A company bought a business division without getting a tax clearance, and years later the state demanded it pay gross receipts tax the seller was later audited and assessed. Is the buyer on the hook — and can it even challenge a tax bill that was issued to the seller?

Subject

Harrington Industrial Plastics (D&O 98-53)

Plain-English summary

In February 1989, Harrington Industrial Plastics, Inc. (a California company) bought the plastics division of Heflin-Harrington Industrial Plastics, Inc. (an Arizona company). Heflin kept its separate rubber-linings division and stayed in business. Harrington's purchase agreement said it assumed the gross receipts taxes due from the plastics division as of closing — but when it bought the business, Harrington did not hold back any of the purchase price in trust and did not request a tax clearance certificate from the Department under Section 7-1-62. At the time, Heflin had self-reported and paid its taxes, and there were no outstanding assessments.

More than two years later, in 1991, the Department audited Heflin and assessed gross receipts tax for periods before the 1989 sale. After Heflin protested and settled, roughly $38,000 of unpaid pre-sale gross receipts tax (plus growing penalty and interest) remained. In June 1996, the Department turned to Harrington and demanded — as a "successor in business" — that it pay Heflin's unpaid taxes (a demand later set at about $93,938, reflecting years of accrued interest). Harrington protested. Hearing Officer Gerald B. Richardson granted the protest in part and denied it in part.

Harrington was liable as a successor in business. New Mexico's successor-in-business statutes (Sections 7-1-61 through 7-1-64) are strict: the assets of a business stay on the hook for the business's taxes even when it changes hands, and a buyer has two mandatory choices — escrow enough of the purchase price and get a clearance certificate, or pay the tax on demand later. A buyer who requests a clearance forces the Department to state the tax due (or issue a "no tax due" certificate) within 60 days, capping the buyer's exposure. Harrington did neither. It argued it hadn't acted "wrongfully" because Heflin appeared current, but the Hearing Officer held that tax liability attaches when the taxable transaction occurs (Section 7-1-13(A)) — not only when it's self-assessed or assessed by the Department — so an unpaid liability existed even before the audit revealed it. And ignoring the escrow requirement was "heedless," which fits the very definition of "wrongful" Harrington relied on. So Harrington was responsible for Heflin's unpaid pre-sale taxes.

But due process let Harrington challenge the underlying assessment. Normally, Section 7-1-24 would bar a successor from contesting an assessment that was issued to (and protested by) someone else after the protest window closed. Here, though, the assessment was issued to Heflin nearly two years after the sale, and Harrington was never notified of the audit or assessment, so it never had a chance to protest in time. The Hearing Officer — noting an agency can't strike a statute down on its face but can find it unconstitutional as applied (Sandia Savings & Loan v. Kleinheim) — held that applying Section 7-1-24 to bar Harrington from disputing the assessment would deny it the notice and opportunity to be heard that procedural due process requires (Rutherford; Erwin). He distinguished the federal tax-lien cases the Department cited (Myers), where a buyer had constructive notice from recorded liens. So Harrington could challenge the Heflin assessment.

On the merits, part of the audit math was wrong — but the delay was not a defense. The Department had used a "test month" audit, and for February 1988 it took an improper shortcut: instead of computing a percentage-of-error from January and applying it to February, it simply disallowed the same dollar amount of deductions as January, even though the two months differed. The Hearing Officer ordered the Department to recalculate February 1988 properly and reduce Harrington's liability. However, the Department's roughly five-year delay in pursuing Harrington did not excuse the liability: the demand came within the ten-year collection statute of limitations (Section 7-1-19), and Harrington had constructive notice of the successor-in-business rules and limitations periods (all public record), plus the Department made Heflin's audit report available. Result: GRANTED IN PART and DENIED IN PART — Harrington remained liable as a successor, but the February 1988 calculation had to be redone and the assessment adjusted downward.

What this means for you

• Buying a business (or even a division) can make you liable for the seller's unpaid taxes — including taxes not yet assessed. New Mexico's successor-in-business statutes attach to the assets and follow the business when it changes hands. A seller who looks current today can still be audited later for pre-sale periods, and the buyer can be left holding that bill.
• Protect yourself at closing: request a tax clearance certificate and escrow part of the price. Under Section 7-1-62, asking for a certificate forces the Department to tell you the tax due (or clear you) within 60 days — capping your exposure. Skipping that step is the single mistake that put Harrington on the hook.
• "The seller seemed paid up" is not a defense. Tax liability attaches when the taxable transaction happens, not when it's assessed. An undiscovered underpayment is still a liability the buyer was supposed to guard against.
• Interest keeps running while the state waits. The demand against Harrington ballooned to more than double the underlying tax largely through years of accrued interest. Because the Department has ten years to collect, that exposure can grow substantially before you ever hear about it.
• If you were never notified, you may still get to fight the underlying bill. A successor who had no notice of the assessment and no chance to protest it in time can, on due-process grounds, challenge the assessment itself — not just whether the successor statutes apply. Preserve any evidence about the audit and the seller's records.
• Delay alone usually won't void a timely assessment. As long as the state acts within the ten-year collection window, the mere passage of time — even years — generally isn't enough to escape liability, because the statutes putting you on notice are public record.

