No. 88-521 

IN THE SUPREME COURT OF THE STATE OF MONTANA 

1990 

AMERICAN TELEPHONE & TELEGRAPH COMPANY, 

a corp., AT&T TECHNOLOGIES, LNC., a corp., 

and MOUNTAIN STATES TELEPHONE & TELEGRAPH 

COMPANY, a corp., 

Plaintiffs and Appellants, 

-vsSTATE TAX APPEAL BOARD OF THE STATE OF MONTANA; 

ROBERT S. RAUNDAL, MARY E. HEMPLEMAN, and DALE D. 

DEAN, as members of and constitute the State Tax 

Appeal Board of the State of Montana; DEPARTMENT OF 

REVENUE OF THE STATE OF MONTANA; and JOHN D. LaFAT7ER, 

in his capacity as Director of the DEPARTMENT OF 

REVENUE OF THE STATE OF MONTANA, 

Defendants and Respondents. 

APPEAL FROM: District Court of the First Judicial District, 

In and for the County of Lewis & Clark, 

The Honorable Thomas Honzel, Judge presiding. 

COUNSEL OF RECORD: 

For Appellant: 

Terry B. Cosgrove argued & Michael J. Rieley; Luxan 

& Murfitt, Helena, Montana 

Dennis Lopach, Mountain States Telephone & Telegraph, 

Helena, Montana 

For Respondent : 

David Woodqerd argued, Dept. of Revenue, Helena, Montana 

Filed: 

Submitted: December 5, 1989 

Decided: February 20, 1990 . 
Justice John C. Sheehy delivered the Opinion of the Court. 

In this case we hold principally that where corporate 

taxpayers are engaged in a unitary business, sales by the 

corporations of temporary cash investments are not to be reported 

by them for Montana's corporation license tax or income tax 

purposes as included in gross sales; and, except for the net gain 

from such sales, the total amounts of such sales should be excluded 

from the formula determining the unitary businessest income for 

Montana Corporation License Tax reporting. 

The taxpayers here are American Telephone and Telegraph 

Company (AT&T), AT&T Technologies (Technologies), formerly known 

as Western Electric, and Mountain States Telephone and Telegraph 

Company (Mountain Bell). For the tax years involved, AT&T was the 

parent corporation of an affiliated group of corporations whose 

operations in Montana consisted of providing intrastate and 

interstate telecommunications and related activities. Technologies 

is a wholly owned subsidiary of AT&T whose operations in Montana 

included the sale of telecommunications equipment. Mountain Bell 

provided interstate and intrastate telecommunications services and 

related activities in Montana and neighboring states, participated 

in furnishing long distance interstate and international 

telecommunications, and, for the tax years involved was owned in 

excess of 50% by AT&T. 

Under a past agreement with the Montana Department of Revenue, 

corporation license tax returns for the three companies were filed 

2 
on a "separate company basis." Each taxpayer filed its own 

separate return, separately reported its income and expenses and 

paid a corporation license tax based upon its separate activity. 

In 1984 the Montana Department of Revenue audited the taxpayers, 

by reviewing their records maintained in their respective corporate 

headquarter offices in New York, New Jersey, and Colorado. The 

Montana Department determined that AT&T and its subsidiaries were 

engaged in a unitary business. There is no dispute in this case 

that the corporations should be considered as a unitary business. 

Montana Department of Revenue proposed a deficiency assessment 

on July 11, 1985. The Taxpayers protested the assessment and after 

an informal conference, supplied additional supporting information 

in a letter dated ~pril 17, 1986. After a further conference on 

June 8, 1986 between representatives of the Department and the 

Taxpayers, the Department issued a final deficiency assessment on 

July 14, 1986. Taxpayers paid the tax under protest and litigation 

in the District Court, First Judicial District, Lewis and Clark 

County ensued. 

