July 18, 2019- David Hoffman v. New Mexico Taxation and Revenue Department, No. A-1-CA-36399

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Court of Appeals of New Mexico
Filed 7/18/2019 11:20 AM

; ae
IN THE COURT OF APPEALS OF THE STATE OF NEW MEXICO . He at

DAVID HOFFMAN and JANIE HOFFMAN,
Protestants-A ppellants/Cross-Appellees,

v. | No. A-1-CA-36399

NEW MEXICO TAXATION AND REVENUE
DEPARTMENT,

Respondent-Appellee/Cross-Appellant.

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.

3 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,

1 2015. 	Taxpayers challenge the hearing officer's determination that Taxpayers'
2 grass-fed beef operation was not a for-profit business. In addition, the 1
Department
3 cross-appeals the hearing officer's decision to abate the Department's assessment of
4 penalties. We affirm the decision and order of the hearing officer.
5 BACKGROUND
6 	{2} 	Taxpayers purchased land in Quay County, New Mexico in 2006 in pursuit of
7 their dream to own and operate a cattle farm. Taxpayers' farming operation turned a
8 profit in 2007 and 2008. In 2009 Taxpayers decided to change the operation to try
9 to raise grass-fed beef. The operation suffered through a drought from 2010 through
10 2012. Taxpayers then reported farm losses on their personal income tax returns in
11 	2009, 2010, and 2012 through 2015. In 2016, pursuant to an audit, the Department
12 determined that Taxpayers' application of the operation's losses as deductions was
13 	improper. The Department proceeded to assess additional personal income tax,
14 penalty, and interest for tax years 2009, 2010, and2012 -2015 1 and found Taxpayers
15 	owed the Department $7,154.00 for tax, $1,293.52 for penalty, and $552.44 in
16 	interest for the years assessed. The Department denied Taxpayers the loss-based
17 deduction based on its conclusion that Taxpayers' grass-fed beef business was not a
1
There is no information in the record showing that Taxpayers reported farm
losses on their personal income tax return in 2011. Despite inconsistencies in
Taxpayers' brief in chief and the Department's cross brief in chief, the exhibits
presented by the Department at the hearing show that only 2009, 2010, 2012, 2013,
2014, and 2015 were assessed-2011 was not included in the assessment.
2

1 for-profit activity under 26 U.S.C. § 183 (2018). Taxpayers formally protested the
2 assessment by filing a timely letter with the Department.
3 	{3} 	At the formal hearing on March 16, 2017, Taxpayers were represented by
4 Douglas Mote, an "[e]nrolled agent" under 31 C.F.R. § 10.4(a) (2018) (enrollment
5 as an enrolled agent is granted to applicants eighteen years old and over who pass a
6 written examination administered by the Internal Revenue Service or who possess a
7 valid tax preparer identification number). Taxpayers argued their operation was a
8 for-profit activity in accordance with the nine factors set forth in 26 C.F.R. § 1.183-
9 2 (2018). Those nine factors are: (1) the manner in which the taxpayer carries on the
10 activity; (2) the expertise of the taxpayer or his advisors; (3) the time and effort
11 	expended by the taxpayer in carrying on the activity; ( 4) the expectation that assets
12 used in activity may appreciate in value; (5) the success of the taxpayer in carrying
13 	on other similar or dissimilar activities; (6) the taxpayer's history of income or losses
14 with respect to activity; (7) the amount of occasional profits, if any, which are
15 	earned; (8) the financial status of the taxpayer; and (9) the elements of personal
16 pleasure or recreation. 26 C.F.R. l.183-2(b). Mr. Mote and Taxpayers provided
17 testimony as to these nine factors.
18 	{4} 	Mr. Mote testified that Taxpayers purchased the land for $170,000 in 2006
19 and its appraised estimated value was $312,600 in 2015, showing appreciation in
20 land value. He also explained Taxpayers put substantial work into the land and into
3