Key questions answered

How does someone become a "successor in business" liable for another company's taxes?
Under Sections 7-1-61 to 7-1-64, when a business is sold its assets remain subject to its tax liability. The buyer must either withhold enough of the purchase price in trust and obtain a clearance certificate, or pay the tax when the Department demands it. A buyer who does neither becomes liable for the seller's unpaid taxes.

Harrington's seller looked current — why was there any liability to withhold for?
Because liability attaches when the taxable transaction occurs (Section 7-1-13(A)), not only when it's self-assessed or formally assessed. The 1991 audit revealed underpaid pre-sale taxes that had existed all along, so there was a liability the buyer was required to guard against at closing.

How could Harrington have avoided this?
By requesting a tax clearance certificate under Section 7-1-62 and escrowing part of the purchase price. That would have forced the Department to state the tax due (or clear the business) within 60 days, capping Harrington's exposure to a known amount instead of an unknown future audit.

Why was Harrington allowed to challenge an assessment issued to the seller?
Because it received no notice. The assessment was issued to Heflin almost two years after the sale, and Harrington was never told of the audit or assessment, so it couldn't protest within the statutory window. The Hearing Officer held that applying Section 7-1-24 to bar Harrington in these circumstances was unconstitutional as applied, violating procedural due process.

Did the state's long delay in pursuing Harrington help?
No. The demand came within the ten-year collection statute of limitations (Section 7-1-19), and Harrington had constructive notice of the successor-in-business statutes and limitations periods. Due process did not require abating the assessment simply because interest had accrued over time.

What did Harrington actually win?
The Hearing Officer found the Department's method of estimating disallowed deductions for February 1988 improper and ordered it recalculated (a separate percentage-of-error for January applied to February, rather than copying January's dollar amount), reducing the assessment accordingly.

Verbatim citations

Assets stay liable when a business changes hands (Section 7-1-61(B)):

The tangible and intangible property used in any business remains subject to liability for payment of the tax due on account of that business to the extent stated herein, even though the business changes hands.

The buyer's mandatory duty (Section 7-1-61(C)):

If any person liable for any amount of tax sells out his business, The purchaser shall withhold and place in a trust account sufficient of the purchase price to cover such amount until the director or his delegate issues a certificate stating that no amount is due, or he shall pay over the amount due to the division upon proper demand therefor by the director or his delegate.

When tax liability attaches (Section 7-1-13(A)):

Taxpayers are liable for tax at the time of and after the transaction or incident giving rise to tax, until payment thereof is made. Taxes are due on and after the date on which their payment is required until payment is made.

The due-process holding (Conclusion of Law 3):

To the extent that Section 7-1-24(A) prevents the Taxpayer from contesting the assessment to Heflin because of the passage of the time for protesting said assessment, Section 7-1-24(A) is unconstitutional as applied to the Taxpayer who had no notice of the Department's assessment at the time it purchased Heflin's plastics division and the Taxpayer must be allowed to challenge the assessment underlying the Department's demand for payment.

Delay was not a defense:

While the passage of time has resulted in the accrual of a substantial amount of additional interest and perhaps has made it more difficult for the Taxpayer to obtain the necessary records to mount other challenges to the assessment, the Taxpayer had at least constructive notice that such was a possibility and due process does not require the assessment to be abated because of this passage of time.

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Harrington Industrial Plastics
• Decision PDF: D&O 98-53

Original ruling text

BEFORE THE HEARING OFFICER
OF THE TAXATION AND REVENUE DEPARTMENT
OF THE STATE OF NEW MEXICO

IN THE MATTER OF THE PROTEST OF
HARRINGTON INDUSTRIAL PLASTICS, INC.
ID. NO. 02-125533-00 4 NO. 98-53
PROTEST TO DEMAND FOR PAYMENT
AS SUCCESSOR IN BUSINESS

DECISION AND ORDER

This matter came on for formal hearing on April 9, 1998 before Gerald B.

Richardson, Hearing Officer. Harrington Industrial Plastics, Inc., hereinafter,

“Taxpayer”, was represented by Fred W. Schwendimann, Esq. The Taxation and

Revenue Department, hereinafter, “Department”, was represented by Gail MacQuesten,

Special Assistant Attorney General. After the hearing the parties were given leave to file

briefs. Subsequently, the Hearing Officer requested additional briefing from the parties

and the last brief was filed on September 16, 1998 and the matter was considered

submitted for decision at that time. Based upon the evidence and the arguments

presented, IT IS DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. The Taxpayer is a California corporation that has been engaged in the sale

and distribution of plastic pipe, valves, fittings, pumps, flow meters, fans and scrubbers

(its “plastics business”) in New Mexico since February 3, 1989.

2. The Taxpayer purchased its New Mexico plastics business from Heflin-

Harrington Industrial Plastics, Inc. (“Heflin”), an Arizona corporation whose principal

place of business was 1048 West Maricopa Freeway, Phoenix, Arizona 85007.

