New Mexico lets me deduct the rent portion of my receipts, but how do I split bundled rent-and-services charges — and what happens if I can't back up my method with records?

View original ruling (PDF)

Plain-English summary

Gemini Las Colinas LLC operates Las Colinas Village, an age-restricted independent/assisted-living community in Albuquerque (residents 55+, average age 83). Under a "Residency Occupancy Agreement," residents pay a single monthly charge that bundles the apartment with services — expanded cable, daily dining, planned activities, safety checks, transportation, linens, housekeeping, and 24/7 front-desk service.

For gross receipts tax (GRT), the split matters: New Mexico taxes the services but lets a business deduct the receipts that are true rent of real property under Section 7-9-53. The Department audited January 2011 through September 2016, concluded Gemini had overstated its rental deduction, and assessed $724,047.43 — $551,325.84 in tax, $110,265.21 penalty, and $62,456.38 interest. Gemini paid the undisputed part and protested the rest.

The core problem was records. The auditor (Ms. Rivera) asked for documentation supporting the rent-vs-services split — service-fee support, lease/deduction support, meal calculations, tenant agreements — and Gemini did not provide records that reconciled. So the Department reconstructed rental receipts from the entity's IRS Forms 8825 (the federal form partnerships use to report rental real-estate income), which are signed under penalty of perjury and were the best information available.

Gemini's original protest was denied (D&O 19-30, 2019). On appeal, the Court of Appeals in Gemini Las Colinas, LLC v. N.M. Taxation & Revenue Dep't, 2023-NMCA-039 clarified New Mexico's burden framework and sent the case back. On remand, Hearing Officer Chris Romero again denied the protest (this D&O 24-04, February 5, 2024):

• The burden framework. Deciding whether a taxpayer overcomes the presumption that an assessment is correct is a purely legal, threshold question — the taxpayer need only point to "some countervailing evidence" that need not be credible or persuasive. The Court of Appeals had found Gemini cleared that threshold, so the burden of production shifted to the Department. But the burden of persuasion always stays with the taxpayer.
• The Department met its burden of production. The auditor's testimony and the IRS Forms 8825 were "evidence to justify the assessment" — enough to make the assessment's correctness a question of fact. That moved the case to the merits.
• Gemini did not carry its burden of persuasion. Its two after-the-fact alternatives fell short. The cost-accounting method (allocating expenses between rent and services, then adding a profit margin) was built without supporting records and ignored the fair market value of the real property — the same flaw rejected in an earlier decision (SSC of Albuquerque, D&O 18-16). The CBRE market study was undercut because no one from CBRE ever visited the property (despite the report saying it had "inspected" it), it contained errors, and it was prepared roughly two weeks before the hearing. The 8825 forms remained the most reliable measure. Where the competing methods are, at best, in "equipoise," the taxpayer loses.
• Penalty and interest stand. The negligence penalty is mandatory under Section 7-1-69, and Gemini's passing reference to being "under advisement" of a "tax accountant" — with no evidence of the accountant's competence, the facts disclosed, or how the advice was wrong — did not establish the good-faith-mistake exception (Section 7-1-69(B)) or the reasonable-reliance non-negligence factor (3.1.11.11(D) NMAC). Interest is mandatory under Section 7-1-67.

Protest denied. Gemini remained liable for the outstanding tax, penalty, and interest.

Why this decision matters

This is the Administrative Hearings Office decision on remand from Gemini Las Colinas, LLC v. N.M. Taxation & Revenue Dep't, 2023-NMCA-039 — the Court of Appeals opinion that clarified, as a matter of first impression, exactly how the "presumption of correctness" works in a New Mexico tax protest. That opinion is now cited in nearly every AHO decision. In short: overcoming the presumption is a low, purely legal threshold (some evidence tending to dispute the assessment, credible or not); once crossed, the Department must produce evidence justifying its assessment; but the taxpayer always keeps the ultimate burden of persuasion, and if the evidence ends up evenly balanced, the taxpayer's protest is denied.

What this means for you

Senior-living, assisted-living, and mixed-use landlords

If you bundle services into "rent," you can deduct only the genuine real-property lease portion under Section 7-9-53; meals, housekeeping, transportation, and similar services are taxable. New Mexico has long allowed you to apportion by "some reasonable basis" (Revenue Rulings 430-94-2, 440-98-2, 430-00-5), but the burden is on you — and a method that ignores the fair market rental value of the space is vulnerable.

Any business claiming the lease-of-real-property deduction

Keep contemporaneous records that support your rent-vs-services split — leases, billing detail, and the basis for your allocation. If your records don't reconcile, the Department can reconstruct your liability from federal returns (like IRS Forms 8825) and "the best information available," and you'll have a hard time dislodging that number later.

Taxpayers planning to rebut an assessment with an expert study

Timing and rigor count. An analysis built after the assessment, without underlying documentation, or by appraisers who never visited the property, carries little persuasive weight — even if the Department offers no competing expert. Because you carry the burden of persuasion, "our numbers are close to theirs" is not enough; evidence in equipoise means you lose.

Businesses relying on an accountant to avoid penalties

To escape the negligence penalty by pointing to professional advice, you must show the adviser was competent, that you made full disclosure, and that your reliance was reasonable. A bare statement that you acted "under advisement" of a "tax accountant," with no detail, will not do — and you cannot delegate away your duty to know your tax obligations.

Common questions

Q: I bundle services into one monthly "rent." Can I deduct all of it?
A: No. Only the portion that is genuine rent of real property is deductible under Section 7-9-53. Charges for meals, housekeeping, transportation, activities, and similar services are taxable gross receipts.

Q: How am I supposed to split the rent from the services?
A: New Mexico lets you use "some reasonable basis" to apportion, but you must be able to support your method with records. A method that ignores the fair market rental value of the space — or that has no underlying documentation — can be rejected.

Q: What happens if I don't have good records?
A: The Department can reconstruct your liability using alternative methods and the best information available, including federal returns such as IRS Forms 8825. Once it does, you bear the burden of proving your method is more reliable — which is hard to do without records.

Q: The state said I "overcame the presumption of correctness." Did I win?
A: Not necessarily. Overcoming the presumption is only a threshold step. The Department then must produce evidence justifying its assessment, and you still carry the ultimate burden of persuasion. If the evidence is evenly balanced, your protest is denied.

Q: Can I rely on this decision for my own situation?
A: Not directly. A Decision and Order resolves one taxpayer's protest on its specific facts and is not a general ruling or advisory opinion of the Department. It does reliably illustrate how the Gemini burden framework works and how important records are to a Section 7-9-53 deduction.

Citations and references

Statutes and regulations:

• NMSA 1978, § 7-9-4 (2002); § 7-9-5 (2002); § 7-9-3.5(A)(1) (2007) — GRT on the privilege of doing business; all receipts presumed taxable; definition of "gross receipts"
• NMSA 1978, § 7-9-53(A) (1998) — deduction for receipts from the lease of real property
• NMSA 1978, § 7-1-17(C) (2007); 3.1.6.12(A) NMAC — assessment presumed correct; threshold "countervailing evidence" to rebut it
• NMSA 1978, § 7-1-10(A) (2007); § 7-1-13(B); 3.1.5.8(A), (C)(3) NMAC — duty to keep records; self-assessment; adequacy of records is a fact question; Department may reconstruct tax from federal returns and other reports
• NMSA 1978, § 7-1-69(A), (B) (2007); 3.1.11.10, 3.1.11.11(D) NMAC — mandatory negligence penalty; good-faith mistake-of-law exception; negligence factors; reasonable-reliance non-negligence factor
• NMSA 1978, § 7-1-67 (2007) — mandatory interest until the tax is paid
• Revenue Rulings 430-94-2, 440-98-2, 430-00-5 — Department policy allowing apportionment of blended rent/service receipts on "some reasonable basis"

Cases:

• Gemini Las Colinas, LLC v. N.M. Taxation & Revenue Dep't, 2023-NMCA-039, 531 P.3d 622 (the Court of Appeals opinion clarifying the presumption-of-correctness burden framework; remanded this protest)
• N.M. Taxation & Revenue Dep't v. Casias Trucking, 2014-NMCA-099 (Department may reconstruct tax from the best information available; presumption survives estimated assessments)
• MPC Ltd. v. N.M. Taxation & Revenue Dep't, 2003-NMCA-021 (unsubstantiated statements cannot overcome the presumption)
• Archuleta v. O'Cheskey, 1972-NMCA-165, 84 N.M. 428; Waldroop v. O'Cheskey, 1973-NMCA-146, 85 N.M. 736 (a taxpayer who fails to keep records cannot complain of the best methods the Department uses)
• Sec. Escrow Corp. v. State Taxation & Revenue Dep't, 1988-NMCA-068, 107 N.M. 540; TPL, Inc. v. N.M. Taxation & Revenue Dep't, 2003-NMSC-007 (deductions strictly construed in favor of the taxing authority; taxpayer must show clear entitlement)
• Marbob Energy Corp. v. N.M. Oil Conservation Comm'n, 2009-NMSC-013, 146 N.M. 24 ("shall" makes the penalty mandatory)
• C & D Trailer Sales v. Taxation & Revenue Dep't, 1979-NMCA-151, 93 N.M. 697; El Centro Villa Nursing Center v. Taxation & Revenue Dep't, 1989-NMCA-070, 108 N.M. 795; Tiffany Constr. Co. v. Bureau of Revenue, 1976-NMCA-127 (a taxpayer cannot delegate away the duty to know its tax obligations; negligence penalty applies even to inadvertent failures)

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Gemini Las Colinas LLC
• Decision PDF: D&O 24-04

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 GEMINI LAS COLINAS LLC
6 TO ASSESSMENT ISSUED UNDER
7 LETTER ID NO. L0294038832

8 v. D&O 24-04

9 NEW MEXICO TAXATION AND REVENUE DEPARTMENT

10 DECISION AND ORDER
11 ON REMAND FROM NEW MEXICO COURT OF APPEALS

12 On December 4, 2019, Chris Romero, Esq., Hearing Officer (Administrative Hearings

13 Office) entered a Decision and Order (D&O 19-30) denying the protest of an assessment of Gemini

14 Las Colinas, LLC (Taxpayer). Taxpayer appealed.

15 In Gemini Las Colinas, LLC v. New Mexico Taxation & Revenue Dep't, 2023-NMCA-

16 039, the Court of Appeals remanded the matter for further proceedings consistent with the

17 opinion expounded therein, leaving it to the discretion of the Hearing Officer to determine what

18 proceedings are necessary – “whether a further hearing or briefing are required or whether the

19 determination can be made on the record as it exists.” See Gemini, 2023-NMCA-039, ¶ 40. The

20 parties agreed that the matter could proceed on remand on the existing evidentiary record. The

21 Hearing Officer concurred and permitted the parties to file supplemental briefing.

22 The hearing on the merits of the protest occurred on August 19, 2019. Taxpayer appeared

23 by and through Mr. Benjamin C. Roybal, Esq. (Betzer, Roybal & Eisenberg P.C.) who was

24 accompanied by witnesses, Mr. Matthew Clifton and Ms. Pia McBride. Mr. Bennet Johnson also

25 appeared and testified for Taxpayer.

