Case Title: LAZY JD CATTLE CO v ST BOARD OF

Citation: 

Docket Number: 

State: montana

Court: Montana Supreme Court

Date: 1972-12-05T00:00:00Z

Document:
No. 12248 I N T H E S U P R E M E C O U R T O F T H E STATE O F M O N T A N A 1972 L A Z Y J D C A T T L E C O M P A N Y e t a l . , P l a i n t i f f s and Respondents, and HERRIN RANCH, INC. , P l a i n t i f f i n Intervention, -vs - STATE BOARD O F EQUALIZATION O F T H E STATE O F M O N T A N A e t a l . , Defendants and Appellants, 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 presiding. Counsel of Record: For Appellants : Edward Jene Bell argued, Board of Equalization, Helena, Montana. For Respondents: H 4 d Luxan Helena, Montana. H. J. Luxan appeared, Helena, Montana. John R, Kline argued, Helena, Montana. Loble, Picotte and Loble, Helena, Montana. Douglas M. Greenwood appeared, Helena, Montana. Submitted: September 27, 1972 Yr. Justice Frank I. Yaswell delivered the Opinion of the Court, P l a i n t i f f s a r e corporate taxpayers who brought a c l a s s action agdinst defendant S t a t e Board of Equalization seeking a declara- tory judgment establishing t h e i r r i g h t t o n e t operating l o s s de- ductions i n computing t h e i r s t a t e corporation license taxes. The d i s t r i c t court of Lewis and Clark County, the Hon. Gordon Bennett, d i s t r i c t judge, entered summary judgment f o r p l a i n t i f f s and denied the summary judgment sought by defendant, From t h i s f i n a l judg- ment, defendant State Board of Equalization appeals. The thirteen plainti-ff corporations a r e each subject t o pay- ment of federal income taxes pursuant t o the Internal Revenue Code, T i t l e 26, U.S.C., and t o Montana corporation license taxes pursuant t o sections 84-1501 through 84-1519, R.C.M. 1947. Each ~f p l a i n t i f f corporations was lawfully e n t i t l e d t o a n e t operating loss deduction on i t s federal tax returns pursuant t o the Internal Revenue Code, 26 U.S.C. § 172, covering one or more of i t s taxable periods ending on o r before December 31, 1970. Each f i l e d Montana corporation license tax returns (accompanied by claims f o r refund) f o r taxable periods ending on or before December 31, 1970, and edch claimed net operating Loss deductions under section 84-1504, %.C.M. 19-47, i n computing i t s s t a t e corporation tax l i a b i l i t y . P l a i n t i f f s a s a c l a s s were given a hearing before the S t a t e Soard of Equalization and thereafter the Board disallowed t h e i r claimed deductions and refunds. Having exhausted t h e i r adminis- t r d t i v e remedies, p l a i n t i f f s f i l e d a c l a s s action i n the d i s t r i c t court of Lewis and Clark county seeking a declaratory judgment (1) t h a t the corporations were e n t i t l e d t o n e t operating 1-oss de- ductions i n computing t h e i r s t a t e corporation license tax l i a b i l i t y , (2) annulling a l l r u l e s , orders, and actions of the S t a t e Board of Equalization t o the contrary, and (3) such a n c i l l a r y r e l i e f i n dicier of judgment a s appears proper. ~ e f e n d a n t ' s answer i n sub- stance admitted the f a c t s concerning what was done, but denied t h a t p l a i n t i f f s were enti-tled t o the r e l i e f requested. Ultimately both p a r t i e s moved f o r summary judgment. The d i s t r i c t court denied summary judgment t o defendant and granted summary judgment t o p l a i n t i f f s . The d i s t r i c t court expressly ruled, i n t e r a l i a , t h a t the corporations were e n t i t l e d t o n e t operating loss deductions a s computed by them for taxable years prior t o 1971; declared c e r t a i n regulations of the Board contrary thereto invalid; declared the findings, conclusions and order of the Board i n the administrative proceeding invalid; voided Board deficiency assessments of $55,824.14 against s i x of p l a i n t i f f corporati-ons, and cxckredthe Board t o refund $25,627.03 with i n t e r e s t t o ten of p l a i n t i f f corporations. Defendant State Board of Equalization now appeals from t h i s f i n a l judgment. The ultimate issue f o r review i s whether the Montana cor- poration license tax law permits n e t operating l o s s deductions for taxable years p r i o r t o 1971, The State Board of Equalization argues t h a t the s t a t e cor- poration license tax law (section 84-1501, e t seq., R.C.M. 1947), both p r i o r and subsequent t o i t s amendment i n 1971, did not permit n e t operating l o s s deductions because (1) the definitions of gross income and n e t income i n section 84-1504, R.C.M. 1947, do not include a deduction f o r n e t operating losses, (2) section 84-1502, R,C.M. 1947, does not s p e c i f i c a l l y provide f o r a n e t operating l o s s deduction, and (3) the l e g i s l a t u r e i n i t s 1971 amendment indicated t h a t sections 84-1502 and 84-1504 did not provide f o r n e t operating l o s s deductions p r i o r t o such amendment, The Board further argues t h a t t o permit such deduction i s t o permit a double allowance f o r the same thing, a s such allowance i s already incorporated i n the s t a t e corporation license tax a c t , P l a i n t i f f s , on the other hand, contend