3. Prior to February 3, 1989, Heflin had operated its own plastics business as

an unincorporated division, and it had also operated an unincorporated division that was

engaged in the installation of rubber linings in storage tanks and other items of supply.

4. On February 3, 1989, the Taxpayer purchased Heflin’s entire plastics

division, but Heflin continued to own and operate its rubber linings division. The Asset

Purchase Agreement (the “Agreement”) whereby the Taxpayer purchased Heflin’s

plastics division was admitted into evidence as Exhibit 1.

5. Pursuant to paragraph 3 of the Agreement, the Taxpayer assumed certain

liabilities allocable to Heflin’s plastics division, including any gross receipts taxes due

and payable from Heflin as of the February 3, 1989, closing date.

6. Heflin self reported and paid gross receipts taxes in the amount it

determined it owed in a timely manner for the reporting periods of January, 1988 through

February, 1989. The amount of gross receipts, deductions from gross receipts, gross

receipts tax, compensating tax and withholding tax reported and paid for those periods are

reflected in Exhibit 2.

7. The Taxpayer did not avail itself of the procedure set forth in Section 7-1-

62 NMSA 1978 (1988 Repl. Pamp.) for requesting and obtaining a tax clearance

certificate from the Department with respect to Heflin’s tax liabilities for taxable periods

occurring before March 1, 1989.

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8. On or about June 4, 1991, The Department commenced a field audit of

Heflin’s books and records for taxable periods occurring after January 1, 1988 and before

June 1, 1991. Because Heflin owned the plastics division during part of that time, the

Department’s audit covered Heflin’s taxable activities with respect to both of its

divisions.

9. The Department’s audit was concluded in late October, 1991, and as a

consequence the Department proposed to assess deficiency gross receipts taxes against

Heflin in the aggregate amount of $47,682.52, plus penalty and interest.

10. Of the aggregate amount of the proposed gross receipts tax deficiency,

$44,666.77 was attributable to taxable periods commencing January 1, 1988 and ending

March 1, 1989.

11. Subsequently, the aggregate amount of proposed gross receipts tax

deficiency was reduced by the Department to $46,854.62, of which $43,838.87 was

attributable to periods commencing January 1, 1988 and ending March 1, 1989.

12. On December 21, 1991, the Department issued an assessment to Heflin,

assessing $46,854.62 in gross receipts taxes, plus penalty and interest.

13. Heflin filed a timely protest of the December 21, 1991 assessment.

14. The Department’s audit of Heflin was based upon an audit procedure

using test months which are audited in detail to arrive at a percentage of error which is

then applied to the other months under audit. For the 1988 tax year, the months of

January, May and June were chosen as tests months. A percentage of error was

calculated for those months and applied to the other months of 1988.

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15. Heflin’s protest contested the use of the month of January, 1988 as a test

month for purposes of calculating a percentage of error. Heflin’s sales receipts during

that month, approximately $542,000, were significantly higher than the other test months,

whose sales receipts were approximately $112,000. During that month it had claimed

deductions of approximately $522,000. As a result of negotiations between the

Department and Heflin to resolve Heflin’s protest, the Department agreed to remove the

month of January from the calculation of the percentage of error and simply use the actual

amount of disallowed deductions for that month, approximately $389,000, to calculate the

proper amount of tax for that month. At the same time, the Department determined that

the month of February, 1988 also contained an unusually high amount of gross receipts,

$583,000, and deductions of approximately $402,000, and determined that if it was

proper to exclude January from the test month calculation for purposes of arriving at a

percentage of error, that February should also be excluded. Instead, however, of

calculating a separate percentage of error for the month of January, and applying it to

determine the amount of disallowable deductions for February, the Department simply

disallowed the same dollar amount of deductions for February, as it had for January.

16. The Department’s methodology for calculating the amount of disallowed

deductions for February was improper. The proper way to have handled the month of

February would have been to calculate a percentage of error for January, 1988 and apply

it to February, 1988, which was a similar, but not identical sales month in terms of the

amount of gross receipts.

17. Heflin did not dispute the manner by which the Department calculated the

amount of disallowed deductions for February, 1988.

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18. As a result of Heflin’s protest, on September 20, 1994, the Department

abated $5,831.13 of the gross receipts taxes assessed, together with the penalty and

interest relating to the amount of gross receipts taxes abated.

15. In consideration of the foregoing abatement, on October 11, 1994, Heflin

withdrew its protest and accepted the amended assessment.

16. The entire amount of the abated gross receipts taxes were attributable to

taxable periods commencing January 1, 1988 and ending March 1, 1989. Accordingly, as

of September 20, 1994, Heflin owed $38,007.74 in gross receipts taxes for periods

occurring prior to the sale of its plastics division to the Taxpayer on February 3, 1989.

17. The assessment against Heflin remains unpaid and outstanding.

18. By letter dated June 5, 1996, the Department demanded, pursuant to

Section 7-1-63 NMSA 1978, that the taxpayer pay Heflin’s unpaid gross receipts taxes

together with the penalty and interest relating thereto in the aggregate amount of

$94,255.19.

