

21 payments register (Taxpayer Ex. 4) are unreliable for the purpose of computing gross receipts and

22 Taxpayer’s corresponding liability. They further underscore the reasonableness of the Department’s

23 determination that Taxpayer’s bank accounts were a more reliable source of information. The

In the Matter of the Protest of The Behles Law Firm, P.C.
Page 37 of 52
1 Hearing Officer agrees that the bank records in this case are more consistent, trustworthy, and

2 reliable than Taxpayer’s records.

3 Taxpayer also disputes the correctness of the audit and the resulting assessment because

4 deposits that supposedly should have been categorized as excludable, deductible, or exempt were

5 allegedly included in the sum which the Department determined to be taxable. Taxpayer does not

6 seemingly acknowledge that the Department afforded substantial opportunity, right up to and

7 including the hearing on the protest, to present evidence that could have addressed these concerns

8 and potentially reduced its liability. The Taxpayer Contact Log (Dept. Ex. G) reveals no less than 25

9 instances during the course of the audit that the Department requested documents of Taxpayer. Ms.

10 Griego even testified that she was prepared to make adjustments during the hearing as Taxpayer

11 presented its evidence.

12 Ultimately, Taxpayer’s documentation was grossly insufficient and unreliable for computing

13 the sum of non-taxable deposits, whether because they purportedly derived from services performed

14 outside of New Mexico, were borrowed monies, or derived from another non-taxable source. For

15 example, a closer review of Taxpayer Ex. 8 which consists of various loan documents confirms that

16 Taxpayer, Ms. Behles, Mr. Walley, and other entities with which they were associated, borrowed

17 money from First National Bank of New Mexico (Clayton) and Ms. Mary Walley (Mr. Walley’s

18 mother). Yet, those documents do not demonstrate the sum or the accounts to which those proceeds

19 were deposited which is the critical issue when considering the accuracy of the bank deposit method

20 of computing Taxpayer’s gross receipts. Since the relevant issue is not how much Taxpayer’s

21 borrowed, but where those borrowed funds were deposited, the records contained in Taxpayer Ex. 8

22 are of little weight.

23 The same is true for those portions of deposits that may have derived from providing

In the Matter of the Protest of The Behles Law Firm, P.C.
Page 38 of 52
1 services outside of New Mexico, and for any other deposit that Taxpayer asserts should be

2 excludable, deductible or exempt. Taxpayer’s exhibits are entirely inadequate for making such

3 computation.

4 Taxpayer also asserts that it occasionally deposited client funds into its operating account,

5 which should not be categorized as gross receipts because they should have been deposited to its

6 client trust account instead. Taxpayer presents no evidence to establish how often this occurred or in

7 what amount. The lack of records in this regard is consistent with the Court’s observations in In re

8 Behles, 2019-NMSC-016, ¶28 in which the Court expressed dismay with Taxpayer’s failure to

9 maintain proper trust account records. See In re Behles, 2019-NMSC-016, ¶2.

10 Taxpayer also asserts that the Department should have considered a survey of attorney

11 compensation commissioned by the State Bar of New Mexico4 when considering the

12 reasonableness of its computations. In other words, Taxpayer’s liability should have been more

13 closely associated with the results of the survey than with the sum of its bank deposits. The Hearing

14 Officer is unpersuaded as there is not one scintilla of evidence to suggest that any survey would

15 produce a computation that is more reliable than the method employed by the Department during

16 the underlying audit in this protest.

17 Finally, Taxpayer argues that the Department’s assessment is incorrect because it simply

18 failed to request the proper records. Otherwise stated, had the Department provided more detailed

19 requests, then Taxpayer could have provided records that would have assured a more accurate

20 computation of its liability. Taxpayer’s argument is simply unfounded and incredulous. The Hearing

21 Officer is unpersuaded that a reasonable taxpayer in Taxpayer’s position would choose to play “hide

22 the ball” when confronted with the possibility of a substantial tax liability. Moreover, if such records

4
https://www.nmbar.org/Nmstatebar/Publications___Resources/Compensation_Survey.aspx

In the Matter of the Protest of The Behles Law Firm, P.C.
Page 39 of 52
1 existed, Taxpayer could have provided them at the hearing. As previously noted, Ms. Griego

2 testified upon Ms. Behles inquiries that she was prepared to make necessary adjustments in reliance

3 on any records Taxpayer might proffer up to and during the hearing.