t h a t they a r e e n t i t l e d t o a n e t operating l o s s deduction and t o the carry-over and carry- back provisions of the federal income tax law i n computing t h e i r s t a t e corporation license taxes f o r taxable years p r i o r t o 1971. They argue t h a t gross income and n e t income f o r Montana corpora- tion license tax purposes i s defined with reference t o the Federal l n t e r n a l Revenue Code and by v i r t u e thereof they a r e e n t i t l e d t o the n e t operating loss deduction provided i n T i t l e 26, U.S.C. 9 172, and the carry-over and carry-back provisions therein. They further take the position t h a t the 1971 amendment by the Montana l e g i s l a t u r e redefined "net operating loss" and "net operating loss deduction1' i n terms of section 84-1502, R,C.M. 1947, and applied t h i s new d e f i n i t i o n t o losses occurring i n 1971 and subsequent years, I n determining the issue before us, we note a t the outset t h a t section 84-1504, R.C.M. 1947, is the basis of p l a i n t i f f s ' claim t h a t they a r e e n t i t l e d t o those n e t operating l o s s deductions a1.lowable under § 172 of the Internal Revenue Code. Section 84-1504 provides t h a t the Montana corporation license tax s h a l l be computed "upon the t o t a l net income of the corporation" f o r the preceding calendar o r f i s c a l year; defines "net income" a s "gross income of the corporation l e s s the allowable deductions"; and defines "gross income" a s income from a l l sources within t h e s t a t e "recognized i n the determination of the corporation's federal income tax l i a b i l i t y " including i n addition i n t e r e s t exempt from federal income tax. It s p e c i f i c a l l y provides t h a t the d e f i n i t i o n of gross income and n e t income "shall not be construed a s allowing the deductions s e t f o r t h i n section 243 of the Federal Internal Revenue Code a s now w r i t t e n , or a s t h a t section s h a l l be labeled or amended. I t Thus the l e g i s l a t u r e i n section 84-1504, R.C.M. 1947, prior t o i t s 1971 amendment s t a t e d , i n e f f e c t , t h a t gross income f o r s t a t e corporation license t a x purposes means the same thing a s gross income for federal income tax purposes (excepting i n t e r e s t exempt from federal income tax which i s not pertinent here); t h a t net income f o r corporation license tax purposes i s equivalent t o federal gross income l e s s allowable deductions; and, t h a t allowable deductions do not include the dividend deduction under 9 243 of the Federal I n t e r n a l Revenue Code. "Gross income", I I n e t income1', and "allowable deductions" f o r s t a t e corporation license tax purposes a r e thus defined with reference t o t h e general structure of the Federal Internal Revenue Code. With the exception of the exempt i n t e r e s t exclusion and dividend deduction contained i n the Federal Internal Revenue Code, the l e g i s l a t u r e l e f t i n t a c t the i n t e r r e l a t i o n of s t a t e corporation license tax gross and n e t income and federal income tax gross and n e t income a s provided i n the Federal Internal Revenue Code. Thus the conclusion t h a t s t a t e gross income and n e t income f o r corporation license tax purposes a r e based on the Federal Internal Revenue Code i s apparent. Three decisions of t h i s Court construing section 84-1504, p r i o r t o the 1971 amendment bear t h i s out. In Board of Equali- zation v. Farmers Union, 140 Mont. 523, 374 P.2d 231, we held that co-ops subject t o Montana corporation license taxes a r e e n t i t l e d t o deduct patronage dividends from gross income because section 84-1504 incorporates by reference the Federal I n t e r n a l Revenue Code i n which 522 allows these deductions i n deter- mining federal income tax l i a b i l i t y , I n Home Bldg. & Loan v. Board of Equalization, 141 Mont. 113, 375 P.2d 312, t h i s Court held t h a t building and loan asso- c i a t i o n s subject t o Montana corporation license tax were e n t i t l e d under section 84-1504 t o deduct dividends paid, because t h e Internal Revenue Code was incorporated by reference i n t o t h a t section and ! j 591 thereof allowed such deduction i n determining federal income tax , * i a b i l i t y . Finally i n Barth v. S t a t e Board of Equal., 148 Mant. 259, 261, 419 P.2d 484, w e again recognized t h a t section 84-1504 incorporated by reference the Federal I n t e r n a l Revenue Code i n holding t h a t a gain realized i n a liquidation s a l e was not recog- nized f o r Montana corporation license t a x purposes because i t was not recognized f o r federal corporation income tax purposes. I n Barth we said: t I Thus, when Sweetheart [a 5reait company ] Ji.ssoFvrd, it had t o pay a Montana corporation license tax, and t h i s tax was t o be based upon i t s 'net income. t 1 Section 84-1504 defines n e t income' i n terms of gross income and r e f e r s t o federal law f o r a d e f i n i t i o n of gross income. "Under section 337, I.R.C. 1954, the gain realized by Sweetheart i n i t s liquidation s a l e was not recog- nized f o r income tax purposes. Therefore, the gain realized upon the s a l e i s not recognized