Title: 1ST FED S L v DEPT OF REVENUE

State: montana

Issuer: Montana Supreme Court

Document:

No. 81-528 IN THE SUPREME COURT OF THE STATE OF MONTANA 1982 FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION, A Federally Chartered Association et al., Plaintiffs and Appellants, DEPARTMENT OF REVENUE et al., Defendants and Respondents. Appeal from: District Court of the First Judicial District, In and for the County of Lewis and Clark Honorable Gordon Bennett, Judge presiding Counsel of Record: For Appellants: Cannon and Sheehy, Helena, Montana Edmund F. Sheehy Jr. argued, Helena, Montana For Respondents: Michael J. Rieley argued, Helena, Montana Filed: Submitted: June 28, 1982 Decided: September 23, 1982 SEP 2 3 2982 Honorable Joel 6. Roth, District Judge, delivered the Opinion of the Court. First Federal Savings and Loan Association of Missoula (Missoula First Federal) and Havre Federal Savings and Loan Association (Havre Federal) (hereinafter also referred to as the "taxpayers") appeal from a summary judgment granted to the Department of Revenue (Department) by the District Court of Lewis and Clark County. We reverse. Missoula First Federal and Havre Federal are federally chartered savings and loan associations doing business in the State of Montana. As such, they are subject to the Montana Corporation License Tax pursuant to the provisions of section 15-31-101(4), MCA. The Department of Revenue is the state agency responsible for the administration and collection of the Montana Corporation License Tax pursuant to section 15-31-111, MCA. These two taxpayers are required annually to pay to the state treasurer 6-3/4 percent of their respective net incomes as a license fee for the privilege of carrying on business in Montana. See sections 15-31-121 and 15-31- 101(3), MCA. Each of these taxpayers filed its Montana Corporation License Tax return for the calendar tax year of 1979. In order to arrive at the net income upon which the tax is based, each taxpayer had deducted from its gross income the interest income it had received from its invest- ments in several federal obligations. Additionally, Havre Federal deducted a net operating loss from prior years which wzs carried over to 1979. After the Department of Revenue received the tax re- turns for 1979 and examined same, the Department disallowed the deduction for interest income on federal obligations on each tax return and also disallowed the deduction of the net operating loss carryover on Havre Federal's return. The Department computed that Missoula First Federal owed an ad- ditional license tax of $12,271.00 plus interest and Havre Federal owed an additional license tax of $47,010.78 plus interest. A notice of the disallowances and resulting tax deficiencies was sent to each taxpayer. Each taxpayer filed a written protest pursuant to section 15-31-503, MCA, with the Department and when the Department refused to reconsider its position, the two tax- payers joined together and filed a declaratory judgment action against the Department on November 12, 1980, in the District Court of Lewis and Clark County, seeking a judicial interpretation of the several state and federal statutes involved plus a judgment declaring part of one state statute relating to the calculation of net operating loss carryovers to be unconstitutional because of its retroactive application. Because only questions of law were raised by the allegations in the complaint and answer, the taxpayers filed their motion for summary judgment on April 3, 1981. Subse- quently, the Department filed its motion for summary judg- ment. Written memoranda were filed by both sides and oral argument was presented on May 28, 1981. The District Court granted the Department's motion, denied the taxpayers ' motion and issued a summary judgment with a memorandum decision on August 19, 1981. The effect of the District Court's summary judgment was that the interest income from