Co-Con, Inc. v. Bureau of Revenue , 87 N.M. 118 ( 1974 )

OPINION

LOPEZ, Judge.

Taxpayers, Co-Con, Inc. and Universal Constructors, Inc. appeal from a decision and order of the commissioner of revenue denying their protests concerning various assessments of gross receipts and compensating tax and penalties. We affirm in part, reverse in part, and remand in part with instructions.

There are five points for consideration:

(1) Gross Receipts on Leases. During the periods under question, items of construction equipment common to the operations of both corporations were utilized by both on their construction projects without regard to which corporation held legal title to the equipment. Co-Con, Inc. is a 100% owned subsidiary of Universal Constructors, Inc. Based on this usage, entries were made in the accounting records of each taxpayer estimating the cost of usage of the equipment. The commissioner held that the amounts recorded represented rental income from the lease of equipment and assessed gross receipts tax on each pursuant to § 72-16A-4, N.M.S.A.1953 (Repl.Vol. 10, pt. 2, Supp.1973).

(2) Compensating Tax on Purchases from Safety Flare, Inc. Taxpayer Co-Con, Inc. contracted with Safety Flare, Inc. for certain services. A non-taxable transaction certificate (NTTC) was issued by Co-Con, Inc. The commissioner held the NTTC invalid and assessed the taxpayer for compensating tax.

(3) Gross Receipts Tax on Additional Receipts from D. W. Falls, Inc. Taxpayer Universal Constructors, Inc. performed a project for D. W. Falls, Inc., on completion of which taxpayer accepted a secured promissory note in lieu of final payment. The commissioner characterized the note as a “time-price differential sale” and assessed a gross receipts tax on the interest paid with the note pursuant to § 72-16A-3(F), N.M.S.A.19S3 (Repl.Vol. 10, pt. 2, Supp.1973). '

(4) Rio Arriba County Gross Receipts Tax. Taxpayer Universal Constructors, Inc. paid gross receipts tax to the state for its receipts on the Heron Dam project but did not pay a similar county tax. The commissioner assessed a gross receipts tax on behalf of Rio Arriba County pursuant to a county ordinance.

(5) Penalties. On all of the above assessments the commissioner assessed penalties of 10% of the tax due pursuant to § 72-13-82(A), N.M.S.A.1953 (Repl.Vol. 10, pt. 2, Supp.1973).

We resolve the conflicts in these situations seriatim:

(1) Taxpayers protest the assessments of their mutual utilization of equipment, stating that they did not receive gross receipts, or in the alternative, that any consideration received was either exempt from taxation or eligible for a deduction from taxable receipts or was less than that computed by the commissioner.

Taxpayers argue that the accounting entries reflecting this utilization were merely cost analyses and were in no way supported by any agreement for mutual reimbursement. By this interpretation, taxpayers seek to avoid the impact of § 72-16A-3(F), supra, which reads in pertinent part as follows:

“F. ‘gross receipts’ means the total amount of money or the value of other consideration, received from selling property in New Mexico, from leasing property employed in New Mexico or from performing services in New Mexico, * * *.” [Emphasis supplied].

Leasing is defined for purposes of gross receipts taxation in § 72-16A-3(J), N.M.S.A.1953 (Rep.Vol. 10, pt. 2, Supp. 1973).

“J. ‘leasing’ means any arrangement whereby, for a consideration, property is employed for or by any person other than the owner of the property * ^ ^ **

The characterization of a transaction as a lease may also be determined by looking to the intentions of the parties as evidenced by their actions with respect to the leased property. Transamerica Leasing Corp. v. Bureau of Revenue, 80 N.M. 48, 450 P.2d 934 (Ct.App.1969).