for Montana corporation license tax purposes. I I Thus t h i s Court has consistently held t h a t the definition of gross income and n e t income f o r s t a t e corporation license tax purposes i s dependent upon and incorporates by reference the provisions of the Federal Internal Revenue Code except a s expressly provided otherwise, a s i n the case of the exempt i n t e r e s t exclusion and the dividend deduction. Apply the foregoing r a t i o n a l e t o the i n s t a n t case, t h e net operating l o s s deduction i s allowable i n computing p l a i n t i f f corporations' s t a t e corporation tax l i a b i l i t y because section 84-1504, R.C.M. 1947, incorporates by reference 1.72 of the Federal Internal Revenue Code i n determining net income f o r federal income tax purposes which permits such deduction. However, the Board urges t h a t i f a n e t operating l o s s deduction i s allowed t o p l a i n t i f f corporations under section 84-1504, then the corporations w i l l be permitted t o claim a second n e t operating l o s s deduction under section 84-1502, a s amended by the 1971 l e g i s l a t u r e . This contention i s specious. The 1971 amendment prohibits a double deduction f o r n e t operating bosses by definition: "The term 'net operating l o s s ' means t h e excess of the deductions allowed by t h i s section, 84-1502, over the gross income, with the modifications specified i n paragraph (b) of t h i s subsection." (Ch. 358,L. 1971). Thus any n e t operating l o s s deduction theretofore permitted under section 84-1504, including by reference net operating losses allowable under 5 172 of the I n t e r n a l Revenue Code, would be eliminated under the new and amended definition of n e t operating loss contained i n the 1971 amendment t o section 84-1502. Finally, the Board contends t h a t the 1971 amendment t o section 84-1502, R,C.M. 1947, constituted a l e g i s l a t i v e declara- tion of i t s i n t e n t with respect t o n e t operating l o s s deductions. The 1971 amendment provides i n pertinent p a r t : "The n e t operating l o s s deduction s h a l l not be allowed with respect t o taxable periods which end on o r before December 31, 1970, but s h a l l be allowed only with respect t o taxable periods beginning on o r a f t e r January 1, 1971." [Ch. 358, L. 1971, codified as section 84-1502 (2) (B) ( f ) , R.C.M. 1947. ] A t issue i s the e f f e c t of t h i s amendment on n e t operating loss deductions f o r taxable years p r i o r t o 1971 pursuant t o section 84-1504. I n i t i a l l y , we observe t h a t the 1971 amendment did not amend nor purport t o amend section 84-1504. The net operating l o s s deductions provided f o r therein were allowable pursuant t o 5 172 of the Federal I n t e r n a l Revenue Code, incor- porated therein by reference. What the l e g i s l a t u r e did by the 1.971 amendment was t o comprehensively redefine the n e t operating l o s s deduction f o r s t a t e corporation license tax purposes without reference t o the provisions governing n e t operating l o s s deductions i n 5 172 of the Federal I n t e r n a l Revenue Code. The l e g i s l a t u r e simply adapted the n e t operating l o s s deduction t o our s t a t e s i t u a t i o n i n an e f f o r t t o create a balanced, reasonable tax structure, But was t h i s zmendment intended t o have a r e t r o a c t i v e e f f e c t ? W e perceive no such intention on the part of the legis- lature. It did not amend section 84-1504, under which p l a i n t i f f s claim the n e t operating l o s s deduction f o r t h e i r taxable years p r i o r t o 1971. It s p e c i f i c a l l y applied t o n e t operating l o s s deductions a s therein defined which were sustained a f t e r December 31, 1970. It changed t h e law with respect t o computation of n e t operating losses,what was included therein and what was not all.owable, f o r taxable years a f t e r 1970. Aside from the question of the constitutional power of the l e g i s l a t u r e t o give retroactive e f f e c t t o t h i s kind of l e g i s l a t i o n , there i s simply no indication i t intended t o do so. Section 12-201, K.C.M. 1947, provides : 1 I N o law contained i n any of the codes o r other s t a t u t e s of Montana i s retroactive unless ex- pressly so declared. " This provision was held t o be "especially applicable" t o the Montana Corporation License Tax Act i n S t a t e v , J, C. Maguire Construction Co., 113 Mont. 324, 331, 125 P.2d 4 3 3 , where we said: "9; * * the fundamental r u l e of construction i s t h a t retroactive e f f e c t i s not t o be given t o a s t a t u t e unless commanded by i t s context, terms, or manifest purpose. I t Here, the n e t operating losses were deductible under section 84-1504 a t the time they were incurred. There i s nothing i n the 1971 amendment t o section 84-1502 indicating an intention on the part of the l e g i s l a t u r e t o retroactively repeal the section 85-1504 operating l o s s deduction. W e decline t o so construe the 1971 amendment under the a u t h o r i t i e s s e t forth above. The summary judgment of the d i s t r i c t court i s affirmed, Associate J u s t i c e / , Chief J u s t i c e ~ s s o c d e J u s t i c e s ,