26 Mr. David Mittle, Esq. appeared on behalf of the opposing party in the protest, the

27 Taxation and Revenue Department (“Department”), accompanied by Ms. Lizette Rivera, protest

In the Matter of the Protest of Gemini Las Colinas, L.L.C.
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1 auditor who also appeared as a witness for the Department.

2 The Administrative Hearings Office is an independent agency tasked with the fair and

3 impartial adjudication of protests under the Tax Administration Act. As explained by Regulation

4 22.600.1.20 C NMAC, the Hearing Officer is not “responsible to or subject to the direction of

5 any officer, employee or agent of the taxation and revenue department[.]” See e.g. Regulation

6 22.600.1 NMAC (2018); See also NMSA 1978, Sections 7-1B-1 – 10.

7 Taxpayer Exhibits 1 – 13 and Department Exhibits C – I were admitted into the

8 evidentiary record by stipulation without objection at the hearing occurring on August 19, 2019.

9 The issue in the protest is whether Taxpayer is entitled to an abatement of assessed gross

10 receipts tax, and associated penalty and interest by application of the deduction provided by

11 NMSA 1978, Section 7-9-53 (1998) which affords a deduction from gross receipts for those

12 amounts derived from the lease of real property. As expounded in greater detail below, the

13 Hearing Officer determined that although there may be competing methods for calculating the

14 amount of a rental deduction under the facts of the protest, the method employed by the Department

15 was reasonable under the circumstances and represented the best method available at the time of the

16 assessment. Moreover, the evidence failed to persuade the Hearing Officer that Taxpayer’s

17 alternative methods of computation produced a more reliable or accurate determination of

18 Taxpayer’s gross receipts tax liability. Therefore, Taxpayer’s protest should be denied. IT IS

19 DECIDED AND ORDERED AS FOLLOWS:

20 FINDINGS OF FACT

21 Neither party nor the Hearing Officer perceived the need to present new evidence. The

22 Hearing Officer reexamined the evidentiary record and restates herein all previous findings of

23 fact as stated in D&O 19-30.

In the Matter of the Protest of Gemini Las Colinas, L.L.C.
Page 2 of 45
1 1. Mr. Matthew Clifton is senior vice president and chief financial officer at Senior

2 Star Management Company (“Senior Star”), which is an entity engaged in the business of

3 operating independent living, assisted living, memory care, and nursing care communities across

4 the United States. [Direct Examination of Mr. Clifton]

5 2. In the present protest, Senior Star manages Taxpayer, which is a single-member

6 limited liability company organized in 2003. [Direct Examination of Mr. Clifton]

7 3. The single member of the limited liability company is an entity called Senior Star

8 Investments 1, L.L.C., which is a joint venture between Welltower, Inc., which possesses a 90-

9 percent interest, and Gemini Powers, LLC which possesses a 10-percent interest. Welltower, Inc.

10 is a real estate investment trust, or REIT. [Direct Examination of Mr. Clifton; Taxpayer Ex. 9]

11 4. Taxpayer owns and operates an independent living community in Albuquerque,

12 New Mexico, known as Las Colinas Village, situated at 500 Paisano Street NE, Albuquerque,

13 NM 87123. [Direct Examination of Mr. Clifton]

14 5. Las Colinas Village offers various-sized apartments including studio, one-

15 bedroom, and two-bedroom apartments, in addition to other various amenities. [Direct

16 Examination of Mr. Clifton]

17 6. All apartments contain a “fully-functional kitchen and a standard bedroom bath.”

18 The community also provides common space dedicated to exercise, activities and dining. [Direct

19 Examination of Mr. Clifton]

20 7. Las Colinas Village is an “age-restricted community.” All residents are required

21 to be 55 years of age or older, but its average age per resident is 83 years. [Direct Examination of

22 Mr. Clifton]

23 8. Although Las Colinas Village retains various characteristics commonly associated

In the Matter of the Protest of Gemini Las Colinas, L.L.C.
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1 with standard apartment complexes, it provides additional services and amenities devised to

2 enhance the quality of life of its elder residents. [Direct Examination of Mr. Clifton]

3 9. Therefore, tenants of Las Colinas Village receive additional benefits in

4 comparison to the tenants of standard apartment communities, including the advantages of

5 designated space for activities, exercise or dining, and a variety of services including access to

6 specialized staff devoted to serving the unique needs of its residents. [Direct Examination of Mr.

7 Clifton]

8 10. The additional benefits permit Taxpayer to charge rents exceeding those amounts

9 that might be common for standard apartment communities that do not provide the same types of

10 additional benefits. [Direct Examination of Mr. Clifton]

11 11. Las Colinas Village leases apartments pursuant to a “Residency Occupancy

12 Agreement” on a month-to-month term. Las Colinas Village does not utilize customary lease

13 agreements because its agreements need to encompass more than rent, such as access to various

14 services. [Direct Examination of Mr. Clifton; Taxpayer Ex. 11]

15 12. The amount of “[r]ent includes all of the services/amenities” incorporated by

16 reference into the agreement by an attached exhibit. Additional services compensated by fees not

17 included in the rent are also available, as similarly incorporated by reference into the agreement

18 by a second attached exhibit. [Taxpayer Ex. 11.3]

19 13. Services specifically and explicitly included in the monthly rent are: 1) expanded

20 cable; 2) dining from 7 a.m. to 6 p.m.; 3) planned community activities; 4) safety checks; 5)

21 transportation for shopping, medical, and community activities; 6) linen services; 7)

22 housekeeping; and 8) 24/7 front desk service. [Taxpayer Ex. 11.14]

23 14. Bundling specified resident services with rent is a common practice within the

In the Matter of the Protest of Gemini Las Colinas, L.L.C.
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1 industry. [Direct Examination of Mr. Clifton]

2 15. The Department conducted an audit for the periods January 31, 2011 through

3 September 30, 2016 in which it examined the portion of Taxpayer’s receipts that were generated

4 from resident services. The Department determined that Taxpayer was overstating its deduction

5 for the rent of real property, resulting in a liability for unpaid gross receipts taxes. [Direct

6 Examination of Mr. Clifton]

7 16. The Department issued a Notice of Assessment of Taxes and Demand for

8 Payment under Letter ID No. L0294038832 for the sum of $724,047.43 comprised of gross

9 receipts tax of $551,325.84, penalty of $110,265.21, and interest of $62,456.38 for the periods

10 January 31, 2011 through September 30, 2016. [Direct Examination of Mr. Clifton; Taxpayer Ex.

11 10; Administrative File]

12 17. Taxpayer conceded that some tax was owed, and it paid the undisputed amount

13 prior to filing its protest. Taxpayer did not concede to the imposition of penalty because it acted

14 “under advisement” of its “tax accountant.” [Direct Examination of Mr. Clifton]

15 18. In computing Taxpayer’s alleged tax liability, the Department significantly relied

16 on IRS Forms 8825, reporting the income of Welltower, Inc. and Senior Star Investments 1,

17 L.L.C., in all years reviewed during the audit, in concluding that additional tax was due and

18 owing. The IRS Forms 8825 accompanied all IRS Forms 1065 in the same years. [Direct

19 Examination of Mr. Clifton; Department Ex. C; Direct Examination of Ms. Rivera]

20 19. Taxpayer provided the IRS Forms 8825 to the Department during the audit.

21 [Direct Examination of Mr. Clifton; Direct Examination of Ms. Rivera; Department Ex. C].

22 20. Taxpayer observed that the Department identified the amount of resident-service

23 income by calculating the difference between gross rents as reported on each IRS Form 8825 and

In the Matter of the Protest of Gemini Las Colinas, L.L.C.
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1 total gross receipts. [Direct Examination of Mr. Clifton]

2 21. Relying on IRS Forms 8825 to establish the sum of Taxpayer’s receipts from the

3 rent of real property may result in an underreporting of such income because REITs, although

4 permitted to invest in independent living, must report an approximate triple-net income when

5 investing in the entities that operate them. For that reason, IRS Forms 8825 may not report the

6 actual income derived from rent. [Direct Examination of Mr. Clifton]

7 22. Triple net income under the present circumstances resembles the income that

8 might be derived from a typical commercial lease in which the tenant assumes liability for

9 insurance, taxes, and maintenance, which results in a tenant base income that is lower than a full-

10 service rental income. [Direct Examination of Mr. Clifton]

11 23. Accordingly, the IRS Forms 8825 reflect certain adjustments that tend to distort

12 Taxpayer’s receipts from rent due to the reporting requirements placed on REITs in this case,

13 because it owns an interest in Taxpayer, the entity that operates Las Colinas Village. [Direct

14 Examination of Mr. Clifton]

15 24. IRS Forms 8825 are used by partnerships and S corporations to report income and

16 deductible expenses from rental real estate activities, including net income or losses from rental

17 real estate activities that flow through from partnerships, estates, or trusts. [Direct Examination

18 of Mr. Clifton; Administrative Notice of General Instructions for Form 8825,

19 https://www.irs.gov/pub/irs-pdf/f8825.pdf]

20 25. IRS Forms 8825 relevant to Taxpayer’s receipts reported income and deductible

21 expenses of Senior Star Investments 1, L.L.C. from rental real estate flowing from Welltower,

22 Inc. [Direct Examination of Mr. Clifton]

23 Cost Accounting

In the Matter of the Protest of Gemini Las Colinas, L.L.C.
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1 26. An alternate system of separating receipts from rent and resident services might

2 stem from utilizing a cost-accounting method. Taxpayer developed a method consisting of the

3 following steps:

4 a. Identify sources of revenue and generally sort them between ancillary

5 income and resident income. Ancillary income is income that is readily identifiable from a direct

6 source. Resident income is the all-inclusive amount due from residents as provided in a Resident

7 Services Agreement.

8 b. Determine which portions of resident income are generated from renting

9 real property or from providing services using a cost-accounting analysis. The process begins by

10 categorizing all expenses into one of the following classifications: 1) services unique to assisted

11 living communities; 2) rent expenses including expenses common among most non-service

12 providing apartment complexes; or 3) shared services consisting of services that might fit into

13 both categories.

14 c. Apply a profit margin to expenses, the sum of which represents gross

15 receipts from those services, plus a profit.

16 d. The amount of allocated service is then combined with ancillary income to

17 determine total gross receipts.

18 e. Taxpayer concludes by computing the amount of the rental deduction by

19 calculating the difference between its total gross receipts from all sources and the sum of

20 allocated services and ancillary services.

21 [Direct Examination of Mr. Clifton; Taxpayer Ex. 1]

22 27. For each year subject of the audit, but after the assessment, Taxpayer initiated its

23 analysis by identifying and categorizing its payroll expenses and identifying the percentage of

In the Matter of the Protest of Gemini Las Colinas, L.L.C.
Page 7 of 45
1 total payroll expenses that should be attributed to services unique to assisted living communities.