1 raising their cattle, causing the land and assets thereon to appreciate in value despite
2 the severe drought. According to Mr. Mote, the appreciation in value of the land and
3 assets, along with the personal time and effort expended by Taxpayers, demonstrates
4 the operation is for-profit under the fourth and third factors of 26 CFR 1.183-2
5 because appreciation in land value and operation assets "more than offsets all [past
6 farm] losses."
7 	{5} 	Taxpayer David Hoffman testified that Taxpayers'· goal for the operation is to
8 raise grass-fed cattle. He stated that Taxpayers each work approximately 45 hours a
9 week on the operation. He also testified to his education in animal husbandry and
10 his knowledge about cattle production. Both Taxpayers shared the opinion that their
11 	operation is a labor of love, and not a hobby. They reasoned that hobbies do not
12 require the amount of hard work and money they contributed to the cattle operation.
13 	{6} 	Auditor Milagros Bernardo provided testimony on behalf of the Department
14 and explained the result of the audit was to disallow Taxpayers' farm losses as
15 	deductions due to consecutive years of increasing losses and because the operation
16 did not qualify for the "presumption of profit motive" under 26 U.S.C. § 183(d)
17 (presuming a business to. be for-profit if the gross income of the business exceeds
18 the deductions for three or more taxable years within a five year consecutive period).
19 She also testified the assessment was proper based on her eleven years of experience
20 as an auditor for the Department and based on the "profit motive interview"
4

1 document outlining Taxpayers' responses to the nine factors under 26 C.F.R. §
2 1.183-2. In Ms. Bernardo's view, the Taxpayers' responses demonstrated that their
3 grass-fed 	cattle 	operation was 	not 	a for-profit 	activity 	and 	stated that 	each
4 determination of whether an activity is for-profit is made on a case-by-case basis
5 after weighing the nine factors; the appreciation in the value of the Taxpayers'
6 property and assets was only one factor considered in making the determination.
7 {7} 	The hearing officer issued a decision and order containing findings of fact,
8 conclusions of law, and an analysis discussing whether Taxpayers' operation was
9 for-profit and whether Taxpayers' penalty should be abated. She applied information
10 from the testimony and exhibits to each of the nine factors under 26 C.F.R. § 1.183-
11 	2. The hearing officer determined that six of the nine factors weighed against, and
12 three supported, finding Taxpayers' operation was for-profit, thereby rendering the
13 	Department's disallowance of the deduction, on balance, reasonable.
14 	{8} 	Regarding the issues before her, the hearing officer first concluded that
15 	Taxpayers failed to overcome the presumption that the assessment of tax and interest
16 by the Department was correct insofar as it was based on the Department's
17 conclusion that Taxpayers' grass-fed beef operation was not engaged in a for-profit
18 	activity eligible for farm loss deductions. Second, the hearing officer found that
19 under the totality of the circumstances, Taxpayers were not negligent because they
5

1 relied on advice from an enrolled agent when they claimed the farm loss deductions
2 and were therefore eligible for penalty abatement.
3 	{9} 	Both Taxpayers and the Department filed timely notices of appeal pursuant to
4 NMSA 1978, Section 7-1-25 (2015), each appealing the rulings within the hearing
5 officer's decision adverse to them. In arguing that the hearing officer failed to
6 consider all of the evidence regarding the operation's for-profit status, Taxpayers
7 point primarily to the appreciation in the value of livestock and the appreciation in
8 the value of the land due to the operation-specific changes made by Taxpayers. The
9 Department makes three arguments on appeal: ( 1) the hearing officer erred when she
10 abated the penalty assessed against the Taxpayers because there is insufficient
11 	evidence in the record to show Taxpayers relied upon the advice of Mr. Mote in
12 making their decision to take the deductions at issue; (2) an enrolled age11-t is not
13 	"competent tax counsel or [an] accountant" and therefore cannot be relied upon for
14 penalty abatement under 3 .1.11.11 NMAC; and (3) the hearing officer failed to make
15 	specific findings of fact supporting the abatement.
16 	STANDARD OF REVIEW
17 {10} 	Upon appeal under the Tax Administration Act, this Court may set aside a
18 	decision and order of a hearing officer o.nly if it is found to be: "(1) arbitrary,
19 capricious or an abuse of discretion; (2) not supported by substantial evidence in the
20 record; or (3) otherwise not in accordance with the law." Section 7-1-25(C). "An
6