4 Most significant upon review of all of the evidence, however, is that not even Taxpayer

5 attempted any computations based on the records proffered at the hearing to establish, at least from

6 its perspective, the portion of receipts that it claimed should have been excludable, deductible, or

7 exempt. Taxpayer merely submits its records with the expectation that relief might be extrapolated

8 from them without any method or explanation. Taxpayer does not direct the Hearing Officer’s

9 attention to any portion of the records which the Hearing Officer can reasonably rely upon to afford

10 the relief it seeks. The Hearing Officer with the evidence presented can merely speculate as to their

11 mathematical significance to the audit and resulting assessment, but relief may not be afforded on

12 speculation, guess, or conjecture. See e.g. Mascarenas v. Jaramillo, 1991-NMSC-014, ¶22, 111

13 N.M. 410, 806 P.2d 59.

14 Our courts have recognized that “[i]t is not the responsibility of . . . the trial court to

15 search the record for evidence to support a claim or assertion. That responsibility belongs to the

16 attorney.” See State v. Maestas, 2018-NMSC-010, ¶51, 412 P.3d 79. The same observation is

17 pertinent in tax protest hearings as well. Evidence pertinent to a material issue must be identified

18 by some reference to the relevant portions of an exhibit. Without some minimal reference, a fact

19 finder should not be expected to search the record in an effort to determine whether there exists

20 dormant evidence which might have some bearing on the outcome of a case. See Adler v. Wal-

21 Mart Stores, 144 F.3d 664, 672 (10th Cir. 1998) (“[courts] have a limited and neutral role in the

22 adversarial process, and are wary of becoming advocates who comb the record of previously

23 available evidence and make a party’s case for it.”); See also United States v. Dunkel, 927 F.2d

In the Matter of the Protest of The Behles Law Firm, P.C.
Page 40 of 52
1 955, 956 (7th Cir.1991) (“Judges are not like pigs, hunting for truffles buried in briefs”).

2 Accordingly, in the absence of something more compelling and persuasive, Taxpayer’s

3 arguments resemble the sort of unsubstantiated statements that our courts have found to be

4 insufficient to overcoming the statutory presumption of correctness.” See MPC Ltd., 2003-

5 NMCA-021, ¶13. Taxpayer cannot on one hand fail to maintain or produce accurate or reliable

6 records, and then on the other hand complain that the Department’s assessments are not correct

7 for lack of those same records, or because the Department did not request the correct records.

8 Therefore, the alternative method employed by the Department for computing Taxpayer’s

9 gross receipts and associated tax liability in this case was reasonable and necessary under the

10 circumstances. It produced the most accurate accounting of gross receipts possible, and to the

11 extent Taxpayer perceived any shortcomings in the computations, Taxpayer had a reasonable

12 opportunity to present records to address those issues, and the failure to effectively do so rests

13 solely with Taxpayer.

14 Because the evidence established that Taxpayer never filed personal or corporate state or

15 federal income tax returns, the Department relied on its calculations of Taxpayer’s gross receipts

16 to also compute Taxpayer’s income tax liability. For the same reasons discussed herein,

17 Taxpayer’s assault on the correctness of the assessment for income tax is similarly rejected.

18 The Hearing Officer also detected no errors with the computation of Taxpayer’s liabilities

19 for withholding tax or worker’s compensation fees based on the evidence presented at the

20 hearing.

21 Statute of Limitations

22 Taxpayer argued that the Department misapplied NMSA 1978, Section 7-1-18 when it

23 assessed taxes, including interest and penalty, beyond the 3-year limitation on assessments.

In the Matter of the Protest of The Behles Law Firm, P.C.
Page 41 of 52
1 Section 7-1-18 (A) states in relevant part that “no assessment of tax may be made by the

2 department after three years from the end of the calendar year in which payment of the tax was

3 due, and no proceeding in court for the collection of such tax without the prior assessment

4 thereof shall be begun after the expiration of such period.”

5 Because the relevant assessments subject of this protest were made on June 28, 2018,

6 they were undoubtedly timely as to any liability due in, or after 2015. Assessment of taxes due in

7 earlier periods may also be assessed, but only as permitted by the exceptions to Section 7-1-18

8 (A).

9 In this protest, the Department relied on two exceptions. The first exception permits that

10 “[i]n case of the failure by a taxpayer to complete and file any required return, the tax relating to

11 the period for which the return was required may be assessed at any time within seven years

12 from the end of the calendar year in which the tax was due, and no proceeding in court for the

13 collection of such tax without the prior assessment thereof shall be begun after the expiration of

14 such period.” See NMSA 1978, Section 7-1-18 (C). Accordingly, this exception would permit

15 assessment by virtue of “failure … to complete and file any required return” due in 2011, as

16 seven years from the end of the calendar year 2011 would be December 31, 2018.

