GEMINI LAS COLINAS, LLC, Protestant-Appellant, v. NEW MEXICO TAXATION & REVENUE DEPARTMENT, Respondent-Appellee.
No. A-1-CA-38672
IN THE COURT OF APPEALS OF THE STATE OF NEW MEXICO
March 13, 2023
IN THE MATTER OF THE PROTEST TO ASSESSMENT ISSUED UNDER LETTER ID NO. L0294038832.
APPEAL FROM THE ADMINISTRATIVE HEARINGS OFFICE
Chris Romero, Hearing Officer
Betzer, Roybal & Eisenberg, LLC
Benjamin C. Roybal
Albuquerque, NM
Rodey, Dickason, Sloan, Akin & Robb, P.A.
Edward Ricco
Albuquerque, NM
for Appellant
David E. Mittle, Special Assistant Attorney General
Santa Fe, NM
for Appellee
IVES, Judge.
{1} This appeal arises from an unsuccessful administrative tax protest brought by Gemini Las Colinas, LLC (Taxpayer) against the New Mexico Department of Taxation and Revenue (Department). Taxpayer challenges the denial of its protest, arguing that the administrative hearing officer (AHO) (1) applied the presumption of correctness and burden of proof in a manner contrary to law and (2) erred in evaluating Taxpayer‘s evidence.
{2} To address these claims of error, we must clarify aspects of the procedure for tax protests under
{3} Applying these legal conclusions to the facts of Taxpayer‘s protest, we hold that the AHO erred by applying the statutory presumption of correctness in a manner contrary to law and that this error was not harmless. We therefore reverse the decision of the AHO and remand for further proceedings.
{4} The facts are undisputed. Taxpayer owns and operates an independent living facility in Albuquerque, renting apartments only to people who are at least fifty-five years old. Residents sign an agreement that includes a monthly rental fee for the apartments, as well as various services, such as housekeeping, community activities, cable television, transportation services, and safety checks.
{5} The Department audited Taxpayer for the period of January 1, 2011, through September 30, 2016. Eventually, the auditor concluded that Taxpayer had been overstating certain deductions for its gross receipts tax liability, and the Department issued a notice of assessment of taxes for $724,047.43 (gross receipts tax of $551,325.84, a penalty of $110,265.21, and interest of $62,456.38). Taxpayer paid the portions of this assessment that it did not dispute and timely filed a tax protest pursuant to
{6} The dispute concerns the method for calculating Taxpayer‘s gross receipts tax. In essence, although Taxpayer charges its residents one monthly fee for both rent and services, only some of that comingled fee is subject to gross receipts tax. Specifically, while the income from the services performed by Taxpayer for its residents is subject to gross receipts tax, Taxpayer may take a deduction for income earned from the rental value of real property. See
{7} During the audit, in an effort to accurately determine the amount of the deduction and Taxpayer‘s liability in light of this deduction, the auditor requested various categories of documentation from Taxpayer. Taxpayer only provided some of the requested documentation. As a result, the auditor experienced difficulties reconciling the various sources of information pertinent to Taxpayer‘s liability and concluded that Taxpayer‘s documentation provided an insufficient foundation on which to calculate the rental deduction.
{8} In the end, to determine the rental income and gross receipts tax liability, the auditor “significantly relied” on one type of document provided by Taxpayer: Internal Revenue Service Form 8825, a federal tax form filed by Taxpayer‘s parent company for each of the tax years in question. Although the record provides few substantive details about this document, the auditor‘s reports state that Form 8825 is titled “Rental Real Estate Income and Expenses of a Partnership or an S
{9} During the protest hearing before the AHO, Taxpayer sought to prove, through testimony, that Form 8825 did not accurately reflect rental income for purposes of determining Taxpayer‘s gross receipts tax liability. Taxpayer‘s witnesses also testified to two alternative methodologies for separating its receipts from rents and services: a cost-accounting method and a third-party market analysis. After Taxpayer rested its case, the Department presented the testimony of its auditor to defend its reliance on Form 8825 and its assessment more broadly.
{10} The AHO denied Taxpayer‘s protest and explained the reasons for the denial in a decision and order, which included a statement at the heart of this appeal:
[A]lthough there may be competing methods for calculating the amount of a rental deduction under the facts of the protest, Taxpayer did not prove by a preponderance of evidence that the method actually employed by the Department resulted in an incorrect assessment, or that the alternative methods proposed at the hearing were more reliable or trustworthy under the facts of this protest. Therefore, Taxpayer did not overcome the presumption of correctness that attached to the assessment and Taxpayer‘s protest should be denied.