The issues before the District Court were the proper 

computation of the sales factor denominator (hereafter explained); 

a proper allowance for the depreciation deduction; proper 

allowances for Taxpayerst contributions to its Employee Stock 

Ownership Plan (ESOP) and Federal Fuel Tax Payment deductions; a 

proper deduction for interest income on United States obligations; 

and the proper allocation of monies originally paid as interest 

owed on overdue taxes. The District Court affirmed the 
determinations of the Department in all respects except one. The 

District Court allowed the Taxpayers a deduction for contributions 

made to its ESOP and for federal fuel tax payments, and ordered a 

refund related to those items. The refund was paid and the 

Department did not cross-appeal from the ~istrict Court order on 

those issues. Taxpayers appealed to this Court from the judgment 

of the District Court on all of the issues except the decision on 

ESOP contributions and federal fuel tax payments. 

We determine that the ~istrict Court was correct in its 

determinations and therefore affirm the same. 

I. 

A background explanation of Montana's Corporation License Tax 

is necessary. 

Every corporation engaged in business in the state of Montana 

must pay annually to the state treasurer as a license fee for the 

privilege of carrying on business in this state a percentage of 

its total net income for the preceding taxable year at the rates 

required under our statutes. In the case of corporations having 

income from business activity which is taxable both within and 

without this state, the license fee is measured by the net income 

derived from or attributable to Montana sources as determined under 

the Corporation License Tax Act. Section 15-31-101(3), MCA. 

Montana, to overcome the difficulty, when a corporation 

engages in a unitary business in more than one state, of 

determining the corporation's income and expenses generated from 

its activities in Montana, has adopted the Uniform Division of 
Income for Tax Purposes Act (UDITPA) . Under the UDITPA method, 

business income is apportioned to each jurisdiction based on a 

three-factor apportionment formula. The factors are property, 

payroll, and sales. The property, payroll and sales factors are 

expressed as a percentage the Montana property, payroll and sales 

bear to the total property, payroll and sales of the business. The 

formula may be expressed as follows: 

Montana Property + Montana Pavroll + Montana Sales 

Total Property Total Payroll Total Sales = Montana 

3 Proportion 

of Income % 

The business income of the corporation is multiplied by the 

fraction to determine the amount of income apportioned to Montana 

for corporation license tax purposes. 

This formula may be applied to a single corporation operating 

a unitary business or to a group of separate corporations operating 

as a unitary business. When a unitary business operation is found 

to exist among a group of separate corporations, the factors 

include the total property, payroll and sales of all companies in 

the group. In this case the Taxpayers have stipulated that their 

operations for the years 1978 through 1982 constitute a unitary 

business and have agreed to the filing of a combined or unitary 

return as requested by the Department. 

The statutory basis for the formula is 5 15-31-305, MCA, which 

provides : 

Apportionment of business income. All business income 

shall be apportioned to this state by multiplying the 

income by a fraction, the numerator of which is the 
property factor plus the payroll factor plus the sales 

factor and the denominator of which is 3. 

We have interpreted the Montana Corporation License Tax and 

UDITPA in Montana Department of Revenue v. American Smelting and 

Refining Company (1977), 173 Mont. 316, 567 P.2d 901 appeal 

dismissed, 434 U.S. 1042 (1978) ; Ward Paper Box Company v. 

Department of Revenue (1981), 196 Mont. 87, 638 P.2d 1053, vacated 

and remanded, 459 U.S. 808 (1982), affld on remand sub nom. 

Russell Stover Candies v. Department of Revenue (1983), 204 Mont. 

122, 665 P.2d 198, appeal dismissed, 464 U.S. 988 (1983), rehlq 

denied, 465 U.S. 1014 (1984); Northwest Airlines v. State Tax 

Appeal Board and Department of Revenue (1986), 221 Mont. 441, 720 

First Issue: Did the Department of Revenue lawfully exclude 

gross receipts from the sale of intangible assets under the sales 

apportionment factor of the Taxpayers1 combined unitary tax return? 

This issue is narrowed to the denominator for total sales in 

the formula for apportionment of unitary business income. 

The specific dispute over the computation of the sales factor 

relates to gross receipts from the Taxpayers' sale of cash 

management investments, referred to as temporary cash investments 

(TCI). TCIs represent Taxpayers1 available cash which has been 

invested in various instruments, be they commercial paper issued 

by corporations, United States Treasury instruments, or other 

readily liquidated investments. Such instruments are bought and 

sold to accommodate the working capital needs of the Taxpayers. 