the federal obligations was n o t d e d u c t i b l e from g r o s s income i n a r r i v i n g a t t a x a b l e n e t income, t h a t t h e n e t o p e r a t i n g l o s s i n c u r r e d i n p r i o r y e a r s could n o t be c a r r i e d over and deducted i n 1979 by Ilavre F e d e r a l and t h a t t h e s t a t e s t a t u t o r y p r o v i s i o n r e l a t - i n g t o n e t o p e r a t i n g l o s s c a r r y o v e r s d i d n o t v i o l a t e t h e c o n s t i t u t i o n a l p r o h i b i t i o n a g a i n s t r e t r o a c t i v e a p p l i c a t i o n of a s t a t e s t a t u t e . I t is from t h a t summary judgment and t h e o r d e r denying t h e t a x p a y e r s ' motion f o r summary judgment t h a t t h e t a x p a y e r s a p p e a l , r a i s i n g t h e f o l l o w i n g t h r e e i s s u e s f o r a p p e l l a t e review: F i r s t I s s u e : Did t h e D i s t r i c t Court e r r by d e c i d i n g t h a t i n t e r e s t income from c e r t a i n f e d e r a l o b l i g a t i o n s is i n c l u d a b l e i n n e t income and hence s u b j e c t t o t h e Montana C o r p o r a t i o n License Tax? W e hold t h e r e was e r r o r on t h i s i s s u e . Second I s s u e : Did t h e D i s t r i c t Court e r r i n d e c i d i n g t h a t t h e Montana C o r p o r a t i o n License Tax is n o t d i s c r i m i n a - t o r y ? W e hold t h a t t h i s i s s u e is moot i n view of our d e c i s i o n on t h e f i r s t i s s u e . T h i r d I s s u e : Did t h e District Court e r r i n d e c i d i n g t h a t s e c t i o n 1 5 - 3 1 - 1 1 4 ( 2 ) ( b ) ( i i ) ( C ) , MCA, is n o t c o n s t i t u - t i o n a l l y r e t r o a c t i v e ? W e hold t h e r e was e r r o r on t h i s i s s u e . FIRST ISSUE The t a x p a y e r s contend t h e f o l l o w i n g i n t e r e s t income from t h e f e d e r a l o b l i g a t i o n s i n d i c a t e d is exempt from t h e Montana C o r p o r a t i o n License Tax: FEDERAL OBLIGATION INTEREST INCOME U.S. T r e a s u r y B i l l s $ 3,843.65 F e d e r a l Home Loan Bank Notes 38,120.61 F e d e r a l Land Bank O b l i g a t i o n s 118,325.70 F e d e r a l Farm C r e d i t Bank S e c u r i t i e s 4,695.82 F e d e r a l Home Loan Bank Dividends on S t o c k s 48,013.00 F e d e r a l Savings and Loan I n s u r a n c e Corporation-30% of I n s u r a n c e Premium and P a r t i a l Payback 8,475.00 The D i s t r i c t Court, i n h o l d i n g t h a t t h e i n t e r e s t income from t h e f e d e r a l o b l i g a t i o n s was i n c l u d a b l e i n n e t income f o r purposes of c a l c u l a t i n g t h e Montana C o r p o r a t i o n License Tax, c i t e d and r e l i e d on a f e d e r a l s t a t u t e , 3 1 U.S.C. S 742 ( 1 9 7 6 ) , which p r o v i d e s a s f o l l o w s : "Except a s o t h e r w i s e provided by law, a l l s t o c k s , bonds, T r e a s u r y n o t e s , and o t h e r o b l i g a t i o n s of t h e United S t a t e s , s h a l l be exempt from t a x a t i o n by o r under S t a t e o r m u n i c i p a l o r l o c a l a u t h o r i t y . T h i s exemption e x t e n d s t o e v e r y form of taxa- t i o n t h a t would r e q u i r e t h a t e i t h e r t h e o b l i g a t i o n s o r t h e i n t e r e s t t h e r e o n , o r both, be c o n s i d e r e d , d i r e c t l y o r i n d i - r e c t l y , i n t h e computation of t h e t a x , e x c e p t n o n d i s c r i m i n a t o r y f r a n c h i s e o r o t h e r nonproperty t a x e s i n l i e u t h e r e o f imposed on c o r p o r a t i o n s and e x c e p t e s t a t e t a x e s o r i n h e r i t a n c e t a x e s . " The District Court reasoned t h a t t h e e x c e p t i o n s t a t e d i n t h e above f e d e r a l s t a t u t e a p p l i e d t o t h e Montana Corpora- t i o n License Tax, which is a d m i t t e d by t h e p a r t i e s h e r e i n t o be a f r a n c h i s e t a x , and hence t h e i n t e r e s t income from t h e