No. 13249 

IN THE SUPREME COURT OF THE STATE OF MONTANA 

1977 

MONTANA DEPARTMENT OF REVENUE, 

STATE OF MONTANA, 

Petitioner and Appellant, 

THE AMERICAN SMELTING AND REFINING 

COMPANY, 

Defendant and Respondent. 

Appeal from: District Court of the First Judicial District, 

Honorable Peter Meloy, Judge presiding. 

Counsel of Record: 

For Appellant: 

Terry B. Cosgrove argued, Helena, Montana 

Theodore W. $.e~ooze argued, Salem, Oregon 

For Respondent: 

Hughes, Bennett and Cain, Helena, Montana 

George T. Bennett argued, Helena, Montana 

Charles Smith, Helena, Montana 

For Amicus Curiae: 

William D. Dexter appeared, Olympia, Washington 

Submitted: January 27, 1977 

Decided : 'mL 1 - 1 1977 

Filed JUL 19 1972. 
Mr. Chief Justice Paul G. Hatfield delivered the Opinion of the Court. 

This is an appeal by the Montana Department of Revenue (DOR) from 

a judgment entered in the district court, Lewis and Clark County, affirmi ng a final decision of the State Tax Appeal Board (STAB). The STAB 

decision ordered a recomputation of the deficiency assessment levied by 

DOR against American Smel ting and Refining Company (ASARCO) . 

In 1972 the auditors of the Mu1 tistate Tax Commission conducted 

an audit of ASARCO's records for the tax years 1967-1970. Subsequent to 

this audit, additional corporation license taxes were assessed against 

ASARCO by DOR. The amount of this deficiency assessment is the underlying 

issue upon appeal . 

ASARCO is a New Jersey corporation engaged in national and international operations in the business of mining, smelting, refining, manufacturing, buying and selling nonferrous metals and minerals. ASARCO 

basically engages in two separate, but related areas of operation. The 

first is a primary metal operation consisting of the mining, milling, smelting and refining of nonferrous metals. The second is a nonferrous a1 loy 

operation consisting of the manufacture and sale of alloy products. 

For the tax years in question ASARCO owned mines in Colorado, 

Washington, Arizona, New Mexico and Idaho in addition to mines in Canada 

and other foreign countries. It operated smelters and refineries in Texas, 

Maryland, Colorado, Montana, Missouri, Arizona, Nebraska, New Jersey, Washington and California for the years in question. Alloy manufacturing plants 

were located in Texas, New Jersey, California, Oklahoma and Indiana. ASARCO 

sales offices were located in New York, Baltimore, Boston, Cincinnati, 

Cleveland, Detroit, Milwaukee, Philadelphia, Rochester and St. Louis. 

ASARCO owns and operates a smelter in East Helena which is its principal operation in Montana. This smelter receives lead ores and concentrates 

from company mines as well as unrelated suppliers. The smelted, but unrefined lead product is then shipped to other units of ASARCO for further 

treatment and eventual sale. Anaconda Company purchased various by-products 
of the East Helena smelter for the years in question. In addition to the 

East Helena smelter ASARCO owns certain active and inactive mining properties 

in Montana. 

Prior to 1962 ASARCO reported its income from its Montana properties 

by separate accounting, pursuant to section 84-1503, R.C.M. 1947. Under 

that method ASARCO determined the gross receipts from its Montana properties 

and deducted all expenses incurred by or attributable to such properties to 

arrive at Montana income. Where overhead expenses such as the cost of transportation were attributable to more than one state, they were apportioned 

to determine the Montana portion. 

In 1962 ASARCO recognized that its business was unitary in nature 

and it could no longer use separate accounting for its income. Pursuant 

to section 84-1503 it requested permission from DOR to change from separate 

accounting to the unitary method of accounting. Permission was granted by 

DOR and a "hybrid" system of reporting income was instituted. Under this 

hybrid system, all but a negligible amount of total company income from 

rents, royalties, dividends, interest and sales of tangible and intangible 

properties was allocated to sources outside Montana. After deductions for 

the allocated income, ASARCO's operating net income was apportioned to 

Montana sources by the use of a three factor formula. 

