### No. 82-121 IN THE SUPREMECOURT OF THE STATEOF MONTANA 1982

BAKER BANCORPORATION, INC., et al., Petitioner andAppellants, and

Respondent,

DEPARTMENT OF REVENUE OF THE STATE OF MONTANA, Respondentsand Respondents.

.1from: District Court of the FirstJudicialDistrict, In and for the Oounty ofLewis and Clark Honorable RobertM. Holter,Judgepresiding. Counsel ofRecord: ForAppellants: Harrison,Loendorf & 

### Poston,Helena,Montana JamesT. Harrison,Jr., argued,Helena,Montana J. Patrick Giblin argued, Billings,Montana ForRespondents: Michael J. 

### Rieley argued, Helena,Montana

Submitted: November 16, 

### 1982 Decided: 

### December 29, 1982 Filed: 

## DEC29

## SSEe"Mr. JusticeGene B. Daly delivered theOpinion of the Court. Appellants, sixholding companies, appeal the denial of their claim for deductions of dividends received from subsidiary 

### corporations in which they own 80 percent 

### 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 in section 15-31-113(2), MCA) and whether case 

### law interpreting thatsectionprior 

### to its amendment is still controlling. Old Revised Codes of Montana (R.C.M.) citeswillbe used since

### we are concerned with provisions enacted prior to and during 1973. Section 84-1504, R.C.M., 1947, is part of Montana's Corporation License Tax Act and describes how the license tax is computed. Prior to 1973, section84-1504 provided the following definitionof gross income and net income: 

# ".



# .. The 

### term gross income means the income from all sources within the state of Montana recognized in the determination of the corporation's federal income tax liability; but shall include interestexempt from federal income tax. The 

### term 'net income' means the -- 

### -- --- -- 

### - gross income of the corporation 

### less the ----- -- --- -- allowable 

### --- deductyons.- 

# ~Ger, thedefinitions

7- --- ---- of gross Income and net income set forth i%

---I - 

### - -- - - this-Ectlon shall not be construed as --- 

### ---- allowing the deductionsset

## f orthiG&ZtioT 243 of the-~ederal

### internal ~evenue Code 

### as -- ----- -- -- -- now written. 

### or as that section shall 

### i3&

-- 

### - - 

### - -- labeled

### or amended. 

# .

# . --- -- ----- 

### " (Emphasis added.) In interpreting the above language, this Court consistently held to the rule that the definition of gross income and net income is dependent upon and incorporates by reference the Federal InternalRevenue Code, except where Montana lawexpressly provides otherwise. Lazy JD Cattle Co. v. State Board of Equalization (1972), 161 Mont. 

### 4i3 504 P.2d 287; FirstFederal Savings and Loan Association v. State Tax Appeal Board (1975), 167 Mont, 33,

## , 535 P.2d 183 (interpreting section 84-1504 for the tax years prior to 1973). Any federal deduction wasallowable in Montana, unless 

### some section of the Montana Corporation License Tax Act expressly provided otherwise. In 1973, the Montana Legislature amended section 84-1504 to read as follows: 

# ".

.. The 

### term gross income means all income recognized in determining the corporation's gross income for federal income tax purposes; but shall include interestexempt 

### from federal income tax. No corporation is exempt from the corporation license tax unless specifically provided for under section 84-1501. Any 

### corporation not subject to 

### or liable forfedgr-aT

.r-- Income tax but not exempt from the corporation license tax under section 84-1501 shall 

### corn-- - pute gross income forcorporation license tax



## --- -- P - purposes in the 

### same manner 

### as a corporation --- F -- --

that is subjectto

### or lia6ie-fEr-fxf6i 

### ---- - 

### - - income tax according 

### to the provisions for ---- -7 

### -- determininuGross incomeinthe federal 

### ihter-

4 4 --- - -- nal revenue code - in e-£f<cttfo~~ee-taxable - 

### - --- year. The 

### term 'net income' means the Gross - -- P - income of the corporation~<ks~ deduc?i%-6~ ----- .- 

### -- -- - set forthinsection84-1502." (~rnp~a~s-a-fle~. -- -- - ----A The deductions claimed by appellants areprovided for in section 243 of the Federal Internal Revenue Code. These deductions

were expressly disallowed in the pre-1973 version of section 84-1504. That disallowance