f e d e r a l o b l i g a t i o n s is i n c l u d a b l e i n t h e n e t income which is t h e b a s i s upon which t h e l i c e n s e t a x is computed. The t a x p a y e r s had u n s u c c e s s f u l l y contended i n t h e D i s - t r i c t Court t h a t t h e s p e c i f i c f e d e r a l s t a t u t e s which c r e a t e d t h e f e d e r a l o b l i g a t i o n s and a u t h o r i z e d t h e i r i s s u a n c e e x p r e s s l y exempted both t h e p r i n c i p a l and t h e i n t e r e s t p a i d t h e r e o n from a l l s t a t e t a x a t i o n e x c e p t e s t a t e and g i f t t a x e s . The f e d e r a l s t a t u t e s which c r e a t e d t h e f e d e r a l o b l i g a t i o n s involved h e r e i n , a u t h o r i z e d t h e i r i s s u a n c e and c o n t a i n t h e exemption are 1 2 U.S.C. S 1433 ( 1 9 7 6 ) , 1 2 U.S.C. S 1 7 2 5 ( e ) ( 1 9 7 6 ) , 1 2 U.S.C. S 2055 ( 1 9 7 6 ) , 1 2 U.S.C. 5 2079 ( 1 9 7 6 ) , 12 U.S.C. 5 2134 (1976) and 3 1 U.S.C. S 769 ( 1 9 7 6 ) . Those f e d e r a l s t a t u t e s e x p r e s s l y p r o v i d e t h a t t h e p r i n c i p a l and i n t e r e s t of t h e v a r i o u s f e d e r a l o b l i g a t i o n s a r e exempt from a l l state t a x a t i o n e x c e p t c e r t a i n t a x e s n o t r e l e v a n t h e r e i n . The Department argued t h a t t h e Montana C o r p o r a t i o n L i c e n s e Tax is a f r a n c h i s e t a x on t h e p r i v i l e g e of d o i n g b u s i n e s s i n Montana w i t h t h e t a x based upon o r measured by t h e n e t income of t h e t a x p a y e r . Hence, it was a r g u e d , t h a t t h e t a x is n o t on t h e p r o p e r t y ( i n t e r e s t income) b u t is on t h e p r i v i l e g e . T h i s C o u r t f i n d s t h e argument t o be unper- s u a s i v e . I t is a d i s t i n c t i o n w i t h o u t a d i f f e r e n c e i n our o p i n i o n . I f t h e f r a n c h i s e t a x is on t h e p r i v i l e g e and t h e t a x is based on t h e n e t income, t h i s Court concludes t h a t t h e t a x is on t h e p r i v i l e g e - and t h e n e t income. I f t h e n e t income i n c l u d e s tax-exempt i n t e r e s t , t h e t a x is on exempt income which is p r o h i b i t e d by t h e s p e c i f i c f e d e r a l s t a t u t e s c r e a t i n g t h e f e d e r a l o b l i g a t i o n s and g r a n t i n g t h e t a x exemp- t i o n . The Montana Supreme Court h e l d i n 1976 i n t h e case o f S e c u r i t y Bank v. Connors and Colbo ( 1 9 7 6 ) , 170 Mont. 59, 550 P.2d 1313, t h a t t h e Montana C o r p o r a t i o n L i c e n s e Tax is a t a x on n e t income. It a l s o a p p e a r s t o t h i s C o u r t t h a t by t h e D e p a r t m e n t ' s i n c l u d i n g t h e t a x - e x e m p t i n t e r e s t i n n e t income, t h e Department is s e e k i n g t o t a x i n d i r e c t l y what it cannot t a x d i r e c t l y , i n v i o l a t i o n of t h e g e n e r a l r u l e set f o r t h i n 31 U.S.C. S 742 ( 1 9 7 6 ) . See, F e d e r a l P r o d u c t s Corp. v. Norberg ( R . I . 1 9 8 1 ) , 429 A.2d 447. I n t h e F e d e r a l P r o d u c t s Corp. c a s e , a Rhode I s l a n d i n d u s t r i a l c o r p o r a t i o n had i n v e s t e d c a s h i n f e d e r a l o b l i g a - t i o n s which were exempt from s t a t e t a x e s . The c o r p o r a t i o n was s u b j e c t t o t h e Rhode I s l a n d B u s i n e s s C o r p o r a t i o n Tax, which was n o t a f r a n c h i s e t a x b u t r a t h e r was a t a x on t h e n e t income of t h e c o r p o r a t i o n . The c o r p o r a t i o n had deducted t h e i n t e r e s t income from its g r o s s r e c e i p t s i n a r r i v i n g a t t h e n e t income s u b j e c t t o t h e s t a t e t a x . The t a x adminis- t r a t o r r e f u s e d t o a l l o w t h e d e d u c t i o n and i n c l u d e d t h e i n t e r e s t income i n t h e c o r p o r a t i o n ' s t a x a b l e n e t income. The