No. 13777 

IN THE SUPREME COURT OF THE STATE OF MONTANA 

MONTANA BANKERS ASSOCIATION et al., 

Plaintiffs and Respondents, 

MONTANA DEPARTMENT OF REVENUE, 

Defendant and Appellant. 

Appeal from: District Court of the First Judicial District, 

Honorable Gordon R. Bennett, Judge presiding 

Counsel of Record: 

For Appellant: 

R. Bruce McGinnis argued, Helena, Montana 

For Respondents: 

Hughes, Bennett and Cain, Helena, Montana 

Luxan, Murfitt and Davis, Helena, Montana 

Howard J. Luxan Jr. argued, Helena, Montana 

Gough, Shanahan, Johnson and Waterman, Helena, 

Montana 

Ronald Waterman argued, Helena, Montana 

Church, Harris, Johnson and Williams, Great Falls, 

Montana 

Submitted: March 13, 1978 

Decided: JuN - 7 19@ 

Filed: JUW y 197e 
Mr. Chief Justice Frank I. Haswell delivered the Opinion of the 

Court. 

The Montana Department of Revenue (DOR) appeals from 

the judgment of the District Court, Lewis and Clark County, 

granting summary judgment and declaratory relief to the Montana 

Bankers Association (MBA), various member banks, and an individual 

shareholder. The substance of the judgment held that stocks, 

bonds, treasury notes and other obligations of the United States 

held by Montana banks were exempt from taxation under the "Montana 

Bank Shares Tax Act", and implementing provisions of the Montana 

Administrative Code. 

The procedural history of this case commenced on May 3, 

1976, when MBA petitioned DOR for amendment of section 42-2.22(20)- 

S22400 of the Montana Administrative Code (MAC) relating to computation of the value of bank stock for assessment purposes. The 

amendment sought by MBA would specifically provide a deduction of 

the value of United States government obligations held by Montana 

banks in computing the value of bank shares for assessment purposes. We note parenthetically that on June 25, 1976, a similar 

amendment was granted by DOR to competing financial institutions, 

specifically building and loan associations, providing a deduction 

of the value of United States government obligations owned by them. 

Following a public hearing on MBA's petition, the hearing 

officer for DOR denied the banks a similar amendment on the ground 

that the Montana Bank Shares Tax is a tax on the owners of the 

shares rather than a tax on the bank's assets, the bank simply 

being a collection agent for the tax with a right of recourse 

against the shareholders in the amount of the tax. This decision 

was appealed to the State Tax Appeal Board which affirmed. 

On September 27, 1976, MBA filed a petition for judicial 

review and declaratory judgment in the District Court of Lewis 

and Clark County. Following amendment, the petition of MBA sought 
(1) amendment of MAC section 42-2.22 (20)-S22400, (2) a declaratory judgment allowing a deduction from the assessed value of 

bank shares in an amount equal to the value of bank-held United 

States obligations, and (3) reversal of the findings, conclusions 

and judgment of the State Tax Appeal Board to the contrary. The 

thrust of MBA's position was that taxation of obligations of the 

United States was prohibited by the federal exemption statute 

(31 U.S.C., 8742) and state taxation of such obligations was 

unconstitutional and illegal under the "borrowing" and "supremacy" 

clauses of the United States Constitution. 

DOR answered seeking a declaratory judgment in its favor. 

The substance of DORIS position was that the federal exemption 

statute was inapplicable, that Montana's Bank Shares Tax Act and 

implementing provisions of the Montana Administrative Code were 

valid, and that the tax as assessed was collectible. The District 

Court granted ~~A's application for an injunction and stay of 

collection of the tax during the pendency of the litigation. 

All parties filed a written stipulation of facts with 

the District Court. EIBA and DOR each filed a motion for summary 

judgment in its favor. The respective motions for summary judgment were submitted to the District Court as the basis of the 

agreed facts, briefs and oral argument. 

On January 27, 1977, the District Court entered its findings of fact, conclusions of law and judgment. It granted MBA's 

motion for summary judgment; denied DORIS motion for summary judgment; vacated the opinion and order of DORIS hearing officer denying amendment of MAC section 42-2.22(20)-522400; and reversed the 

conclusions of law of the State Tax Appeal Board. The essence 

of the District Court's judgment was that Montana banks were 

" * * * entitled as a matter of law to claim as a deduction and 

to deduct on its bank statement for assessment for the taxable 

year 1976 those federal obligations owned by it on assessment 

day * * *". The District Court's judgment was based on its 
conclusion that the federal obligations were exempt from 

state taxation under the federal exemption statute; that a contrary 

interpretation of state law would violate such federal exemption 

statute; and that the federal exemption statute is paramount 

and controlling under the Supremacy Clause of the United States 

Constitution. 

DOR has appealed from the District Court judgment. 

This appeal presents a single issue: Is a Montana bank 

entitled as a matter of law to claim and deduct for state "Bank 

Shares Tax" purposes those United States government obligations 

owned by it on tax assessment day? 

It is axiomatic that a state may not encroach upon the 

borrowing power of the United States government by taxing federal 

obligations. This principle is derived from the "borrowing" and 

"supremacy" clauses of the United States Constitution and from 

the constitutional doctrines announced by the United States 

Supreme Court in McCulloch v. Maryland, (1819), 4 Wheat. 316. 

A statutory pronouncement of this rule is found in 31 U.S.C. 742: 

"742. Exemption from taxation. 