2 The primary categories of services are dietary, transportation, and activities. [Direct Examination

3 of Mr. Clifton; Taxpayer Exs. 1 – 7]

4 28. Taxpayer also evaluated its shared payroll, meaning those expenses that could be

5 attributed to either rent expenses or service expenses and divided those expenses between its

6 service and rent expenses. Shared expenses primarily include housekeeping payroll as well as

7 supplies, equipment, and uniforms. [Direct Examination of Mr. Clifton; Taxpayer Exs. 1 – 7]

8 29. Payroll expenses attributed to rent included those portions of the shared expenses

9 that were not attributed to services, as well as payroll expenses related to management, repair

10 and maintenance, and leasing. [Direct Examination of Mr. Clifton; Taxpayer Exs. 1 – 7]

11 30. The percentage of payroll and benefits expenses Taxpayer attributed to services in

12 the relevant periods of time were:

13 a. 45 percent in 2011;
14 b. 45.9 percent in 2012;
15 c. 45.2 percent in 2013;
16 d. 48.8 percent in 2014;
17 e. 49.6 percent in 2015; and
18 f. 49.6 percent in 2016.

19 [Direct Examination of Mr. Clifton; Taxpayer Exs. 2.1; 3.1; 4.1; 5.1; 6.1; and 7.1]

20 31. The identified percentage of shared payroll and benefits expenses are then

21 allocated to the service category while the remainder are allocated to the rent category. [Direct

22 Examination of Mr. Clifton; Taxpayer Exs. 1 – 7]

23 32. Taxpayer next identified and categorized its non-payroll expenses into the same

24 categories of shared expenses, service expenses, and rent expenses. [Direct Examination of Mr.

25 Clifton; Taxpayer Exs. 1 – 7]

26 33. Expenses categorized as shared expenses were divided into rental expenses and

In the Matter of the Protest of Gemini Las Colinas, L.L.C.
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1 service expenses utilizing the same percentage identified for the allocation of payroll and

2 benefits for the applicable period. Consequently, the following percentages of shared expenses

3 were allocated to services in the relevant periods of time:

4 a. 45 percent in 2011;
5 b. 45.9 percent in 2012;
6 c. 45.2 percent in 2013;
7 d. 48.8 percent in 2014;
8 e. 49.6 percent in 2015; and
9 f. 49.6 percent in 2016.

10 [Direct Examination of Mr. Clifton; Taxpayer Exs. 2.4; 3.4; 4.4; 5.4; 6.4; and 7.4]

11 34. The identified percentage of non-payroll expenses are then allocated to the service

12 category while the remainder are allocated to the rent category. [Direct Examination of Mr.

13 Clifton; Taxpayer Exs. 1 – 7]

14 35. Payroll and benefits expenses are then merged with other expenses to determine

15 the sum of all expenses, per category. [Direct Examination of Mr. Clifton; Taxpayer Exs. 1 – 7]

16 36. Taxpayer’s analysis concluded that its total expenses, which should be allocated

17 to services in the relevant periods of time were:

18 a. $776,455 in 2011;
19 b. $803,907 in 2012;
20 c. $840,984 in 2013;
21 d. $880,804 in 2014;
22 e. $970,918 in 2015; and
23 f. $716,555 in 2016.

24 [Direct Examination of Mr. Clifton; Taxpayer Exs. 2.5; 3.5; 4.5; 5.5; 6.5; and 7.5]

25 37. Taxpayer then evaluated its income from ancillary sources and resident sources,

26 and similarly allocated it between rental income and service income. Income that Taxpayer

27 allocated to services in the relevant periods of time were:

28 a. $20,371 in 2011;
29 b. $20,577 in 2012;

In the Matter of the Protest of Gemini Las Colinas, L.L.C.
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1 c. $25,232 in 2013;
2 d. $31,430 in 2014;
3 e. $27,084 in 2015; and
4 f. $21,450 in 2016.

5 [Direct Examination of Mr. Clifton; Taxpayer Exs. 2.5; 3.5; 4.5; 5.5; 6.5; and 7.5]

6 38. The amounts designated as service income were then added to the amounts

7 calculated for the costs of services, to which Taxpayer then added a profit margin. The sum of

8 total receipts attributed to service, the allocation of services, and the added margins represent

9 Taxpayer’s determination of the taxable gross receipts. The amounts claimed in the relevant

10 periods of time were:

11 a. $828,894 in 2011;
12 b. $857,685 in 2012;
13 c. $900,948 in 2013;
14 d. $948,611 in 2014;
15 e. $1,038,101 in 2015; and
16 f. $767,599 in 2016.

17 [Direct Examination of Mr. Clifton; Taxpayer Exs. 2.5; 3.5; 4.5; 5.5; 6.5; and 7.5]

18 39. Taxpayer then calculated its total gross income for the relevant periods of time in

19 the following amounts:

20 a. $3,094,026.63 in 2011;
21 b. $3,120,883.48 in 2012;
22 c. $3,343,150.57 in 2013;
23 d. $3,497,877.11 in 2014;
24 e. $3,773,318.68 in 2015; and
25 f. $1,921,962.65 in 2016.

26 [Direct Examination of Mr. Clifton; Taxpayer Exs. 2.6; 3.6; 4.6; 5.6; 6.6; and 7.6]

27 40. Taxpayer then calculated the difference between its total gross income and the

28 taxable gross receipts to arrive at the claimed rental income deduction. The claimed rental

29 deduction for each relevant period was:

30 a. $2,265,133.07 in 2011;

In the Matter of the Protest of Gemini Las Colinas, L.L.C.
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1 b. $2,263,198.04 in 2012;
2 c. $2,442,202.84 in 2013;
3 d. $2,549,266.46 in 2014;
4 e. $2,735,218.09 in 2015; and
5 f. $1,921,962.65 in 2016.

6 [Direct Examination of Mr. Clifton; Taxpayer Exs. 2.6; 3.6; 4.6; 5.6; 6.6; and 7.6]

7 41. Taxpayer Exhibits 2 – 7 were prepared subsequent to the assessment giving rise to

8 the protest with the knowledge that rental income was deductible from gross receipts. [Cross

9 Examination of Mr. Clifton]

10 42. The analysis contained in Taxpayer Exhibits 1 – 7 was not provided to the

11 Department at the time of the audit, nor were its source documents. [Direct Examination of Ms.

12 Rivera]

13 Third-Party Market Analysis

14 43. Taxpayer also retained the services of a third-party, CBRE, to perform a market

15 study that could complement or corroborate the accuracy of its cost-accounting method by

16 obtaining an independent analysis of the comparable properties in the local market to establish

17 fair market values. [Direct Examination of Mr. Clifton; Taxpayer Ex. 13]

18 44. Mr. Bennett Johnson is a licensed commercial appraiser formerly employed by

19 CBRE where he served as vice-president and co-practice leader of its national senior housing and

20 care group where his group provided appraisal services in addition to other services relating to

21 senior living. As of the date of the hearing, he was transitioning to a new employer. [Direct

22 Examination of Mr. Johnson]

23 45. Mr. Johnson graduated from Northeastern University in 2006 with a degree in

24 business. Mr. Johnson is licensed as an appraiser in several states and is a member of various

25 organizations relevant to the field of commercial appraisal and senior living. [Direct

In the Matter of the Protest of Gemini Las Colinas, L.L.C.
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1 Examination of Mr. Johnson]

2 46. Mr. Johnson is not licensed as an appraiser in New Mexico. [Cross Examination

3 of Mr. Johnson]

4 47. Mr. Johnson performed a market analysis on Taxpayer’s behalf in which he

5 evaluated the rental value of the residential units at Las Colinas Village. [Direct Examination of

6 Mr. Johnson; Taxpayer Ex. 13]

7 48. Mr. Johnson was the lead appraiser on the analysis and primary author of the Rent

8 Analysis Summary at Taxpayer Exhibit 13, which represents a “high-level summary” of CBRE’s

9 analysis and conclusions. [Direct Examination of Mr. Johnson]

10 49. A market analysis evaluates comparable properties in order to identify a

11 comparable value for the property being appraised. [Direct Examination of Mr. Johnson]

12 50. CBRE was engaged to provide services in May of 2019 and continued through

13 July of 2019. [Direct Examination of Mr. Johnson]

14 51. A market analysis is generally initiated by locating comparable properties,

15 meaning similar properties, in reasonable proximity as the property being appraised. An

16 appraiser might also refer to industry resources and data. [Direct Examination of Mr. Johnson]

17 52. Neither Mr. Johnson nor anyone else from CBRE visited Las Colinas Village as

18 part of performing the market analysis. [Cross Examination of Mr. Johnson]

19 53. The rental analysis summary, under the heading for “Assumption and Limiting

20 Conditions” represents that “CBRE, Inc. through its appraiser (collectively, ‘CBRE’) has

21 inspected through reasonable observation the subject property.” [Taxpayer Ex. 13.12]

22 54. Mr. Johnson notes that Las Colinas Village is situated in an “inferior market

23 location” in comparison to other properties he reviewed as part of his analysis. [Cross

In the Matter of the Protest of Gemini Las Colinas, L.L.C.
Page 12 of 45
1 Examination of Mr. Johnson]

2 55. The CBRE market analysis confirmed that there is a premium for fair rental value

3 for assisted living communities. [Direct Examination of Mr. Johnson]

4 56. The rent analysis summary contains minor errors including reference to an

5 incorrect quantity of rental units and reference to properties more than 20 miles away, but those

6 errors have minimal or no effect on the conclusions of the analysis. [Direct Examination of Mr.

7 Johnson]

8 57. Taxpayer retained the services of CBRE in 2019 partly in anticipation of the

9 hearing of the protest. The summary is dated August 5, 2019. [Cross Examination of Mr. Clifton;

10 Taxpayer Ex. 13.1]

11 Illustrative Comparison
12 Cost Accounting v. Third-Party Market Analysis

13 58. Taxpayer prepared an illustrative comparison to assess the results of its own cost-

14 accounting method with the third-party market analysis. [Direct Examination of Mr. Clifton;

15 Taxpayer Exs. 1 – 7; Exs. 12 – 13]

16 59. The illustrative comparison indicated that the cost-allocation method produced a

17 larger amount of rental income, therefore producing a larger rental deduction. [Taxpayer Ex. 12]

18 60. The illustrative comparison suggested that in 2011, the cost-accounting method

19 produced a rental deduction of $2,265,133 in comparison to the third-party market analysis that

20 suggested an equivalent rental deduction of $1,771,601, a difference of 27.9 percent, or

21 $493,532. [Taxpayer Ex. 12]

22 61. The illustrative comparison suggested that in 2012, the cost-accounting method

23 produced a rental deduction of $2,263,198 in comparison to the third-party market analysis that

24 suggested an equivalent rental deduction of $2,205,041, a difference of 2.6 percent, or $58,157.

In the Matter of the Protest of Gemini Las Colinas, L.L.C.
Page 13 of 45
1 [Taxpayer Ex. 12]

2 62. The illustrative comparison suggested that in 2013, the cost-accounting method

3 produced a rental deduction of $2,442,203 in comparison to the third-party market analysis that

4 suggested an equivalent rental deduction of $2,306,868, a difference of 5.9 percent, or $135,335.

5 [Taxpayer Ex. 12]

6 63. The illustrative comparison suggested that in 2014, the cost-accounting method

7 produced a rental deduction of $2,549,266 in comparison to the third-party market analysis that

8 suggested an equivalent rental deduction of $2,432,635, a difference of 4.8 percent, or $116,631.

