Baker Bancorporation Inc. v. Dept ( 1982 )

No. 82-121
IN THE SUPREME COURT OF THE STATE OF MONTANA
1982
BAKER BANCORPORATION, INC., et al.,
Petitioner and Appellants, and
Respondent,
DEPARTMENT OF REVENUE OF THE STATE
OF MONTANA,
Respondents and Respondents.
.1 from: District Court of the First Judicial District,
In and for the Oounty of Lewis and Clark
Honorable Robert M. Holter, Judge presiding.
Counsel of Record:
For Appellants:
Harrison, Loendorf & Poston, Helena, Montana
James T. Harrison, Jr., argued, Helena, Montana
J. Patrick Giblin argued, Billings, Montana
For Respondents:
Michael J. Rieley argued, Helena, Montana
Submitted: November 16, 1982
Decided : December 29, 1982
Filed:
DEC 2 9 SSEe"
M r . J u s t i c e Gene B. D a l y d e l i v e r e d t h e O p i n i o n of t h e C o u r t .
A p p e l l a n t s , s i x h o l d i n g companies, a p p e a l t h e d e n i a l of t h e i r
claim f o r d e d u c t i o n s o f d i v i d e n d s r e c e i v e d from s u b s i d i a r y cor-
porations i n which t h e y own 8 0 p e r c e n t or more of the voting
stock.
The controversy here centers upon the interpretation of a
1973 amendment to Section 84-1504, Revised Codes of Montana
(1947), (recodified in part i n s e c t i o n 15-31-113(2), MCA) and
w h e t h e r case law i n t e r p r e t i n g t h a t s e c t i o n p r i o r t o i t s amendment
is still controlling. Old Revised Codes of Montana (R.C.M.)
c i t e s w i l l be u s e d s i n c e w e are c o n c e r n e d w i t h p r o v i s i o n s e n a c t e d
p r i o r t o and d u r i n g 1 9 7 3 .
Section 84-1504, R.C.M., 1947, is part of Montana's
C o r p o r a t i o n L i c e n s e Tax A c t and d e s c r i b e s how t h e l i c e n s e t a x is
computed.
P r i o r t o 1 9 7 3 , s e c t i o n 84-1504 p r o v i d e d t h e f o l l o w i n g d e f i n i -
t i o n o f g r o s s income and n e t income:
". . . The term g r o s s income means t h e income
f r o m a l l s o u r c e s w i t h i n t h e s t a t e of Montana
recognized in the determination of the
c o r p o r a t i o n ' s f e d e r a l income t a x l i a b i l i t y ;
b u t s h a l l i n c l u d e i n t e r e s t exempt from f e d e r a l
income t a x . The t e r m
-- -- ' n e t - c o m e ' -
in -
- means -
- the
gross -
----- income o f t h e c o r p o r a t i o n less -- e
- --- th
a l l- a b l e d e d u c t y o n s . -
-o w - 7-
~Ger, - --h e - - f i n i t i o n s
t de
--
o f g r o s s Income - n e t -
---I
a n d - income - f o r t h -
- set i%
t h i s - E c---- n
--
-
tlo s h a l l n o t be construed as
allowing t h e d e d u c t i o n s s e t f r t h i G & Z t i o T
o
2 4 3 ----- e - ~ e d e r a l -
-- of t h internal ~ e v e -- u e
- n - Code a s
or as t h a t
now w r i t t e n . - - - s e c t i o n s h a l l -- i3&
--
l- b e l e d --r -----
-- a o amended. .. " ( E m p h a s i s added.)
I n i n t e r p r e t i n g t h e above language, t h i s Court cons ist e n t l y
held to the rule that t h e d e f i n i t i o n of gross income and net
income is dependent upon and incorporates by reference the
F e d e r a l I n t e r n a l R e v e n u e Code, e x c e p t where Montana l a w e x p r e s s l y
provides otherwise. Lazy JD Cattle Co. v. State Board of
E q u a l i z a t i o n ( 1 9 7 2 ) , 1 6 1 Mont. 43
i 5 0 4 P.2d 287; F i r s t F e d e r a l
S a v i n g s and Loan A s s o c i a t i o n v. S t a t e Tax A p p e a l Board (1975),
167 Mont, 33, , 5 3 5 P.2d 1 8 3 ( i n t e r p r e t i n g s e c t i o n 84-1504 f o r
the tax years prior to 1973). Any federal deduction was
allowable in Montana, unless some section of the Montana
Corporation License Tax Act expressly provided otherwise.