17 The second exception permits that “[i]f a taxpayer in a return understates by more than

18 twenty-five percent the amount of liability for any tax for the period to which the return relates,

19 appropriate assessments may be made by the department at any time within six years from the

20 end of the calendar year in which payment of the tax was due.” See NMSA 1978, Section 7-1-18

21 (D). Accordingly, this exception would permit assessment by virtue of understating Taxpayer’s

22 liability by more than 25 percent tax that would have been due in 2012, as six years from the end

23 of the calendar year 2012 would be December 31, 2018.

In the Matter of the Protest of The Behles Law Firm, P.C.
Page 42 of 52
1 Under each deadline, the relevant starting point for computing the deadline to assess is

2 not the year in which the tax was incurred, but the year in which the tax was due. For example,

3 corporate income tax may have been incurred in tax year 2010, but because it was not due until

4 2011, the deadline to assess for 2010 would not begin to run until the end of 2011 because that

5 was the year in which the tax was due.

6 In this protest, the assessment of withholding tax, gross receipts tax, and the civil fraud

7 penalty issued under Letter ID. No. L0634339120 spanned all reporting periods from January 31,

8 2010 to June 30, 2017. The evidence established that Taxpayer filed through October 2010 and

9 assumed non-filer status in all subsequent periods. Accordingly, the assessment issued under

10 Letter ID. No. L0634339120 is timely as to all periods in which tax was due in 2011, including

11 any tax that was incurred in December 2010 which would have been due in January 2011.

12 Although an assessment of tax for periods preceding December 2010 might be presumed

13 untimely, the audit narrative (Department Ex. D) and the Taxpayer Contact Log (Department Ex.

14 G) suggested that Taxpayer executed a waiver of limitations for 2010, which Taxpayer did not

15 dispute. Accordingly, NMSA 1978, Section 7-1-18 (F), which provides that “[i]f the taxpayer

16 has signed a waiver of the limitations on assessment imposed by this section, an assessment of

17 tax may be made or a proceeding in court begun without regard to the time at which payment of

18 the tax was due.” For that reason, the assessment for all other periods in 2010, preceding

19 December 2010, is also deemed timely.

20 The assessment of corporate income tax under Letter ID No. L1041624880 spanned all

21 reporting periods from December 31, 2010 to December 31, 2016. The evidence established that

22 Taxpayer never filed corporate income taxes or personal income taxes through which the income

23 of the S-Corporation would have been reported. Accordingly, the assessment issued under Letter

In the Matter of the Protest of The Behles Law Firm, P.C.
Page 43 of 52
1 ID. No. L1041624880 is timely as to all tax that was incurred in 2010, but not due until 2011. To

2 the extent any doubt remains, Taxpayer did not dispute that it executed a waiver applicable to

3 2010 pursuant to Section 7-1-18 (F).

4 The Department made a similar finding in reference to the assessment of worker’s

5 compensation fees under Letter ID No. L2115366704. Once again finding that Taxpayer was a

6 non-filer during all relevant periods, the Department assessed it all periods from March 31, 2010

7 to June 30, 2017. Once more, the waiver referenced in the Taxpayer Contact Log (Dept. Ex. G)

8 and the Audit Narrative (Dept. Ex. D) encompasses any period of 2010 that would otherwise be

9 excluded by Section 7-1-18 (C). Thus the assessment under Letter ID No. L2115366704 is

10 timely.

11 All assessments at issue in the protest were timely and consistent with the limitations

12 imposed by Section 7-1-18. To the extent Taxpayer might also assert that the Department is

13 precluded from engaging in collection activities on timely-assessed liabilities, as implied in its

14 closing argument, Section NMSA 1978, Section 7-1-19 permits collection activities for ten years

15 from the date of an assessment. It states, “[n]o action or proceeding shall be brought to collect

16 taxes administered under the provisions of the Tax Administration Act and due under an

17 assessment or notice of the assessment of taxes after the later of either ten years from the date of

18 such assessment or notice[.]” (Emphases Added)

19 Penalty

20 Under the facts presented, the Department determined that it would be appropriate to impose

21 penalties in the amount of 50 percent of the assessed tax liabilities as required by NMSA 1978,

22 Section 7-1-69 (D). That provision states, “[i]n the case of failure, with willful intent to evade or

23 defeat a tax, to pay when due the amount of tax required to be paid, there shall be added to the

In the Matter of the Protest of The Behles Law Firm, P.C.
Page 44 of 52
1 amount fifty percent of the tax or a minimum of twenty-five dollars ($25.00), whichever is greater,

2 as penalty.”