lower c o u r t a f f i r m e d t h e t a x a d m i n i s t r a t o r b u t , on a p p e a l t o t h e Rhode I s l a n d Supreme C o u r t , t h e i n t e r e s t income from t h e f e d e r a l o b l i g a t i o n s was h e l d t o be exempt from t h e s t a t e t a x . The d e c i s i o n emphasizes t h a t t h e t a x a d m i n i s t r a t o r was a t t e m p t i n g t o do i n d i r e c t l y what h e c o u l d n o t do d i r e c t l y , i.e., l e v y a s t a t e t a x on i n t e r e s t income from f e d e r a l o b l i g a t i o n s when t h e f e d e r a l o b l i g a t i o n s and t h e i n t e r e s t therefrom were e x p r e s s l y d e c l a r e d t o be exempt from s t a t e t a x a t i o n p u r s u a n t t o 3 1 U.S.C. S 742 ( 1 9 7 6 ) . The Rhode I s l a n d Supreme Court s a i d t h a t a l t h o u g h t h e t a x admin- i s t r a t o r contended t h a t he i n c l u d e d t h e i n t e r e s t income merely a s a measure t o determine t h e c o r p o r a t e income t a x due t o t h e s t a t e , he overlooked t h e f a c t t h a t t h e amount of t h e t a x a s s e s s e d was i n c r e a s e d by more t h a n $11,000.00 by t h e i n c l u s i o n of t h e tax-exempt i n t e r e s t from t h e tax-exempt f e d e r a l o b l i g a t i o n s i n t h e measure of t h e t a x . That c o u r t concluded by s a y i n g t h a t t h e o n l y c o n c l u s i o n t o draw is t h a t t h e s t a t e t a x was a n i n d i r e c t t a x on exempt f e d e r a l o b l i g a - t i o n s and t h e i r i n t e r e s t and hence i n v a l i d . During o r a l argument on t h i s a p p e a l , t h e t a x p a y e r s 1 c o u n s e l o r a l l y c i t e d t h e r e c e n t Tennessee c a s e of Memphis Bank and T r u s t Co. v. Garner (Tenn. 1 9 8 1 ) , 624 S.W.2d 551, a s a c a s e found a f t e r t h e b r i e f s on a p p e a l were f i l e d . T h a t c a s e is c o n t r a r y t o t h e t a x p a y e r s 1 p o s i t i o n h e r e i n . T h a t c a s e involved a l o c a l bank e x c i s e t a x which was computed on t h e b a n k ' s n e t e a r n i n g s which i n c l u d e d i n t e r e s t from tax- exempt f e d e r a l o b l i g a t i o n s . The Tennessee Supreme Court s a i d t h e r e was n o t h i n g i n t h e g e n e r a l f e d e r a l exemption s t a t u t e ( 3 1 U.S.C. S 742 ( 1 9 7 6 ) ) o r i n t h e p a r t i c u l a r f e d e r a l exemption s t a t u t e s p e r t a i n i n g t o t h e f e d e r a l o b l i - g a t i o n s involved t h a t p r o h i b i t e d t h e s t a t e from measuring t h e bank e x c i s e t a x on n e t e a r n i n g s which i n c l u d e d i n t e r e s t on f e d e r a l o b l i g a t i o n s . Counsel s t a t e d t h a t t h e c a s e h a s been appealed t o t h e United S t a t e s Supreme Court and c e r - t i o r a r i has been g r a n t e d . W e d i s a g r e e w i t h t h e Tennessee c o u r t . I t is our o p i n i o n t h a t both t h e g e n e r a l f e d e r a l exemption s t a t u t e and t h e i n d i v i d u a l p a r t i c u l a r f e d e r a l exemption s t a t u t e s c l e a r l y exempt t h e i n t e r e s t income of t h e f e d e r a l o b l i g a t i o n s involved i n t h e i n s t a n t c a s e from t h e Montana C o r p o r a t i o n L i c e n s e Tax. I n summary on t h e f i r s t i s s u e , w e hold t h a t t h e D i s - t r i c t Court e r r e d and t h a t t h e i n t e r e s t income r e c e i v e d by the t a x p a y e r s on t h e exempt f e d e r a l o b l i g a t i o n s is n o t i n c l u d a b l e i n n e t income f o r t h e purpose of c a l c u l a t i n g t h e Montana C o r p o r a t i o n L i c e n s e Tax. SECOND ISSUE S i n c e w e decided t h a t t h e i n t e r e s t income from t h e t a x - e x e m p t f e d e r a l o b l i g a t i o n s i n v o l v e d h e r e i n is n o t i n c l u d a b l e i n n e t income f o r t h e purpose of computing t h e IJlontana C o r p o r a t i