19. Subsequently, by letter dated September 30, 1996, the Department

amended its demand, reducing the amount demanded to $93,938.24.

20. On October 21, 1996, the Taxpayer filed a timely, written protest to the

Department’s September 30, 1996 demand letter.

21. The amounts demanded of the Taxpayer by the Department relate only to

liabilities attributable to Heflin’s plastics division.

DISCUSSION

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Pursuant to the provisions of Sections 7-1-61 through 7-1-64 NMSA 1978 (1988

Repl. Pamp.)1, which shall be referred to as the “successor in business” provisions of the

Tax Administration Act, Sections 7-1-1 to 7-1-82 NMSA 1978, the Department issued a

demand letter to the Taxpayer, demanding payment of unpaid gross receipts taxes which

had been assessed against Heflin for periods prior to the date of the Taxpayer’s purchase

of Heflin’s plastics division. The Taxpayer purchased its plastics division business from

Heflin in February of 1989 without availing itself of the procedures provided in the

successor in business statutes to obtain a tax clearance from the Department for any tax

liabilities of Heflin. There were no outstanding assessments against Heflin at the time of

the Taxpayer’s purchase of Heflin’s plastics division. The Department, however, audited

Heflin during 1991 and assessed gross receipts taxes for periods predating Heflin’s sale of

its plastics division to the Taxpayer. The Taxpayer was not notified of the Department’s

audit or assessment of Heflin, and learned of the Department’s claim against it as a

successor in business when the Department made its demand for payment in June of

1996. The primary issue to be decided, then, is whether the Taxpayer may be held liable

under the successor in business provisions for the liabilities assessed to Heflin relating to

its plastics division for periods prior to the Taxpayer’s purchase of the plastics division.

Before discussing the Taxpayer’s arguments, the operation of the successor in business

statutes will be examined.

Section 7-1-61(B) provides that:

The tangible and intangible property used in any business
remains subject to liability for payment of the tax due on

1
The 1988 Replacement Pamphlet version of these provisions shall be the version referred to herein as
those were the statutes in effect at the time of the sale of Heflin to the Taxpayer.

6
account of that business to the extent stated herein, even
though the business changes hands.

This provision makes clear that even though a business changes hands, the assets of that

business remain subject to liability for any taxes due from the business which changed

hands. The statute then goes on to prescribe the duties of a successor in business.2

Specifically, Section 7-1-61(C) provides:

If any person liable for any amount of tax sells out his
business, The purchaser shall withhold and place in a trust
account sufficient of the purchase price to cover such
amount until the director or his delegate issues a certificate
stating that no amount is due, or he shall pay over the
amount due to the division upon proper demand therefor
by the director or his delegate. (emphasis added).

It is a well settled rule of statutory construction that the use of the word "shall" in a statute

indicates that the provisions are intended to be mandatory rather than discretionary, unless a

contrary legislative intent is clearly demonstrated. State v. Lujan, 90 N.M. 103, 560 P.2d

167 (1977). Applying this rule to Section 7-1-61(C), the statute mandates that a purchaser

place sufficient funds in a trust account to cover the amount of tax for which the business is

liable, or, in the alternative, the purchaser is mandated to pay over the amount due upon

demand by the Department.

Section 7-1-62 provides the means for a purchaser of a business to determine the

amount of taxes for which the Department may hold him liable and provides for releasing a

purchaser and the assets of the business purchased from liability for the taxes of the

business purchased if the procedures outlined are followed. It provides:

2
“Successor in business” is not defined in the Tax Administration Act. However, the successor in
business statutes themselves refer to “the purchaser” of a business. In this case the tax liability at issue was
assessed to Heflin and there is no dispute that the Taxpayer in this case was the purchaser of Heflin, whose
liability the Department seeks to collect from the Taxpayer, as successor in business.

7
A. Within thirty days after receiving from the purchaser a
written request for a certificate, or within thirty days from the
date the former owner’s records are made available for audit,
which ever period expires the later, but in any event not later
than sixty days after receiving the request, the director or his
delegate shall either issue the certificate or mail a notice to
the purchaser of the amount of tax for which the vendor is
liable and which must be paid as a condition of issuing the
certificate.
B. Failure of the director or his delegate to mail the notice
within the required time releases the purchaser from any
obligation to withhold from the purchase price and releases
the property from the operation of Section 7-1-61 NMSA
1978.

Thus, this section provides a means for a purchaser to protect himself from any demands

from the Department for payment of taxes owing by the business purchased. The purchaser

can request a certificate of no tax due. The Department has, at most, sixty days to either tell

the purchaser the amount for which he and the assets purchased are liable, or the

Department is barred from making further claims against him or the assets for taxes owing

by the former business. Because in this case it is undisputed that the Taxpayer did not place

in trust any portion of the purchase price to cover any tax liability of Heflin, nor did the

Taxpayer obtain a tax clearance from the Department for the tax liabilities of Heflin, the

Department has made demand upon the Taxpayer for payment of Heflin’s liability, and the

Taxpayer’s liability for payment of that liability is what is at issue herein.

