1998 -NMCA- 55, Teco Investments, Inc. v. Taxation and Revenue Dept. of State of N.M.

• Decision Date: 27 March 1998
• Docket Number: Nos. 18068,18071,s. 18068
• Citation: 957 P.2d 532,125 N.M. 103,1998 NMCA 55
• Parties: , 1998 -NMCA- 55 TECO INVESTMENTS, INC., Plaintiff-Appellant, v. TAXATION AND REVENUE DEPARTMENT OF THE STATE OF NEW MEXICO, Respondent-Appellee. and CHINO MINES COMPANY, Plaintiff-Appellant, v. TAXATION AND REVENUE DEPARTMENT OF THE STATE OF NEW MEXICO, Respondent-Appellee.
• Court: Court of Appeals of New Mexico

Page 532

957 P.2d 532

125 N.M. 103, 1998 -NMCA- 55

TECO INVESTMENTS, INC., Plaintiff-Appellant, v. TAXATION AND REVENUE DEPARTMENT OF THE STATE OF NEW MEXICO,

Respondent-Appellee.

and

CHINO MINES COMPANY, Plaintiff-Appellant, v. TAXATION AND REVENUE DEPARTMENT OF THE STATE OF NEW MEXICO,

Respondent-Appellee.

Nos. 18068, 18071.

Court of Appeals of New Mexico.

March 27, 1998.

Tom Udall, Attorney General, Margaret B. Alcock, Special Assistant Attorney General, Santa Fe, for Appellee.

Curtis W. Schwartz, Margaret Lewis Meister, Modrall, Sperling, Roehl, Harris & Sisk, P.A., Santa Fe, for Appellant Teco Investments, Inc.

Paul D. Barber, Rosenfelt, Barlow, Barber, Barudin & Borg, P.A., Albuquerque, for Appellant Chino Mines Company.

OPINION

BOSSON, Judge.

¶1 These consolidated cases involve a taxpayer, Chino Mines, who erroneously paid a tax it did not owe, a compensating use tax, and failed to pay a tax it did owe, a gross receipts tax. When it discovered the error, taxpayer invoked the doctrine of equitable recoupment and requested an offset of one tax for the other, as satisfaction in full, because the two taxes were identical in amount. The New Mexico Taxation and Revenue Department refused because fault for the mistake lay with the taxpayer and not the Department, a point which apparently is not in dispute. The Department demanded its gross receipts tax in full plus penalties and interest, in addition to retaining a portion of the compensating use tax which exceeded the reach of the statute of limitations pertaining to refunds. After an unsuccessful administrative appeal, taxpayer appeals to this court. We reverse.

BACKGROUND

¶2 In late 1987, Chino Mines entered into a lease agreement with Teco Investments, agreeing to lease equipment from Teco for use in its copper mine in Hurley, New Mexico. The hearing officer found that under the lease agreement, Chino agreed "to pay and on demand indemnify Teco for any taxes" imposed on the transaction. Teco understood that Chino would pay any "transaction taxes" due on the leasing of mining equipment. However, instead of paying Teco's gross receipts tax, which is owed on sales occurring inside New Mexico, Chino erroneously paid compensating use tax, which is due for sales occurring outside New Mexico. See Siemens Energy & Automation, Inc. v. New Mexico Taxation & Revenue Dep't, 119 N.M. 316, 322, 889 P.2d 1238, 1244 (Ct.App.1994). The amount due under either tax was identical.

¶3 In 1995, the Department assessed Teco over $500,000 in gross receipts taxes, penalties, and interest due for the period going back to 1988 under the seven-year statute of limitations for back taxes. Under its lease agreement with Teco, Chino agreed to make this payment, but Chino also requested a refund of the compensating use tax it had mistakenly paid over the same period of time. However, refunds are subject to a three-year statute of limitations, and the Department refunded the compensating use taxes for only the years 1992, 1993, and 1994; Chino was denied a refund for the earlier years.

¶4 As a result of its error, Chino now finds itself liable for over $500,000 in Teco's back taxes and penalties, while denied a refund on the compensating use tax it paid during much of that same time (1988 through 1991). Chino protested the denial of its refund for 1988, 1989, 1990, and 1991. Teco protested the assessment of gross receipts tax, penalties, and interest. Chino and Teco both argued that under the doctrine of equitable recoupment the amount paid in compensating use tax should be recouped to pay the gross receipts tax or applied against that tax. After a hearing, the protests of both taxpayers were denied. The hearing officer acknowledged that the factual prerequisites of equitable recoupment were met in this case. Nonetheless, the hearing officer rejected the claim based upon other equities, specifically the fault of Teco and Chino for their own dilemma, and the lack of culpability in the Department.

DISCUSSION

Standard of Review

¶5 Under the statutory procedure for review of Department hearing officer decisions, we are to set aside a decision only if it is " 'found to be: (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.' " Siemens Energy & Automation, Inc., 119 N.M. at 317-18, 889 P.2d at 1239-40 (quoting NMSA 1978, § 7-1-25(C) (1989)). In this case, the only question is whether the hearing officer acted in accordance with the law of equitable recoupment in rejecting taxpayers' appeals.