I n 1 9 7 3 , t h e Montana L e g i s l a t u r e amended s e c t i o n 84-1504 to
r e a d as f o l l o w s :
". . . The term g r o s s income means a l l income
recognized i n determining the corporation's
g r o s s income f o r f e d e r a l i n c o m e t a x p u r p o s e s ;
b u t s h a l l i n c l u d e i n t e r e s t exempt f r o m f e d e r a l
i n c o m e t a x . N o c o r p o r a t i o n is exempt from t h e
corporation license tax unless specifically
p r o v i d e d f o r u n d e r s e c t i o n 84-1501. Any cor-
p o r a t i o n n o t s u b j e c t t o or l i a b l e forfedgr-aT
.
r-
-
Income t a x b u t n o t exempt f r o m t h e c o r p o r a t i o n
l i c e n s e t a x under s e c t i o n 84-1501 - a l l -sh- corn-
--
p u t e - r o s s income -- o r c o r p o r a t i o n l i c e n s e -
g f P
p u r p o s e s i n --e same manner a s a c o r p o r a t i o n
th
tax
--- F - -
t o or
t h a t i s ----e c t- - l i a 6 i e - f E r - f x-f 6 i
subj
income t a x a c c o r d i n g t o - - i s i o n s f o r
---- -7
the prov
determininu --- 4
Gross i n c o m e i n t h e f e d e r a l ihter-
4
-- -
n a l r e v e n u e c o d e - e - £ f < c t t f o ~ ~- t - a-l e
in - ee- ax b -
- ear.
y -- term - income' means t h e G r o s s
The P
'net
-----c o m e . f t h e c o r p o --t -o n ~ < k deduc?i%-6~
in o
- r a i- - s ~
s e t f o r t h --n s e c t i o n 84-1502."
- - i - - - A
- -
(~rnp~a~s-a-fle~.
The d e d u c t i o n s c l a i m e d b y a p p e l l a n t s a r e p r o v i d e d f o r i n sec-
t i o n 243 o f t h e F e d e r a l I n t e r n a l Revenue Code. These d e d u c t i o n s
were expressly disallowed in the pre-1973 version of section
84-1504. T h a t d i s a l l o w a n c e was d e l e t e d i n 1 9 7 3 .
The a p p e l l a n t s h e r e are s i x one-bank holding companies, each
o f which owns 80 p e r c e n t or more of t h e v o t i n g s t o c k o f a commer-
c i a l bank. The f o l l o w i n g is a l i s t o f t h e h o l d i n g c o m p a n i e s and
t h e i r r e s p e c t i v e bank s u b s i d i a r i e s :
P a r e n t H o l d i n g Company Bank
--
- Subsidiaries
Baker Bancorporat i o n , I n c . Montana
Montana
Rank
Bank
of B a k e r , N.A.
Bozeman B a n c o r p o r a t i o n , I n c . of Bozeman, N.A.
B u t t e I n s u r a n c e Agency, I n c . Montana Bank of B u t t e , N.A.
Mineral County Bancorporation, Montana Bank of Mineral County
Inc.
Red Lodge B a n c o r p o r a t i o n , I n c
Roundup I n s u r a n c e Agency, I n c .
. Montana Bank o f Red L o d g e , N.A.
Montana Bank o f Roundup, N.A.
From 1973 t o 1979, the appellants consolidated their tax
returns with their respective subsidiaries. The D e p a r t m e n t o f
R e v e n u e , upon e x a m i n i n g t h e r e t u r n s , d e n i e d a p p e l l a n t s p e r m i s s i o n
to consolidate them. In recalculating the returns, the
Department did not allow appellants deduct ions for dividends
r e c e i v e d from t h e i r s u b s i d i a r i e s .
The appellants appealed the Department's decision to the
S t a t e Tax A p p e a l Board (STAB) . STAB o v e r t u r n e d t h e D e p a r t m e n t ' s
d e c i s i o n , and a l l o w e d t h e d e d u c t i o n s . STAB f o l l o w e d t h e case l a w
w h i c h s t a t e d t h a t t h e C o r p o r a t i o n L i c e n s e Tax A c t i n c o r p o r a t e s by
r e f e r e n c e t h e F e d e r a l I n t e r n a l Revenue Code. STAB r e a s o n e d t h a t
s i n c e S e c t i o n 243 o f t h e F e d e r a l I n t e r n a l Revenue Code allows t h e
d e d u c t i o n s , and s i n c e no p r o v i s i o n i n t h e C o r p o r a t i o n L i c e n s e Tax
Act e x p r e s s l y p r o h i b i t s the deductions, a p p e l l a n t s could deduct
t h e d i v i d e n d s r e c e i v e d from t h e i r s u b s i d i a r i e s .