An in-depth examination of ASARCO's hybrid system indicates the 

fol lowing procedure was used to compute tax 1 iabil ity for the years in 

question. ASARCO classified the income listed below as nonbusiness income 

under DORIS 1967 regulations, deducted it from its apportionable income, and 

allocated it as indicated: 

(a) Income from mine royal ties paid by the lessees of ASARCO's 

Keystone Mine previously operated by ASARCO and located in the State of Colorado was allocated to the State of Colorado; 

(b) Income from patents and copyrights on items developed by ASARCO's 

research department and used in ASARCO's operations and licensed to others, 

was a1 located to commercial domici 1 e; 
(c) Income from rental of housing units on mining properties and 

rented to employes was allocated to the state where such rental units are 

1 ocated : 

(d) Interest income from United States obl igations , customers notes 

and bonds, notes on the sale of a plant and General Cable stock, from state 

and municipal bonds, time certificates, bankers acceptances, and commercial 

paper was allocated to the state of commercial domicile; 

(e) Gains from the sales of tangible properties were allocated to 

the state of sale; 

(f) Dividends paid on stocks were allocated to state of commercial 

domicile; 

(g) Gains from the sale of stock were allocated to the state of 

commercial domicile; and 

(h) Income from securities deposited with Montana state agencies 

and from money deposited in Montana was allocated to Montana. 

The percentage of apportionable income or loss attributable to 

Montana sources was calculated by the use of this formula: 

Montana property + Montana Payroll + Montana Sales 

Total ASARCO Total ASARCO Total ASARCO 

Property Payroll Sales - % 

Averaged by dividing by 3 

The percentage obtained was then multiplied by ASARCO's total apportionable 

income to determine the Montana contribution. 

DOR contends the hybrid system used by ASARCO to calculate its 

Montana income incorrectly interpreted section 84-1503, R.C.M. 1947. That 

section at the time in question, stated: 

"If the income of any corporation from sources within the 

state cannot be properly segregated from income without 

the state, then, in that event, the amount of the net income returned shall be that proportion of the taxpayer's 

total net income which the taxpayer's gross business done 

in the state of Montana bears to the total gross business 

of the taxpayer, and apportionment shall be made under the 

rules and regulations prescribed by the state board of 

equal ization, giving consideration to sales, property and 

payroll and such other factors as may be deemed applicable; provided, however, that the state board of equalization shall , upon the presentation of satisfactory 
evidence, determine that the income from sources within 

the state of Montana may be properly segregated from 

income from sources without the state of Montana and 

shall allow separate accounting. The board shall publish not less than once a year, all rules and regulations 

pertaining to this section. All decisions by the board 

under this section shall be subject to judicial review 

in an action prosecuted by the corporation in the district court of Lewis and Clark county. The taxpayer 

cannot change from one method of accounting to another 

method of accounting without first obtaining permission 

from the board. " 

DOR interprets the above statute as creating only two methods of 

determining income from sources within Montana--separate accounting or 

apportionment of total net income. Separate accounting is available only 

if income from sources within the state may be segregated from sources 

without the state. In the absence of the above conditions, total business 

net income must be apportioned. 

DOR determined that the income classified by ASARCO as nonbusiness 

income was, in fact, business income as defined by DOR's 1967 regulations. 

DOR therefore restored this income bapportionable net income. In addition, 

DOR included in apportionable net income the net income of six of ASARCO's 

wholly owned subsidiaries. DOR contends that ASARCO and the six subsidiary 

corporations were engaged in a unitary business and therefore the combination was merely an extension of the apportionment method of taxation dictated by section 84-1503. 

Pursuant to DOR's calculations of ASARCO's Montana income additional 

corporate license taxes were assessed. Protest was made by ASARCO and a hearing was held before the director of DOR. The director's decision affirmed 

the deficiency assessment. Thereafter ASARCO appealed to STAB which reversed the director's decision. DOR then petitioned the district court, 

Lewis and Clark County, requesting a review of the STAB order. On December 

17, 1975, the district court entered judgment affirming the decision of STAB. 

DOR appeals the district court judgment. 

Three issues are before the Court upon appeal: 

1) Whether DOR had the authority, pursuant to sections 84-1503 

and 84-1508, R.C.M. 1947, to adopt its Regulations 1001-1020 (Chapter 10) 
concerning rules for the apportionment of corporate net income? 

2) Whether ASARCO was correct in its deduction of a1 leged nonbusiness income from apportionable net income prior to apportionment? 