(Emphases added.) Taxpayer appealed pursuant to
DISCUSSION
{11} In reviewing the AHO‘s decision, “we apply a whole-record standard of review.” Town & Country Food Stores, Inc. v. N.M. Regul. & Licensing Dep‘t, 2012-NMCA-046, ¶ 8, 277 P.3d 490 (internal quotation marks and citation omitted). We will only set aside the decision if it is “(1) arbitrary, capricious or an abuse of discretion; (2) not supported by substantial evidence in the record; or (3) otherwise not in accordance with the law.” Team Specialty Prods., Inc. v. N.M. Tax‘n & Revenue Dep‘t, 2005-NMCA-020, ¶ 8, 137 N.M. 50, 107 P.3d 4 (internal quotation marks and citation omitted); accord
{12} Taxpayer‘s primary claim of error is that the AHO misunderstood what the law required Taxpayer to do to overcome the statutory presumption that an assessment is correct. See
I. The AHO Erred in Applying the Presumption of Correctness
{13} Our discussion of Taxpayer‘s first claim of error proceeds in three parts. First, we discuss the established procedural framework for tax protest proceedings. Second, we clarify that framework by answering legal questions of first impression in New Mexico: (1) what a protesting taxpayer must do to overcome the presumption of correctness, and whether evidentiary weighing is appropriate at this stage; and (2) if a taxpayer overcomes the presumption, precisely what kind or kinds of burden shift to the Department and which party ultimately bears the burden of persuasion. Third and finally, applying our legal conclusions to the facts of this case, we hold that the AHO erred and that the error was not harmless, and we therefore reverse and remand for further proceedings.
A. The Established Procedural Framework for Tax Protest Proceedings
{14} Many tax protest proceedings, including this one, begin when the department issues a notice of assessment of taxes to a taxpayer.
{15} Under the Tax Administration Act, the tax assessment in the notice “is presumed to be correct.”
{16} As occurred in the case before us, a taxpayer can attempt to overcome this initial burden factually, by “coming forward with some countervailing evidence tending to dispute the factual correctness of the assessment made by the secretary.”1
B. Unresolved Legal Issues
{18} Taxpayer‘s appeal presents two legal issues related to this procedural framework: (1) what must a taxpayer do to overcome the presumption of correctness and whether, at this juncture, the hearing officer acts in their fact-finding capacity; and (2) if a taxpayer overcomes the presumption, what type of burden shifts to the department, and—relatedly—which party bears the ultimate burden of persuasion.
{19} Answering these questions is no easy task. A leading treatise on evidence notes that the term “presumption” is “the slipperiest member of the family of legal
1. The Operation of the Presumption of Correctness
{20} We begin our analysis with
The effect of the presumption of correctness is that the taxpayer has the burden of coming forward with some countervailing evidence tending to dispute the factual correctness of the assessment made by the secretary. Unsubstantiated statements that the assessment is incorrect cannot overcome the presumption of correctness.
{21} We approach the interpretation of regulations just as we approach the interpretation of statutes. Hobbs, 2016-NMCA-022, ¶ 9. In so doing, we give effect to clear and unambiguous language and give words their ordinary meanings. Albuquerque Bernalillo Cnty. Water Util. Auth. v. N.M. Pub. Regul. Comm‘n, 2010-NMSC-013, ¶ 52, 148 N.M. 21, 229 P.3d 494.
{23} Considering the plain language of the two sentences of the regulation together, we conclude that determining whether the taxpayer has overcome the presumption of correctness is the first step in resolving a tax protest, and that it will only be the last step if the taxpayer fails to overcome the presumption. That is, if the taxpayer
{24} Our precedent buttresses this conclusion. As discussed, our tax protest cases indicate that once the presumption of correctness is overcome, the “burden shifts to the [d]epartment to demonstrate the correctness of the tax assessment.” Casias Trucking, 2014-NMCA-099, ¶ 8; accord MPC Ltd. v. N.M. Tax‘n & Revenue Dep‘t, 2003-NMCA-021, ¶ 13, 133 N.M. 217, 62 P.3d 308. As a consequence, under this burden-shifting framework, logic dictates that the initial presumption of correctness inquiry is not necessarily dispositive. If the taxpayer rebuts the presumption, the department must be given an opportunity to present evidence to support its assessment, and the hearing officer may not grant or deny the protest without, at the very least, determining whether the department has carried its burden. The precise nature of this burden is a subject we address in the next section of this opinion.