6 
Taxpayers contend that the total amount received by Taxpayers 

on the sale of a TCI should be included in the total sales receipts 

of the Taxpayers which serves as the denominator in the sales 

factor of the apportionment formula. The example posed by the 

Taxpayers is that if the Taxpayers pay $10,000 for an intangible 

asset such as a certificate of deposit and sell it for $11,000, the 

"gross receipts1' from the sale is $11,000, which is includable in 

the sales factor. The position of the Department, on the other 

hand, is that with respect to the sales of intangibles, the ''gross 

receipts1' for purposes of the sales factor includes only the gain 

on the sale; that is, the difference between the cost of the item 

and the sale price, or in the example, the gain of $1,000. 

Taxpayers claim that the Department's position is inconsistent with 

usual treatment afforded to sales of tangible personal property and 

has no statutory support. 

In examining the contentions of the parties on this issue, the 

District Court sided with the Taxpayers insofar as the statutory 

definitions are concerned. The District Court stated that business 

income is defined in 5 15-31-302(1), MCA, as ''income arising from 

transactions and activity in the regular course of the taxpayer's 

trade or business and includes income from tangible and intangible 

property if the acquisition, management, and disposition of the 

property constitute integral parts of the taxpayer's regular trade 

or business operations." The District Court further noted that 

llsalesll isdefined in 5 15-31-302(5), MCA, as Itall gross receipts.'' 

The District Court concluded that receipts from temporary cash 
investments come within the statutory definition of sales. 

The District Court nevertheless concluded that the Department 

has statutory authority to exclude the gross figures derived from 

the sale of TCIs by the Taxpayers in the pertinent parts of 15- 

31-312, MCA: 

If the allocation and apportionment provisions of this 

part do not fairly represent the extent of the taxpayer's 

business activity in this state, the taxpayer may 

petition for or the tax administrator may require, in 

respect to all or any part of the taxpayer's business 

activity, if reasonable: 

(2) The exclusion of any one or more of the factors; 

(3) The inclusion of one or more additional factors which 

will fairly represent the taxpayer's business activities in 

this state; or 

(4) The employment of any other method to effectuate an 

equitable allocation and apportionment of the taxpayer's 

income. 

Terming the foregoing statutory provision as a "relief 

provision" and that the applicable rules are §§ 42.26.261 and 

42.26.263, ARM, the ~istrict Court looked at Appeals of Pacific 

Telephone and Teleqraph Com~anv, CCH California Tax Reports, Part 

205-858, 14,907-36 through 14,907-43, an administrative decision 

from the California State Board of Equalization in 1978. 

Addressing a similar problem, the California agency stated the 

issue as: "What we must decide, therefore, is whether § 25137 

permits respondent to exclude the return of the capital element of 

the investment receipts.It The ~alifornia Board held: 

In this case we think the answer to that question is 

clear. The inclusion of this enormous volume of 
investment receipts substantially overloads the sales 

factor in favor of New York, and thereby inadequately 

reflects the contributions made by all the other states, 

including California, which supply the markets for the 

communications services provided by Pacific and its 

affiliates. Moreover, we are unable to accept, even for 

a moment, the notion that more than 11 percent of the 

Bell System's entire unitary business activities should 

be attributed to any single state solely because it is 

the center of working capital investment activities that 

are clearly only an incidental part of one of America's 

largest, and most widespread businesses. We conclude, 

therefore, thatUDITPA1s normal provisions "do not fairly 

represent the extent of the taxpayer's business activity 

in this state,'' and that respondent is authorized, under 

5 25137 to require a deviation from the normal rules. 

Another case relied on by the ~istrict Court was ~merican 

Telephone and Telesraph Company v. Director, Division of Taxation, 

476 A.2d 800 (N.J. Super. A.D. 1984). 

But the Taxpayers object to the District Court's reliance on 

the relief provision to exclude gross income from TCIs from the 

formula. Their argument is that the Department's authority, from 

the testimony in the case, was based on a "practice1' of the 

Department to exclude such sales figures as to all taxpayers. 

