Gathings v. Bureau of Revenue , 87 N.M. 334 ( 1975 )

OPINION

WOOD, Chief Judge.

The appeal is concerned with penalties assessed under § 72-13-82(A), N.M.S.A. 1953 (Repl.Vol. 10, pt. 2, Supp.1973) on the basis that the taxpayers (Robert O. Ga-things and Nedra Gathings) were negligent in failing to pay state income tax when due. The taxpayers contend: (1) they were not negligent; (2) the penalties deprived them of equal protection of the law; and (3) the word “negligence” is void for vagueness.

The Bureau issued assessments for income tax, interest and penalty for the year 1967, and for interest and penalty for the years 1968, 1969 and 1970. The taxpayers protested. After formal hearing the Commissioner of Revenue denied the protests and upheld the assessments. The taxpayers appealed directly to this Court. In this appeal the taxpayers have abandoned contentions directed to the income tax, interest and penalty for 1967 and contentions directed to the interest for 1968, 1969, 1970. The appeal is concerned only with the penalty assessments.

Section 72-13-82(A), supra, provides:

“In the case of failure, due to negligence * * * but without intent to defraud, to pay when due any amount of tax required to be paid * * * there shall be added to the amount two per cent [2%] per month or a fraction thereof from the date the tax was due * * * not to exceed ten per cent [10%] thereof * * * as penalty * *

Negligence

The taxpayers and the Bureau agree that “negligence” in § 72-13-82(A), supra, should be equated with the federal standard of “lack of reasonable cause.” See 26 U.S.C.A. § 6651(a) (1974 Supp.). We accept this agreement in the case and apply a standard of reasonable cause, or its lack, in deciding the negligence issue.

It is not disputed that income tax returns were not timely filed for 1968, 1969 and 1970, and that the taxes due for those years were not timely paid. See § 72-15A-10, N.M.S.A.1953 (Repl.Vol. 10, pt. 2, Supp. 1973).

There is evidence that the taxpayers relied on a certified public accountant to prepare and file their returns and to send in the checks in payment of the taxes. The taxpayers claim they did all a reasonably prudent taxpayer could or would do under the circumstances. On the basis of this evidence, they assert they were not negligent as a matter of law.

Two seemingly contradictory approaches appear in the cases. One approach is that the responsibility for filing the return and paying the tax is on the taxpayer; that this responsibility is a personal, nondelegable duty. This approach distinguishes between reliance on an accountant for advice, and reliance for the acts of filing the return and paying the tax. Under this approach, reliance on an accountant would not be reasonable cause for failure to pay taxes when due. Logan Lumber Co. v. Commissioner of Int. Revenue, 365 F.2d 846, 4 A.L.R.Fed. 521 (5th Cir. 1966); Ferrando v. United States, 245 F.2d 582 (9th Cir. 1957); Pfeiffer v. United States, 315 F.Supp. 392 (E.D.Cal.1970); Bar L. Ranch, Inc. v. Phinney, 272 F.Supp. 249 (E.D.Tex.1967), aff’d, 400 F.2d 90 (5th Cir. 1968). The Bureau urges us to adopt this approach.

A second approach is that reliance on an accountant is reasonable care as a matter of law; that when all responsibility is delegated to the accountant, the taxpayer is not chargeable with the accountant’s negligence. In re Fisk’s Estate, 203 F.2d 358 (6th Cir. 1953); Haywood Lumber & Min. Co. v. Commissioner of Int. Rev., 178 F.2d 769 (2nd Cir. 1950); Ragadale v. Paschal, 118 F.Supp. 280 (E.D.Ark.1954). The taxpayers urge us to adopt this approach.

We do not examine the various fact situations in an attempt to reconcile the two approaches into one legal rule. See Inter-American Life Insurance Company v. Commissioner of Int. Revenue, 56 T.C. 497 (1971), aff’d, 469 F.2d 697 (9th Cir. 1972); 10 Mertens, Law of Federal Income Taxation, § 55.23, at 172-174 (1970 Rev.). Nor do we choose between the two approaches. Under either approach, the Commissioner’s decision is to be sustained.

Under the nondelegable duty approach, the taxpayers’ asserted reliance on the accountant would be legally insufficient. On the other hand, the reliance approach has a factual predicate; that the taxpayers did in fact rely. In asserting that they relied on the accountant, the taxpayers view the evidence in the light most favorable to themselves. Our review, however, considers the evidence in the light most favorable to the Commissioner’s decision. Westland Corporation v. Commissioner of Revenue, 84 N.M. 327, 503 P.2d 151 (Ct.App.1972). When so considered, there is substantial evidence that the taxpayers did not rely on the accountant for payment of the tax when due.

