Baker Bancorporation Inc. v. Dept

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