3 As previously noted, the Department carries the burden of proving by a preponderance of

4 evidence that the greater penalty was warranted and should be imposed. See Regulation

5 3.1.11.18 (B) (1) & (2) NMAC “The issue of whether the taxpayer or other person exercised

6 gross negligence or willful disregard for whether taxes were paid is an objective standard to be

7 determined by the facts and circumstances.” See Regulation 3.1.11.18 (B) (3) NMAC.

8 Regulation 3.1.11.18 (A) (1) NMAC provides in relevant part that “willful attempt to evade”

9 or “willful attempt to evade or defeat” means “conscious awareness of the obligation to pay taxes

10 coupled with either reckless disregard for, or gross negligence with respect to, whether the tax

11 obligation is paid.”

12 It goes on to explain that a “willful attempt to evade or defeat” may include: (a) engaging in

13 business while not filing tax returns coupled with the knowledge that the business is subject to tax.

14 See Regulation 3.1.11.18 (A) (2) (a) NMAC.

15 The Regulation provides several examples of “willful attempt to evade or defeat a tax.” One

16 example explains:

17 L is an attorney who is familiar with business and tax law and is
18 the primary shareholder in PC, a professional corporation. PC has
19 reported and paid gross receipts tax in the past. PC stops reporting
20 and paying gross receipts tax; L is aware of this. L has willfully
21 caused the evasion of PC’s taxes.

22 At all relevant times in this case, Ms. Behles was an attorney with decades of experience.

23 Although she never did state during the hearing how long she had practiced law, the Court in In

24 re Behles observed she had been “licensed to practice law in New Mexico for nearly fifty

25 years[.]” See In re Behles, 2019-NMSC-016, ¶5. For decades, she also practiced in a variety of

26 law firms bearing her name or her initials, suggesting that she had significant experience in

In the Matter of the Protest of The Behles Law Firm, P.C.
Page 45 of 52
1 conducting business in New Mexico. Moreover, Ms. Sanchez and Ms. Griego noted that

2 Taxpayer consistently filed its CRS-1 returns until the latter part of 2010 after which all

3 reporting ceased.

4 In the meantime, a review of the settlement disbursement sheets and other documents

5 contained in Taxpayer Ex. 7 demonstrate how it was Taxpayer’s practice to consistently pass

6 along and collect gross receipts tax on its share of settlement proceeds and earned fees. See

7 Taxpayer Ex. 7; 7.6; 7.14; 7.34; 7.35; 7.54; 7.58; 7.63; 7.95; 7.101; 7.102; 7.105; 7.107; 7.109;

8 7.117. The sample of settlement disbursement sheets contained in Taxpayer Ex. 7 indicates that

9 Taxpayer would have collected tens of thousands of dollars in funds designated for tax.

10 However, the evidence demonstrated that the money was never remitted to the Department.

11 To the extent Ms. Behles might claim to be ignorant of New Mexico tax laws, the

12 Department pointed out that Ms. Behles’ prior dealings with the Department, exemplified in

13 Taxpayer Ex. 5, similarly contributed to her knowledge of Taxpayer’s tax obligations under state

14 law. Although Taxpayer argued that prior proceedings in reference to other entities with which

15 Ms. Behles may have been associated was improper or irrelevant, it does lend further support for

16 finding that Ms. Behles had some familiarity and knowledge with the tax laws of New Mexico.

17 The totality of these observations is significant because they establish to the satisfaction

18 of the Hearing Officer that Ms. Behles was knowledgeable of Taxpayer’s tax reporting and

19 payment obligations. Nevertheless, neither Ms. Behles nor Mr. Walley actually ever disputed that

20 fact.

21 Mr. Walley recognized the obligation to report and pay taxes, but explained he fell

22 behind for a variety of reasons and intended to get caught up. Ms. Behles, on the other hand,

23 claims that she never knew that Taxpayer stopped filing CRS-1 reports in late 2010 while also

In the Matter of the Protest of The Behles Law Firm, P.C.
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1 asserting a variety of explanations for Taxpayer’s lapse. The purported reasons included back

2 surgeries, knee surgeries, cancer, family illnesses, death, and problems with the Department’s

3 electronic filing system. Yet, there was no evidence to suggest that any combination of the

4 events cited resulted in an inability to prepare a return, make payment, or even procure the

5 services of another person to assist Taxpayer with fulfilling its tax reporting and payment

6 obligations.

