No. 13777 IN THE SUPREME COURT OF THE STATE OF MONTANA

MONTANA BANKERS ASSOCIATION et al., Plaintiffs and Respondents,

MONTANA DEPARTMENTOF 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:

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# y197eMr. 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 theMontana Bankers Association (MBA),various member banks, and an individual shareholder. The substance of the judgmentheld 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 assessmentpurposes. The amendment soughtby MBA would specifically provide a deduction of the value of United States government obligationsheld by Montana banks in computing the value of bank shares for assessmentpurposes. We note parenthetically that on June 25, 1976, a similar amendmentwas granted by DOR to competing financial institutions, specificallybuilding 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 TaxAppeal 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 TaxAppeal Board to the contrary. The thrust of MBA's position was that taxation of obligations of the United Stateswas prohibited by the federal exemption statute

(31U.S.C., 8742) and state taxation of such obligationswas 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 DORISposition was that the federal exemption statutewas inapplicable, thatMontana's Bank SharesTax 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 DistrictCourt. 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 DORISmotion 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 TaxAppeal Board. The essence of the District Court's judgmentwas thatMontana banks were 

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## * * * entitled as amatter 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 

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## *". The District Court's judgmentwas based on itsconclusion that the federal obligationswere exempt from state taxation under the federal exemption statute; that a contrary interpretation of state lawwould 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 amatter of law to claim and deduct for state "Bank SharesTax"purposes those United States government obligations owned by it on tax assessment day? It is axiomatic that a statemay not encroach upon the borrowing power of the United States government by taxing federal obligations. This principle isderived 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),4Wheat. 316. A statutory pronouncement of this rule is found in 31 U.S.C. 742: "742. Exemption from taxation. "Exceptas otherwise provided by law, all stocks, bonds, treasury notes, and other obligations of the United States, shallbe exempt from taxation by or under State ormunicipal or local authority. This exemption extends to every form of taxation thatwould require that either the obligations or the interest thereon,or both,be considered, directly or indirectly,in the computation of the tax 

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## *. [subjectto 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 statutewas 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. 12U.S.C. 548. Van Allen v. The Assessors, (18651,3Wall. 573; National Bank v. Commonwealth, (1869),9Mall. 353; DesMoines National Bank v. Fairweather, (1923), 263 U.S.



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## * * * This resultwas reached in part on the theory that the stockholders' interests in a corporation represent a separateproperty interest from the corporation's ownership of its assets, so that a tax on the stockholders' interests is not a tax on the federalobligations which are included in the corporateproperty. This rationale has been carried over to cases involving stock of state-created banks, and thus a tax on their shareholders, thoughmeasured by corporate assetswhich include federal obligations, is held not to offend the rule immunizing such obligations from state taxation. (Citationomitted.) Further, in levying a tax on shareholders, a statemay require its payment by the corporation,as a collecting agent.

(Citationomitted.)" 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 statutesauthorize 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 tomake itselfwhole, i.e. is there an express or implied right of reimbursement? We conclude thatMontana's statutes imposing a bank shares tax complywith 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: "Thisexemption extends to every form of taxation thatwould require that either the obligations or the interest thereon, or both, be considered, directly or indirectly, in the computation of the tax

## * * * [subjectto 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 requiresUnited 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 statutemust be construed strictly against the taxpayer,citing a line of cases holding that tax statutes granting exemptions and deductionsmust be strictly construed against the taxpayer claiming them. This rule of statutory construction,however, applies only to ambiguous statuteswhere legislative intent is not clear from the language of the statute and has no applicationwhere, as here, the meaning of the statute is clear from its language. Our holding is further strengthenedby 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 fivepurposes 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." Inmore detail the Report continueswith 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 Statehas taken the position that the statute as nowworded 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 thatwould 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 (orother 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 statuteby 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 applicableMontana statutes nor administrative regulations expressly authorizes a deduction for the value of federal obligations in computing the bank shares tax. However, the Montana statutemust be construed as permitting such deduction and administrative regulations to the contrary must fall. Any other constructionwould violate the federal exemption statute and be unconstitutionalunder 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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