Originally, the Department official testified that the Department 

had a regulation to support the practice. However it appears that 

ARM § 42.26.263 is not by its terms applicable here, and that the 

Department cannot retroactively rely on its new regulation, ARM 5 

42.26.259(1)(a) which was promulgated by the Department after the 

problem in this case arose. Under ARM § 42.26.261(2), the relief 

section may be invoked only in specific cases of unusual fact 

situations which will be unique and nonrecurring. Taxpayers argue 

that if the Department is relying on a "practicew which is an 
unwritten internal policy that applies to all taxpayers in all 

situations, it is a statement of general applicability that 

implements or prescribes a law or policy and thereby is a llrule.ll 

Section 2-4-102(10), MCA. Therefore Taxpayers contend that the 

Department should have promulgated beforehand a rule of general 

applicability, and since it did not, it may not rely on the 

In support of this contention, Taxpayers rely on 

Patterson v. State Department of Revenue (1976) , 171 Mont. 168, 557 

P.2d 798; Northwest Airlines v. State Tax Appeal Board and 

Department of Revenue (1986), 221 Mont. 441, 720 P.2d 676, and CBS, 

Inc. v. Comptroller of the Treasury, Maryland Tax Rep. (CCH) Income 

Tax Number 2300 A & B, § 201-305, page 12009 (Dec. 2, 1988). These 

cases, Taxpayers contend, require a properly adopted rule as first 

necessary to exclude from gross sales the receipts from sales of 

TCIs. 

Additionally, Taxpayers contend that before the Department 

may apply the relief provision statute, the Department, which had 

the burden of proof, must first establish that the standard threefactor formula does not accurately reflect the business activity 

of the Taxpayers within the state. Taxpayers argue that the 

Department showed nothing in the administrative proceedings before 

the District Court of an actual distortion of Montana income 

because of the TCIS, and instead relied on a blanket exclusion as 

to all taxpayers. The Department claimed it made no difference 

whether the distortion was 2 percent or 20 percent, all gross 

proceeds from TCIS must be excluded. The United States Supreme 
Court held in Container Corporation v. Franchise Tax Board (1983), 

463 U.S. 159, 103 S.Ct. 2933, 77 L.Ed.2d 545, that under a due 

process challenge, a 14 percent change in taxable income was not 

sufficient to permit a change in the apportionment formula. 

The District Court did not accept these arguments respecting 

the necessity of a rule before the apportionment formula could be 

modified. The ~istrict Court looked instead at the goals of 

UDITPA, and its effect on multistate taxpayers as applied by the 

Department in this type of case. UDITPA was drafted as a practical 

means of assuring that a multistate taxpayer is not taxed on more 

than its total net income. A basic purpose of the Uniform Act is 

uniformity among those states which have adopted it. Atlantic 

Richfield Company v. Department of Revenue (Or. 1986), 717 P.2d 

613. The Oregon Supreme Court stated in an earlier case that there 

are two basic goals in UDIPTA: 

(1) Fair apportionment of income among the taxing 

jurisdictions ; and (2) uniformity of application of the 

statutes. 

Twentieth Century-Fox v. Department of Revenue (Or. 1985) , 700 P. 2d 

1035, 1039. 

Two representatives of the Department testified that the 

universally accepted interpretation of tax administrators in UDITPA 

states is not to include gross receipts from sales of temporary 

cash investments in the sales factor. Otherwise, a substantial 

distortion of the Taxpayer's business activity in the state would 

result. 

Thus the District Court had testimonial support for its 
determination that the position of the Department was founded on 

statutory authority. Under 5 15-31-312, MCA, if the allocation and 

apportionment provisions (the formula) do not fairly represent the 

extent of the taxpayer's business activity in the state, the tax 

administrator is authorized to require, if reasonable, !'the 

employment of any other method to effectuate an equitable 

allocation and apportionment of the taxpayer ' s income. While the 

Department is authorized and directed to prescribe regulations to 

carry out the purposes of 5 15-31-312, MCA, and other parts of the 

Act (see 5 15-31-313, MCA), still the statutory goal that the tax 

administrator interpret the Act so as to achieve equitable 

apportionment of the taxpayer's income generated in the state has 

been attained in this case. The Taxpayers here are not being 

treated differently from other taxpayers in similar situations. 