9 [Taxpayer Ex. 12]

10 64. The illustrative comparison suggested that in 2015, the cost-accounting method

11 produced a rental deduction of $2,735,218 in comparison to the third-party market analysis that

12 suggested an equivalent rental deduction of $2,461,206, a difference of 11.1 percent, or

13 $274,012. [Taxpayer Ex. 12]

14 65. The illustrative comparison suggested that in 2016, the cost-accounting method

15 produced a rental deduction of $1,921,963 in comparison to the third-party market analysis that

16 suggested an equivalent rental deduction of $1,799,078, a difference of 6.8 percent, or $122,885.

17 [Taxpayer Ex. 12]

18 66. The illustrative comparison suggested that the cumulative results of the cost-

19 accounting method produced a total rental deduction of $14,176,981 in comparison to the third-

20 party market analysis that suggested an equivalent cumulative rental deduction of $12,977,429, a

21 difference of 8.5 percent, or $1,199,552. [Taxpayer Ex. 12; Administrative Notice of Cumulative

22 Results]

23 The Audit and Assessment

In the Matter of the Protest of Gemini Las Colinas, L.L.C.
Page 14 of 45
1 67. Ms. Lizette Rivera is a tax auditor for the Department. She has been employed

2 with the Department for approximately eight years. [Direct Examination of Ms. Rivera]

3 68. Performing research relevant to Senior Star, Ms. Rivera observed that Taxpayer

4 was registered to conduct business in New Mexico but reported minimal gross receipts in the

5 range of $15,000 to $19,000 per month. [Direct Examination of Ms. Rivera]

6 69. Ms. Rivera also observed that all of Taxpayer’s employees were employed by

7 Senior Star, and not directly by Taxpayer. [Direct Examination of Ms. Rivera]

8 70. Ms. Rivera was eventually tasked with performing an audit of Taxpayer. [Direct

9 Examination of Ms. Rivera]

10 71. One of the initial undertakings of the audit was to identify Taxpayer’s gross

11 receipts through the reconciliation of various financial documents provided by Taxpayer.

12 However, Taxpayer’s records did not produce consistent or reliable figures of gross receipts nor

13 provide a foundation for calculating an appropriate rental deduction. [Direct Examination of Ms.

14 Rivera]

15 72. There were four categories of records that Ms. Rivera requested of Taxpayer,

16 which could have been helpful to her computations, but which Taxpayer did not provide:

17 a. supporting documentation for service fees;
18 b. supporting documentation for lease of real property reported deductions;
19 c. supporting documentation for prepared meals calculation for reported gross
20 receipts; and
21 d. tenant agreements, invoices and/or billing statements.

22 [Direct Examination of Ms. Rivera; Taxpayer Ex. 8.2]

23 73. Ms. Rivera eventually referred to IRS Forms 8825 for tax years 2011 through

24 2015 to identify Taxpayer’s gross receipts from rent while total receipts were computed by

25 reference to Taxpayer’s receipt registers. [Direct Examination of Ms. Rivera; Taxpayer Ex. 8]

In the Matter of the Protest of Gemini Las Colinas, L.L.C.
Page 15 of 45
1 74. Ms. Rivera found the IRS Forms 8825 to be reliable since taxpayers prepare and

2 submit the information under penalty of federal law. [Direct Examination of Ms. Rivera]

3 75. IRS Forms 8825 identified gross rents for Las Colinas Village in the following

4 amounts:

5 a. $3,102,008 in 2011 [Department Ex. C.1];
6 b. $1,558,546 in 2012 [Department Ex. C.2];
7 c. $1,675,811 in 2013 [Department Ex. C.3];
8 d. $1,479,615 in 2014 [Department Ex. C.4]; and
9 e. $1,974,413 in 2015 [Department Ex. C.5].

10 76. Since the amount reported for 2011 appeared to be an anomaly when compared to

11 years 2012 through 2015, the Department disregarded the reported amount in favor of the

12 average of the amounts reported in subsequent years. The same average was applied to the

13 applicable portion of 2016 since income had not been yet reported for that year. [Direct

14 Examination of Ms. Rivera]

15 77. Relying on the average amounts reported from 2012 through 2015, gross rents for

16 2011 and 2016 were computed as follows:

17 a. $1,672,096.20 in 2011 [Taxpayer Ex. 8.13]; and
18 b. $1,254,072.15 in 2016 [Taxpayer Ex. 8.15].

19 78. Ms. Rivera perceived the IRS Forms 8825 as the most reliable report of revenue

20 generated from rent. [Direct Examination of Ms. Rivera]

21 79. Neither Taxpayer’s cost-accounting analyses nor the CBRE market analysis were

22 provided to Ms. Rivera until after the matter had proceeded into protest. [Direct Examination of

23 Ms. Rivera]

24 80. The CBRE market analysis as well as the cost-allocation analysis would have

25 been considered and may have been helpful had they been provided earlier in the process.

26 However, they were not available, and the audit proceeded in reliance on the best information

In the Matter of the Protest of Gemini Las Colinas, L.L.C.
Page 16 of 45
1 available at the time. [Direct Examination of Ms. Rivera]

2 Procedural History of Protest

3 81. On November 1, 2017, Taxpayer, by and through its counsel of record, submitted

4 its protest to the assessment issued under Letter ID No. L0294038832. [Administrative File]

5 82. On November 21, 2017, the Department acknowledged receipt of Taxpayer’s

6 protest under Letter ID No. L1978884912. [Administrative File]

7 83. The Department filed a Hearing Request on December 7, 2017 in which it

8 requested a scheduling hearing. [Administrative File]

9 84. On December 7, 2017, the Administrative Hearings Office entered a Notice of

10 Telephonic Scheduling Hearing which set an initial hearing on the protest for January 5, 2018.

11 [Administrative File]

12 85. On January 5, 2018, an initial scheduling hearing occurred in which the parties

13 agreed that the hearing satisfied the 90-day hearing requirement and that a second hearing should

14 occur after the parties have had an opportunity to meet and confer. [Administrative File]

15 86. On January 12, 2018, the Administrative Hearings Office entered a Second Notice

16 of Telephonic Scheduling Conference which set a hearing for April 6, 2018. [Administrative

17 File]

18 87. On April 6, 2018, after a hearing to address scheduling, the Administrative

19 Hearings Office entered a Scheduling Order and Notice of Administrative Hearing.

20 [Administrative File]

21 88. On September 10, 2018, Mr. Mittle substituted as counsel for the Department’s

22 previous attorney of record. [Administrative File]

23 89. On October 2, 2018, Taxpayer served Protestant’s First Set of Interrogatories and

In the Matter of the Protest of Gemini Las Colinas, L.L.C.
Page 17 of 45
1 First Request for Production on the Department. [Administrative File]

2 90. On October 22, 2019, the Department served Department’s Responses to

3 Protestant’s First Set of Interrogatories and Request for Production of Documents.

4 [Administrative File]

5 91. On November 1, 2018, Taxpayer served Protestant’s Second Set of Interrogatories

6 and Second Request for Production on the Department. [Administrative File]

7 92. On November 27, 2018, Taxpayer filed a Motion for Continuance1 of the merits

8 hearing set for January 14, 2019. [Administrative File]

9 93. On November 28, 2018, the Department served Department’s Responses to

10 Protestant’s Second Set of Interrogatories and Second Request for Production of Documents.

11 [Administrative File]

12 94. On December 6, 2018, the Administrative Hearings Office entered a Continuance

13 Order, Amended Scheduling Order and Notice of Administrative Hearing setting a hearing on

14 the merits of Taxpayer’s protest for February 26, 2019. [Administrative File]

15 95. On February 6, 2019, Taxpayer filed Protestant’s Prehearing Statement.

16 [Administrative File]

17 96. On February 7, 2019, the Department filed an Unopposed Motion for

18 Continuance. [Administrative File]

19 97. On February 15, 2019, the Administrative Hearings Office entered an Order

20 Vacating Hearing on Merits and Notice of Telephonic Scheduling Hearing, which converted the

21 merits hearing on February 26, 2019 to a telephonic scheduling hearing. [Administrative File]

1
The motion for continuance stated that Taxpayer “moves the Department’s Hearing Officer” for the requested
relief. Just for clarification, neither the Administrative Hearings Office nor its presiding hearing officer are affiliated
with the Department. See NMSA 1978, Sections 7-1B-1 to – 10

In the Matter of the Protest of Gemini Las Colinas, L.L.C.
Page 18 of 45
1 98. On February 26, 2019, the Administrative Hearings Office reset the scheduling

2 hearing and entered a Notice of Telephonic Scheduling Hearing because the Department did not

3 appear. [Administrative File]

4 99. On April 24, 2019, the Administrative Hearings Office entered a Scheduling

5 Order and Notice of Administrative Hearing which in addition to other deadlines, set a hearing

6 on the merits of Taxpayer’s protest for August 19, 2019. [Administrative File]

7 100. On July 29, 2019, Taxpayer filed Protestant’s Prehearing Statement and the

8 Department filed Department’s Prehearing Statement. [Administrative File]

9 Post-Appeal Proceedings

10 101. On May 12, 2023, the New Mexico Court of Appeals mandated this protest for

11 further proceeding. See Gemini Las Colinas, LLC v. New Mexico Taxation & Revenue Dep't,

12 2023-NMCA-039.

13 102. In response to the mandate, Taxpayer on May 31, 2023, filed a Motion to Allow

14 Supplemental Briefing on Remand Based on the Present Record. [Administrative File]

15 103. On June 12, 2023, the Department filed Department’s Response in Opposition to

16 Taxpayer’s Motion to Allow Supplemental Briefing on Remand Based on the Present Record.

17 [Administrative File]

18 104. On June 15, 2023, the Administrative Hearings Office entered an Order on

19 Mandate and Supplemental Briefing Schedule. [Administrative File]

20 105. On July 17, 2023, Taxpayer filed Taxpayer’s Supplemental Brief on Remand.

21 [Administrative File]

22 106. On July 18, 2023, the parties filed a Joint Motion to Allow Use of Unofficial

23 Transcript of Proceedings. [Administrative File]

In the Matter of the Protest of Gemini Las Colinas, L.L.C.
Page 19 of 45
1 107. On July 25, 2023, the Administrative Hearings Office entered an Order Granting

2 Joint Motion to Allow Use of Unofficial Witten Transcript of Proceedings. The order specified

3 that, “[i]n case of any discrepancy between the unofficial written transcript and the audio

4 recording of the hearing, the audio recording shall be determinative.” [Administrative File]

5 108. On July 31, 2023, Taxpayer filed Taxpayer’s Submission of Unofficial Transcript

6 of the Merits Hearing. [Administrative File]

7 109. On August 9, 2023, the Department filed Department Motion to Extend Deadline

8 to File Response to Gemini’s Supplement Brief on Remand. [Administrative File]

9 110. On August 21, 2023, Taxpayer filed Taxpayer’s Response in Opposition to the

10 Department’s Motion for 90-day extension of time to File Supplemental Brief on Remand.

11 [Administrative File]

12 111. On August 22, 2023, the Administrative Hearings Office entered an Order

13 Permitting Reply. The order specified that, “[a]lthough the tribunals’ rules of procedure provide

14 no right of reply, the Hearing Officer upon review of the Response determined that his decision

15 on the underlying motion may nevertheless be assisted by a brief reply.” [Administrative File]

16 112. On August 24, 2023, the Department filed Department Reply in Response to

17 Gemini’s Objection to Extension of Deadline to Respond to Gemini’s Supplemental Brief on

18 Remand. [Administrative File]

19 113. On August 29, 2023, the Administrative Hearings Office entered an Order

20 Enlarging Time to File Response to Gemini’s Supplemental Brief on Remand. [Administrative

21 File]

22 114. On September 5, 2023, the Department filed Department Motion for

23 Reconsideration of Order Enlarging Time to File Response to Gemini’s Supplemental Brief on

In the Matter of the Protest of Gemini Las Colinas, L.L.C.
Page 20 of 45
1 Remand. [Administrative File]

2 115. On September 25, 2023, the Administrative Hearings Office entered a Second

3 Order Enlarging Time to File Response to Gemini’s Supplemental Brief on Remand.

4 [Administrative File]

5 116. On September 29, 2023, the Department filed Department’s Response to

6 Taxpayer’s Supplemental Brief on Remand. [Administrative File]

7 117. On October 30, 2023, Taxpayer filed Taxpayer’s Supplemental Reply Brief on

8 Remand. [Administrative File]

9 DISCUSSION

10 The parties agree that the issues before the Hearing Officer on remand from the Court of

11 Appeals are reduced to the questions of: (1) whether the Department satisfied its burden of

12 production in response to the Court of Appeals’ determination that Taxpayer rebutted the

13 presumption of correctness; and (2) if so, whether Taxpayer has satisfied the burden of persuasion

14 on the merits of the protest.