### was deleted in 1973. The appellants here are six one-bank holding companies, each of which owns 80percent 

### or 

### more of the voting stockof a commercial bank. The following is a list of the holding companies and theirrespective bank subsidiaries: ParentHolding Company Baker Bancorporation, Inc

# . Bozeman Bancorporation, Inc. ButteInsuranceAgency, Inc. Mineral CountyBancorporation, Inc. Red Lodge Bancorporation, Inc

# . Roundup InsuranceAgency, Inc. Bank Subsidiaries --- Montana Rank of Baker, N.A. Montana Bank of Bozeman, N.A. Montana Bank of Butte, N.A. Montana Bank of Mineral County Montana Bank of Red Lodge, N.A. Montana Bank of Roundup, N.A. From 1973 to 1979, the appellants consolidated their tax returns with their respective subsidiaries. The Department of Revenue, upon examining the returns, denied appellantspermission 

### to consolidate them. 

### In recalculating the returns, the Department did not 

### allow appellants deductions for dividends received from their subsidiaries. The appellants appealed the Department's decision 

### to theStateTax Appeal Board (STAB)

# . STAB overturned the Department's decision, and allowed the deductions. STAB followed the 

### case law which stated thatthe Corporation License Tax Act incorporates by reference the Federal Internal Revenue Code. STAB reasoned that sinceSection 243 of the Federal Internal Revenue Code allows the deductions, and sinceno provision inthe Corporation License Tax Act expressly prohibits the deductions, appellants could deduct the dividends received from their subsidiaries. The Department appealed STAB's decision 

### to the District Court of the First Judicial District, Lewis & Clark County. The District Court reversed STAB's decision, stating that STAB incorrectly applied pre-1973 statutory and case 

### law incomputing tax returns for the years 1973through 1979. The District Court concluded that section 84-1504 as amended in 1973, in its plain meaning, limits deductions to only those allowed in section - -- 84-1502. Since the deduction claimed by appellants

### was not provided for in section 84-1502, the District Court disallowed the deduction, regardless of the provision in the federal tax code. The sole issue on review is whether under section 84-1504, R.C.M., 1947, (recodified in part in section 15-31-113(2), MCA)

## , appellants 

### are allowed 

### to deduct dividends received from subsidiaries in which they own 80 percent 

### or 

### more of the voting stock. In interpreting section 84-1504 prior to its 1973amendment, this Court acknowledged that the Federal Internal Revenue Code would be used to define "gross income," "net income," and "all allowable deductions,*I unless another provision expressly provided otherwise. Lazy JD Cattle Co. v. State Board of Equalization (1972), 161Mont. 40, 504 P.2d 287; First Federal Savings & Loan v. State Tax Appeal Board (1975)r 167Mont. 33, 535 P.2d 183 (applyingpre-1973 statutes). InLazy JDCattleCo. -- --- -- 

### we stated the rule as follows: "Thus this Court has consistently held that the definition of gross income and net income for 

### state corporation license tax purposes 

### is dependent upon and incorporates by referencethe provisions of the Federal Internal Revenue Code except as expressly provided otherwise, 

### as in the case of the exempt interest exclusion and the dividend deduction." 504 P.2d at290. See also Board of Equalization 

### v. Farmer's Union Grain Terminal Assln (1962), 140Mont. 523, 374 P.2d 231; Home Building & Loan Assln of Helena v. Board of Equalization (1962), 141Mont. 113, 375 P.2d 312; and Barth v. State Board of Equalization (1966), 148Mont. 259, 419 P.2d 484. These 

### cases have not been overruled and 

### are stillgood 

### lawinMontana. STAB based its decision on the above 

### cases; the District Court did not. We agree with the STAB reasoning and hereby reinstate its order. The 1973 amendment 

### to section 84-1504 did not alter the interrelationship that exists between the Federal Internal Revenue Code and the Montana Corporation License Tax Act. The InternalRevenue Code insection243permits corporations to take

a deduction for 100 percent of the dividends received by them from subsidiarycorporations inwhich they own 80percent 

### or more of the voting stock. No provision in the Montana Corporation License Tax Act expressly prohibits the section 243 deduction. Appellants 

### are therefore entitled 

### to deduct 

### all dividends received by them from subsidiary corporations inwhich they own 80percent 

### or more of the stock. The District Court's judgment i ated and the STAB order reinstated.

Chief Ju'sticc