1 action is arbitrary and capricious if it is unreasonable, irrational, wi[l]lful, and does
2 not result from a sifting process." Regents of the Univ. of Ca. v. N.M Water Quality
3 Control Comm 'n, 2004-NMCA-073, , 	35, 136 N.M. 45, 94 P.3d 788 (internal
4 quotation marks and citation omitted); see id. ( affirming commission's provision of
5 "adequate" statement of reasons for adopting water standards).
6 	{11} 	When reviewing a hearing officer's decision, this Court considers the burden
7 on the taxpayer to overcome the presumption of correctness of an assessment by the
8 Department. Holt v. N.M Dep 't of Taxation & Revenue, 2002-NMSC-034,, 4, 133
9 N.M. 11. "While we employ the whole record standard of review, the evidence is
10 viewed in the light most favorable to the decision of the hearing officer." Brim
11 	Healthcare, Inc. v. Taxation & Revenue Dep't, 1995-NMCA-055,, 3, 119 N.M.
12 	818, 896 P.2d 498. If there is more than one inference that can be drawn from the
13 	evidence, "then the inference drawn by the hearing officer is conclusive." Kewanee
14 Indus., Inc. v. Reese, 1993-NMSC-006,, 6, 114 N.M. 784, 845 P.2d 1238; Waldroop
15 	v. O'Cheskey, 1973-NMCA-146,, 9, 85 N.M. 736,516 P.2d 1119; Rust Tractor Co.
16 v. Bureau ofRevenue, 1970-NMCA-107,, 5, 82 N.M. 82,475 P.2d 779. "We do not
17 reweigh the evidence" on which the hearing officer's inference is based. Kewanee
18 Indus. Inc., 1993-NMSC-006,, 6.
7

1 DISCUSSION
2 	{12} 	We begin by noting that we have carefully reviewed the record proper in its
3 entirety, along with the findings of fact and conclusions of law set forth in the
4 hearing officer's written decision and order. Based on our review of the record and
5 as we briefly explain below, we affirm the hearing officer's decision and order
6 entered on April 10, 2017, for substantially the same reasons set forth therein. See
7 Rule 12-405(B) NMRA (providing that appellate courts may dispose of a case by
8 non-precedential 	order, 	decision 	or 	memorandum 	opinion 	under 	certain
9 circumstances).
10 The 	Hearing 	Officer's 	Determination 	That 	Taxpayers' 	Grass-Fed 	Cattle
11 	Operation 	is Not For-Profit is 	Supported 	by Substantial Evidence and 	in
12 Accordance With Law
13 	{13} 	We first address the reasoning employed by the hearing officer in her .
14 determination that Taxpayers failed to overcome the correctness presumption of the
15 	assessment of tax and interest. As the hearing officer's analysis shows, six of the
16 nine factors from 26 C.F.R. § 1.183-2 weigh against Taxpayers and support the
17 hearing officer's determination that the operation is not for-profit. We reiterate that
18 	even if more than one inference can reasonably be drawn from the facts presented at
19 the hearing, the hearing officer's findings are conclusive. See Kewanee Indus. Inc.,
20 	1993-NMSC-006,, 6.
8

1 {14} 	On the record before us, we cannot conclude the hearing officer's decision is
2 arbitrary or capricious because there are clear, rational connections "between the
3 facts found and the choices made" by the hearing officer regarding the issue of
4 whether the business is for-profit. See Regents of the Univ. of Cal., 2004-NMCA-
5 073, 135 (internal quotation marks and citation omitted). In this regard, Taxpayers
6 have 	not 	shown 	that 	the 	hearing 	officer 	acted 	fraudulently, 	arbitrarily 	or
7 capriciously, 	that the hearing officer's decision is unsupported by substantial
8 evidence, or that the hearing officer did not act in accordance with the law.
9 	{15} 	To begin, the hearing officer properly weighed 26 C.F.R. § l.183-2's nine
10 factors according to the evidence presented at the hearing. First, Taxpayers' lack of
11 	business plan or formal budget, lack of experience in engaging in a similar business,
12 failure to mitigate losses other than selling cattle one year due to drought, lack of
13 	profits on the grass-fed beef operation, reliance on other full time jobs for income,
14 and characterization of raising cattle as fulfillment of a lifelong dream all indicate,
15 	as the hearing officer observed, that Taxpayers are operating their farm not for-
16 profit, but for other purposes. Second, evidence supported the hearing officer's
17 determination that even though Taxpayer David Hoffman researched and studied
18 	animal husbandry and cattle breeding operations, expended a substantial amount of
19 time and effort on the operation, and relied on the possibility that grass-fed beef may
20 be profitable in the future, this information and the factors to which it applies does
9

1 not outweigh the other factors and the contrary evidence that underpins each. We
2 conclude there to be clear, rational connections between the hearing officer's finding
3 that Taxpayers' business was not operated for profit and her analysis of each of the
4 nine factors. Accordingly, we affirm the hearing officer's conclusion of law that
5 Taxpayers' 	business was not a for-profit activity, and the attendant denial 	of
6 Taxpayers' deductions and affirmance of the Department's assessments.
7 Taxpayers' Penalty Was .Properly Abated Because Taxpayers Relied on an
8 Enrolled Agent and Were Not Negligent
9 {16} 	Second, we address the hearing officer's finding that the penalty assessed is
10 abated because Taxpayers consulted with Mr. Mote, an enrolled agent under 31
11 	C.F.R. § 10.4(a), on their tax liability and relied upon his advice when he prepared
12 their tax returns. Under the Tax Administration Act, a penalty shall be assessed when
13 	a taxpayer fails to pay the required amount of tax due, if the failure is "due to
14 negligence or disregard of department rules and regulations, but without intent to
15 	evade or defeat tax[.]" NMSA 1978, § 7-1-·69(A) (2007). Negligence is defined by
16 the New Mexico Administrative Code as the "failure to exercise that degree of
17 ordinary business care and prudence which reasonable taxpayers would exercise
18 under like circumstances" or "inaction by taxpayers where action is required" or
19 acting with "carelessness,, erroneous belief or inattention." 3 .1.11.10 NMAC.
20 	{17} 	The Department's regulations describe circumstances which "may indicate
21 	that a taxpayer has not been negligent or in disregard of rules and regulations."
10