The repeated investment short term by the Taxpayers in New York of 

cash monies, which if not invested would be merely cash on hand or 

cash in till, skews the strict application of the formula, because 

the gross receipts must be allocated to New York. That 

interpretation would not truly reflect the income generated by the 

Taxpayers in doing business in Montana. Strict adherence to the 

UDITPA formula alone does not result in allocation to Montana a 

fair portion of the Taxpayers1 income generated by doing business 

in this state. Therefore the relief statute comes into play and 

was properly applied by the Department of Revenue. Accordingly, 

we uphold the District Court which in turn upheld the position of 

the Department of Revenue on this issue. 
Taxpayers state the next issue in this manner: 

Is the Taxpayer entitled to claim the amount of 

depreciation expense for Montana State Tax purposes that 

is statutorily allowable under the Internal Revenue Code 

or is it limited to the amount that was claimed on its 

federal tax return? 

It appears that for 1954 and subsequent years, at the urging 

of the Federal Communications Commission, AT&T and the Internal 

Revenue Service entered into a closing agreement under which intercompany profits were eliminated from the regulated telephone 

company's consolidated accounts for federal income tax purposes. 

Under the provision of the closing agreement, AT&T did not claim 

on its federal returns the full amount of depreciation it could 

otherwise have claimed under the Internal Revenue Code. 

In Montana, for the years from 1967 to 1978, Taxpayers were 

filing on a separate company basis, and each Taxpayer was reporting 

its full gain from the sale of an asset and deducting depreciation 

in the full allowable amount for the asset. As a result, Western 

Electric paid a tax to Montana on the actual profit it made from 

selling an asset to Mountain Bell and AT&T. Mountain Bell and AT&T 

took a deduction on separate Montana returns for the full amount 

paid for such assets in conformance with 5 167 of the Federal 

Internal Revenue Code, but different from the deduction taken on 

the AT&T consolidated federal return which was in compliance with 

the closing agreement. When the Montana Department required 

Mountain Bell and the other Taxpayers to make a combined state 

filing, the depreciation claimed by Taxpayers was not the same as 
if they had filed separate returns. ~eductions in the federal 

consolidated tax return were computed in accordance with the 

closing agreement and not 5 167 of the Federal Internal Revenue 

Code. Taxpayers contend that the Montana Departmentls mandated 

requirement of a unitary business report denied the Taxpayers the 

ability to fully depreciate their assets as 5 167 allowed. 

The Montana Department took the position that Taxpayers were 

limited to the depreciation deduction reported on line 20 of their 

federal income tax return, and not such other deductions as 5 167 

of the Internal Revenue Code may permit. Taxpayers contend that 

15-31-114(2)(a), MCA, incorporates the Federal Internal Revenue 

Code § 167 into Montana law, and thereby allows a taxpayer to take 

all the deductions allowed pursuant to 5 167. 

Taxpayers further point out that the District Court placed 

great weight on the fact that the Taxpayers requested the federal 

closing agreement. They also contend that the District Court 

confused, or appeared to confuse, the closing agreement with an 

llelectionll authorized under various provisions of the Federal 

Internal Revenue Code and that a closing agreement is not such an 

election. 

The Taxpayers also contend that the applicable regulation 

promulgated by the Montana Department in effect during the taxable 

years involved here was ARM § 42.23.212(1) which established the 

basis for determining gain or loss as the Ifbasis prescribed by the 

Internal Revenue Code," and that again, the Department, after this 

case was submitted, promulgated a proposal to amend 5 42.23.404, 
ARM, to provide that depreciation shall be the same as I1reported 

for federal income tax purposes." 

Additionally, Taxpayers rely on Baker Bancorportion v. 

Department of Revenue (1983) , 202 Mont. 94, 657 P. 2d 89. That case 

confirms that a taxpayer is allowed all federal deductions unless 

the Montana legislature provided otherwise. 