{25} Before turning to that topic, we make an observation that follows naturally from the preceding discussion: the presumption of correctness assessment is made by the hearing officer in a purely legal capacity. The regulation‘s call for “some
2. Burden-Shifting and Burdens of Proof
{26} We now discuss what the department must do to carry its burden of demonstrating or showing that its assessment is correct. See id.; see also MPC Ltd., 2003-NMCA-021, ¶ 13 (“A taxpayer may rebut the presumption, shifting the burden to the [d]epartment to show the correctness of the tax assessment.“). Conceivably, the burden mentioned in our cases could refer to the burden of persuasion, the burden of production, or both, Strausberg, 2013-NMSC-032, ¶ 24, and this appeal forces us to determine the nature of this burden. Must the department simply put forth evidence to justify its assessment (a burden of production), or must the department
{27} To arrive at these conclusions, we first discuss which party has these burdens initially. The regulations concerning tax protest hearings state that “[t]he taxpayer shall have the burden of proof, except as otherwise provided by law.”
{28} These considerations in mind, we believe that the statements about burden shifting in Casias Trucking and MPC Ltd. refer to the burden of production, and that the burden of persuasion remains with the taxpayer throughout the proceedings. We know that the taxpayer bears both burdens at the outset, and that the burden of persuasion generally does not leave the party who bears it initially. We believe these propositions lead to an obvious conclusion, and we do not believe that any authority compels us to reject it. Indeed, Taxpayer has not cited, and we have not found, any statute or regulation stating, or even suggesting, that New Mexico law deviates from general burden of persuasion principles in the context of tax protest proceedings. Moreover, our precedents recognizing that the department bears some burden, Casias Trucking and MPC Ltd., do not include any holdings or set forth any legal
be read in a manner that implies a shifting of a burden of persuasion, we likewise believe they may be coherently read to imply a shifting of the burden of production—they are, as such, ambiguous. See, e.g., 2727 San Pedro LLC, 2017-NMCA-008, ¶ 25 (holding that “a reasonable person” could not conclude that the tax authority bore its burden to show that the assessor‘s assessment used a “generally accepted appraisal technique[]” after the presumption of correctness had been overcome, and thus this Court concluded that the hearing officer erred in ruling that the tax authority overcame its post-presumption of correctness burden); First Nat‘l Bank, 1977-NMCA-005, ¶ 25 (“When a taxpayer overcomes the presumption of the correctness of the assessor‘s method of valuation, the burden shifts to the assessor to prove that his method of valuation utilized a ‘generally accepted appraisal technique.’ The board shall then determine the merits of the protest.“). Because these cases are not directly pertinent to this appeal, we need not interpret them definitively. We simply note that, on our reading, these cases do not have the persuasive power required to sustain Taxpayer‘s argument.
{30} To conclude our analysis, we note that the legal conclusions discussed in this opinion—regarding the presumption of correctness and burden-shifting framework—do not substantively alter the ordinary procedural sequence of tax protest proceedings. Consistent with agency regulations, we believe it will ordinarily be the taxpayer who presents its case in chief first. See
We now turn to Taxpayer‘s claim of error, applying our legal conclusions to the AHO‘s decision in this case
C. The AHO Erred, and the Error Is Not Harmless
{31} Taxpayer‘s argument is straightforward: the AHO erred in applying an “improperly high standard on [Taxpayer]” to rebut the presumption of correctness. Specifically, Taxpayer argues that the AHO erred by concluding that Taxpayer had not rebutted the presumption of correctness because it did not prove by “a preponderance of evidence” that the assessment was incorrect. As a result, Taxpayer claims that “[t]he [AHO]‘s evaluation of the evidence and his resulting findings are invalid because the [AHO] conducted his analysis with the presumption still in force and the burden of proof improperly placed on [Taxpayer] rather than on the Department.”
{32} We agree with Taxpayer that the decision and order indicates that the AHO sought a preponderance of evidence to overcome the statutory presumption of correctness, and we agree that this evidentiary standard was “not in accordance with the law.”