15 A Clarified Way Forward

16 As explained by the Court of Appeals, Taxpayer’s appeal presented two legal issues related

17 to the tax protest’s procedural framework:

18 (1) what must a taxpayer do to overcome the presumption of
19 correctness and whether, at this juncture, the hearing officer acts in
20 their fact-finding capacity; and (2) if a taxpayer overcomes the
21 presumption, what type of burden shifts to the department, and—
22 relatedly—which party bears the ultimate burden of persuasion.

23 See Gemini, 2023-NMCA-039, ¶ 18.

24 The Court of Appeals recognized that answering these questions was “no easy task” and that

25 it involved issues of first impression. See Gemini, 2023-NMCA-039, ¶ 13, ¶19. It ultimately

26 clarified the framework within which a hearing officer is to evaluate the presumption of correctness

In the Matter of the Protest of Gemini Las Colinas, L.L.C.
Page 21 of 45
1 in a protest.

2 “[D]etermining whether the taxpayer has overcome the presumption of correctness is the

3 first step in resolving a tax protest, and that it will only be the last step if the taxpayer fails to

4 overcome the presumption.” See Gemini, 2023-NMCA-039, ¶ 23. “[T]he presumption of

5 correctness assessment is made by the hearing officer in a purely legal capacity.” See Gemini, 2023-

6 NMCA-039, ¶ 25.

7 “The regulation’s call for ‘some countervailing evidence’ that ‘tend[s]’ to dispute the

8 assessment, 3.1.6.12(A) NMAC, is merely a threshold requirement for evidence, and that evidence

9 need not be credible or ultimately persuasive.” See Gemini, 2023-NMCA-039, ¶ 25. “[I]f the

10 taxpayer has not overcome the presumption, the protest may simply be denied. In this scenario,

11 there is no need for the department to present any evidence.” See Gemini, 2023-NMCA-039, ¶ 23.

12 In this protest, because the Court of Appeals determined that Taxpayer overcame the

13 presumption of correctness, this discussion will commence with the burden that is consequently

14 placed on the Department after a Taxpayer satisfies this threshold burden.

15 The Department’s Burden under Gemini

16 If Taxpayer rebuts the presumption of correctness, the burden that shifts to the Department

17 is a burden of production. The “burden of production” consists of “evidence to justify [the

18 Department’s] assessment” as opposed to “ultimately prov[ing] the correctness of its assessment to

19 the hearing officer by a preponderance of evidence (burden of persuasion).” See Gemini, 2023-

20 NMCA-039, ¶ 26.

21 “To overcome this burden, the department must put forth evidence to show the

22 correctness of its assessment—that is, evidence sufficient to make the correctness of the

23 department's assessment a question of fact.” See Gemini, 2023-NMCA-039, ¶ 29. “[S]tatements

In the Matter of the Protest of Gemini Las Colinas, L.L.C.
Page 22 of 45
1 about burden shifting in [New Mexico Taxation & Revenue Dept. v. Casias Trucking, 2014-NMCA-

2 099] and [MPC Ltd. v. New Mexico Taxation & Revenue Dept., 2003-NMCA-021] refer to the

3 burden of production, and that the burden of persuasion remains with the taxpayer throughout the

4 proceedings.” See Gemini, 2023-NMCA-039, ¶ 28.

5 “[T]he [D]epartment cannot simply rely on the unreliability or incredibility of the

6 [T]axpayer’s evidence. Instead, the [D]epartment must produce evidence to justify its

7 assessment.” See Gemini, 2023-NMCA-039, ¶ 29.

8 Taxpayer argued on remand that the Department “did not produce such evidence and

9 therefore failed to advance this proceeding to the merits stage.” See Taxpayer’s Supplemental Brief

10 on Remand, Page 3. The Hearing Officer respectfully disagrees. The evidence was presented in the

11 form of cross examination, direct examination, and reference to both Taxpayer’s and the

12 Department’s admitted exhibits.

13 As background, Taxpayer originally came to Ms. Rivera’s attention in connection with

14 work she was performing on another matter around 2013 or 2014. In performing research in

15 connection with that matter, she had observed the existence of at least two apparently related but

16 separate entities that appeared to be engaging in business from the same location. Taxpayer was

17 one of the entities. In reference to Taxpayer, Ms. Rivera recalled observing what she perceived to

18 be “minimal reporting as taxable” consisting primarily of “food costs” in the range of $15,000 to

19 $19,000 per month. The other entity was not registered with the Department. She also observed

20 that Senior Star maintained Taxpayer’s employees, but that there was some confusion

21 attributable to the fact that Taxpayer as well as the second entity also apparently claimed the

22 same employees on their respective payrolls. The Department subsequently commenced an audit

23 of Taxpayer and the other entity.

In the Matter of the Protest of Gemini Las Colinas, L.L.C.
Page 23 of 45
1 One of the first steps was to gather Taxpayer’s records with which Ms. Rivera could

2 compute Taxpayer’s gross receipts tax liability, including records that would allow for the

3 computation of its deduction under Section 7-9-53. Over a period of time, Taxpayer provided

4 income statements, receipt registers, and IRS Forms 1065 for Senior Star Investments 1, LLC.

5 Ms. Rivera observed that the data contained in the various documents Taxpayer provided

6 could not be reconciled or confirmed against Taxpayer’s CRS-1 reports in the relevant tax

7 periods. Ms. Rivera eventually determined that Taxpayer’s receipts could be computed from

8 Taxpayer’s receipt registers, but the same records proved undependable for calculating

9 Taxpayer’s deduction for rent under Section 7-9-53. Ms. Rivera observed that information from

10 Taxpayer’s register indicating the amounts of receipts generated from providing services were

11 contradictory to other documents which should have but did not reconcile with the register.

12 In addition to the shortcomings in records Taxpayer provided, Ms. Rivera also recalled

13 her efforts being hindered by Taxpayer’s inconsistent computation methodologies, failure to

14 provide all requested records, as well as what Ms. Rivera perceived as Taxpayer’s lack of full

15 disclosure.

16 Ms. Rivera noted at Taxpayer Ex. 8.5:

17 [T]axpayer is required to have appropriate supporting
18 documentation for deductible gross receipts under NMSA 1978,
19 [Section] 7-9-53 (A), for the Lease of Real Property. The
20 [T]axpayer did not provide supporting documentation to support
21 all reported deductions on the CRS-1 report. The taxpayer
22 provided Senior Star Investments I LLC's federal form 1065 U.S.
23 Return of Partnership Income, form 8825, Rental Real Estate
24 Income and Expenses of a Partnership or an S Corporation, for the
25 tax years of 2011 through 2015, which provided gross rent
26 amounts derived from the NM location.

27 Thus, given the challenges presented by the lack of complete and reliable records, Ms.

28 Rivera identified what she concluded to be the best method under the circumstances of

In the Matter of the Protest of Gemini Las Colinas, L.L.C.
Page 24 of 45
1 computing Taxpayer’s gross receipts liability for the years in question. Ms. Rivera determined

2 that IRS Forms 8825, which reported Senior Star Investments 1, LLC’s gross rents from Las

3 Colinas Village represented the most reliable report of receipts from rent and therefore, a

4 trustworthy evaluation of Taxpayer’s potential deduction under Section 7-9-53.

5 Ms. Rivera noted, also on Taxpayer Ex. 8.5:

6 Pursuant to NMSA 1978, [Section] 7-1-10; Regulation 3.1.5.8 (C)
7 (3) NMAC, the Department may use tax return information to
8 compute or estimate tax due. The taxpayer failed to provide
9 sufficient supporting documentation for reported deductions under
10 NMSA 1978, [Section] 7-9-53 (A), lease of real property;
11 therefore, the auditor utilized the taxpayer provided form 8825,
12 Rental Real Estate Income and Expenses of a Partnership or an S
13 Corporation, for the tax years of 2011 through 2015.

14 Ms. Rivera’s determination that IRS Forms 8825 represented the best evidence available

15 to her of Taxpayer’s deduction under Section 7-9-53 was reasonable.

16 Similar to observations made by Ms. Rivera, the Hearing Officer also observed through

17 administrative notice that IRS Forms 1065 in all relevant years2 required that the partner or

18 limited liability company member signing the return do so under penalty of perjury.

19 Accordingly, in the absence of more reliable records, such as those contemplated by Section 7-1-

20 10 (A) (2007), as cited by Ms. Rivera, it was reasonable for the Department to rely on the IRS

21 Forms 8825 as the most reliable and trustworthy indicators of Taxpayer’s receipts from rent.

22 The fact that the forms are filed under penalty of perjury is not dispositive, but it provides

23 significant weight in assuring the auditor in an audit, or a fact finder in a protest, that the forms

24 were prepared with care and due diligence, and for that reason, are reliable and trustworthy. That

25 is why it was reasonable for Ms. Rivera to rely on the IRS Forms 8825 in the absence of more

2
The hearing officer took administrative notice of the signature fields for IRS Form 1065 for each relevant year.
Forms for years preceding 2019 are accessible at https://apps.irs.gov/app/picklist/list/priorFormPublication.html.

In the Matter of the Protest of Gemini Las Colinas, L.L.C.
Page 25 of 45
1 reliable documentation.

2 Taxpayer did not dispute the accuracy of the forms for their intended purpose, but asserts

3 they are an unreliable indicator of rental income for computing Taxpayer’s tax liability because

4 they have undergone certain adjustments.

5 However, if the IRS Forms 8825 are accurate for their intended purpose, but unreliable

6 for the purpose of computing Taxpayer’s deduction from rent because of certain adjustments,

7 then it would be reasonable to infer that any adjustment reflected in the form could be reversed

8 to reveal a pre-adjusted and presumably more precise figure. Such a task is likely within the

9 expertise of an accounting or tax professional, provided there are supporting records to

10 substantiate the adjustments and support their subsequent reversal. Yet, it is the shortage of

11 supporting documentation that caused the Department to rely on the forms in the first place.