The statute which is applicable is 5 1-31-142 (a), MCA, 

which allows corporations the following deductions in computing 

net business income: 

(2) (a) All losses actually sustained and charged 

off within the year and not compensated by insurance 

or otherwise, including a reasonable allowance for 

the wear and tear and obsolescence of property used 

in the trade or business, such allowance to be 

determined according to the provisions of 9 167 of 

the Internal Revenue Code in effect with respect to 

the taxable year. All elections for depreciation 

shall be the same as the elections made for federal 

income tax purposes. No deduction shall be allowed 

for any amount paid out for any buildings, permanent 

improvements, or betterments made to increase the 

value of any property or estate, and no deductions 

shall be made for any amount of expense of restoring 

property or making good the exhaustion thereof for 

which an allowance is or has been made. (Emphasis 

supplied.) 

The District Court determined that the underlined language in 

the above statute sets forth a clear legislative intent that a 

corporate taxpayer is required to report the same amount of 

depreciation on its state return as it did on its federal return. 

The Department concedes that a closing agreement is not an 

llelectionll asthat term is used in the Federal Revenue Codes. This 

is not conclusive of the issue, however. The clear intent of 5 15- 
31-114(2)(a), MCA, is that there should be uniformity in the 

depreciation amounts claimed for federal income tax purposes and 

for state corporation license tax purposes. We hold that the 

statute requires that the same figures be used for depreciation on 

the state corporation license tax returns as on the federal income 

tax returns and so uphold the District Court. 

IV. 

Should the Department limit interest expense to the extent 

that federal interest income is excluded in the state returns for 

1979 thru 1982? 

Prior to 1982, corporations filing Montana corporation license 

tax returns included in their net income, interest income from 

federal obligations. 

In 1982, this Court in First Federal Savings and Loan 

Association v. Department of Revenue (1982), 200 Mont. 358, 654 

P.2d 496, cert den. 462 U.S. 1144, 103 S.Ct. 3128, 77 L.Ed.2d 1378 

(1983), held that federal interest income received by corporate 

taxpayers was not includable in the net income for purposes of 

calculating the Montana tax. Taxpayers state that in conformance 

with the First Federal decision, the Taxpayers excluded federal 

interest income from their Montana corporation license tax returns. 

The legislature responded to the First Federal decision by 

enacting § 15-31-116, MCA (1983) , which provided an equal reduction 

of allowed interest expense for corporations which excluded federal 

interest income. To implement 5 15-31-116, MCA, the Department 

promulgated two rules, 89 42.23.416 and 42.23.417, ARM. 
On November 23, 1984, this Court reversed the First Federal 

decision in Schwinden v. Burlington Northern (1984) , 213 Mont. 382, 

691 P.2d 1351. As part of that decision, this Court determined 

that 5 15-31-116, MCA, was unconstitutional. The Court then went 

on to discuss the application of the Schwinden case regarding 

Montana corporation license tax filings before or after the 

issuance of that opinion: 

We order that the tax obligations of Burlington Northern, 

Inc. for the taxable year 1982 shall be determined under 

the Montana corporation license tax as interpreted by 

this Court in this Opinion, as well as the corporation's 

future Montana corporation license tax returns while said 

tax remains in effect. As to all other corporate 

taxpayers, filing under the Montana corporation license 

tax provisions, their returns shall be filed with taxes 

computed according to this Opinion for taxable years 

ending after the date of this Opinion and for any 

amendment of tax returns for earlier years . . .. 

After the Schwinden decision, the Department promulgated 

amendments to 35 42.23.416 and 42.23.417, ARM and also adopted a 

new rule, § 42.23.111, ARM. This last rule required that corporate 

filings before the issuance of the Schwinden decision, which had 

excluded federal interest income pursuant to First Federal must 

still reflect reduced reductions for interest expense as provided 

in the statute declared unconstitutional, 15-31-116, MCA. 

In a later case (unpublished), this Court in Cause No. 86- 

490, entitled Ted Schwinden, Governor of the State of Montana, 

Ellen Feaver, Director of Revenue of the State of Montana, Montana 

Association of Counties, Montana League of Cities and Towns, Urban 

coalition and Montana School Board Association, as plaintiffs vs. 
Burlington Northern, Inc., defendant, at the behest of Daniels 

County, referred to the foregoing language in Schwinden with 

respect to the prospective or retroactive effect of that case as 

follows: 

As a matter of interpretation of our decision in 

Schwinden, the critical factor as to whether income from 

federal obligations should betaxed for corporate license 

tax purposes under our decision in Schwinden, or under 

our decision in First Federal is the date of filing the 

corporate tax return by the taxpayer. Returns or amended 

returns filed before November 23, 1984 are entitled to 

compute their corporate license taxes in accordance with 

the decision of First Federal. Returns or amended 

returns filed after November 23, 1984, are to have 

corporate license taxes computed according to Schwinden. 

