First Fed. Sav. Loan Assn. v. St.

No. 12939

I N THE SUPREME COURT O THE STATE O MONTANA F F

FIRST FEDERAL SAVINGS & L A ON ASSOCIATION O BILLINGS e t a l . , F

P e t i t i o n e r s and Respondents,

STATE' T X APPEAL BOARD OF THE A STATE O M N A A e t a l , , F OTN,

A p p e l l a n t s and Respondents,

Appeal from: D i s t r i c t Court of t h e F i r s t J u d i c i a l D i s t r i c t , Honorable Gordon R. Bennett, Judge p r e s i d i n g ,

Counsel of Record :

For Appellant :

Terry B. Cosgrove argued, Helena, Montana Joseph R. Massman appeared, Helena, Montana

F o r Respondents:

Cannon and G a r r i t y , Helena, Montana Ross W. Cannon argued and Donald A. G a r r i t y argued, H e k na , Montana

Submitted: A p r i l 11, 1975 Mr. J u s t i c e Wesley C a s t l e s d e l i v e r e d t h e Opinion of t h e C o u r t .

T h i s i s a n a p p e a l by t h e Montana Department of Revenue from a judgment of t h e d i s t r i c t c o u r t , Lewis and C l a r k County, r e v e r s i n g o r d e r s of t h e Montana Department of Revenue and t h e

S t a t e Tax Appeal Board.

T h i s m a t t e r was t r i e d on a n a g r e e d s t a t e m e n t of f a c t s . P l a i n t i f f s a r e s e v e r a l s a v i n g s and l o a n a s s o c i a t i o n s l o c a t e d i n Montana. I n t h e i r 1972 Montana c o r p o r a t i o n l i c e n s e t a x r e t u r n s , t h e y d e d u c t e d from t h e i r g r o s s incomes t h e bad d e b t r e s e r v e a u t h o r i z e d by s e c t i o n s 166 and 593, T i t l e 26, United S t a t e s Code. A t t h e same t i m e , t h e y f i l e d amended r e t u r n s f o r t a x y e a r s 1967 t h r o u g h 1971, i n which t h e y a l s o c l a i m e d t h e bad d e b t r e s e r v e deduction. The Department of Revenue d o e s n o t q u e s t i o n t h e amount

of t h e bad d e b t r e s e r v e d e d u c t i o n c l a i m e d and a d m i t s p l a i n t i f f s a r e e n t i t l e d t o u s e such a d e d u c t i o n i n computing t h e i r f e d e r a l

income t a x r e t u r n s .

The Department of Revenue d i s a l l o w e d t h e bad d e b t r e s e r v e d e d u c t i o n f o r a l l t a x y e a r s i n which i t w a s c l a i m e d . Plaintiffs

p e r f e c t e d a t i m e l y a p p e a l t o t h e S t a t e Tax Appeal Board which, a f t e r h e a r i n g , found i n f a v o r of t h e Department. P l a i n t i f f s ap-

p e a l e d t h a t r u l i n g t o t h e d i s t r i c t c o u r t which e n t e r e d judgment for the plaintiffs, From t h a t judgment, t h e Department of Revenue b r i n g s t h i s a p p e a l .

I n l i g h t of o u r t r e a t m e n t of t h i s a p p e a l , w e need d i s c u s s

b u t one o f t h e i s s u e s r a i s e d by a p p e l l a n t : Whether, i n computing t h e i r Montana c o r p o r a t i o n l i c e n s e t a x e s f o r t a x a b l e y e a r s p r i o r t o 1973, Montana s a v i n g s and l o a n a s s o c i a t i o n s may d e d u c t t h e bad d e b t r e s e r v e a u t h o r i z e d f o r such a s s o c i a t i o n s by s e c t i o n s 166 and 593, T i t l e 26, U.S.C.?

During t h e t a x y e a r s i n q u e s t i o n , s e c t i o n 8 4 - 1 5 0 4 ( 2 ) , R.C.M. 1947, d e f i n e d g r o s s and n e t income a s :

"The t e r n g r o s s income means t h e income from 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 r e c o g n i z e d i n t h e determination of t h e 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 income' means t h e g r o s s income of t h e c o r p o r a t i o n less t h e a l l o w a b l e d e d u c t i o n s . However, t h e d e f - i n i t i o n s of g r o s s income and n e t income s e t f o r t h i n t h i s s e c t i o n s h a l l n o t be c o n s t r u e d a s a l l o w - i n g t h e d e d u c t i o n s s e t f o r t h i n s e c t i o n 243 of t h e F e d e r a l I n t e r n a l Revenue Code * * * " 0