7 Although the Hearing Officer might empathize with circumstances in which Ms. Behles

8 and Mr. Walley found themselves, the Hearing Officer was unpersuaded that those

9 circumstances justified discontinuing tax reporting and payment for years preceding the

10 assessments without any outward attempts at corrective measures. Mr. Walley testified that he

11 intended to get caught up, but never did, and there was no tangible indication in any relevant

12 years that his stated intentions were genuine.

13 In contrast, the evidence established that the Department provided Taxpayer written

14 notices of Taxpayer’s delinquencies for years prior to conducting its audit, but Taxpayer never

15 responded in any manner.

16 The evidence also established that Ms. Behles had been receiving mail at the same post

17 office address during all relevant times, and that was the same address to which various

18 notifications had been sent. To the extent Ms. Behles and Mr. Walley claimed to be ignorant of

19 the mounting issues or the Department’s various attempts to communicate, neither Ms. Behles

20 nor Mr. Walley were very credible in that regard.

21 The Hearing Officer was persuaded by credible evidence that Taxpayer engaged in

22 business while not filing tax returns combined with the knowledge that the business was subject to

23 tax. Although Mr. Walley and Ms. Behles testified to the various trials and tribulations which

In the Matter of the Protest of The Behles Law Firm, P.C.
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1 contributed to their failure to report and pay taxes, the Hearing Officer doubted that after so many

2 years of disregarding Taxpayer’s obligations, that Mr. Walley or Ms. Behles ever intended to take

3 the appropriate steps to rectify years of willful disregard or gross negligence.

4 The Hearing Officer finds by a preponderance of evidence that the Department’s

5 assessment of penalty under the circumstances presented by the evidence was warranted and

6 appropriate. See Regulation 3.1.11.18 (B) (3) NMAC. Taxpayer through Mr. Walley and Ms.

7 Behles possessed a conscious awareness of the obligation to pay taxes coupled with either reckless

8 disregard for, or gross negligence with respect to, whether the tax obligation is paid.

9 Residual Points

10 Taxpayer’s primary arguments are all addressed in detail, but its closing argument

11 presents numerous subordinate issues, all of which the Hearing Officer fully considered, but

12 which require no further discussion. All such issues presented were given careful and thorough

13 consideration, but ultimately deemed unpersuasive and are rejected.

14 Nevertheless, the Hearing Officer will briefly address the Taxpayer’s assertion that the

15 audit and resulting assessments arose from one or more reports from disgruntled individuals with

16 whom Ms. Behles had prior dealings. The Hearing Officer first notes that there was no credible

17 evidence to suggest the audit and assessment arose from vindictive motives. Instead, the

18 evidence established that the Department was aware of Taxpayer’s delinquencies well in advance

19 of initiating the audit in 2017. Even if there were some evidence to suggest that the audit and

20 resulting assessment arose from such report, that does not justify or provide a defense for years

21 of Taxpayer disregarding its tax reporting and payment obligations. The Hearing Officer was

22 unpersuaded that motive was a relevant issue in this matter.

23 Taxpayer also argued that the Department improperly disregarded its tax returns when

In the Matter of the Protest of The Behles Law Firm, P.C.
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1 evaluating and computing its tax liability. However, Ms. Sanchez and Ms. Griego credibly

2 testified that Taxpayer did not file tax returns. The Department appropriately emphasized that the

3 tax returns contained in Taxpayer Ex. 10 displayed no indication of being filed and they were

4 neither signed nor dated. That observation, when considered with the credible testimony of Ms.

5 Sanchez and Ms. Griego that neither Taxpayer, nor Mr. Walley and Ms. Behles ever filed federal

6 or state income taxes, supports the reasonableness of the Department’s method of computation in

7 this case. The Hearing Officer does not find the returns in Taxpayer Ex. 10 to be trustworthy or

8 reliable.