Section 7-1-63 provides the legal basis for the demand for payment which was made

in this case. It provides:

A. If, after any business is sold, any tax for which the former
owner is liable remains due, the director or his delegate shall
make demand upon the purchaser for payment over of that
amount and the purchaser shall comply with the demand.
B. Upon the payment over of the amount required to be
withheld as provided by Subsection C of Section 7-1-61

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NMSA 1978, the balance, if any, may be released to the
former owner or otherwise lawfully disposed of. The former
owner shall be credited with the payment of tax.

Finally, Section 7-1-64 sets out the consequences for a purchaser who has failed to

withhold a portion of the purchase price for payment of taxes for which a seller of a

business was liable or has refused a demand for payment pursuant to Section 7-1-63. It

provides:

A. If the purchaser has wrongfully failed to withhold and
pay over as provided by Subsection C of Section 7-1-61
NMSA 1978, or has not made payment after demand by the
director or his delegate as provided in Section 7-1-63 NMSA
1978, he becomes a delinquent taxpayer.
B. The purchaser hereunder may completely discharge his
responsibility under the provisions of this section by
surrendering and assigning all of his interest in the tangible
and intangible property acquired, or the proceeds thereof, to
the director or his delegate for disposition by him in the
manner provided for disposition of property levied upon by
Section 7-1-31 NMSA 1978.

The Taxpayer’s argument that it should not be liable for the amounts assessed

against and remaining unpaid by Heflin turns on its reading of the language of Section 7-1-

64(A) which refers to a purchaser who has “wrongfully failed to withhold and pay over”

amounts as provided by Section 7-1-61(C). The Taxpayer argues that because Heflin had

self-reported and paid taxes every month to the Department prior to the sale of the business

and the taxes owing for the month of January, 1989 were reported and paid the following

month, that Heflin was not “liable for any amount of tax” and thus there was no need to

escrow any portion of the purchase price for any tax liability and the Taxpayer thus, did not

“wrongfully” fail to withhold and pay over taxes. Because the term “wrongfully” is not

defined in the Tax Administration Act, the Taxpayer relies upon the common definition of

9
“wrongful” found Black’s Law Dictionary, Revised Fourth Edition, which defines wrongful

as, “injurious, heedless, unjust, reckless or unfair.” The Taxpayer argues that because it was

not apparent that Heflin was liable for any unpaid taxes, its conduct in not escrowing a

portion of the purchase price for a tax liability was not wrongful.

The Taxpayer’s reading of the successor in business provisions is too narrow. It

assumes that the only basis for imposing liability on a successor in business is when it

wrongfully fails to escrow a portion of the purchase proceeds to cover liabilities either

already self-assessed by the Taxpayer or those already established by the Department.

In fact, a reading of the successor in business statutes makes clear that there are two ways

in which a successor in business becomes liable for the unpaid taxes of its predecessor.

By using the disjunctive term “or” in describing the duties of a successor in business in

Section 7-1-61(C), the statute provides for two alternative options3 for a successor in

business to handle the obligation imposed by subsection B of that same statute upon the

assets of the business being acquired. The first option a purchaser has is to withhold and

place in a trust account a sufficient portion of the purchase price to cover the liability and

to hold that amount in trust until the Director issues a certificate of no tax due. The

purchaser then has the option to promptly determine the amount for which it could be

held liable by requesting a certificate of no tax due from the Department pursuant to

Section 7-1-62. Upon receipt of such a request, the Department has, at most, sixty days

to inform a purchaser of the amount of tax due or to issue the certificate of no tax due.

Otherwise, the purchaser’s obligation to withhold and pay over any amount demanded is

3
As noted earlier, the use by the legislature of the word “shall” in describing these options indicates a
mandatory obligation upon the successor, under either option chosen by the successor.

10
extinguished and the assets of the business purchased are released from liability for taxes.

Section 7-1-62.

The second option a Taxpayer has under Section 7-1-61(C) is to not escrow a

portion of the purchase proceeds and take a chance that there will not be any unpaid tax

liability which can be asserted against it or that if there is a liability, that the Department

will not discover or determine it and make a demand for payment. This option has more

downside risk, however. That is because if this option is chosen, once demand for

payment is made by the Department, the purchaser “shall pay over the amount due...”

The language of Section 7-1-64(A) reaffirms the two options provided to

purchasers in Section 7-1-61 and makes clear that the consequence of failing to follow

either of the options provided has the same result. The purchaser becomes a delinquent

taxpayer liable for the tax liability of the predecessor business, for it provides that:

If the purchaser has wrongfully failed to withhold and pay
over as provided by Subsection C of Section 7-1-61 NMSA
1978, or has not made payment after demand by the
director or his delegate as provided in Section 7-1-63
NMSA 1978, he becomes a delinquent taxpayer.

