### No. 12939 

### INTHE SUPREME COURT OF THE STATE OF MONTANA

FIRST FEDERAL SAVINGS & 

### LOAN ASSOCIATION OF BILLINGS etal., Petitioners and Respondents,

STATE'TAX APPEAL BOARD OF 

### THE STATE OF MONTANA, etal,, Appellants and Respondents,

Appeal from: District Court 

### of theFirstJudicial District, Honorable Gordon 

### R. Bennett, Judge presiding, Counsel of Record

### : For Appellant

### : Terry 

### B. Cosgrove argued, Helena, Montana Joseph 

### R. Massman appeared, Helena, Montana ForRespondents: Cannon and Garrity, Helena, Montana Ross W. 

### Cannon argued and Donald A. 

### Garrity argued,

Hekna

# ,Montana

Submitted: April 

### 11, 1975Mr. JusticeWesley Castlesdelivered the Opinion of theCourt.
This 

### is an appeal by theMontana Department of Revenue from a judgment of the districtcourt, Lewis and Clark County, reversing orders of theMontana Department of Revenue and the StateTax 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, Title26, United StatesCode. Atthe same time, they filed amended returns for tax years 1967 through 1971, inwhich 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
areentitled touse such a deduction incomputing their federal income tax returns. The Department of Revenue disallowed the bad debt reserve deduction for alltax years inwhich it 

### was claimed. Plaintiffs perfected a timely appeal tothe StateTax Appeal Board which, after hearing, found in favor of the Department. Plaintiffs appealed thatruling tothe districtcourt which entered judgment for theplaintiffs, From thatjudgment, the Department of Revenue brings this appeal. In lightof our treatment of thisappeal, we need discuss but one of the issues raised by appellant: Whether, incomputing their Montana corporation license taxes for taxable years prior to 1973, Montana savings and loan associationsmay deduct the bad debt reserve authorized for such associations by sections 166 and 593, Title 26, U.S.C.? During the tax years inquestion, 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 stateof Montana recognized inthe 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 setforth inthis section shall not be construed as allowing the deductions setforth in section 243 of the Federal Internal Revenue Code 

## * * *
"0 This Court recently construed that language inLazy JD CattleCo. v. State Board of ~qualization, 161Mont. 40, 45, 504 P.2d 287, wherein we stated: "Thus thisCourt 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 asexpressly provided otherwise, asinthe case of the exempt interest exclusion and the dividend deduction." Section 84-1502, R.C.M. 1947, reads, inpertinent part: 

### "In computing the net income the following deductions shallbe 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 166and 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 theFederal Internal Revenue Code, incomputing theirMontana corporation license taxes for taxable years prior to 1973. While it is true the Federal Internal Revenue Code has broken the loss provisions intotwo separate sections, section 165 for casualty losses and section 166 for bad debts, it doesnot necessarily follow thatMontana's section 84-1502(2) refers solelytocasualty losses and not tobad debts. A clear reading of the words "All losses" has the plain and obvious meaning that alllosses, including bad debts, aretobe 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 theFederal Revenue Act of 1916, 39 Stat. 767, which read: "In the case of a corporation

## * * 

## * such net income shallbe 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 theyear and not compensated by insurance or otherwise 

## * * *." The provisions relating tocorporate deductions did not specificallymention 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 Actof 1916 did not specificallymention bad debts asbeing deductible, the regulations promulgated pursuant thereto did recognize their deductibility. Art. 151of 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 arethose losses which have been definitely ascertained tohave occurred and which were charged off during the year for which the return ismade." 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 inArticle 125 of Regulations No. 33, 16 Treasury Decisions InternalRevenue, T.D. No. 1944. Thus, not only the plain meaning of the words "All losses", but alsothe interpretation given tothe federal stat- i ute, from whence our statutewas drawn, indicates that bad debts aredeductible under section 84-1502(2). In allowing for
a deduction for bad debts, the legislature has provided a specificmethod for deducting the bad debts which must be followed: Bad debts aredeductible only when "actually sustained and charged off within the year". Where the Montana code has attempted to specifically deal with a particular deduction, inthis

case bad debts, then theprovisions of theMontana code govern, tothe 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 limitalldeductible losses tothose actually sustained during the taxable year because inLazy JDCattleCo. thisCourt permitted the taxpayer tocarry forward and carry back "losses" pursuant tothe net operating loss deduction allowed by section 172 of the Federal Internal Revenue Code. The net operating lossdeduction is a different concept. It is not a "loss". The term "net operating loss" means the excess of all 

# - the deductions allowed by Chapter 1of SubtitleA of the Federal Internal Revenue Code over the gross income. That amount can either be carried back or carried forward according tothe provisions of the statute. But, an individual bad debt lossmay not be carried back or forward independently inand of itself. Pursuant to section 84-1502(2), it must be deducted inthe year "actually sustained and charged off". Inother words, in computing the net operating loss for any given year the bad debt losses utilized inthe computation would be only those "actually sustained and charged off within theyear".The judgment of the districtcourt isreversed.

We concur:

L -r,. cJ \-

Mr. Chief JusticeJames T. Harrison.