Hoffman v. N.M. Taxation & Revenue Dep't

• Decision Date: 18 July 2019
• Docket Number: No. A-1-CA-36399,A-1-CA-36399
• Parties: DAVID HOFFMAN and JANIE HOFFMAN, Protestants-Appellants/Cross-Appellees, v. NEW MEXICO TAXATION AND REVENUE DEPARTMENT, Respondent-Appellee/Cross-Appellant.
• Court: Court of Appeals of New Mexico

DAVID HOFFMAN and JANIE HOFFMAN, Protestants-Appellants/Cross-Appellees, v. NEW MEXICO TAXATION AND REVENUE DEPARTMENT, Respondent-Appellee/Cross-Appellant.

No. A-1-CA-36399

COURT OF APPEALS OF THE STATE OF NEW MEXICO

July 18, 2019

This decision of the New Mexico Court of Appeals was not selected for publication in the New Mexico Appellate Reports. Refer to Rule 12-405 NMRA for restrictions on the citation of unpublished decisions. Electronic decisions may contain computer-generated errors or other deviations from the official version filed by the Court of Appeals.

APPEAL FROM ADMINISTRATIVE HEARINGS OFFICE

Dee Dee Hoxie, Hearing Officer

Queener Law Firm, P.C.

Richard L. Queener

Clovis, NM

for Appellants

Hector H. Balderas, Attorney General

Marek Grabowski, Special Assistant Attorney General

Santa Fe, NM

for Appellee

MEMORANDUM OPINION

HANISEE, Judge.

{1} David and Janie Hoffman (Taxpayers) appeal from the decision and order of the administrative hearing officer affirming the New Mexico Taxation and Revenue Department's (the Department) assessment of Taxpayers' personal income tax, penalty, and interest for tax periods from January 1, 2009 through December 31, 2015. Taxpayers challenge the hearing officer's determination that Taxpayers' grass-fed beef operation was not a for-profit business. In addition, the Department cross-appeals the hearing officer's decision to abate the Department's assessment of penalties. We affirm the decision and order of the hearing officer.

BACKGROUND

{2} Taxpayers purchased land in Quay County, New Mexico in 2006 in pursuit of their dream to own and operate a cattle farm. Taxpayers' farming operation turned a profit in 2007 and 2008. In 2009 Taxpayers decided to change the operation to try to raise grass-fed beef. The operation suffered through a drought from 2010 through 2012. Taxpayers then reported farm losses on their personal income tax returns in 2009, 2010, and 2012 through 2015. In 2016, pursuant to an audit, the Department determined that Taxpayers' application of the operation's losses as deductions was improper. The Department proceeded to assess additional personal income tax, penalty, and interest for tax years 2009, 2010, and 2012 - 2015¹ and found Taxpayers owed the Department $7,154.00 for tax, $1,293.52 for penalty, and $552.44 in interest for the years assessed. The Department denied Taxpayers the loss-based deduction based on its conclusion that Taxpayers' grass-fed beef business was not a for-profit activity under 26 U.S.C. § 183 (2018). Taxpayers formally protested the assessment by filing a timely letter with the Department.

{3} At the formal hearing on March 16, 2017, Taxpayers were represented by Douglas Mote, an "[e]nrolled agent" under 31 C.F.R. § 10.4(a) (2018) (enrollment as an enrolled agent is granted to applicants eighteen years old and over who pass a written examination administered by the Internal Revenue Service or who possess a valid tax preparer identification number). Taxpayers argued their operation was a for-profit activity in accordance with the nine factors set forth in 26 C.F.R. § 1.183-2 (2018). Those nine factors are: (1) the manner in which the taxpayer carries on the activity; (2) the expertise of the taxpayer or his advisors; (3) the time and effort expended by the taxpayer in carrying on the activity; (4) the expectation that assets used in activity may appreciate in value; (5) the success of the taxpayer in carrying on other similar or dissimilar activities; (6) the taxpayer's history of income or losses with respect to activity; (7) the amount of occasional profits, if any, which are earned; (8) the financial status of the taxpayer; and (9) the elements of personal pleasure or recreation. 26 C.F.R. 1.183-2(b). Mr. Mote and Taxpayers provided testimony as to these nine factors.

{4} Mr. Mote testified that Taxpayers purchased the land for $170,000 in 2006 and its appraised estimated value was $312,600 in 2015, showing appreciation in land value. He also explained Taxpayers put substantial work into the land and into raising their cattle, causing the land and assets thereon to appreciate in value despite the severe drought. According to Mr. Mote, the appreciation in value of the land and assets, along with the personal time and effort expended by Taxpayers, demonstrates the operation is for-profit under the fourth and third factors of 26 CFR 1.183-2 because appreciation in land value and operation assets "more than offsets all [past farm] losses."