Under the applicable definition, the value of consideration received for leasing the equipment in question was the right to use such equipment. It should be noted at this point that the consolidation of these taxpayers’ appeals was purely a matter of convenience and efficiency in procedure. Each transaction and taxpayer must be considered separately for purposes of determining taxability as though only one taxpayer at a time were before the court. Each transferor of construction equipment in the case at bar made accounting entries showing the machinery as “receivable” while each transferee entered the equipment as “liability.” Although this fact, taken by itself, might do no more than support taxpayers’ claim that the entries were mere cost analyses, the accompanying treatment by both companies of the transactions as gross rentals for federal corporate income tax purposes in the same tax year indicates that the intent of the taxpayers was to treat the arrangements as rentals or leases. Taxpayers must treat transactions uniformly for all purposes within the tax scheme and not attempt to show, first, a lease for federal purposes and second, a non-taxable event for state purposes. We find ample evidence in the record to indicate that taxpayers engaged in leasing, both by intent and within the scope of the statutory definition.

Taxpayers’ remaining arguments with respect to this first point are equally unpersuasive. They state that the joint use of equipment may not be termed a lease because the shareholders of Universal Constructors, Inc. own all the equipment in question. As stated before, these two corporations must be treated as separate entities for taxation purposes. House of Carpets, Inc. v. Bureau of Revenue, 84 N.M. 747, 507 P.2d 1078 (Ct.App.1973). Taxpayers cannot hide behind their shareholders in an effort to escape corporate liability.

The consideration for these leases may not be termed either a contribution to capital by the lender or a dividend on capital stock by the lessee. There is no evidence of a dividend or capital contribution on the record; and there is no showing of entitlement to the exemption [§ 72-16A-12.13, N.M.S.A.1953 (Repl.Vol. 10, pt. 2, Supp.1973)] claimed by taxpayers on appeal. Rock v. Commissioner of Revenue, 83 N.M. 478, 493 P.2d 963 (Ct.App.1972).

The taxpayers further contend that the amounts assessed by the commissioner for these leases are excessive. The record shows that the bureau used the admittedly conservative figures of the taxpayers in order to arrive at the value of these gross receipts. Taxpayers are in error in their understanding of the use of their values of consideration by the bureau. The commissioner has determined that the amount of gross receipts is the value received by the lessor or transferor of the equipment. The gross receipts tax is levied upon the lessor of equipment, not the user as taxpayers would have us hold. Section 72-16A-3(F), supra.

As a final contention under this first conflict, taxpayers argue that their leases should be exempt from the gross receipts tax under § 72-16A-14.26, N.M.S.A. 1953 (Repl.Vol. 10, pt. 2, Supp.1973) which exempts receipts from joint use by a corporation and/or its subsidiary of office machines and facilities. This section is purely exclusionary and limited to machines of a general administrative nature. The heavy construction equipment exchanged by taxpayers in no way qualifies for this exemption.

In summary, then, we resolve the first point adversely to the taxpayers by finding that they did receive gross receipts from the leasing of equipment, that the consideration received was in no way exempt from taxation pursuant to § 72-16A-4, supra, and that the amount subject to gross receipts tax, as computed by the bureau, was the proper taxable figure.

(2) The bureau has conceded the nontaxability of this transaction. The tax, penalty and interest relating to this issue will be abated in full by the commissioner of revenue. Leaco Rural Telephone Cooperative, Inc. v. Bureau of Revenue, 86 N.M. 629, 526 P.2d 426 (Ct.App.1974).

(3) The taxpayer contends that the additional money received from D. W. Falls, Inc. for services performed was in the form of interest and should be exempt from taxation by the bureau pursuant to § 72-16A-12.13, N.M.S.A.1953 (Repl.Vol. 10, pt. 2, Supp.1973). The commissioner argues that the additional money must be viewed as a “time-price differential sale” and is therefore taxable under § 72-16A-3(F), supra. We will not discuss the applicability of § 72-16A-12.13, supra, since we view the issue to be the applicability of the tax sought to be imposed under § 72-16A-3(F), supra, and § 72-16A-4, supra, rather than any arguable exemption from that tax.

