No. 12939 

IN THE SUPREME COURT OF THE STATE OF MONTANA 

FIRST FEDERAL SAVINGS & LOAN 

ASSOCIATION OF BILLINGS et al., 

Petitioners and Respondents, 

STATE' TAX APPEAL BOARD OF THE 

STATE OF MONTANA, et al,, 

Appellants and Respondents, 

Appeal from: District Court of the First Judicial District, 

Honorable Gordon R. Bennett, Judge presiding, 

Counsel of Record : 

For Appellant : 

Terry B. Cosgrove argued, Helena, Montana 

Joseph R. Massman appeared, Helena, Montana 

For Respondents: 

Cannon and Garrity, Helena, Montana 

Ross W. Cannon argued and Donald A. Garrity argued, 

Hek na , Montana 

Submitted: April 11, 1975 
Mr. Justice Wesley Castles delivered the Opinion of the Court. 

This is an appeal by the Montana Department of Revenue 

from a judgment of the district court, Lewis and Clark County, 

reversing orders of the Montana Department of Revenue and the 

State Tax Appeal Board. 

This matter was tried on an agreed statement of facts. 

Plaintiffs are several savings and loan associations located in 

Montana. In their 1972 Montana corporation license tax returns, 

they deducted from their gross incomes the bad debt reserve 

authorized by sections 166 and 593, Title 26, United States Code. 

At the same time, they filed amended returns for tax years 1967 

through 1971, in which they also claimed the bad debt reserve 

deduction. The Department of Revenue does not question the amount 

of the bad debt reserve deduction claimed and admits plaintiffs 

are entitled to use such a deduction in computing their federal 

income tax returns. 

The Department of Revenue disallowed the bad debt reserve 

deduction for all tax years in which it was claimed. Plaintiffs 

perfected a timely appeal to the State Tax Appeal Board which, 

after hearing, found in favor of the Department. Plaintiffs appealed that ruling to the district court which entered judgment 

for the plaintiffs, From that judgment, the Department of Revenue brings this appeal. 

In light of our treatment of this appeal, we need discuss 

but one of the issues raised by appellant: Whether, in computing 

their Montana corporation license taxes for taxable years prior 

to 1973, Montana savings and loan associations may deduct the bad 

debt reserve authorized for such associations by sections 166 and 

593, Title 26, U.S.C.? 

During the tax years in question, section 84-1504(2), R.C.M. 
1947, defined gross and net income as: 

"The tern 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 deductions. However, the definitions of gross income and net income set forth 

in this section shall not be construed as allowing the deductions set forth in section 243 of 

the Federal Internal Revenue Code * * * "0 

This Court recently construed that language in Lazy JD 

Cattle Co. v. State Board of ~qualization, 161 Mont. 40, 45, 

504 P.2d 287, wherein we stated: 

"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." 

Section 84-1502, R.C.M. 1947, reads, in pertinent part: 

"In computing the net income the following deductions 

shall be allowed from the gross income received by 

such corporation within the year from all sources: It*** 

'I 2. All losses actually sustained and 

charged off within the year and not compensated by 

insurance or otherwise * * *". 

Although sections 166 and 593 of the Federal Internal 

Revenue Code authorize a deduction from gross income for a reserve 

for bad debts, the issue, more narrowly stated, becomes whether 

our Montana Corporation License Tax statutes have "expressly 

provided otherwise'" we hold that section 84-1502 (2) , R.C.M. 

1947, has expressly provided otherwise and respondents may not 

deduct the bad debt reserve deduction, authorized by the Federal 

Internal Revenue Code, in computing their Montana corporation 

license taxes for taxable years prior to 1973. 

While it is true the Federal Internal Revenue Code has 

broken the loss provisions into two separate sections, section 

165 for casualty losses and section 166 for bad debts, it does 
not necessarily follow that Montana's section 84-1502(2) refers 

solely to casualty losses and not to bad debts. A clear reading 

of the words "All losses" has the plain and obvious meaning that 

all losses, including bad debts, are to be deducted under this 

section of Montana's code. A bad debt is a "loss". 

The predecessor of section 84-1502(2) was enacted by 

our legislature in 1917. Section 2, Chapter 79, Laws of 1917. 

It was lifted almost verbatim from Sec. 12(a) of the Federal 

Revenue Act of 1916, 39 Stat. 767, which read: 

"In the case of a corporation * * * such net income 

shall be ascertained by deducting from the gross 

amount of its income received within the year 

from all sources--- 

"Second. All losses actually sustained and 

charged off within the year and not compensated 

by insurance or otherwise * * *." 

The provisions relating to corporate deductions did not specifically mention bad debts, as such, until a separate bad debt provision was added as Sec. 234(a) of the Federal Eevenue Act of 

1918, 40 Stat. 1077. While the Revenue Act of 1916 did not specifically mention bad debts as being deductible, the regulations 

promulgated pursuant thereto did recognize their deductibility. 

Art. 151 of Regulations No. 33, Revised, 20 Treasury Decisions 

Internal Revenue 126, 199, states: 

"Bad Debts.--Losses which may be properly deducted 

from gross income on account of bad debts or 

doubtful accounts are those losses which have 

been definitely ascertained to have occurred and 

which were charged off during the year for which 

the return is made." 

While Regulations No. 33, Revised, was promulgated on January 2, 

1918, following the enactment of the predecessor of our section 

84-1502 (2) , R.C.M. 1947, a similar interpretation of Sec. I1 G (b) 

of the Federal Revenue Act of 1913, 38 Stat. 172, can be found 

in Article 125 of Regulations No. 33, 16 Treasury Decisions Internal 
Revenue, T.D. No. 1944. 

Thus, not only the plain meaning of the words "All 

losses", but also the interpretation given to the federal stat- i 

ute, from whence our statute was drawn, indicates that bad 

debts are deductible under section 84-1502(2). In allowing for 

a deduction for bad debts, the legislature has provided a specific method for deducting the bad debts which must be followed: 

Bad debts are deductible only when "actually sustained and 

charged off within the year". Where the Montana code has attempted to specifically deal with a particular deduction, in this 

case bad debts, then the provisions of the Montana code govern, 

to the exclusion of methods permitted by the Federal Internal 

Revenue Code, in this case deduction by the reserve method. 

Respondents next contend that section 84-1502(2), R.C.M. 

1947, does not limit all deductible losses to those actually sustained during the taxable year because in Lazy JD Cattle Co. 

this Court permitted the taxpayer to carry forward and carry 

back "losses" pursuant to the net operating loss deduction allowed by section 172 of the Federal Internal Revenue Code. The net 

operating loss deduction is a different concept. It is not a 

"loss". The term "net operating loss" means the excess of all - 

the deductions allowed by Chapter 1 of Subtitle A of the Federal 

Internal Revenue Code over the gross income. That amount can 

either be carried back or carried forward according to the provisions of the statute. But, an individual bad debt loss may 

not be carried back or forward independently in and of itself. 

Pursuant to section 84-1502(2), it must be deducted in the year 

"actually sustained and charged off". In other words, in computing the net operating loss for any given year the bad debt 

losses utilized in the computation would be only those "actually 

sustained and charged off within the year". 
The judgment of the district court is reversed. 

We concur: 

L -r,. cJ 

\- 

Mr. Chief Justice James T. 

Harrison.