9 Finally, Taxpayer continued to assert impropriety from the unavailability of Ms. Lucero

10 to testify at the hearing. The cause for her unavailability is addressed in more detail in the

11 Department’s Amendment to Prehearing Statement that was filed on February 19, 2020. Despite

12 Taxpayer’s opposition to the substitution of Ms. Sanchez for Ms. Lucero, the Hearing Officer

13 was persuaded that Ms. Sanchez was a competent witness with personal knowledge and that the

14 absence of Ms. Lucero was not prejudicial to Taxpayer. To the extent Taxpayer could have

15 assertedly relied on Ms. Lucero to testify on any matter that could have been perceived as

16 favorable to Taxpayer’s position, it was incumbent on Taxpayer to secure her appearance.

17 Taxpayer made no effort to do so prior to being notified of Ms. Lucero’s unavailability. See

18 Gallegos v. Yeargin W. Constructors, 1986-NMCA-087, ¶14, 104 N.M. 623, 725 P.2d 599 (a

19 party has the obligation to subpoena witnesses whose presence is indispensable to their case.)

20 Having considered all of the evidence and arguments, the Hearing Officer was persuaded

21 that Taxpayer’s protest should be GRANTED IN PART as to the adjustments to which Ms.

22 Griego conceded the Taxpayer was entitled and DENIED with respect to all remaining issues.

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1 CONCLUSIONS OF LAW

2 A. Taxpayer filed a timely, written protest to the Department’s assessments, and

3 jurisdiction lies over the parties and the subject matter of the protest.

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

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

6 C. Taxpayer carries the burden to present countervailing evidence or legal argument

7 to show that it is entitled to an abatement of an assessment. See Casias Trucking, 2014-NMCA-

8 099, ¶8.

9 D. If a taxpayer presents sufficient evidence to rebut the presumption, then the

10 burden shifts to the Department to re-establish the correctness of the assessment. See MPC Ltd.,

11 2003-NMCA-021, ¶13.

12 E. Taxpayers have a legal obligation to retain records capable of accurately

13 computing state taxes as required by NMSA 1978, Section 7-1-10 (A).

14 F. Upon determination that a taxpayer’s records are insufficient to accurately

15 compute taxes, the Department may resort to alternative means of computing a tax obligation,

16 which includes the bank deposit method provided by Regulation 3.1.5.8 NMAC.

17 G. Where a taxpayer’s claim for relief relies on the application of an exemption or

18 deduction, “the statute must be construed strictly in favor of the taxing authority, the right to the

19 exemption or deduction must be clearly and unambiguously expressed in the statute, and the

20 right must be clearly established by the taxpayer.” See Wing Pawn Shop v. Taxation and Revenue

21 Department, 1991-NMCA-024, ¶16, 111 N.M. 735, 809 P.2d 649 (internal citation omitted); See

22 also TPL, Inc. v. N.M. Taxation & Revenue Dep’t, 2003-NMSC-007, ¶9, 133 N.M. 447, 64 P.3d

23 474.

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1 H. Taxpayer did not rebut the statutory presumption of correctness that attached to the

2 assessments under NMSA 1978, Section 7-1-17 and the burden did not therefore shift to the

3 Department to re-establish the correctness of its assessments.

4 I. The Department established by a preponderance of evidence that it appropriately

5 assessed civil penalty in the amount of fifty percent for failure, with willful intent to evade or defeat

6 a tax, to pay when due the amount of tax required to be paid. See NMSA 1978, Section 7-1-69 (D).

7 For the foregoing reasons, Taxpayer’s protest should be GRANTED IN PART limited to

8 the adjustments to which Ms. Griego conceded the Taxpayer was entitled, and DENIED with

9 respect to all other issues in dispute. With regard for adjustments, Taxpayer’s taxable receipts

10 should be reduced by $71,405.54 [FoF No. 133] with corresponding adjustments made to the

11 amounts due for tax, penalty, and interest. Interest and penalty shall continue to accrue as

12 permitted by law until paid in full.

13 DATED: December 31, 2020

14
15 Chris Romero
16 Hearing Officer
17 Administrative Hearings Office
18 P.O. Box 6400
19 Santa Fe, NM 87502

In the Matter of the Protest of The Behles Law Firm, P.C.
Page 51 of 52
1 NOTICE OF RIGHT TO APPEAL

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

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

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

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

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

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

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

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

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

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

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

13 CERTIFICATE OF SERVICE

14 On December 31, 2020, a copy of the foregoing Decision and Order was submitted to the

15 parties listed below in the following manner:

16 First Class Mail and Email Email Only
17

18 INTENTIONALLY BLANK
19
20 John Griego, Legal Assistant
21 Administrative Hearings Office
22 P.O. Box 6400
23 Santa Fe, NM 87502

In the Matter of the Protest of The Behles Law Firm, P.C.
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