"Except as otherwise provided by law, all stocks, 

bonds, treasury notes, and other obligations of 

the United States, shall be exempt from taxation 

by or under State or municipal or local authority. 

This exemption extends to every form of taxation 

that would require that either the obligations or 

the interest thereon, or both, be considered, 

directly or indirectly, in the computation of the 

tax * * *. [subject to certain exceptions not 

relevant to the case on appeal]" (Bracketed phrase 

substituted.) 

The first sentence of this statute comprised the entire 

statute prior to 1959. In 1959 the statute was amended by 

adding the second sentence. 

An exception to this principle exists where Congress has 

consented to the State's imposition of a tax upon stockholders' 

interests in a national bank, measured by corporate asset values, 

without making any deduction for federal obligations owned by 

the banks. 12 U.S.C. 548. Van Allen v. The Assessors, (18651, 
3 Wall. 573; National Bank v. Commonwealth, (1869), 9 Mall. 

353; Des Moines National Bank v. Fairweather, (1923), 263 U.S. 

" * * * This result was reached in part on the 

theory that the stockholders' interests in a 

corporation represent a separate property interest 

from the corporation's ownership of its assets, 

so that a tax on the stockholders' interests is 

not a tax on the federal obligations which are 

included in the corporate property. This rationale 

has been carried over to cases involving stock of 

state-created banks, and thus a tax on their shareholders, though measured by corporate assets which 

include federal obligations, is held not to offend 

the rule immunizing such obligations from state 

taxation. (Citation omitted.) Further, in levying 

a tax on shareholders, a state may require its payment by the corporation, as a collecting agent. 

(Citation omitted.)" Society for Sav. v. Bowers, 

(1955), 349 U.S. 143, 75 S.Ct. 607, 99 L.Ed. 950. 

Bowers established the criteria for determining whether 

state statutes authorize a valid bank shares tax: 

(1) Whether there is a provision entitling the state 

to collect the bank shares tax from depositors? 

(2) Whether the statute relieves the bank from having 

to pay the tax for a depositor who withdrew his account between 

tax assessment day and collection day, or if the bank is required 

to pay, is it entitled to reimbursement from the depositor? 

(3) If the tax is on the depositor, does the bank have 

the right to make itself whole, i.e. is there an express or 

implied right of reimbursement? 

We conclude that Montana's statutes imposing a bank shares 

tax comply with these guidelines in Bowers. 

All of the foregoing cases were decided before the 1959 

amendment to 31 U.S.C. 742. That amendment added the following 

sentence to the federal exemption statute: 

"This exemption extends to every form of taxation 

that would require that either the obligations or 

the interest thereon, or both, be considered, 

directly or indirectly, in the computation of the 

tax * * * [subject to certain exemptions not relevant 

to the case on appeal]". (Bracketed phrase substituted.) 
The language of the 1959 amendment is clear, unambiguous, 

direct and certain. The plain language provides an exemption 

to every form of state taxation that requires United States 

obligations or interest to be considered directly or indirectly 

in the computation of the tax. The statute speaks for itself. 

DOR argues that the federal exception statute must be 

construed strictly against the taxpayer, citing a line of cases 

holding that tax statutes granting exemptions and deductions must 

be strictly construed against the taxpayer claiming them. This 

rule of statutory construction, however, applies only to ambiguous 

statutes where legislative intent is not clear from the language 

of the statute and has no application where, as here, the meaning 

of the statute is clear from its language. 

Our holding is further strengthened by House Report No. 

1148, September 3, 1959 and Senate Report No. 909, September 5, 

1959. The Senate Report and Conference Report on the 1959 amendment indicates five purposes of the amendment, one of which reads 

as follows: 

"Fourth, the bill makes it clear that both the principal and interest on U. S. obligations are exempt 

from all State taxes except nondiscriminatory franchise, 

etc., taxes." 

In more detail the Report continues with this language: 

"D. CLARIFYING EXEMPTION OF U. S. OBLIGATIONS FROM 

STATE OR LOCAL TAXATION 

"Present law provides that obligations of the United 

States are to be exempt from taxation by or under 

State or local authority. The Supreme Court has 

held that this includes the exemption of interest on 

U. S. obligations from taxation by or under State or 

local authority. It has been pointed out to your 

committee, however, that one State has taken the position that the statute as now worded does not prohibit 

a State from including interest on Federal obligations 

in computing 'gross income' upon which taxable net 

income is determined. The bill (sec. 105) makes it 

clear that the exemption for Federal obligations 

extends to every form of taxation that would require 

either the obligation, or the interest on it, or both 

to be considered directly or indirectly in the computation of the tax, except nondiscriminatory franchise 

taxes (or other nondiscriminatory nonproperty taxes 

imposed in lieu thereof) on corporations and except 

estate or inheritance taxes." 
Thus, it appears to us that Congress intended to prohibit 

state inroads on the federal exemption statute by enacting an 

all-inclusive prohibition against any form of state taxation 

that requires United States obligations to be considered, directly or indirectly, in computing the state tax. 

We note that neither the applicable Montana statutes 

nor administrative regulations expressly authorizes a deduction 

for the value of federal obligations in computing the bank shares 

tax. However, the Montana statute must be construed as permitting 

such deduction and administrative regulations to the contrary must 

fall. Any other construction would violate the federal exemption 

statute and be unconstitutional under the Supremacy Clause of 

the United States Constitution. 

The judgment of the District Court is affirmed. 

\ 

Chief Justice 

We concur: 

District 

Mr. Justice Daly and Mr. Justice Shea, dissenting. 

We dissent to 

our views in a written 

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