T h i s C o u r t r e c e n t l y c o n s t r u e d t h a t language i n Lazy J D C a t t l e Co. v . S t a t e Board of ~ q u a l i z a t i o n ,1 6 1 Mont. 4 0 , 45,

504 P.2d 287, wherein we s t a t e d :

"Thus t h i s C o u r t 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 i s dependent 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 of 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 a s 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 c a s e of 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 . "

S e c t i o n 84-1502, R.C.M. 1947, r e a d s , i n p e r t i n e n t p a r t :

" I n computing t h e n e t income t h e f o l l o w i n g d e d u c t i o n s s h a l l be a l l o w e d from t h e g r o s s income r e c e i v e d by s u c h c o r p o r a t i o n w i t h i n t h e y e a r from a l l s o u r c e s : I t * * *

'I 2. A l l l o s s e s a c t u a l l y s u s t a i n e d and c h a r g e d o f f w i t h i n t h e y e a r and n o t compensated by i n s u r a n c e o r o t h e r w i s e * * *".

Although s e c t i o n s 1 6 6 and 593 of t h e F e d e r a l I n t e r n a l Revenue Code a u t h o r i z e a d e d u c t i o n from g r o s s income f o r a r e s e r v e

f o r bad d e b t s , t h e i s s u e , more n a r r o w l y s t a t e d , becomes whether o u r Montana C o r p o r a t i o n L i c e n s e Tax s t a t u t e s have " e x p r e s s l y

p r o v i d e d otherwise'" we h o l d t h a t s e c t i o n 84-1502 ( 2 ) , R.C.M. 1947, h a s 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 and r e s p o n d e n t s may n o t d e d u c t t h e bad d e b t r e s e r v e d e d u c t i o n , a u t h o r i z e d by t h e F e d e r a l

I n t e r n a l Revenue Code, i n computing t h e i r Montana c o r p o r a t i o n l i c e n s e t a x e s f o r t a x a b l e y e a r s p r i o r t o 1973. While i t i s t r u e t h e F e d e r a l I n t e r n a l Revenue Code h a s

broken t h e l o s s p r o v i s i o n s i n t o two s e p a r a t e s e c t i o n s , s e c t i o n 165 f o r c a s u a l t y l o s s e s and s e c t i o n 166 f o r bad d e b t s , it d o e s n o t n e c e s s a r i l y f o l l o w t h a t Montana's s e c t i o n 84-1502(2) r e f e r s s o l e l y t o c a s u a l t y l o s s e s and n o t t o bad d e b t s . A c l e a r reading of t h e words " A l l l o s s e s " h a s t h e p l a i n and o b v i o u s meaning t h a t a l l l o s s e s , i n c l u d i n g bad d e b t s , a r e t o be d e d u c t e d under t h i s s e c t i o n o f Montana's code. A bad d e b t i s a " l o s s " .

The p r e d e c e s s o r of s e c t i o n 84-1502(2) was e n a c t e d by o u r l e g i s l a t u r e i n 1917. S e c t i o n 2 , C h a p t e r 7 9 , Laws of 1917. I t w a s l i f t e d a l m o s t v e r b a t i m from S e c . 1 2 ( a ) of t h e F e d e r a l Revenue Act of 1916, 39 S t a t . 767, which r e a d :

" I n t h e c a s e o f a c o r p o r a t i o n * * * such n e t income s h a l l be a s c e r t a i n e d by d e d u c t i n g from t h e g r o s s amount of i t s income r e c e i v e d w i t h i n t h e y e a r from a l l sources---

"Second. A l l l o s s e s a c t u a l l y s u s t a i n e d and c h a r g e d o f f w i t h i n t h e y e a r and n o t compensated by i n s u r a n c e o r o t h e r w i s e * * *."

The p r o v i s i o n s r e l a t i n g t o c o r p o r a t e d e d u c t i o n s d i d n o t s p e c i f i -c a l l y mention bad d e b t s , a s s u c h , u n t i l a s e p a r a t e bad d e b t p r o -v i s i o n w a s added a s Sec. 2 3 4 ( a ) of t h e F e d e r a l Eevenue Act of 1918, 4 0 S t a t . 1077. While t h e Revenue A c t o f 1916 d i d n o t speci f i c a l l y mention bad d e b t s a s b e i n g d e d u c t i b l e , t h e r e g u l a t i o n s promulgated p u r s u a n t t h e r e t o d i d r e c o g n i z e t h e i r d e d u c t i b i l i t y . Art. 1 5 1 of R e g u l a t i o n s No. 33, R e v i s e d , 20 T r e a s u r y D e c i s i o n s I n t e r n a l Revenue 1 2 6 , 199, s t a t e s :

"Bad Debts.--Losses which may be p r o p e r l y d e d u c t e d from g r o s s income on a c c o u n t o f bad d e b t s o r d o u b t f u l a c c o u n t s a r e t h o s e l o s s e s which have been d e f i n i t e l y a s c e r t a i n e d t o have o c c u r r e d and which were c h a r g e d o f f d u r i n g t h e y e a r f o r which t h e r e t u r n i s made."