Section 7-1-16 NMSA 1978 defines who is a delinquent taxpayer. The status of being a

delinquent taxpayer is significant because, under the Tax Administration Act one must be

a “delinquent taxpayer” for the Department to seek enforcement of its claims for payment

by seizure of property by levy or by enjoining a person from engaging in business. See,

Sections 7-1-31 and 7-1-53 NMSA 1978. In this case, the Taxpayer is not a delinquent

taxpayer under Section 7-1-16 because that section provides an exception when a protest

to a demand for payment pursuant to Section 7-1-63 is filed in a timely manner as

provided in Section 7-1-24, which provides for protests to the assessment of tax or the

11
application to a taxpayer of any provision of the Tax Administration Act. Thus, any

liability of the Taxpayer for the matter under protest is held in abeyance pending the

resolution of the Taxpayer’s protest.

In addition to being subject to liability for the taxes assessed against Heflin for

failure to comply with the Department’s demand for payment, the Taxpayer may also be

held liable for wrongful failure to withhold a portion of the purchase price of the

business. First, the Taxpayer argues that because Heflin was reporting and paying tax,

and there were no outstanding assessments against Heflin, there was no tax liability to be

covered by the requirement to withhold a portion of the purchase price to cover the

liability of the business being sold. There is nothing in the Tax Administration Act or

the successor in business statutes to justify such a narrow interpretation of tax liability.

Section 7-1-13(A) defines when liability for tax attaches, providing that:

Taxpayers are liable for tax at the time of and after the
transaction or incident giving rise to tax, until payment
thereof is made. Taxes are due on and after the date on
which their payment is required until payment is made.
(emphasis added).

Thus, liability attaches when the transaction generating the tax occurs and is not limited

to amounts self-assessed by a taxpayer. Additionally, the fact that the successor in

business statutes themselves provide for a tax clearance certificate to be issued within

thirty days from the date the former business’ records are produced for audit makes it

clear that the liability of the business sold is not limited to amounts either self-assessed or

assessed by the Department prior to the sale of the business. Section 7-1-62. Thus, the

fact that the liability at issue herein was not assessed against Heflin until long after the

business was sold to the Taxpayer is irrelevant to whether the Taxpayer had a duty to

12
withhold a portion of the purchase price to cover such liability. The liability relates only

to those periods prior to the Taxpayer’s purchase of the business and since the liability

was not paid by Heflin at any time after the transactions generating the tax occurred, there

was a liability subject to the requirement that a purchaser withhold a portion of the

purchase price to cover.

Second, the Taxpayer’s argument that its conduct in failing to withhold and

escrow a portion of the purchase price does not meet the commonly understood definition

of wrongful is also erroneous. Even under the Black’s Law Dictionary definition relied

upon by the Taxpayer in arguing that it was not wrongful in failing to withhold, the

Taxpayer’s conduct meets the definition. This is because one of the terms used to define

wrongful is “heedless”. In this case, the statute directs that the purchaser of a business

“shall withhold and place in a trust account sufficient of the purchase price to cover...”

the tax liability of the business purchased. The Taxpayer’s conduct was heedless of the

requirement of Section 7-1-61(C), and was, therefore, wrongful.

As the foregoing discussion illustrates, the statutory scheme which imposes

liability upon successors in business is quite strict and comprehensive. It is clear that the

legislature intended to ensure that the state does not lose tax revenues because a business

changes hands, no matter how the transaction is handled by the seller and the purchaser.

See, Sterling Title Co. of Taos v. Commissioner of Revenue, 85 N.M. 279, 511 P.2d 765

(Ct. App. 1973) (Sutin, J., specially concurring).

DUE PROCESS CONSIDERATIONS

The next issue to be determined is whether, having failed to avail itself of the

procedures by which the Taxpayer could have obtained a tax clearance or at least have

13
known of the amount of tax liability it was undertaking when purchasing Heflin, the

Taxpayer is barred from challenging the amount of taxes which were assessed to Heflin

and for which it is now being held liable. The Taxpayer has presented evidence that the

manner by which the Department adjusted the assessment for the month of February,

1988 was improper, and I have no doubt that the shortcut taken by the Department to

calculate the disallowed deductions for that month is not an acceptable audit technique.

The Department takes the position that in protesting the Department’s assertion of

liability as a successor in business, the Taxpayer may not challenge the underlying

assessment. To this argument, the Taxpayer argues that such a statutory scheme would

deny the Taxpayer fundamental fairness required by the Due Process Clause.

In examining the provisions of Section 7-1-24 NMSA 1978, which govern what

may be protested, it would appear that the statute would not allow a successor in

business, who did not file a timely protest to the underlying assessment of tax against its

predecessor, to protest the assessment itself in its protest to the determination of whether

it is liable for tax as a successor in business. Section 7-1-24(A) NMSA 1978 (1990 Repl.