{33} We now must consider whether this error is harmless or whether it warrants reversal. See Hi-Country Buick GMC, Inc. v. N.M. Tax‘n & Revenue Dep‘t, 2016-NMCA-027, ¶ 11, 367 P.3d 862 (conducting harmless error analysis in review of a tax protest proceeding). Although the burden is on the appellant to show that its alleged error was prejudicial, see Christopherson v. St. Vincent Hosp., 2016-NMCA-097, ¶ 37, 384 P.3d 1098, reversal is required where the appellant “provides the slightest evidence of prejudice,” and this Court will “resolve all doubt in favor of the
{34} On appeal, the Department argues that any procedural error, in the event one occurred, “does not rise to the level of prejudice or necessitate reversal.” To support this view, the Department argues that both sides presented their cases at the hearing and cross-examined each other‘s witnesses, and that the AHO subsequently weighed all the evidence from both sides. At the end of this process, the AHO came to a conclusion that fully resolved the merits of the protest:
The method selected and utilized by the Department in this protest, which relied on . . . Form[] 8825, was wholly reasonable given the apparent lack of records available for employing other reasonable methods, including the alternatives proposed by Taxpayer at the hearing. The [AHO] is unable to conclude based on the evidence presented that the Department‘s determination of Taxpayer‘s liability was incorrect.
On the basis of these facts, we understand the Department to argue that the AHO‘s error was not prejudicial because, ultimately, the AHO conducted a full merits assessment and concluded that Taxpayer had been unable to show by a preponderance of evidence that the Department‘s assessment was incorrect.
{35} Taxpayer, on the other hand, argues that because the decision and order “commingles and muddles consideration of the presumption and determination of the merits, . . . it is impossible to say where one begins and the other ends.” In Taxpayer‘s view, it is impossible for this Court to determine to what extent, if any,
{36} Although we agree with only some of Taxpayer‘s contentions, we conclude that the error was not harmless. To explain why, we consider Taxpayer‘s prejudice argument sequentially: (1) whether its evidence should have overcome the presumption of correctness; (2) whether the presumption should therefore have played no role in the AHO‘s analysis; and (3) whether the Department should have been ultimately responsible for proving its case by a preponderance of evidence.
{37} First, we agree that Taxpayer‘s evidence overcame the presumption of correctness. At the outset of the proceeding, Taxpayer sought to rebut the presumption factually, by “coming forward with some countervailing evidence tending to dispute the factual correctness of the assessment.” {38} Second, we agree with Taxpayer and the Department that the presumption of correctness should have played no subsequent role in the determination of the merits {39} Third, we disagree with Taxpayer‘s argument that, after it rebutted the presumption, the Department bore the burden of persuasion. As we have explained, the taxpayer bears the burden of persuasion throughout; it never shifts to the department. {40} For the reasons outlined here, we reverse and remand the case to the AHO for further proceedings consistent with this opinion. We leave to the discretion of the {41} On appeal, Taxpayer makes two claims of error related to the AHO‘s treatment of its evidence. First, it argues that the AHO erroneously faulted Taxpayer for not presenting its alternative methods of determining the rental receipts deduction until the protest hearing itself (i.e., well after it was audited and assessed). Taxpayer contends that its evidence of alternative methods should not have been “disparage[d]” on this basis, because according to Taxpayer, it presented its evidence of alternative methods “at the exact point it was expected to do so: during the protest hearing.” {42} Second, it argues that it was “blindsided” by the AHO‘s dissatisfaction—as reflected in the decision and order—regarding a perceived lack of supporting documentation to support its alternative methods. Taxpayer contends that “[h]ad the hearing officer raised such a concern [at the hearing], [Taxpayer] could have introduced the underlying general ledger records into evidence at that time or asked that the evidentiary record be held open to allow it to do so after the hearing concluded.” {44} However, we are unpersuaded by Taxpayer‘s second argument. Taxpayer has cited no authority for the dubious proposition that an administrative adjudicator—whether acting in the capacity of evidentiary gatekeeper or finder-of-fact—has a duty to make the parties aware of evidence it believes the parties should present. Accordingly, we hold that the AHO did not abuse his discretion or act arbitrarily or capriciously by not alerting Taxpayer of its perceived evidentiary shortcomings. {45} We reverse and remand for further proceedings consistent with this opinion. {46} IT IS SO ORDERED. ZACHARY A. IVES, Judge MEGAN P. DUFFY, Judge GERALD E. BACA, JudgeII. The AHO Imposed an Erroneous Evidentiary Requirement on Taxpayer
CONCLUSION