{5} Taxpayer David Hoffman testified that Taxpayers' goal for the operation is to raise grass-fed cattle. He stated that Taxpayers each work approximately 45 hours a week on the operation. He also testified to his education in animal husbandry and his knowledge about cattle production. Both Taxpayers shared the opinion that their operation is a labor of love, and not a hobby. They reasoned that hobbies do not require the amount of hard work and money they contributed to the cattle operation.

{6} Auditor Milagros Bernardo provided testimony on behalf of the Department and explained the result of the audit was to disallow Taxpayers' farm losses as deductions due to consecutive years of increasing losses and because the operation did not qualify for the "presumption of profit motive" under 26 U.S.C. § 183(d) (presuming a business to be for-profit if the gross income of the business exceeds the deductions for three or more taxable years within a five year consecutive period). She also testified the assessment was proper based on her eleven years of experience as an auditor for the Department and based on the "profit motive interview" document outlining Taxpayers' responses to the nine factors under 26 C.F.R. § 1.183-2. In Ms. Bernardo's view, the Taxpayers' responses demonstrated that their grass-fed cattle operation was not a for-profit activity and stated that each determination of whether an activity is for-profit is made on a case-by-case basis after weighing the nine factors; the appreciation in the value of the Taxpayers' property and assets was only one factor considered in making the determination.

{7} The hearing officer issued a decision and order containing findings of fact, conclusions of law, and an analysis discussing whether Taxpayers' operation was for-profit and whether Taxpayers' penalty should be abated. She applied information from the testimony and exhibits to each of the nine factors under 26 C.F.R. § 1.183-2. The hearing officer determined that six of the nine factors weighed against, and three supported, finding Taxpayers' operation was for-profit, thereby rendering the Department's disallowance of the deduction, on balance, reasonable.

{8} Regarding the issues before her, the hearing officer first concluded that Taxpayers failed to overcome the presumption that the assessment of tax and interest by the Department was correct insofar as it was based on the Department's conclusion that Taxpayers' grass-fed beef operation was not engaged in a for-profit activity eligible for farm loss deductions. Second, the hearing officer found that under the totality of the circumstances, Taxpayers were not negligent because they relied on advice from an enrolled agent when they claimed the farm loss deductions and were therefore eligible for penalty abatement.

{9} Both Taxpayers and the Department filed timely notices of appeal pursuant to NMSA 1978, Section 7-1-25 (2015), each appealing the rulings within the hearing officer's decision adverse to them. In arguing that the hearing officer failed to consider all of the evidence regarding the operation's for-profit status, Taxpayers point primarily to the appreciation in the value of livestock and the appreciation in the value of the land due to the operation-specific changes made by Taxpayers. The Department makes three arguments on appeal: (1) the hearing officer erred when she abated the penaltyassessed against the Taxpayers because there is insufficient evidence in the record to show Taxpayers relied upon the advice of Mr. Mote in making their decision to take the deductions at issue; (2) an enrolled agent is not "competent tax counsel or [an] accountant" and therefore cannot be relied upon for penalty abatement under 3.1.11.11 NMAC; and (3) the hearing officer failed to make specific findings of fact supporting the abatement.

STANDARD OF REVIEW

{10} Upon appeal under the Tax Administration Act, this Court may set aside a decision and order of a hearing officer 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." Section 7-1-25(C). "An action is arbitrary and capricious if it is unreasonable, irrational, wi[l]lful, and does not result from a sifting process." Regents of the Univ. of Ca. v. N.M. Water Quality Control Comm'n, 2004-NMCA-073, ¶ 35, 136 N.M. 45, 94 P.3d 788 (internal quotation marks and citation omitted); see id. (affirming commission's provision of "adequate" statement of reasons for adopting water standards).

{11} When reviewing a hearing officer's decision, this Court considers the burden on the taxpayer to overcome the presumption of correctness of an assessment by the Department. Holt v. N.M. Dep't of Taxation & Revenue, 2002-NMSC-034, ¶ 4, 133 N.M. 11. "While we employ the whole record standard of review, the evidence is viewed in the light most favorable to the decision of the hearing officer." Brim Healthcare, Inc. v. Taxation & Revenue Dep't, 1995-NMCA-055, ¶ 3, 119 N.M. 818, 896 P.2d 498. If there is more than one inference that can be drawn from the evidence, "then the inference drawn by the hearing officer is conclusive." Kewanee Indus., Inc. v. Reese, 1993-NMSC-006, ¶ 6, 114 N.M. 784, 845 P.2d 1238; Waldroop v. O'Cheskey, 1973-NMCA-146, ¶ 9, 85 N.M. 736, 516 P.2d 1119; Rust Tractor Co. v. Bureau of Revenue, 1970-NMCA-107, ¶ 5, 82 N.M. 82, 475 P.2d 779. "We do not reweigh the evidence" on which...