While R e g u l a t i o n s No. 33, Revised, w a s promulgated on J a n u a r y 2 , 1918, f o l l o w i n g t h e enactment of t h e p r e d e c e s s o r of o u r s e c t i o n 84-1502 ( 2 ) , R.C.M. 1947, a s i m i l a r i n t e r p r e t a t i o n of S e c . I1 G ( b ) of t h e F e d e r a l Revenue Act of 1913, 38 S t a t . 1 7 2 , c a n be found i n A r t i c l e 125 o f R e g u l a t i o n s No. 33, 16 T r e a s u r y D e c i s i o n s I n t e r n a l Revenue, T.D. No. 1944.

Thus, n o t o n l y t h e p l a i n meaning of t h e words " A l l l o s s e s " , but a l s o t h e i n t e r p r e t a t i o n given t o t h e f e d e r a l s t a t - i

u t e , from whence o u r s t a t u t e was drawn, i n d i c a t e s t h a t bad d e b t s a r e d e d u c t i b l e under s e c t i o n 8 4 - 1 5 0 2 ( 2 ) . I n allowing f o r

a d e d u c t i o n f o r bad d e b t s , t h e l e g i s l a t u r e h a s p r o v i d e d a s p e c - i f i c method f o r d e d u c t i n g t h e bad d e b t s which must be f o l l o w e d :

Bad d e b t s a r e d e d u c t i b l e o n l y when " a c t u a l l y s u s t a i n e d and charged o f f w i t h i n t h e year". Where t h e Montana code h a s a t -tempted t o s p e c i f i c a l l y d e a l w i t h a p a r t i c u l a r d e d u c t i o n , i n t h i s c a s e bad d e b t s , t h e n t h e p r o v i s i o n s of t h e Montana c o d e g o v e r n , t o t h e e x c l u s i o n of methods p e r m i t t e d by t h e F e d e r a l I n t e r n a l Revenue Code, i n t h i s c a s e d e d u c t i o n by t h e r e s e r v e method.

Respondents n e x t contend t h a t s e c t i o n 8 4 - 1 5 0 2 ( 2 ) , R.C.M. 1947, d o e s n o t l i m i t a l l d e d u c t i b l e l o s s e s t o t h o s e a c t u a l l y s u s - t a i n e d d u r i n g t h e t a x a b l e y e a r b e c a u s e i n Lazy J D C a t t l e Co.

t h i s C o u r t p e r m i t t e d t h e t a x p a y e r t o c a r r y forward and c a r r y back " l o s s e s " p u r s u a n t t o t h e n e t o p e r a t i n g l o s s d e d u c t i o n a l l o w -e d by s e c t i o n 172 of t h e F e d e r a l I n t e r n a l Revenue Code. The n e t operating l o s s deduction is a d i f f e r e n t concept. It i s not a

"loss". The t e r m " n e t o p e r a t i n g l o s s " means t h e e x c e s s of a l l - t h e d e d u c t i o n s a l l o w e d by C h a p t e r 1 of S u b t i t l e A of t h e F e d e r a l

I n t e r n a l Revenue Code o v e r t h e g r o s s income. That amount c a n e i t h e r b e c a r r i e d back o r c a r r i e d forward a c c o r d i n g t o t h e prov i s i o n s of t h e s t a t u t e . But, an i n d i v i d u a l bad d e b t l o s s may

n o t be c a r r i e d back o r forward i n d e p e n d e n t l y i n and of i t s e l f . P u r s u a n t t o s e c t i o n 8 4 - 1 5 0 2 ( 2 ) , i t must be d e d u c t e d i n t h e y e a r " a c t u a l l y s u s t a i n e d and c h a r g e d o f f " . I n o t h e r words, i n com- p u t i n g t h e n e t o p e r a t i n g l o s s f o r any g i v e n y e a r t h e bad d e b t l o s s e s u t i l i z e d i n t h e computation would be o n l y t h o s e " a c t u a l l y

s u s t a i n e d and charged o f f w i t h i n t h e y e a r " .

The judgment o f t h e d i s t r i c t c o u r t i s r e v e r s e d .

W e concur:

L -r,. cJ \ -

Mr. Chief J u s t i c e James T . Harrison.