Daniels County case at 5. 

Taxpayers now contend that with respect to their returns filed 

prior to the Schwinden decision, November 23, 1984, it is improper 

for the Department, under 5 15-31-116, MCA, to offset the interest 

expense sustained during the taxable year by the Taxpayers to the 

amount of federal obligations income which is deducted from the 

Montana returns. They further contend that the application of 

the regulations in the ARM are now founded upon a statute, 5 15- 

31-116, MCA, which has been held unconstitutional, and so should 

have no effect as to the computation of their corporate license 

taxes in those applicable years. [Section 15-31-116 has since been 

repealed. 5 1, Ch. 125, Laws of Montana (1989)l. 

There is possible merit in the contention of the Taxpayers 

that the Department is applying regulations founded on an 

unconstitutional statute which would be therefore improper. 

However, the language of Schwinden applies here and the computation 
of the corporate license taxes for the Taxpayers for the years 

prior to Schwinden is controlled by the language of the Schwinden 

case. The tax returns which the Taxpayers had filed before 

Schwinden were for the single entities here involved and not for 

the unitary or combined business. The result of the audit of the 

years here in question is that the Taxpayers should have filed a 

unitary return before Schwinden showing the combined results of the 

corporate entities. Thus, the computation of license taxes for the 

years involved is being modified substantially because the results 

are taken from a unified business now instead of from each of the 

separate corporations that made the initial returns. A complete 

amendment of the earlier filed returns has occurred, and that 

amendment has taken place after November 23, 1984. Therefore, 

under Schwinden, the taxes owing shall be computed as an llamendment 

of tax returns for the earlier years." On this basis we again 

uphold the determination of the District Court. 

v. 

Does Montana allow the Department to reclassify interest 

payments as tax payments? 

Because AT&T obtained extensions prior to filing its original 

tax returns for the years involved here, it was required to pay 

interest on overdue taxes pursuant to 5 15-31-502, MCA. Under the 

statute, interest was added at the statutory rate from the date due 

until paid. 

Under 5 15-31-503 (2), MCA, interest on a deficiency assessment 

is computed pursuant to 5 15-31-502. 
Taxpayers argue that all of the interest paid when filing the 

original returns must now be reclassified as taxes paid. The 

Taxpayers want the interest payment credited against the tax due 

under the Department's deficiency assessment of additional 

corporate license taxes. The ~istrict Court concluded that the 

statutes relating to interest were clear and that the Taxpayers 

could not obtain a credit against the tax deficiency for the 

interest previously paid. 

The interest which the Taxpayers originally paid for the 

single entity returns was computed on the amount of taxes then due 

but which were not paid within the statutory period. The 

Department is mandated under the provisions of 5 15-31-502, and 5 

15-31-503, MCA, to collect interest on the deficiency assessment 

amounts at the statutory rate from the date due until paid. The 

Department is not empowered under the statutes to reclassify 

interest paid as tax paid nor is it authorized to apply the amount 

of interest paid as a credit against a deficiency assessment. 

It is the contention of the Taxpayers that because the 

sections are unclear as to whether the Department has the power to 

reclassify such interest payments and consider them as credits 

against the taxes, that the statutes must be construed against the 

taxing authority and for the Taxpayers. The contention that the 

statutes are unclear is based upon the Taxpayers' argument that the 

statutes do not prohibit the Department from classifying the 

initial payment of interest as tax. 

We regard the statutes as affirmatively requiring the 
Department to collect interest on overdue taxes when paid, and also 

on deficiency assessments when determined. 

The District Court reasoned that 5 15-31-502 and 5 15-31-503, 

MCA, required interest payments to be treated as the Department 

applied them and we uphold the decision of the District Court. 

VI . 

The judgment of the District Court on all issues upon which 

an appeal is taken in this case is affirmed. 

I Justice I ' j 

We Concur: