Court Opinion

ID: 9596978
Source: CourtListenerOpinion
Date Created: 2023-08-22 00:54:44.282007+00
Date Added: 2024-06-11T18:01:36.411465
License: Public Domain

OPINION HENDLEY, Judge. This is an appeal from the Commissioner’s Decision and Order assessing emergency school tax, gross receipts tax, compensating tax, municipal tax, penalty and interest against Torridge Corporation, d/b/a El Camino Restaurant and Lounge (Torridge) for the reporting period January 1, 1966 to March 31, 1971 and emergency school tax, gross receipts tax, municipal tax, penalty and interest against El Camino Motel, Inc. (El Camino) for the reporting period January 1, 1966 to March 31, 1971. We affirm in part and reverse in part. Torridge is a New Mexico corporation which operates a package liquor store, a lounge and a restaurant. El Camino is a New Mexico corporation which operates a motel. Both corporations have the same accountant. All tax returns for the period in question were timely filed. During October, 1970 a fire occurred on the Torridge premises which destroyed, among other things, its entire books and records (ledgers, journals, bank statements, deposit slips and checks). The same fire also destroyed the entire records of El Camino except for a journal and ledger for 1970 which were not on the premises at the time of the fire. The Commissioner does not challenge the accidental nature of the fire. Subsequently, the Commissioner conducted an audit from January 1, 1968 to March 31, 1971. The auditor made a finding that the gross receipts had been understated by 25%. Pursuant to § 72-13-33(D), N.M.S. A.1953 (Repl.Vol.1961, pt. 2, Supp.1971) the audit was extended to cover the years 1966 and 1967. For the audit period, the auditor computed the gross receipts of both taxpayers based upon bank deposits, eliminating such bank deposits as could be determined from bank microfilm records to be either interdepartmental transactions or bank to bank transfers. Subsequent to the original audit a second audit was made and a partial abatement was provided for in the Commissioner’s Decision and Order. Taxpayers contend: (1) that the Commissioner was not justified in computing gross receipts from the taxpayers’ bank deposits and (2) that the audit was “fraught with so many errors” that the Decision and Order is arbitrary, capricious, an abuse of discretion, not supported by substantial evidence, and not in accordance with law. Bank Deposit Method.  This is a matter of first impression. It is taxpayers’ contention under this point that the Commissioner is not justified in using this method unless there is either a strong suspicion that taxpayer has received income from undisclosed sources or that taxpayer has failed to keep any records or that the records are inadequate. Taxpayers state that the mere fact that their records were destroyed by fire should not justify the Commissioner’s resort to the bank deposit method with its inherent inaccuracies. We disagree. Section 72-13-22 (A), N.M.S.A.1953 (Repl.Vol.1961, pt. 2, Supp.1971) states: “72-13-22. Investigative authority and pozvers. A. For the purpose of establishing or determining the extent of the liability of any person for any tax, for the purpose of collecting any tax or for the purpose of enforcing any statute administered by the bureau, the commissioner or his delegate is authorized to examine equipment and to examine and require the production of any pertinent records, books, information or evidence, to require the presence of any person and to require him to testify under oath concerning the subject matter of the inquiry and to make a permanent record of the proceedings.”  We deem this statute not only as authority to examine pertinent books and records for the purpose of verification but also as authority to reconstruct records when they are destroyed. The fact of an accidental destruction is not material. The nonexistence of records, for whatever reasons, is the pertinent fact. We are not impressed by taxpayers’ argument that the cases cited for the proposition of using the bank deposit method only relate to fraud and criminal prosecution. See Standard Federal Tax Reporter, CCH, Vol. 3, ¶^2767.051-2767.0525 (1972) and cases cited therein. The issue is: when records do not exist, for whatever reason, what methods are available and reasonable in order to reconstruct the records ?  Both taxpayers argue that since the two corporations had the same accountant, this was evidence that the books of both corporations were kept in the same way and, thus, the 1970 records of El Camino which corresponded with the returns filed that year created a presumption that the records of both corporations for the prior years would correspond with the returns filed for those years. We cannot say, as a matter of law, that such a presumption exists under the record as presented. To the contrary, once the notice of assessment of taxes is delivered to the taxpayer, the statutory presumption, of the correctness of the assessment, applies. Section 72-13-32(C), N.M.S.A.1953 (Repl.Vol. 1961, pt. 2, Supp.1971). See McConnell v. State ex rel. Bureau of Revenue, 83 N.M. 386, 492 P.2d 1003 (Ct.App.1971).  We conclude that the bank deposit method is a reasonable method of reconstruction of records, regardless of what the reasons are for not having records. After the audit and the notice of assessment of taxes is delivered to taxpayer, taxpayer must carry the burden of proof in order to negate the presumption of correctness. The Audit. It is taxpayers’ contention that the audit was “fraught with so many errors as to result in an arbitrary and capricious result.”  The Commissioner used the “test months” technique in performing the audit. After the first audit, a second and final audit was prepared and certain adjustments were made in favor of taxpayers. Taxpayers state: “[t]he question naturally arises in one’s mind what a third audit would reveal.” Our answer to this is the same as under the first point. The notice of assessment of taxes based on the audit is presumed to be correct. Section 72-13-32(C), supra. Absent a showing of incorrectness by taxpayers, the audit and notice of assessment of taxes must stand.  The “test months” method was used for the audit period, January 1, 1968 to March 31, 1971. The test months were used to determine gross receipts subject to tax. There is evidence that the test months method is acceptable practice. Although there is conflicting evidence, the Commissioner could draw the inference from the evidence of the auditor, that the gross receipts were the amount computed by use of the test months and bank deposit methods. See Archuleta v. O’Cheskey, 84 N.M. 428, 504 P.2d 638 (Ct.App.), decided November 30, 1972. The Commissioner’s decision, that the taxpayers failed to establish the inaccuracy of the gross receipts ascertained by the audit, is supported by evidence. Accordingly, the presumption of correctness of the assessments for January .1, 1968 to March 31, 1971, has not been overcome. Taxpayers assert the audit technique was arbitrary because there were records available for El Camino for 1970, and because there is evidence that the records for both corporations for other years were kept in the same way. The argument is that the audit technique used should not have been employed in the light of this evidence. Two statutes are involved in this argument — ! 72-13-27, N.M.S.A.1953 (Supp. 1971) which requires a taxpayer to maintain records which permit an “accurate compilation” of taxes, and § 72-13-32, supra, which gives the Commissioner general investigative authority in determining the extent of tax liability. The taxpayers’ position would have the effect of foreclosing any investigation of potential tax liability once a taxpayer asserts the records presented by him were accurate. Our answer is that the two statutes are on equal footing; that although the taxpayer is required to keep accurate records, the Commissioner is also authorized to investigate to determine the extent of any tax liability. In this case, the investigation was not foreclosed by the fact that some records were available for one of the corporations for one of the years in question. Nor are the resulting assessments to be set aside by the presence of records for one taxpayer for one year when the Commissioner’s ruling necessarily approved the audit results, and the audit results necessarily showed the available records were either inaccurate or incomplete. The techniques employed cannot be held to be arbitrary as a matter of law.  The assessments for 1966 and 1967 present a question of evidence. Those assessments were reached by using the gross receipts reported by the taxpayers for those years and applying to those reported receipts “ . . . the percentage of exceptions found in the regular audit period. .” The evidence is that the audit period was January 1, 1968 to March 31, 1971. The audit shows the “percentage of exceptions”, that is, the percentage of under-reporting of receipts, to be three different figures, depending on the portion of the audit period involved. There is no evidence of an “average” or “mean” under-reporting percentage. Compare Archuleta v. O’Cheskey, supra. The auditor did not take test months for 1966 and 1967, and did not compute receipts for those years by the bank deposit or any other method. There is no evidence that any under-reporting percentage determined for an audit period can reasonably be applied to unaudited years. The undisputed evidence of no audit for 1966 and 1967, of no test for gross receipts for those years and of different under-reporting percentages for the audited period establishes an absence of any basis for the assessments for 1966 and 1967. Since this evidence is uncontradictcd, the Commissioner erred in ruling that the taxpayers failed to show the assessments for 1966 and 1967 were incorrect. The showing was there was no basis for these assessments. This showing overcame the presumption that the assessments were correct. We affirm the Decision and Order of the Commissioner as to Torridge for the audit period January 1, 1968 to March 31, 1971, and reverse as to the years 1966 and 1967. We affirm the Decision and Order of the Commissioner as to El Camino for the audit period January 1, 1968 to March 31, 1971, and reverse as to the years 1966 and 1967. It is so ordered. WOOD, C. J., concurs. SUTIN, J., dissents.