The record shows that the arrangement for a promissory note, secured by a mortgage, given by D. W. Falls, Inc. to Universal Constructors, Inc. in payment for services rendered came through the initiation of D. W. Falls, Inc. Uncontradicted testimony by the secretary-treasurer of the taxpayer shows that the note was given and accepted as an interest bearing instrument after all work had been completed by taxpayer :

“Q. Now, at the time you entered into the contract, you did not contemplate any type of time price differentials, that term is used in the Statute ?

“A. That is correct.

* * *

“Q. Mr. Leder, in connection with that note, at the time of the note and mortgage was received, had all the work been done by Universal ?

“A. Yes.

“Q. And, it had been fully billed out?

“A. Yes.

“Q. And, I think the face of the note is down to the penny on the amount of the last- — or is it the same number as the amount of the last invoice, is that correct?

“A. That is correct.

“Q. And, you testified earlier that that number could not have been determined until the job was completed because the job was bid and the work was done on a unit-price basis of at least three periods of the contract ?

“A. . That is correct.

“ * * *

“MR. SAUNDERS: May I add one more question to that? Were all of these, the note and the mortgage, were these prepared following the date of the last invoice regardless of the date shown on them?

“MR. LEDER: Yes they were.

“MR. SAUNDERS : And, they were executed after that date ?

“MR. LEDER: Afterwards, yes.”

In order to be taxable as a “time-price differential sale”, the money in question must have been bargained for before the contract work was rendered and the final invoice delivered. A subsequent service charge is not part of a “time-price.” Interest cannot be part of a “time-price” unless it is contracted for. Field Enterprises Educational Corporation v. Commissioner of Revenue, 82 N.M. 24, 474 P.2d 510 (Ct.App.1970); see Davis v. Commissioner of Revenue, 83 N.M. 152, 489 P.2d 660 (Ct.App.1971).

Under the commissioner’s rationale, all interest paid upon a note to liquidate a debt for services rendered would necessarily have to be categorized as part of a “time-price” sale. This is clearly not the meaning of “time-price differential sale”, and such words will be given their ordinary meaning unless a different legislative intent is clearly indicated. Davis v. Commissioner of Revenue, supra. The additional money paid on the note from D. W. Falls, Inc. to taxpayer was in the nature of interest and may not be characterized as “time-price” for the purposes of § 72-16A-3(F), supra. The tax as imposed by the bureau is inapplicable and we reverse the bureau on this issue.

(4) Taxpayer has challenged the imposi'tion of a county gross receipts tax, raising issues of federal and state constitutionality and statutory construction. We decline to reach the constitutional issues presented in order to remand this particular area of conflict for further consideration by the bureau.

The taxpayer urges us to find that the Rio Arriba County gross receipts tax does not reach the gross receipts which taxpayer received from the Heron Dam project in that county. The commissioner argues that the taxpayer cannot raise the issue of applicability of the tax on appeal since it was allegedly not raised below. Section 72-13-39 (A), N.M.S.A.1953 (Repl.Vol. 10, pt. 2, Supp.1973); House of Carpets, Inc. v. Bureau of Revenue, supra. Taxpayer has submitted a Memorandum of Positions in which the issue of applicability of the county tax is timely raised. This memorandum was properly included as part of the record both through permission of the bureau and by order of this court (April 3, 1974). The issue of statutory construction is, therefore, properly before this court on appeal.

Under § 72-13-39 (D) (3), N.M.S.A.1953 (Repl.Vol. 10, pt. 2, Supp.1973) this court shall set aside a decision and order of the commissioner if it is found to be not in accordance with law. The decision and order of the commissioner in this case declares simply that the taxpayer “is liable for Rio Arriba County tax upon its gross receipts derived from the Heron Dam project, 4 U.S.C. §§ 104-110.” As stated above, we are not concerned with the constitutional issue raised before the bureau; we cannot be until we know something about the statute which is challenged. There is nowhere in the record any indication that the ordinance in question even exists.

Section 72-13-32(C), N.M.S.A. 1953 (Repl.Vol. 10, pt. 2, Supp.1973) states:

“C. Any assessment of taxes made by the bureau is presumed to be correct.”