3) Whether the income from six of ASARCO's wholly owned subsiaries was properly included in apportionable net income? 

On December 30, 1966, DOR adopted its Regulations 1001-1020 

(Chapter 10). These regulations were effective with respect to tax years 

beginning on and after January 1, 1967. Included within these regulations 

are specific rules for allocation and apportionment of corporate income 

derived from sources both within and without Montana. In addition key 

terms are specifically defined as to their application to the regulations. 

The regulations provide for two methods of accounting for income; 

apportionment according to a three-factor formula and separate accounting. 

Separate accounting is allowed only in situations where income can be 

specifically segregated as to source.Apportionment of income must be used 

in all other cases. The apportionment system adopts what may be categorized 

as a "business vs. nonbusiness" test in regard to determining what income 

is apportioned and what income may be allocated to source. Under this 

system all business income is apportioned by use of the three-factor formula 

while only nonbusiness income may be allocated to source. Business income 

is defined as all income arising from transactions and activity in the regular 

course of the taxpayer's trade or business and includes income from tangible 

and intangible property if the acquisition, management and disposition of the 

property constitute integral parts of the taxpayer's regular trade or business operations. Nonbusiness income is defined as all income other than 

business income. 

ASARCO urges these regulations were ineffective as applied to it 

for the tax years 1967-1970 for two reasons: 

1. DOR by virtue of section 84-1503 had the authority to adopt 

rules and regulations only as to the apportionment of such income as could 

not be segregated as to source. 

2. The regulations adopt a "business vs. nonbusiness" income test 

-6- 
rather than the "source" of income test found in section 84-1503 and are 

therefore fatally inconsistent. 

Any contention that DOR lacks the authority to adopt rules and 

regulations interpreting taxation statutes is without merit. In regard to 

the statute in question, the power to adopt rules and regulations is clearly 

and unambiguously stated within the text of the statute. Furthermore 

section 84-1508, R.C.M. 1947, gives DOR power to provide "such other regulations as may from time to time be found necessary." We affirmed this 

principle in State ex rel. Fulton v. District Court, 139 Mont. 573, 366 P.2d 

435. 

The crux of this entire case is the interpretation of section 

84-1503 and DOR Regulations 1001-1020. There is no merit in ASARCO's contention that DOR has only authority to adopt rules and regulations for the 

apportionment of income incapable of segregation as to source. 

The function of the Supreme Court when construing a statute is 

simply to ascertain and declare what is in substance stated therein, and 

not to insert what has been omitted or to omit what has been inserted. Dunphy 

v. Anaconda Co., 151 Mont. 76, 438 P.2d 660; In re Transportation of School 

Children, 117 Mont. 618, 161 P.2d 901 ; Section 93-401-15, R.C.M. 1947. The 

fundamental rule of statutory construction is that the intent of the legislature controls. Matter of Senate Bill No. 23, Chapter 491, Montana Session 

Laws of 1973, 168 Mont. 102, 540 P.2d 975, 32 St.Rep. 954; Hammill v. Young, 

168 Mont. 81, 540 P.2d 971, 32 St.Rep. 935; Dunphy v. Anaconda Co., supra; 

Section 93-401-16, R.C.M. 1947. Where the intent of the legislature can be 

determined from the plain meaning of the words used, the courts may not go 

further and apply any other means of interpretation. State ex rel. Huffman 

v. District Court, 154 Mont. 201, 461 P.2d 847; Dunphy v. Anaconda Co., supra. 

Here, the plain meaning of the words used by the legislature unmistakably 

discloses its intent. DOR clearly has the authority to adopt rules and regulations as to the apportionment of corporate income without regard to source. 

There also is no merit in ASARCO's second contention. ASARCO argues 
that section 84-1503 contains a "source of income" test to be used in 

determining apportionable income vs. allocatable income. ASARCO concludes 

that this apparent conflict with the business vs. nonbusiness income test 

found in the regulations makes the regulations ineffective as applied to 

ASARCO. As support for its theory of inconsistency between the statute 

and the regulations, ASARCO points out that section 84-1503 was amended 

in 1974, and the amended statute conforms to the regulations. 