Pamp.), provides that a taxpayer may dispute the assessment to the taxpayer of any

amount of tax, the application to the taxpayer of any provision of the Tax Administration

Act or the denial of or failure to either allow or deny a claim for refund. In this case, the

assessment was issued to and protested by Heflin, the “taxpayer” for purposes of the

assessment. Liability against the Taxpayer in this case is based upon the Department’s

determination that the Taxpayer was a successor in business and the Department’s

demand for payment issued to the Taxpayer on September 30, 1996. The Taxpayer’s

protest of that determination and demand for payment under Section 7-1-24(A) amounts

14
to a protest to the application of the successor in business provisions of the Tax

Administration Act to the Taxpayer. The time for protesting the assessment had already

long passed. Heflin did file a timely protest to the assessment, but apparently did not

inform the Taxpayer of the ongoing protest and did not raise the issue now being raised

by the Taxpayer with respect to the calculation of taxes due for February, 1988. Clearly,

because the time limits for protesting the assessment to Heflin had long passed, the

Taxpayer is barred from contesting the underlying assessment itself under Section 7-1-24.

Thus, the question presented is whether Section 7-1-24(A) as applied in the context where

an assessed liability is asserted against a successor in business, where the assessment was

issued after the purchase date4 and the purchaser was not notified5 of the assessment until

after the time for protest has passed, operates to deprive the successor of due process in

violation of the constitutions of the state and federal governments.

Prior to answering that question, the authority of this forum to determine that

issue must first be addressed. That is because it is well settled that administrative

agencies cannot rule on the facial constitutionality of a statute which the agency

administers. Robinson v. United States, 718 F.2d 336 (10th Cir. 1983). The New

Mexico Supreme Court has approved, however, the distinction drawn by Professor Davis

4
This case presents a very different situation than one in which an assessment was of record before the
successor purchases a business. In that case, Section 7-1-8(J) NMSA 1978 provides an exception to
taxpayer confidentiality which would otherwise prevent the Department from informing one taxpayer about
another taxpayer’s liabilities. Subsection J allows the department to provide information about a taxpayer
to a purchaser of a business as provided in the successor in business statutes, Sections 7-1-61 through 7-1-
64 NMSA 1978 as to the amount and basis of any unpaid assessment of tax for which his seller is liable.
Thus, an existing assessment would be of record to the purchaser at the time of purchase.
5
It is not at all clear why the Taxpayer was not notified of the assessment against Heflin at the time it was
issued, since neither party presented any evidence on this issue. If the Department had information obtained
during its audit which revealed the sale of the plastics division, it clearly could have informed the Taxpayer
of the assessment and its basis (the audit) when it was issued under the provisions of § 7-1-8 (J) NMSA
1978.

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in his administrative law treatise at § 20.04 which recognizes the distinction between

determining the facial constitutionality of a law and determining the constitutionality of a

statute as applied in particular circumstances, and allows administrative agencies to

determine the latter. Sandia Savings & Loan Association v. Kleinheim, 74 N.M. 95,

100, 391 P.2d 324 (1964). Because the Taxpayer’s challenge to Section 7-1-24 amounts

to a challenge to the constitutional applicability of Section 7-1-24 under the particular

circumstances of this case, this forum may address the Taxpayer’s due process argument.

The essence of procedural due process is that parties be given notice and an

opportunity for a hearing in order to present claims and defenses. Rutherford v. City of

Albuquerque, 113 N.M. 573, 829 P.2d 652 (1992). As stated in Erwin v. City of Santa

Fe, 115 N.M. 596, 855 P.2d 1060 (Ct. App. 1993):

Due process is not a technical abstraction unrelated to time,
place and circumstances, but rather an embodiment of
fundamental ideas of fair play and justice. (Citations
omitted). Due process, then, is a malleable principle which
must be molded to each situation, considering both the
rights of the government and the rights of the individual.
(Citation omitted). Application of due process principles is
therefore intensely practical and the nature of due process
negates inflexible procedures. (Citations omitted).

Id., 115 N.M. at 599.

The Department argues that the situation in this case is analogous to the purchase

of property subject to a tax lien and has cited to federal decisions which have held that a

person who purchases property subject to a federal tax lien may not challenge the merits

of the tax assessment itself and that this prohibition does not deprive the purchaser of due

process. In Myers v. United States, 647 F.2d 591 (5th Cir., 1981), the court balanced the

competing interests of the parties. It weighed the substantial interest of the government to

16
collect revenues against the interests of a property owner who acquired his rights through

a foreclosure sale made subject to two recorded federal tax liens. It found that although

due process required a prompt and meaningful judicial determination of the priority of the

respective interests claimed by the property holder and the government, that the taxpayer

against whom the lien had been filed had had an ample opportunity to contest the

assessment underlying the lien and that a subsequent purchaser’s rights were not so

substantial as to require that he be allowed to challenge the underlying assessment. Id., at

603-604.

I find the facts of this case to be distinguishable from those in the federal cases

relied upon by the Department. In Myers, there were recorded federal tax liens of which

the purchaser had constructive notice because they were a matter of public record. In this

case, the assessment at issue was not even issued until nearly two years after the Taxpayer

purchased the plastics division from Heflin. Because the Department audited the

predecessor, Heflin, which was still doing business in New Mexico and had only sold a

division to the Taxpayer, and the Taxpayer was not notified of the assessment or the basis

for the assessment by the Department, it did not have the opportunity to protest the

assessment within the statutory time frame provided by § 7-1-24.