o n L i c e n s e Tax, t h e second i s s u e becomes moot. THIRD ISSUE The D i s t r i c t Court h e l d t h e r e was no u n c o n s t i t u t i o n a l r e t r o a c t i v e a p p l i c a t i o n of s e c t i o n 1 5 - 3 1 - 1 1 4 ( 2 ) ( b ) ( i i ) ( C ) , MCA, t o Havre F e d e r a l ' s 1979 t a x r e t u r n . Havre F e d e r a l had i n c u r r e d a n e t o p e r a t i n g l o s s i n each of t h e f i v e y e a r s from 1974 through 1978. Those l o s s e s o c c u r r e d because, p r i o r t o 1979, i n t e r e s t income from f e d e r a l o b l i g a t i o n s was n o t sub- ject t o t h e Montana C o r p o r a t i o n L i c e n s e Tax because i n t e r e s t income from s t a t e o b l i g a t i o n s was s p e c i f i c a l l y exempt from s a i d t a x . Hence, when Havrs F e d e r a l deducted t h e f e d e r a l i n t e r e s t income from g r o s s income i n a r r i v i n g a t n e t income on its t a x r e t u r n s f o r t h o s e e a r l i e r y e a r s , a n e t o p e r a t i n g l o s s r e s u l t e d . S e c t i o n 1 - 3 - 1 1 4 ( 2 ) ( b ) ( ) MCA, p r o v i d e s f o r t h e c a r r y i n g forward of n e t o p e r a t i n g l o s s e s . Under t h a t s t a t u t e Bavre F e d e r a l c a r r i e d forward its n e t o p e r a t i n g l o s s e s from 1974 through 1978 and a p p l i e d same .to its 1979 r e t u r n which r e s u l t e d i n no n e t income f o r 1979. I t is t o be noted t h a t Havre F e d e r a l computed its n e t o p e r a t i n g L o s s e s i n 1974 t h r o u g h 1 9 7 8 p u r s u a n t t o t h e Montana C o r p o r a t i o n License Tax s t a t u t e s t h e n i n e f f e c t . S e c t i o n 1 5 - 3 1 - 1 1 4 ( 2 ) ( b ) ( i i ) ( C ) , MCA, p r o v i d e s : "Any n e t o p e r a t i n g l o s s c a r r i e d over t o any t a x a b l e y e a r s beginning a f t e r Decem- ber 31, 1978, must be calculared under the provisions of this section effective for the taxable year for which the return claiming the net operating loss carryover is filed." The Department, acting under the authority of the above-quoted statute, recalculated the net income of Havre Federal for the years 1974 through 1978 based upon the 1979 law, which resulted in the adding back of the deducted federal interest income in each of the earlier years which further resulted in the elimination of the net operating losses for each of the earlier years. Hence, there were no operating losses to carry forward to 1979. It seems clear to this Court that the retroactive application of a 1979 law to the years 1974 through 1978 is unconstitutional. Havre Federal made investment decisions and financial plans based on the tax laws in effect in the years involved. The state cannot change a law in 1979 and compel a recalculation of tax returns filed for 1974 through 1978 based upon the new law effective for the first time in This Court stated in the case of Castles v. State ex rel. Department of Highways (1980), - Mont. - , 609 P.2d 1223, 1225, 37 St.Rep. 734, 736: "A retroactive law is one that takes away or impairs vested rights acquired under existing laws or creates new obligations or imposes new duties in respect to transactions already past." We conclude that section 15-31-114(2)(b)(ii)(C), MCA, is unconstitutional because it requires retroactive applica- tion, it is in violation of the uue process clause of the federal and state constitutions, and it imposes a new duty on Havre Federal. CONCLUSION We reverse the District Court's order denying the tax- payers' motion for summary judgment and reverse the District Court's order granting the Department's motion for summary judgment and remand this case to the District Court for the purpose of entering new orders and summary judgment in con- formance with this decision. tricy Judge, sitting in place of Mr. Justice Fred J. Weber We concur: %ceg,wm, W e f Justice trict Judge, sittihg in place of Mr. Justice John C. Sheehy I