The D e p a r t m e n t a p p e a l e d STAB's d e c i s i o n t o t h e D i s t r i c t C o u r t
of the First Judicial District, Lewis & Clark County. The
District Court reversed STAB's decision, stating that STAB
i n c o r r e c t l y a p p l i e d pre-1973 s t a t u t o r y and case l a w i n c o m p u t i n g
t a x r e t u r n s f o r t h e y e a r s 1973 t h r o u g h 1979. The D i s t r i c t C o u r t
c o n c l u d e d t h a t s e c t i o n 84-1504 a s amended i n 1 9 7 3 , i n i t s p l a i n
meaning, limits deductions to - -o s e
o n l y t h- allowed in section
84-1502. S i n c e t h e d e d u c t i o n claimed by a p p e l l a n t s w a s n o t pro-
v i d e d f o r i n s e c t i o n 84-1502, the District Court disallowed the
d e d u c t i o n , r e g a r d l e s s of the provision i n the federal tax code.
The s o l e i s s u e o n r e v i e w is w h e t h e r u n d e r s e c t i o n 84-1504,
R.C.M., 1947, ( r e c o d i f i e d i n p a r t i n s e c t i o n 15-31-113(2), MCA) ,
appellants are allowed to deduct d i v i d e n d s received from sub-
sidiaries i n which they own 80 p e r c e n t o r more of the voting
stock.
I n i n t e r p r e t i n g s e c t i o n 84-1504 p r i o r to i t s 1 9 7 3 amendment,
t h i s Court acknowledged that the F e d e r a l I n t e r n a l Revenue Code
would b e u s e d t o define "gross income," " n e t income," and "all
allowable d e d u c t i o n s ,*I unless another provision e x p r e s s l y pro-
vided otherwise. Lazy JD Cattle Co. v. State Board of
Equalization ( 1 9 7 2 ) , 1 6 1 Mont. 40, 5 0 4 P.2d 287; F i r s t Federal
Savings & Loan v. S t a t e Tax A p p e a l Board ( 1 9 7 5 ) r 1 6 7 Mont. 33,
5 3 5 P.2d 1 8 3 ( a p p l y i n g p r e - 1 9 7 3 statutes). Lazy J D - a t t l e --
In -- C-- Co.
w e s t a t e d t h e r u l e as f o l l o w s :
"Thus t h i s Court h a s c o n s i s t e n t l y h e l d t h a t
t h e d e f i n i t i o n o f g r o s s income and n e t income
f o r s t a t e c o r p o r a t i o n l i c e n s e t a x p u r p o s e s is
d e p e n d e n t upon and i n c o r p o r a t e s by r e f e r e n c e
t h e p r o v i s i o n s o f t h e F e d e r a l I n t e r n a l Revenue
Code e x c e p t as e x p r e s s l y p r o v i d e d o t h e r w i s e ,
a s i n t h e case o f t h e exempt i n t e r e s t e x c l u -
s i o n and t h e d i v i d e n d d e d u c t i o n . " 504 P.2d
a t 290.
S e e a l s o Board o f E q u a l i z a t i o n v. F a r m e r ' s Union G r a i n T e r m i n a l
A s s l n ( 1 9 6 2 ) , 1 4 0 Mont. 5 2 3 , 374 P.2d 231; Home B u i l d i n g & Loan
A s s l n of Helena v. Board o f E q u a l i z a t i o n ( 1 9 6 2 ) , 1 4 1 Mont. 1 1 3 ,
3 7 5 P.2d 312; and B a r t h v . S t a t e Board o f Equalization (1966),
1 4 8 Mont. 2 5 9 , 419 P.2d 484. T h e s e cases h a v e n o t b e e n o v e r r u l e d
a n d are s t i l l good l a w i n Montana.
STAB b a s e d its decision on the above cases; the District
Court did not. We agree with the STAB r e a s o n i n g and hereby
r e i n s t a t e its o r d e r .
The 1 9 7 3 amendment to s e c t i o n 84-1504 did not alter the
interrelationship that exists be t w e e n the Federal Internal
Revenue Code and t h e Montana C o r p o r a t i o n L i c e n s e Tax A c t . The
I n t e r n a l Revenue Code i n s e c t i o n 243 p e r m i t s c o r p o r a t i o n s t o t a k e
a d e d u c t i o n f o r 1 0 0 p e r c e n t of the dividends received by them
f r o m s u b s i d i a r y c o r p o r a t i o n s i n which t h e y own 8 0 p e r c e n t o r more
of the voting stock. No provision i n t h e Montana C o r p o r a t i o n
L i c e n s e Tax A c t e x p r e s s l y p r o h i b i t s t h e s e c t i o n 2 4 3 d e d u c t i o n .
Appellants are therefore entitled to deduct all dividends
r e c e i v e d b y them from s u b s i d i a r y c o r p o r a t i o n s i n which t h e y own
8 0 p e r c e n t or more of t h e s t o c k .
The D i s t r i c t C o u r t ' s judgment i a t e d and t h e STAB o r d e r
reinstated.
Chief Ju'sticc