Equitable Recoupment

¶6 The doctrine of equitable recoupment was first applied by the United States Supreme Court in Bull v. United States, 295 U.S. 247, 55 S.Ct. 695, 79 L.Ed. 1421 (1935) and then in Stone v. White, 301 U.S. 532, 57 S.Ct. 851, 81 L.Ed. 1265 (1937). See Hoffman F. Fuller, Finality and Equity in Tax Litigation, 10 Am. J. Tax Pol'y 51, 52, 71 n. 3 (1992). The Supreme Court has observed that in both Bull and Stone, a "single transaction or taxable event had been subjected to two taxes on inconsistent legal theories, and what was mistakenly paid was recouped against what was correctly due." Rothensies v. Electric Storage Battery Co., 329 U.S. 296, 300, 67 S.Ct. 271, 272, 91 L.Ed. 296 (1946). In Bull, the single taxable event permitting equitable recoupment was receipt by executors of a sum of money. The government attempted to tax it twice: under the Estate Tax Act as a part of the decedent's gross estate, and under the Income Tax Act as income to the estate after decedent's death. Rothensies, 329 U.S. at 300, 67 S.Ct. at 272. In Stone, the government was allowed to recoup a tax refund and apply it to pay a time-barred claim for taxes owed. Rothensies, 329 U.S. at 300, 67 S.Ct. at 272. The trustees had mistakenly paid tax on estate income when this tax should have been paid by the beneficiary. Id. The claim against the beneficiary was time-barred. The trustees sued for a refund, which would inure to the beneficiary. Id. The Court allowed recoupment of the refund, the tax the government should not have collected, to be applied against the tax the beneficiary should have paid. Id.

¶7 New Mexico has adopted the doctrine of equitable recoupment subject to the restrictions customarily recognized by federal courts. Vivigen, Inc. v. Minzner, 117 N.M. 224, 231, 870 P.2d 1382, 1389 (Ct.App.1994). Under this standard,

[i]f the taxpayer pays taxes on a transaction under one view of the facts and the law, the government cannot impose taxes on the transaction under a different view of the facts or the law without giving the taxpayer credit for the initial amount paid, even though the taxpayer's claim for refund or credit would otherwise be untimely.

Id. at 230, 870 P.2d at 1388. This Court again reviewed equitable recoupment in Siemens Energy & Automation, Inc., 119 N.M. at 323, 889 P.2d at 1245 (requiring a strict identity of interest when multiple taxpayers are involved).

¶8 In the case before us, the hearing officer determined that Teco and Chino satisfied the three conditions of equitable recoupment: 1) a single taxable event, 2) taxes assessed on that event on inconsistent theories, and 3) a strict identity of interest. The Department disputes this determination by the hearing officer. The hearing officer identified the single taxable event as Teco's lease of equipment to Chino. It is that single event upon which the Department seeks to assess gross receipts tax against Teco and upon which Chino paid compensating use tax. In Siemens Energy & Automation, Inc., 119 N.M. at 323, 889 P.2d at 1245, this Court observed that a sale of equipment constituted a single taxable event. We are persuaded that the hearing officer correctly determined that Teco's lease of equipment to Chino was a single taxable event.

¶9 The hearing officer also agreed with taxpayers that the two taxes were paid on an inconsistent basis, observing that the gross receipts tax and the compensating use tax "are designed to be complementary and mutually exclusive." The Department does not dispute this basic premise, and could not do so. In Siemens Energy & Automation, Inc., we observed that the compensating use tax and the gross receipts tax are inconsistent; they cannot be imposed on the same party for the same taxable event. 119 N.M. at 322, 889 P.2d at 1244 ("[T]he determination as to which tax applies turns on the point of sale."). Instead, the Department argues that Chino's voluntary payment of compensating use tax does not relieve Teco of the responsibility to pay gross receipts tax. See id. ("[V]oluntary payment of compensating tax by the purchaser does not relieve the seller of liability for gross receipts tax ...."). However, as the hearing officer correctly pointed out, Siemens Energy & Automation, Inc. does not stand for the proposition that a voluntary tax payment is a complete bar to the doctrine of equitable recoupment. Indeed, the Siemens Energy & Automation, Inc . court went on to analyze whether the doctrine applied to the facts of that case even after observing that the payment of the inconsistent tax was voluntary. 119 N.M. at 323, 889 P.2d at 1245. The doctrine of equitable recoupment only requires that the two taxes be inconsistent; it contains no requirement that the inconsistent payments be involuntary. We agree with the hearing officer's conclusion that "the voluntariness of a tax payment is not a bar to the application of equitable recoupment[.]"

¶10 The Department also takes issue with the hearing officer's determination that a strict identity of interest existed between Teco and Chino. The Department argues that Teco and Chino are separate business entities and have no strict identity of interest. However, under limited circumstances, which we will shortly describe, separate parties may nonetheless have a strict identity of interest.

¶11 We addressed the nature of this third...