In the construction of an amendatory act it will be presumed 

that the legislature, in passing it, intended to make some change in the 

existing law, and therefore the Court should endeavor to give effect to 

the amendment. Pilgeram v. Hass et al., 118 Mont. 431, 167 P.2d 339; 

Nichols v. School District No. 3, 87 Mont. 181, 287 P.624. However this 

presumption of change is not conclusive. This Court stated in School District No. 12 v. Pondera County, 89 Mont. 342, 297 P. 498, that a change 

in a statute may be made merely to express more clearly the original intent 

of the legislature. Such is the case here. The unamended statute is not 

a model of clear draftmanship in regard to guide1 ines for the apportionment of corporate income. DOR therefore adopted Regulations 1001-1020 

to provide clear guidelines for taxpayer compliance. The legislature thereafter saw fit to clarify the section by the 1974 amendment to section 84- 

1503. The unamended version of section 84-1503 is not in conflict with 

the regulations and therefore ASARCO must report its income in compliance 

with those regulations. 

Regarding ASARCO's second issue, we find the hybrid system of reporting income used by ASARCO to be invalid under section 84-1503. As above, the 

crux of this issue is the interpretation of section 84-1503 and Regulations 

1001-1020. The intent of the legislature in regard to the determination of 

what income is apportionable income is clear and unambiguous. Section 84- 

1503 provides for two methods of accounting for income; separate accounting 

and apportionment. 

Section 84-1503 provides a test for the determination of the correct 
method of accounting to be used by a corporation in reporting its Montana 

corporation license tax. If income from all sources within Montana can "be 

properly segregated from income without the state" then and only then, may 

the separate accounting method be used. Furthermore if the separate accounting method is applicable, total net income must be allocated to source rather 

than the hybrid system used by ASARCO. 

ASARCO recognized its business was unitary in nature in 1962. It 

requested and was granted permission by DOR to discontinue the separate 

accounting system then in use. Hence both parties agree that ASARCO must 

apportion its income and the question becomes what income is included in 

apportionable net income. 

The regulations are clear and simple. All business income is apportionable and nonbusiness income is allocated to source. ASARCO argues that 

certain items of income listed above are nonbusiness income and therefore 

properly deductible from apportionable net income. This contention is incorrect. 

The regulations state that business income includes income derived 

from tangible and intangible property if the acquisition, management, and 

disposition of the property constitute integral parts of the taxpayer's regular trade or business operation. After an in-depth examination of the income in question, we find this income is derived from sources that are 

integral portions of its business. This finding is in direct conflict with 

the district court's finding of fact which state this income is nonbusiness 

income. The test of whether this income is in reality business or nonbusiness 

income is a matter of statutory interpretation. We feel therefore that the 

finding of the district court is in error. We are confronted herein with a 

conclusion of law, rather than a finding of fact. Listed below are examples 

of the relationship of this alleged nonbusiness income to ASARCO. 

1) Royalty Income--The royalty income arose from two sources, 

mine royalties and patent royalties. The mine royalties arose when ASARCO 

leased its Keystone mine in Colorado to an unrelated mining concern. ASARCO 

had operated this mine prior to the leasing. The royalty was computed on the 
basis of mine production. The patent income arose from royalties paid 

for the use of devices developed by ASARCO1s research department. These 

devices were developed initially for ASARCO1s use in its various plants and 

mines. The main item included herein was a vertical feed furnace. 

2) Rental Income. The majority of this income is derived from 

homesites rented to employees working near ASARCO mines and plants. Mr. 

Pecca, an ASARCO official, testified at the DOR hearing: 

"This is the, it's almost exclusively rents received 

from employees working at the company mines which are 

located in remote areas and the company is required 

to provide houses. " 

3) Interest Income--The interest income arose from customers ' notes 

on bonds, U. S. government notes, notes taken on the sale of a plant and 

stock, state and municipal bonds, and time certificates and other commercial 

paper. All were clearly 1 iquid securities and were therefore readily available for use in meeting company obligations and debts. 

4) Gains on the Sale of Stock--ASARC0 bought and sold stock in 

various corporations during the years in question. Included within the sales 

were stock of General Cable, Revere Copper, Kennicott Copper, and Hecla 

Mining Company. These corporations are all engaged in the business of either 

producing metal ore or manufacturing the refined product into goods. The 

stock was used by ASARCO for business purposes, such as gaining access to 

raw materials or access to potential customers for its refined metals. 

