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" 
Mr. Justice Gene B. Daly delivered the Opinion of the Court. 

Appellants, six holding 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 that section prior to its amendment 

is still controlling. Old Revised Codes of Montana (R.C.M.) 

cites will be 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, section 84-1504 provided the following definition of 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 interest exempt from federal 

income tax. The term 'net income' means the -- -- --- -- - 

gross income of the corporation less the ----- -- --- -- allowable --- deductyons.- ~Ger, the definitions 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 cons is tently 

held to the rule that the definition of gross income and net 

income is dependent upon and incorporates by reference the 

Federal Internal Revenue Code, except where Montana law expressly 

provides otherwise. Lazy JD Cattle Co. v. State Board of 

Equalization (1972), 161 Mont. 4i3 504 P.2d 287; First Federal 

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 was 
allowable 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 interest exempt 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 - 

cornpute - gross income for corporation 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 -- determininu Gross incomein the 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 forth in section 84-1502." (~rnp~a~s-a-fle~. -- -- - ----A 

The deductions claimed by appellants are provided 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 80 percent or more of the voting stock of a commercial bank. The following is a list of the holding companies and 

their respective bank subsidiaries : 

Parent Holding Company 

Baker Bancorporat ion, Inc . Bozeman Bancorporation, Inc. 

Butte Insurance Agency, Inc. 

Mineral County Bancorporation, 

Inc. 

Red Lodge Bancorporat ion, Inc . Roundup Insurance Agency, 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 appellants permission 

to consolidate them. In recalculating the returns, the 

Department did not allow appellants deduct ions for dividends 

received from their subsidiaries. 

The appellants appealed the Department's decision to the 
State Tax Appeal Board (STAB) . STAB overturned the Department's 

decision, and allowed the deductions. STAB followed the case law 

which stated that the Corporation License Tax Act incorporates by 

reference the Federal Internal Revenue Code. STAB reasoned that 

since Section 243 of the Federal Internal Revenue Code allows the 

deductions, and since no provision in the 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 in computing 

tax returns for the years 1973 through 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 1973 amendment, 

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), 161 Mont. 40, 504 P.2d 287; First Federal 

Savings & Loan v. State Tax Appeal Board (1975)r 167 Mont. 33, 

535 P.2d 183 (applying pre-1973 statutes). In Lazy JD Cattle Co. -- --- -- 

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 reference 
the 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 

at 290. 

See also Board of Equalization v. Farmer's Union Grain Terminal 

Assln (1962), 140 Mont. 523, 374 P.2d 231; Home Building & Loan 

Assln of Helena v. Board of Equalization (1962), 141 Mont. 113, 

375 P.2d 312; and Barth v. State Board of Equalization (1966), 

148 Mont. 259, 419 P.2d 484. These cases have not been overruled 

and are still good law in Montana. 

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 be tween the Federal Internal 

Revenue Code and the Montana Corporation License Tax Act. The 

Internal Revenue Code in section 243 permits corporations to take 

a deduction for 100 percent of the dividends received by them 

from subsidiary corporations in which they own 80 percent 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 in which they own 

80 percent or more of the stock. 

The District Court's judgment i ated and the STAB order 

reinstated. 

Chief Ju'sticc