12 In the absence of records, “[t]he Department is authorized to use any method or

13 combination of methods to reconstruct or verify taxpayers’ records, including but not limited to

14 utilizing bank deposits, comparison to industry standards, and assessment of taxes based on the

15 best information available.” See Casias, 2014-NMCA-099, ¶7 (Emphasis Added). Ms. Griego

16 credibly testified and established to the satisfaction of the Hearing Officer that her audit, and

17 resulting assessment of tax, was based on the best information available.

18 In this regard, Judge Sutin’s observation in Archuleta v. O'Cheskey, 1972-NMCA-165, ¶

19 16, 84 N.M. 428, 431, 504 P.2d 638, 641, is profound. He said, “[t]he taxpayer has a duty to

20 provide the commissioner with books and records upon which to establish a standard for taxation

21 as provided by law. If he fails to do so, he cannot complain of the best methods used by the

22 commissioner.” See also Waldroop v. O’Cheskey, 1973-NMCA-146, 85 N.M. 736, 516 P.2d

23 1119. Judge Sutin’s observation is germane to the facts underlying this protest. The dispute

In the Matter of the Protest of Gemini Las Colinas, L.L.C.
Page 26 of 45
1 stems from, and ultimately teeters on a lack of records, in which case the law provides for the

2 Department to adopt an alternative method of computing Taxpayer’s liability. That is what the

3 Department did in the present matter.

4 At this stage in the proceedings, the Department’s burden is one of production in which

5 “the [D]epartment must produce evidence to justify its assessment.” See Gemini, 2023-NMCA-

6 039, ¶ 29. The Hearing Officer was persuaded and satisfied that the Department “put forth

7 evidence to show the correctness of its assessment—that is, evidence sufficient to make the

8 correctness of the department’s assessment a question of fact.” See Gemini, 2023-NMCA-039, ¶

9 29. Therefore, the case is ready for resolution on the merits. “[T]he burden of persuasion remains

10 with the [T]axpayer[.]” See Gemini, 2023-NMCA-039, ¶ 28.

11 The Merits

12 “If the [D]epartment’s evidence creates a question of fact about the correctness of the

13 assessment, it has fulfilled its burden of production, and the case is ripe for the hearing officer to

14 resolve factual disputes and decide the protest on the merits.” See Gemini, 2023-NMCA-039, ¶

15 29. “[I]f the evidence is in equipoise, the hearing officer should deny the taxpayer’s protest.” See

16 Gemini, 2023-NMCA-039, ¶ 29.

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

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

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

20 the total amount of money or the value of other consideration
21 received from selling property in New Mexico, from leasing or
22 licensing property employed in New Mexico, from granting a right to
23 use a franchise employed in New Mexico, from selling services
24 performed outside New Mexico, the product of which is initially
25 used in New Mexico, or from performing services in New Mexico.

26 (Emphases Added)

In the Matter of the Protest of Gemini Las Colinas, L.L.C.
Page 27 of 45
1 The Gross Receipts and Compensating Tax Act imposes a statutory presumption that all

2 gross receipts of a person engaged in business are taxable. See NMSA 1978, Section 7-9-5 (2002).

3 However, taxpayers may reduce their gross receipts liability through the application of relevant

4 deductions and exemptions. The difference between total gross receipts and applicable deductions

5 and exemptions represents a taxpayer’s taxable gross receipts.

6 The applicable deduction in this protest permits taxpayers to deduct from gross receipts

7 those amounts derived from the lease of real property. It provides, in relevant part that, “[r]eceipts

8 from … lease of real property … may be deducted from gross receipts.” See Section 7-9-53 (A).

9 Thus, where a taxpayer’s receipts are derived from a mixture of leasing property and provision of

10 services, disagreements have arisen regarding the methods employed by taxpayers to extract the

11 deductible portion of its receipts from its total gross receipts to determine its taxable portion of

12 receipts. See e.g., In the Matter of SSC Albuquerque Operating Company LLC, D&O No. 18-16

13 (May 30, 2018) (non-precedential).

14 In evaluating the claim to a deduction, well established law in New Mexico explains “when

15 a deduction is claimed by a taxpayer, the statute is to be strictly construed in favor of the taxing

16 authority, and the right to the deduction must be clearly and unambiguously expressed.” See Sec.

17 Escrow Corp. v. State Taxation & Revenue Dept., 1988-NMCA-068, ¶ 20, 107 N.M. 540, 545, 760

18 P.2d 1306, 1311. Moreover, the taxpayer must show that it is clearly entitled to the statutory

19 deduction. Id.; TPL, Inc. v. New Mexico Taxation & Revenue Dept., 2003-NMSC-007, ¶ 9, 133

20 N.M. 447, 451, 64 P.3d 474, 478.

21 All taxpayers are responsible for self-reporting and paying their tax obligations. See NMSA

22 1978, Section 7-1-13 B. This responsibility includes the initial task of calculating one’s total gross

23 receipts and the secondary task of accurately computing one’s deductions to arrive at one’s taxable

In the Matter of the Protest of Gemini Las Colinas, L.L.C.
Page 28 of 45
1 gross receipts. In this regard, NMSA 1978, Section 7-1-10 A requires that, “every taxpayer shall

2 maintain books of account or other records in a manner that will permit the accurate computation

3 of state taxes or provide information required by the statute under which the person is required to

4 keep records.”

5 The Department does not disagree that Taxpayer generates receipts from the lease or rent of

6 real property within the meaning of Section 7-9-53. Disagreement over how to compute the amount

7 of the deduction represents the crux of the issue.

8 As already discussed, the Department determined that the most reliable method, considering

9 the quantity and quality of Taxpayer’s records, was by reference to IRS Forms 8825. Taxpayer

10 disputed the propriety of that method and proposed two alternatives at the hearing. The question on

11 the merits may then be summarized as which method produces the most reliable computation of

12 Taxpayer’s gross receipts tax liability.

13 The Department has never promulgated rules establishing a specific methodology for

14 calculating the amount of the deduction under Section 7-9-53 in situations where, as in the

15 present case, a taxpayer’s receipts from leasing property are blended, or comingled, with receipts

16 from providing services. However, it has generally adhered to the same policy for more than 25

17 years, as memorialized in a series of revenue rulings.

18 In 1998, the Department acknowledged the uniqueness of assisted living facilities, which

19 although not entirely equivalent to assisted living communities, share common traits rendering

20 its remarks meaningful to the present scenario. In Revenue Ruling 440-98-2, the Department

21 observed that “[a]ssisted living facilities occupy a middle position on a continuum extending

22 from apartment buildings at one end and nursing homes on the other. In a typical lease of an

23 apartment unit, little if any personal service is provided by the landlord. Nursing homes provide

In the Matter of the Protest of Gemini Las Colinas, L.L.C.
Page 29 of 45
1 care for the individual, who is more a patient than a resident; nursing home receipts are

2 predominantly from providing services.”

3 Therefore, an assisted living community like Las Colinas Village, related to an assisted

4 living facility, is similarly situated between the opposite poles described in the ruling, perhaps

5 somewhere between assisted living facilities and apartment buildings. Under the specific facts

6 provided in the ruling, a taxpayer sought the Department’s concurrence with a proposed

7 methodology for calculating the deductible portion of its gross receipts under Section 7-9-53.

8 The Department summarized the taxpayer’s methodology as follows:

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

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

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

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

19 calculated value of the real property lease exceeds the calculated value of the services

20 provided[.]”

21 The approved methodology was consistent with the general view the Department

22 memorialized approximately four years earlier in Revenue Ruling 430-94-2, in which it similarly

23 recognized that assisted living entities derive receipts from blending leasehold interests in real

24 property with attendant services. The Department refrained from imposing any specific method

25 for apportioning receipts, and only required that a taxpayer employ some reasonable basis for its

26 apportionment. It stated:

27 The receipts from the rental of real property are deductible and the

In the Matter of the Protest of Gemini Las Colinas, L.L.C.
Page 30 of 45
1 receipts from meals, housekeeping and other services are taxable.
2 Separate stating of taxable and nontaxable items is not required. To
3 clarify its billings and reporting, X may separately state the amount
4 of taxable and nontaxable items in its billings and accounts.
5 Alternatively, without separately stating taxable and nontaxable
6 items in its billings, X may apportion its receipts using some
7 reasonable basis to determine the portion attributable to the lease
8 of real property and the portion attributable to the sale of meals,
9 housekeeping and other services.

10 (Emphasis Added)

11 In 2000, the Department again considered similar facts in Revenue Ruling 430-00-5 and

12 maintained that a taxpayer “may apportion its receipts using some reasonable basis to determine

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

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

15 In this protest, Taxpayer presents two alternative methodologies for calculating the

16 amount of its asserted deduction and disputes the reasonableness of the methodology employed

17 by the Department, which ultimately gave rise to the assessment.

18 Cost-Accounting Methodology

19 At the hearing, Mr. Clifton testified quite knowledgeably regarding the advantages of a

20 cost-accounting methodology for determining the gross receipts derived from certain services

21 based on the corresponding cost of providing those services. This method was not presented to

22 the Department before it conducted its audit and Mr. Clifton acknowledged that Taxpayer

23 Exhibits 1 – 7, all of which were presented during his discussion of the methodology, were

24 prepared after the assessment was issued.

25 Observing the timeliness of the analysis represented in Taxpayer Exhibits 1 – 7 is

26 pertinent for several reasons. Neither the analysis nor any supporting documents were provided

27 to the Department during the audit or at any other time prior to the assessment. Ms. Rivera

28 explained that had it been presented, she would have given it due consideration so long as it was

In the Matter of the Protest of Gemini Las Colinas, L.L.C.
Page 31 of 45
1 accompanied by supporting documentation. This point not only relates back to Ms. Rivera’s

2 determination of what method was best at the time she performed the audit, but it also highlights

3 an ongoing issue in the protest: the lack of records.

4 Despite Mr. Clifton’s testimony, Taxpayer Exhibits 1 – 7 were not accompanied by any

5 underlying or supporting documentation, which if available, might have corroborated the figures

6 grounding the analysis and increased the persuasiveness of the testimony and subsequent

7 arguments regarding its reliability. In contrast, the analysis lacks the sort of records that could

8 enhance its persuasive value.

9 Despite observations regarding the scarcity of supporting records, the cost-accounting

10 analysis in this case shares similarities with the analysis employed in SSC of Albuquerque. In that

11 protest, the Department claimed that the taxpayer’s methodology was not reasonable because it

12 failed to consider the fair market value of the rental property in computing the amount of the

13 rental deduction.

14 SSC of Albuquerque observed that taxpayer’s methodology overlooked the fact that tax is

15 imposed on all receipts less applicable deductions (e.g., Section 7-9-5 minus Section 7-9-53

16 equals taxable gross receipts). In contrast, the computation suggested by the taxpayer in SSC of

17 Albuquerque calculated the amount of the claimed deduction as the difference between all

18 receipts and purported taxable gross receipts (e.g., Section 7-9-5 minus taxable gross receipts

19 (such as receipts generated from services) equals deduction under Section 7-9-53). SSC of

20 Albuquerque determined this method was unreasonable because the amount of the claimed

21 deduction was determined by variables not associated with the value of the real property.

22 In this protest, Taxpayer’s cost-accounting methodology resembles the approach

23 employed in SSC of Albuquerque and is similarly indifferent to the value of the real property

In the Matter of the Protest of Gemini Las Colinas, L.L.C.
Page 32 of 45
1 within the calculation. Taxpayer Exhibits 1 – 7 confirm that the analysis makes no reference to

2 the value of the real property central to the asserted deduction.

3 The Hearing Officer emphasizes that it is not the objective of this discussion to endorse

4 or impugn the trustworthiness of a cost-accounting methodology. Cost accounting may be

5 reasonable under appropriate circumstances if accompanied by supporting evidence as

6 contemplated by Section 7-1-10, but that is not the case in this protest.

7 As Ms. Rivera explained, the records provided during the audit were unreconcilable

8 among other records she reviewed, and the evidence presented at the hearing similarly lacked

9 any records establishing the sources of the figures provided in the spreadsheets detailing

10 Taxpayer’s analyses. Without some supporting records, the analysis contained in Taxpayer

11 Exhibits 1 – 7 lacks the sort of footing that might establish it as reliable, trustworthy, and

12 ultimately persuasive.

13 For these reasons, the cost-allocation analysis in this protest, although presenting an

14 alternative for computing Taxpayer’s liability, falls short of persuading the Hearing Officer that

15 it is superior and more reliable than the methodology adopted by the Department on account of

16 Taxpayer’s scarcity of supporting records.

17 Third-Party Market Analysis

18 In 2019, Taxpayer retained the services of CBRE and Mr. Johnson to perform a rent

19 analysis to “estimate the market rent levels for [Las Colinas Village].” The introduction to the

20 analysis summary explained that “[t]his analysis is to be used in connection with the State of

21 New Mexico tax audit.” Mr. Johnson testified that the summary was completed approximately

22 two weeks before the scheduled hearing consistent with the date appearing on the cover page of

23 Taxpayer Exhibit 13.

In the Matter of the Protest of Gemini Las Colinas, L.L.C.
Page 33 of 45
1 Mr. Clifton testified that the intended purpose of the analysis was to analyze and perhaps

2 validate the conclusions of its cost-accounting analysis, as well as address the potential

3 perception that the cost-accounting analysis was indifferent to the fair market value of the real

4 property central to the deduction.

5 The Department’s opposition to the market analysis was primarily established through

6 cross-examination. Although Taxpayer emphasized that the Department did not present a

7 competing expert witness, the Hearing Officer perceived its cross-examination of Mr. Johnson as

8 highly effective at emphasizing flaws and shortcomings in the analysis. One point that Mr.

9 Johnson acknowledged was that neither he nor anyone else associated with CBRE ever visited

10 Las Colinas Village. Even if not a requirement of the applicable Uniform Standards of

11 Professional Appraisal Practice, this fact tends to diminish the reliability of the analysis.

12 Referring to that analysis, the reader should note, at Taxpayer Ex. 13.12, the first

13 statement under the section entitled “Assumption and Limiting Conditions[,]” states that the

14 appraiser “has inspected through reasonable observation the subject property.” Yet, the evidence

15 revealed potential contradictions of that statement with respect to whether an “inspection”

16 occurred and whether it was based on “reasonable observation.”

17 This is significant especially in reference to those factors that might be affected by

18 personal inspection, such as the “age/condition adjustment” or the “quality of construction

19 adjustment” at Taxpayer Ex. 13.3. To be clear, the Hearing Officer does not necessarily find that

20 the adjustments were unwarranted, but that the reliability of the evidence justifying those

21 adjustments is undercut by the fact that Mr. Johnson never personally examined the property, nor

22 did anyone else from CBRE. For that reason, the overall reliability and subsequent persuasive

23 value of the analysis is diminished.

In the Matter of the Protest of Gemini Las Colinas, L.L.C.
Page 34 of 45
1 The Department also emphasizes an assortment of potential errors in the summary that

2 may not in fact be detrimental to the analysis. For example, the summary references at least two

3 comparable properties located no less than 20 miles away in Rio Rancho, New Mexico

4 [Taxpayer Ex. 13.3] and an incorrect number of residential units [Taxpayer Ex. 13.8]. Those

5 errors when viewed in the surrounding circumstances, even if minor, tend to further diminish the

6 overall reliability of the analysis because they suggest that the analysis was hastily prepared

7 without sufficient attention to accuracy or detail. Again, these observations further reduce the

8 persuasive value of the analysis.

9 Nevertheless, Taxpayer argues that the third-party market analysis corroborates the

10 outcome of the cost-allocation analysis where, for the most part, the differences between their

11 conclusions might be perceived as insignificant. The comparisons are illustrated at Taxpayer

12 Exhibit 12 where in 2011, Taxpayer’s cost-accounting methodology identified rental income of

13 $2,265,133 in contrast with the market analysis, which identified rental income of $1,771,601, or

14 a difference of 27.9 percent. Taxpayer does not necessarily dispute the striking difference

15 between the results but directs the Hearing Officer’s attention to the subsequent years where

16 there is less disparity between the outcomes.

17 In 2012, Taxpayer’s cost-accounting methodology identified rental income of $2,263,198

18 in contrast with the market analysis, which identified rental income of $2,205,041, or a

19 difference of 2.6 percent, which is indeed significantly less than the previous year.

20 In 2013, Taxpayer’s cost-accounting methodology identified rental income of $2,442,203

21 in contrast with the market analysis, which identified rental income of $2,306,868, or a

22 difference of 5.9 percent.

23 In 2014, Taxpayer’s cost-accounting methodology identified rental income of $2,549,266

In the Matter of the Protest of Gemini Las Colinas, L.L.C.
Page 35 of 45
1 in contrast with the market analysis, which identified rental income of $2,432,635, or a

2 difference of 4.8 percent.

3 In 2015, Taxpayer’s cost-accounting methodology identified rental income of $2,735,218

4 in contrast with the market analysis, which identified rental income of $2,461,206, or a

5 difference of 11.1 percent.

6 In 2016, Taxpayer’s cost-accounting methodology identified rental income of $1,921,963

7 in contrast with the market analysis, which identified rental income of $1,799,078, or a

8 difference of 6.8 percent.

9 However, the percentages used to describe the similarities also tend to distract from their

10 differences: the difference in 2011 was $492,532; the difference in 2012 was $58,157; the

11 difference in 2013 was $135,335; the difference in 2014 was $116,631; the difference in 2015

12 was $274,012; and the difference in 2016 was $122,885. The cumulative difference is

13 $1,199,552 or 8.5 percent. This difference is significant and lends substantial credence to the

14 reasonableness of the Department’s conclusion that the most reliable information for computing

15 Taxpayer’s liability was contained in the IRS Forms 8825, which as Ms. Rivera testified, was the

16 best method available to her at the time of the audit. See FOF 75 – 78.

17 Once more, this Decision and Order should not be construed as endorsing or impugning

18 any methodology. In fact, and once again, Ms. Rivera testified that she was amenable to

19 considering other methodologies provided they were accompanied by supporting records. The

20 Hearing Officer cannot now or at the time of the original decision fault the Department’s reliance

21 on IRS Forms 8825 when they represented the most trustworthy source of information.

22 Regulation 3.1.5.8 A NMAC, provides that “[t]he adequacy or inadequacy of taxpayer

23 records is a matter of fact to be determined by the secretary or secretary’s delegate.” When, as in

In the Matter of the Protest of Gemini Las Colinas, L.L.C.
Page 36 of 45
1 this case, the Department determined Taxpayer’s records to be inadequate, it concluded to

2 compute Taxpayer’s liability using alternative methods, which under Regulation 3.1.5.8 C (3)

3 NMAC permitted reliance on “federal returns and other governmental reports” among other

4 methods.

5 Under this structure, the Hearing Officer is persuaded that the most trustworthy

6 information on the question of receipts deriving from rent was contained in the IRS Forms 8825.

7 Federal income tax returns are typically prepared with considerable attention to detail and care

8 and are signed under penalty of law, which to the Hearing Officer, enhances their reliability.

9 Reliance on the forms may not represent a perfect method of computing Taxpayer’s gross

10 receipts tax liability, but as Ms. Rivera explained, they provided the best method at the time of

11 audit, and the Hearing Officer is unable to find based on the evidence presented at the hearing

12 that other methods presented by Taxpayer were superior.

13 For this reason, the Hearing Officer is unable to find that Taxpayer’s methods were

14 superior to the method employed by the Department in reliance on IRS Forms 8825. To the

15 extent this decision might be read as suggesting the evidence is in equipoise, because none of the

16 methods presented is beyond reproach, then Taxpayer’s protest must be denied and the

17 Department’s assessment must stand. See Gemini, 2023-NMCA-039, ¶ 29.

18 To reiterate the sentiments expressed by Judge Sutin, “[t]he taxpayer has a duty to

19 provide the commissioner with books and records upon which to establish a standard for taxation

20 as provided by law. If he fails to do so, he cannot complain of the best methods used by the

21 commissioner.” See O'Cheskey, 1972-NMCA-165, ¶ 16. In this case, the Department identified

22 what it believed to be the best method given the information available to it. Taxpayer, as Judge

23 Sutin observed, cannot now complain of the best methods used.

In the Matter of the Protest of Gemini Las Colinas, L.L.C.
Page 37 of 45
1 Taxpayer failed to persuade the Hearing Officer that it should prevail on the merits of its

2 protest.

3 Penalty

4 The Court of Appeals did not consider the issue of penalty, but the issue will be

5 addressed again since the Department’s presumption of correctness extends to the imposition of

6 penalty and interest. See Regulation 3.1.6.13 NMAC.

7 When a taxpayer fails to pay taxes due to the State because of negligence or disregard of

8 rules and regulations, but without intent to evade or defeat a tax, NMSA 1978, Section 7-1-69

9 (2007) requires that:

10 there shall be added to the amount assessed a penalty in an amount
11 equal to the greater of: (1) two percent per month or any fraction of
12 a month from the date the tax was due multiplied by the amount of
13 tax due but not paid, not to exceed twenty percent of the tax due
14 but not paid.

15 (Emphasis Added)

16 The statute’s use of the word “shall” makes the imposition of penalty mandatory in all instances

17 where a taxpayer’s actions or inactions meet the legal definition of “negligence.” See Marbob

18 Energy Corp. v. N.M. Oil Conservation Comm'n, 2009-NMSC-013, ¶22, 146 N.M. 24, 32 (use of

19 the word “shall” in a statute indicates that a provision is mandatory absent clear indication to the

20 contrary).

21 Regulation 3.1.11.10 NMAC defines negligence in three ways: (A) “failure to exercise that

22 degree of ordinary business care and prudence which reasonable taxpayers would exercise under

23 like circumstances;” (B) “inaction by taxpayer where action is required”; or (C) “inadvertence,

24 indifference, thoughtlessness, carelessness, erroneous belief or inattention.” In this case, Taxpayer

25 was negligent because it failed to accurately compute, report and pay its gross receipts tax

26 obligations under A, B, and C, but perhaps mostly through inadvertence or erroneous belief.

In the Matter of the Protest of Gemini Las Colinas, L.L.C.
Page 38 of 45
1 On occasions where a taxpayer might fall under the definition of civil negligence

2 generally subject to penalty, Section 7-1-69 (B) provides a limited exception in that “[n]o penalty

3 shall be assessed against a taxpayer if the failure to pay an amount of tax when due results from a

4 mistake of law made in good faith and on reasonable grounds.”