1 3 .1.11.11 NMAC. One such situation is when "the taxpayer proves that the failure
2 to pay tax or to file a return was caused by reasonable reliance on the advice of
3 competent tax counsel or accountant as to the taxpayer's liability after full disclosure
4 of all relevant facts[.]" 3.1.11.ll(D) NMAC. Under Section 7-1-69(B), "[n]o penalty
5 shall be assessed against a taxpayer if the failure to pay an amount of tax when due
6 results from a mistake of law made in good faith and on reasonable grounds."
7 	{18} 	Based upon the totality of the circumstances, we agree with the hearing officer
8 in her finding that Taxpayers were not negligent. In arguing· that reliance upon an
9 enrolled agent is insufficient to qualify Taxpayers for penalty abatement, the
10 Department argues the fact that "enrolled agent" is not included in the language of
11 	3.1.11.1 l(D) NMAC and that an enrolled agent's role is limited to representing
12 Taxpayers at hearings. However, the non-exclusive language of 3.1.11.11 NMAC
13 	("[t]he following situations may indicate that a taxpayer has not been negligent"
14 (emphasis added)) and the broad language of Section 7-1-69(B) (no penalty will be
15 	assessed if failure to pay tax "results from a mistake of law made in good faith and
l 6 on reasonable grounds" (emphasis added)), does not exclude reliance upon the
17 advice of an enrolled agent as a proper reason for penalty abatement. Furthermore,
18 	other courts have concluded otherwise. See Mortensen v. Comm 'r, 440 F.3d 375,
19 388 (6th Cir. 	2006) ("Much like a taxpayer's reliance on an attorney or an
20 accountant, reliance on an enrolled agent is a factor we must consider in determining
11

1 the reasonableness of a taxpayer's actions[.]"). Similarly, in both Estate ofRobinson
2 	v. Comm'r, 100 T.C.M. (CCH) 82 (T.C. 2010) and Gentile v. Comm'r, 100 T.C.M.
3 (CCH) 451 (T.C. 2010) the taxpayers relied upon the advice of an enrolled agent,
4 and each was found to be a professional upon whom reliance may be placed in good
5 faith, 	and which justifies the non-imposition 	of accuracy-related penalties 	on
6 resulting 	underpayments 	of 	taxes. 	Here, 	the 	record 	reflects 	that 	Taxpayers
7 reasonably relied upon the advice of Mr. Mote in claiming the deductions. As well,
8 Mr. Mote is an enrolled agent with the Internal Revenue Service under 31 C.F.R. §
9 	10.4(a) and is therefore, we conclude, a tax professional that counseled Taxpayers
10 regarding their tax liability during the tax years at issue.
11 	{19} 	Regarding the Department's argument that substantial 	evidence 	did not
12 support the hearing officer's conclusion that Taxpayers reasonably relied on the
13 	advice of Mr. Mote in deciding to take the deductions, Mr. Mote demonstrated his
14 familiarity with the details of Taxpayers' grass-fed cattle operation through his
15 	testimony at the hearing. He was knowledgeable about the condition of the land
16 when Taxpayers first purchased it, the number of cattle on Taxpayers' property, why
17 Taxpayers changed their operation to grass-fed beef, the genetic differences of grass-
18 	fed cattle versus grain-fed cattle, and the details of Taxpayers' plan to raise cattle for
19 organic beef and how it will take time for Taxpayers to accomplish their goals. Mr.
20 Mote's extensive knowledge of Taxpayers' operation shows he was made aware of
12

1 the 	relevant 	facts 	regarding 	the 	operation 	in 	conjunction with his 	service to
2 Taxpayers as an enrolled agent. We have no trouble concluding, as did the hearing
3 officer, that such expertise, combined with the informed nature of Mr. Mote's advice
4 .to Taxpayers, qualifies as compet~nt tax counsel on which Taxpayers reasonably,
5 and not negligently, relied.
6 {20} 	Thus, we conclude it is apparent that Mr. Mote was made aware of the facts
7 about Taxpayers' operation and that Taxpayers relied upon Mr. Mote's advice in
8 claiming the farm losses as deductions on their personal income tax return. As a
9 result, substantial evidence supported the hearing officer's findings and conclusion
10 that Taxpayers were not negligent under Section 7-1-69 and its decision to abate the
11 	penalty.
12 CONCLUSION
13 	{21} 	For the foregoing reasons, we affirm the hearing officer's decision and order
14 	of April 10, 2017.
15 	{22}
16
17
IT IS SO ORDERED.
J. NiiLES HANISEE, Judge
13

1
WE CONCUR:
Megan PDuffy
2 3 MEGAN P. DUFFY, Judge
4
5
BRIANA H. ZAMORA, Judge
14