McConnell v. State ex rel. Bureau of Revenue, 83 N.M. 386, 492 P.2d 1003 (Ct.App.1971) indicates, however, that this presumption need be overcome only by a taxpayer’s disputing the factual correctness of an assessment. This the taxpayer has done by challenging the bureau’s interpretation of the county ordinance in its Memorandum of Positions. Since no one is in a better position to demonstrate the contents of a tax statute than the bureau, the burden was properly shifted by the memorandum to the bureau to at least acknowledge the existence of the Rio Arriba County gross receipts tax ordinance.

Whether the bureau’s assessment in this instance was in conformity with law is beyond the recitation of the record. Since our review must be based upon this record, § 72-13-39(A), supra, we find it impossible to proceed without some knowledge of the considerations underlying the bureau’s action on this issue. For this reason, this particular matter must be remanded to the bureau for further proceedings so that the record will indicate the reasoning of the bureau and the basis on which it denied the taxpayer’s protest. Title Services, Inc. v. Commissioner of Revenue, 86 N.M. 128, 520 P.2d 284 (Ct.App.1974).

(5) Taxpayers protest the penalties assessed by the commissioner pursuant to § 72-13-82(A), supra. The bureau asserts the general proposition that a presumption of correctness attaches to all its assessments. Section 72-13-32(C), supra; McConnell v. State ex rel. Bureau of Revenue, supra; see also § 72-16A-5, N.M.S. A.1953 (Repl.Vol. 10, pt. 2, Supp.1973).

Taxpayers contend that § 72-13-82(A), supra, should not be so read as to impose a per se liability upon all protesting taxpayers. The commissioner asks us to construe the section in such a way that a penalty is due any time a tax is due. This interpretation overly extends the scope of this section and attributes meaning to the words of subsection (a) which are not clearly indicated. Davis v. Commissioner of Revenue, supra.

The statute provides that the 10% penalty shall be added to the amount owed only in the event of failure to pay an assessed amount “due to negligence or disregard of rules and regulations.” Section 72-13-82(A), supra. The diligent protest of all these issues by taxpayers negates the possibility of any negligence on their parts. Further, the taxpayers have not disregarded any rules and regulations. They have carried forward a thorough protest against the rulings of the commissioner with reasonable doubt as to the interpretation and applicability of the various taxes sought to be imposed by the order of the commissioner. Any presumptions of correctness which may have attached to the commissioner’s decision have been sufficiently overcome by the taxpayers’ showing that the bureau in at least one instance above (Point 2) failed to follow the statutory provisions of the tax act and by taxpayers’ presenting evidence in all other instances to dispute the factual correctness of the commissioner’s assessments. McConnell v. State ex rel. Bureau of Revenue, supra; see Archuleta v. O’Cheskey, 84 N.M. 428, 504 P.2d 638 (Ct.App.1972). This series of disputes involved at times very complex and difficult legal issues; the taxpayers at all times had reason to believe that they would prevail, as they have in over half of the contentions raised. In no way can we conclude from these circumstances that the commissioner’s assessments were not paid through taxpayers’ negligence or disregard of the rules and regulations. Any other reading of § 72-13-82(A), supra, would render the qualifications “negligence” and “disregard” utterly meaningless. The decision of the commissioner to assess penalties pursuant to § 72-13-82(A), supra, was not in accordance with law and is reversed in its entirety.

In summary, therefore, the decision and order of the commissioner with respect to (Point 1), Gross Receipts on Leases, supra, is affirmed. The decision and order of the commissioner with respect to (Point 4), Rio Arriba County Gross Receipts Tax, supra, is reversed and the cause remanded to the commissioner for further proceedings consistent with this opinion. The decision and order of the commissioner with respect to (Points 2), Compensating Tax on Purchases from Safety Flare, Inc., supra, (3), Gross Receipts Tax on Additional Receipts from D. W. Falls, Inc., supra, and (5), Penalties, supra, are hereby reversed.

It is so ordered.

HERNANDEZ, J., concurs.