5 Mr. Clifton made fleeting reference to reliance on Taxpayer’s tax accountant, yet there

6 was no other evidence explaining Taxpayer’s general assertion that its actions or inactions

7 relevant to this protest were founded on an informed judgment or determination based on

8 reasonable grounds. See C & D Trailer Sales v. Taxation & Revenue Dep’t, 1979-NMCA-151,

9 ¶¶8-9, 93 N.M. 697, 604 P.2d 835 (penalty upheld where there was no evidence that the taxpayer

10 “relied on any informed consultation” in deciding not to pay tax). For example, Mr. Clifton did not

11 explain the tax accountant’s qualifications, the information upon which the tax accountant

12 provided advice, or how that advice was allegedly erroneous. Consequently, there is insufficient

13 evidence in the record to establish that the mistake of law provision of Section 7-1-69 (B) should

14 provide for an abatement of penalty in this case.

15 Further grounds for abatement of civil negligence penalty are provided by Regulation

16 3.1.11.11 NMAC. That regulation establishes eight indicators of non-negligence where penalty

17 may be abated. Based on the argument of Taxpayer and the evidence presented, only one factor

18 under Regulation 3.1.11.11 NMAC is potentially applicable in this proceeding:

19 D. the taxpayer proves that the failure to pay tax or to file a return
20 was caused by reasonable reliance on the advice of competent tax
21 counsel or accountant as to the taxpayer's liability after full
22 disclosure of all relevant facts; failure to make a timely filing of a
23 tax return, however, is not excused by the taxpayer's reliance on an
24 agent[.]

25 Yet, as explained above, Taxpayer made only a brief reference to being “under

26 advisement” of its “tax accountant” but provided no other evidence to establish that the “tax

In the Matter of the Protest of Gemini Las Colinas, L.L.C.
Page 39 of 45
1 accountant” was minimally competent (i.e., certified public accountant) or that subsequent

2 reliance on his or her advice was reasonable after full disclosure of relevant facts.

3 During Taxpayer’s closing argument, it described a brief portion of Ms. Rivera’s

4 testimony as yielding to the assertion that Taxpayer was “under advisement” of a “tax

5 accountant” for justifying the abatement of penalty. That characterization of Ms. Rivera’s

6 statement as an admission is unreasonable. Ms. Rivera testified only that she had been

7 communicating with a specific individual, but her point of contact changed when Taxpayer

8 reportedly determined that the advice that individual provided was erroneous. Ms. Rivera’s

9 testimony was not a concession that penalty should be abated, or even a confirmation that the

10 information that Taxpayer allegedly relied upon was erroneous. Instead, it merely explained her

11 understanding of why her communications were redirected from one individual to another.

12 It is Taxpayer’s duty to ascertain the tax consequences of its actions. See Tiffany

13 Construction Co., 1976-NMCA-127, ¶5. Taxpayers cannot “abdicate this responsibility [to learn of

14 tax obligations] merely by appointing an accountant as its agent in tax matters.” See El Centro

15 Villa Nursing Center v. Taxation and Revenue Department, 1989-NMCA-070, ¶14, 108 N.M. 795.

16 The Department does not allege that Taxpayer’s actions or inactions were intended to

17 evade or defeat a tax. But even if arising from inadvertence or erroneous belief, El Centro Villa

18 Nursing provides that civil negligence penalty is appropriate and Regulation 3.1.11.11 (D) NMAC

19 offers no basis for the abatement of penalty.

20 Taxpayer’s protest should be DENIED.

21 CONCLUSIONS OF LAW

22 A. Taxpayer filed a timely, written protest to the Department’s Notice of Assessment of

23 Taxes and Demand for Payment under Letter ID No. L0294038832, and jurisdiction lies over the

In the Matter of the Protest of Gemini Las Colinas, L.L.C.
Page 40 of 45
1 parties and the subject matter of the protest.

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

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

4 C. Taxpayer carries the burden to present countervailing evidence or legal argument

5 to show entitlement to an abatement of an assessment. See Casias Trucking, 2014-NMCA-099,

6 ¶8.

7 D. “The presumption exists even if the secretary has issued assessments using

8 alternative methods of reconstruction of a tax or has estimated the tax.” Id.

9 E. “Unsubstantiated statements that the assessment is incorrect cannot overcome the

10 presumption of correctness.” MPC Ltd., 2003-NMCA-021, ¶13.

11 F. “[D]etermining whether the taxpayer has overcome the presumption of

12 correctness is the first step in resolving a tax protest, and that it will only be the last step if the

13 taxpayer fails to overcome the presumption.” Gemini Las Colinas, LLC v. New Mexico Taxation

14 & Revenue Dep't, 2023-NMCA-039, ¶ 23, 531 P.3d 622, 629.

15 G. “[T]he presumption of correctness assessment is made by the hearing officer in a

16 purely legal capacity.” See Gemini Las Colinas, LLC v. New Mexico Taxation & Revenue Dep't,

17 2023-NMCA-039, ¶ 25, 531 P.3d 622, 630.

18 H. “The regulation’s call for ‘some countervailing evidence’ that ‘tend[s]’ to dispute

19 the assessment, 3.1.6.12(A) NMAC, is merely a threshold requirement for evidence, and that

20 evidence need not be credible or ultimately persuasive.” See Gemini Las Colinas, LLC v. New

21 Mexico Taxation & Revenue Dep't, 2023-NMCA-039, ¶ 25, 531 P.3d 622, 630.

22 I. “[T]he hearing officer’s determination does not involve fact-finding tasks such as

23 making credibility determinations and weighing evidence.” See Gemini Las Colinas, LLC v. New

In the Matter of the Protest of Gemini Las Colinas, L.L.C.
Page 41 of 45
1 Mexico Taxation & Revenue Dep't, 2023-NMCA-039, ¶ 25, 531 P.3d 622, 630.

2 J. “[I]f the taxpayer has not overcome the presumption, the protest may simply be

3 denied. In this scenario, there is no need for the department to present any evidence.” See Gemini

4 Las Colinas, LLC v. New Mexico Taxation & Revenue Dep't, 2023-NMCA-039, ¶ 23, 531 P.3d

5 622, 629.

6 K. “[I]f the taxpayer has overcome the presumption, the outcome of the protest, at

7 that point, remains undetermined. The taxpayer has overcome its initial hurdle, but further legal

8 and factual assessments remain before the hearing officer can determine whether to grant or deny

9 the protest.” See Gemini Las Colinas, LLC v. New Mexico Taxation & Revenue Dep't, 2023-

10 NMCA-039, ¶ 23, 531 P.3d 622, 629.

11 L. “If the taxpayer rebuts the presumption, the department must be given an

12 opportunity to present evidence to support its assessment, and the hearing officer may not grant

13 or deny the protest without, at the very least, determining whether the department has carried its

14 burden.” See Gemini Las Colinas, LLC v. New Mexico Taxation & Revenue Dep't, 2023-NMCA-

15 039, ¶ 24, 531 P.3d 622, 629–30.

16 M. “[I]f a taxpayer rebuts the presumption of correctness, the burden that shifts to the

17 department is a burden of production.” See Gemini Las Colinas, LLC v. New Mexico Taxation &

18 Revenue Dep't, 2023-NMCA-039, ¶ 29, 531 P.3d 622, 631.

19 N. “[T]he burden that shifts to the department is a burden of production” and “the

20 burden of persuasion is ultimately borne by the taxpayer.” See Gemini Las Colinas, LLC v. New

21 Mexico Taxation & Revenue Dep't, 2023-NMCA-039, ¶ 26, 531 P.3d 622, 630.

22 O. The “burden of production” is “evidence to justify [the Department’s]

23 assessment” as opposed to “ultimately prov[ing] the correctness of its assessment to the hearing

In the Matter of the Protest of Gemini Las Colinas, L.L.C.
Page 42 of 45
1 officer by a preponderance of evidence (burden of persuasion).” See Gemini Las Colinas, LLC v.

2 New Mexico Taxation & Revenue Dep't, 2023-NMCA-039, ¶ 26, 531 P.3d 622, 630.

3 P. “To overcome this burden, the department must put forth evidence to show the

4 correctness of its assessment—that is, evidence sufficient to make the correctness of the

5 department's assessment a question of fact.” See Gemini Las Colinas, LLC v. New Mexico

6 Taxation & Revenue Dep't, 2023-NMCA-039, ¶ 29, 531 P.3d 622, 631.

7 Q. “Likewise, the existence of this burden means that the department cannot simply

8 rely on the unreliability or incredibility of the taxpayer's evidence. Instead, the department must

9 produce evidence to justify its assessment.” See Gemini Las Colinas, LLC v. New Mexico

10 Taxation & Revenue Dep't, 2023-NMCA-039, ¶ 29, 531 P.3d 622, 632.

11 R. “If the department's evidence creates a question of fact about the correctness of

12 the assessment, it has fulfilled its burden of production, and the case is ripe for the hearing

13 officer to resolve factual disputes and decide the protest on the merits.” See Gemini Las Colinas,

14 LLC v. New Mexico Taxation & Revenue Dep't, 2023-NMCA-039, ¶ 29, 531 P.3d 622, 632.

15 S. “[I]f the evidence is in equipoise, the hearing officer should deny the taxpayer's

16 protest. Cf. UJI 13-304 NMRA (noting that “[e]venly balanced evidence is not sufficient” to

17 carry the burden of persuasion).” See Gemini Las Colinas, LLC v. New Mexico Taxation &

18 Revenue Dep't, 2023-NMCA-039, ¶ 29, 531 P.3d 622, 632.

19 T. Under NMSA 1978, Section 7-1-67 (2007), Taxpayer is liable for accrued interest

20 under the assessment. Interest continues to accrue until the tax principal is satisfied.

21 U. Under NMSA 1978, Section 7-1-69 (2007), Taxpayer is liable for civil negligence

22 penalty.

23 V. “Every person required by the provisions of any statute administered by the

In the Matter of the Protest of Gemini Las Colinas, L.L.C.
Page 43 of 45
1 department to keep records and documents and every taxpayer shall maintain books of account or

2 other records in a manner that will permit the accurate computation of state taxes or provide

3 information required by the statute under which the person is required to keep records.” See

4 NMSA 1978, Section 7-1-10 (A).

5 W. “The adequacy of a taxpayer’s books and records is a question of fact.” See

6 Waldroop v. O'Cheskey, 1973-NMCA-146, ¶ 5, 85 N.M. 736, 738, 516 P.2d 1119, 1121.

7 Taxpayer’s protest IS DENIED. Taxpayer shall be liable for the outstanding portions of

8 the assessment in addition to penalty and interest accruing until paid in full.

9 DATED: February 5, 2024

10
11 Chris Romero
12 Hearing Officer
13 Administrative Hearings Office
14 P.O. Box 6400
15 Santa Fe, NM 87502

In the Matter of the Protest of Gemini Las Colinas, L.L.C.
Page 44 of 45
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 February 5, 2024, a copy of the foregoing Decision and Order on Remand was submitted

15 to the parties listed below in the following manner:

16 First Class Mail Interagency Mail
17
18
19
20 INTENTIONALLY BLANK

In the Matter of the Protest of Gemini Las Colinas, L.L.C.
Page 45 of 45