The Department argues that because the Taxpayer could have protected itself from

liability by seeking a tax clearance at the time of its purchase of Heflin’s plastics division

and that this should suffice to satisfy the Taxpayer’s due process claim. While true, the

same could be said of ordinary taxpayers who are on notice of the tax statutes and through

either ignorance or carelessness, fail to follow them and are later assessed a liability.

Even though they could have prevented their situation, they are still afforded a hearing at

17
which they have a meaningful opportunity to challenge the basis for the Department’s

assessment. Due process considerations require the same for the Taxpayer in the

circumstances of this case. Given that the liability at issue was not of record at the time

the Taxpayer purchased its business and the Taxpayer was not given notice of the audit or

assessment when they occurred, the Taxpayer is entitled to challenge the assessment

itself.

The Taxpayer did present evidence which established that the Department did not

use a proper estimating technique in calculating the disallowable deductions for the

month of February, 1988. The Taxpayer does not dispute the Department’s removal of

February in addition to January from the calculation of the percentage of error for the

remainder of 1988. It simply argues that a percentage of error should be calculated for

January and applied to February, rather than to simply disallow the identical dollar

amount of deductions in February as in January, even though their gross receipts and

amount of deductions were not identical. It was erroneous for the Department to have not

calculated a separate percentage of error for January and apply that percentage to

February. The Department is ordered to do so and to adjust the amount of the assessment

accordingly.

The Taxpayer also has raised due process concerns over the hardship created by

the fact that the Department waited nearly five years after issuing the assessment to

Heflin to assert a successor in business liability, which allegedly has prejudiced the

Taxpayer’s ability to obtain information from the distant past to otherwise challenge the

underlying assessment. While the Department offered no explanation as to why it waited

so long to assert successor in business liability and, obviously, it would be a far better

18
collection practice to assert such liabilities earlier, nonetheless, the Department asserted

the liability within the ten-year statute of limitations for collecting an assessment. See, §

7-1-19 NMSA 1978. I see this issue differently than the issue of whether due process

requires that the Taxpayer be given an opportunity to challenge the underlying

assessment. While the Taxpayer could not have had notice of the assessment at issue in

this case in the circumstances of this case, the Taxpayer did have constructive notice of

the successor in business statutes as well as the statute of limitations for both issuing

assessments and for bringing actions to collect assessments, since those statutes are of

public record. Thus, it was on notice that failing to escrow part of the purchase price and

request a tax clearance or statement of taxes due could subject it to liability based upon a

subsequent audit for years prior to its purchase and that any assessment issued could be

collected at any time within ten years from the date of the assessment. Additionally, the

Department did make the audit report of Heflin available to the Taxpayer, which gave the

Taxpayer the basis to attempt to challenge the underlying assessment, and by this

decision, the opportunity to challenge the assessment itself. While the passage of time

has resulted in the accrual of a substantial amount of additional interest and perhaps has

made it more difficult for the Taxpayer to obtain the necessary records to mount other

challenges to the assessment, the Taxpayer had at least constructive notice that such was a

possibility and due process does not require the assessment to be abated because of this

passage of time.

CONCLUSIONS OF LAW

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1. The Taxpayer filed a timely, written protest to the Department’s

application of the successor in business provisions of the Tax Administration Act to the

Taxpayer, and jurisdiction lies over both the parties and the subject matter of this protest.

2. The Taxpayer wrongfully failed to withhold and pay over taxes owed by

Heflin when it purchased its business from Heflin and the Taxpayer is therefore liable for

Heflin’s unpaid taxes for periods occurring prior to the date of Taxpayer’s purchase of

Heflin’s plastics division under the successor in business statutes of the Tax

Administration Act.

3. To the extent that Section 7-1-24(A) prevents the Taxpayer from

contesting the assessment to Heflin because of the passage of the time for protesting said

assessment, Section 7-1-24(A) is unconstitutional as applied to the Taxpayer who had no

notice of the Department’s assessment at the time it purchased Heflin’s plastics division

and the Taxpayer must be allowed to challenge the assessment underlying the

Department’s demand for payment.

4. Due process considerations do not require that the Taxpayer be relieved of

liability as a successor in business because of the delay of the Department in asserting

successor in business liability against the Taxpayer.

5. The Department used an improper method of calculating the amount of

disallowable deductions for the month of February, 1988.

For the following reasons, the Taxpayer’s protest IS HEREBY GRANTED IN

PART AND DENIED IN PART. The Department IS HEREBY ORDERED TO

ADJUST THE AUDIT CALCULATIONS FOR THE MONTH OF FEBRUARY, 1988

20
IN ACCORDANCE WITH THIS DECISION AND TO ADJUST THE TAXPAYER’S

LIABILITY ACCORDINGLY.

DONE, this 1st day of October, 1998.

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