Apart from the question of fact as to reliance, there is a question of fact as to whether there was a lack of reasonable cause for the failure to pay the taxes when due. When the evidence is considered in the light most favorable to the Commissioner’s decision, there is substantial evidence that the taxpayers lacked reasonable cause in failing to pay the taxes when due.

The taxpayers used the same accountant for the tax years 1966 through 1970. The same procedure was followed in each of those years. The accountant prepared the tax returns and prepared the check with which to pay the tax and presented the return and check to the taxpayers for their signatures. In 1967 the accountant wrote to the Bureau inquiring whether the taxpayer had filed his tax return for 1966. The letter stated that the taxpayer had filed his federal return and thought the state return was clipped to the back of the federal return. The Commissioner found the taxpayer failed to establish that the 1967 taxes were paid or that a return had been filed for that year. This finding is not challenged on appeal. The original returns for 1968, 1969 and 1970, together with checks for the tax declared on each return, were in the taxpayers’ possession when nonpayment was discovered in 1971. Discovery occurred when Dr. Gathings was cleaning his desk in connection with moving to a new office. There is an inference that the original returns and checks were in unopened envelopes. Although Dr. Gathings’ checkbook was balanced each month, he did not know the checks attached to the original returns were outstanding until the 1971 discovery. Thus, the check to pay the 1968 tax would have been outstanding more than two years. The combined total of the checks for the three years exceeded $22,000.00.

There being substantial evidence that the taxpayers did not rely on the accountant to pay the taxes, the reliance approach urged by taxpayers lacks the factual predicate for its application. There being substantial evidence that the taxpayers lacked reasonable cause for failing to pay the taxes when due, the Commissioner’s finding of negligence is affirmed.

Equal Protection

There is evidence that the Commissioner of Revenue has the authority to determine whether a penalty should be assessed or to abate a penalty which has been assessed. There is evidence that this authority has been exercised. The taxpayers claim that either in imposing the penalties against them or in failing to abate those penalties, they have been discriminated against and thereby deprived of equal protection of the law. Sims v. Board of Education of Independent Sch. Dist. No. 22, 329 F.Supp. 678 (U.S.D.C.N.M.1971).

Where taxes are not timely paid, there is evidence that a penalty is not assessed or if assessed, abated, in the following situations: (1) where the taxpayer is misled by an employee of the Bureau of Revenue; (2) where a taxpayer cannot file a return because of injury; (3) where the untimeliness is due to a death in the family; (4) where an Act of God, such as a fire, intervened; and (5) where there has been a theft of taxpayer’s records.

The taxpayers conceded at oral argument that their theory of reliance on an accountant is not factually similar to the above five situations. They assert, however, that the rationale is the same; that timely payment of the taxes was beyond their control because of their reliance on the accountant.

The rationale is not to be applied without regard to the facts. We do not consider the “control” argument because the factual situations where the penalty is either not assessed or is abated are concededly not similar to the taxpayers’ reliance argument. Specifically, there is insufficient factual similarity to apply the same rationale. Further, there is substantial evidence that the taxpayers did not rely on the accountant. The penalties do not deny the taxpayers equal protection of the law.

Void for Vagueness

This contention has two parts.

First, the taxpayers assert the word “negligence” is so vague that it violated due process. The claim is that the taxpayer has no notice as to what acts amount to negligence.

Second, the taxpayers contend the word “negligence” is so vague that the Commissioner does not have a known and pre-established standard for evaluating the taxpayer’s failure to pay taxes when due.

The word “negligence” is a general standard capable of reasonable application and sufficient to limit and define the Commissioner’s powers in imposing a penalty. City of Santa Fe v. Gamble-Skogmo, Inc., 73 N.M. 410, 389 P.2d 13 (1964); Johnson v. Sanchez, 67 N.M. 41, 351 P.2d 449 (1960); Compare the opinions in Safeway Stores, Inc. v. City of Las Cruces, 82 N.M. 499, 484 P.2d 341 (1971).

The Decision and Order of the Commissioner are affirmed.

It is so ordered.

HENDLEY, J., concurs. SUTIN, J., dissenting.