Therefore all the above income was generated by the unitary business operation 

of ASARCO. 

The concept of including income from the sale of tangible and 

intangible property and income derived from rents, royalties and interest 

within apportionable net income is not new nor unique. In Sperry and Hutchinson Co. v. Department of Revenue, 270 Or. 329, 527 P.2d 729, 731, short 

term securities held to satisfy the need for liquid capital were held to be 

apportionabl e. The Oregon court stated: 

'IS & H argues that because this income is the return on 

an intangible it must be allocated to legal situs. 

Nothing in our former law requires such an arbitrary 
result and our current law expressly prohibits it." 

527 P.2d 731. 

The current law referred to by the Oregon court is in pertinent part 

identical to the DOR regulations here in question. A similar result dealing with short term intangibles was reached in Montgomery Ward & Co., Inc. v. 

Comm. of Taxation, 276 Minn. 479, 151 N.W.2d 294. 

In Cleveland-Cliffs Iron Co. v. Michigan Corporation and Securities 

Commission, 351 Mich. 652, 88 N.W.2d 564, 572, the issue was whether an 

investment portfolio containing certain steel stocks should be included in 

determining the book net worth of the corporation. The court held the stocks 

were closely related to the company's business, quoting with approval from 

Flint v. Stone Tracy Company, 220 U.S. 107, 31 S.Ct. 342, 55 L.Ed. 389: 

"Nor can it be justly said that investments have no 

real relation to the business transacted by a corporation. The possession of large assets is a business 

advantage of great value; it may give credit which will 

result in more economical business methods; it may give 

a standing which shall facilitate purchases; it may 

enable the corporation to enlarge the field of its activities and in many ways give it business standing and 

prestige." 88 N.W.2d 572. 

See also: Great Lakes Pipe Line Co. v. Commissioner of Taxation, 272 Minn. 

403, 138 N.W.2d 612. 

Concerning the final issue, DOR is correct in its contention that 

net income and apportionment factors of six of ASARCO's wholly owned subsidiaries must be included in ASARCO's computation of apportionable net 

income. This is merely an extension of the unitary method of taxation. 

Simply stated, the traditional concept of a combination of various units 

of a corporation for unitary method tax computation is extended to a combination of various related or affiliated corporations. 

In the instant case, the six affiliated corporations are clearly 

separate and distinct from ASARCO. However all are wholly owned by ASARCO 

and share common members of their respective boards of directors with ASARCO. 

A close relationship exists between ASARCO's business operation and the subsidiaries in that the subsidiaries all provide ASARCO with material, services, 

or a market for its products. From the discussion of the individual 
corporation's operations listed below, it is clear the corporations are 

dependent upon each other and each in turn contributes to the other's 

business success. 

1) Federated Metals of Canada--Federated Metals is a Canadian 

corporation which basically operates the same business in Canada as 

ASARCO's American operation. ASARCO provides Federated with certain central 

services such as operations technology and accounting and financial services. 

In addition, sales between the two corporations are significant. 

2) ASARCO Mercanti 1 e Company--ASARC0 Mercanti 1 e is engaged sol ely 

in the purchase and sale of machinery for ASARCO's subsidiaries. All central 

services are provided by ASARCO. 

3) Enthone, Inc. --Enthone is a Connecticut corporation engaged in 

the manufacture and sale of metal finishing chemicals and supplies used in 

metal plating. About 16% of Enthone's raw materials were purchased from 

ASARCO. Central services were provided by ASARCO. 

4) International Metal Company--This company is ASARCO's exclusive 

sales outlet for materials delivered to foreign countries. ASARCO provides 

a1 1 central services. 

5) Lone Star Lead Construction Co.--Lone Star is a Texas corporation engaged in lining tanks with lead for protection against corrosive 

contents. The vast majority of its lead requirements are purchased from 

ASARCO . 

6) Northern Peru Mining Co. --A1 1 production from Northern Peru's 

mines are sold to ASARCO and refined in its plants. 

In addition to the foregoing, Mr. Pecca testified as to other services provided by ASARCO to all its subsidiaries. These include: 

1. ASARCO handles central insurance of the subsidiaries. 

2. Services provided by ASARCO are billed to the subsidiaries, 

including top management. 

3. All United States and state returns are prepared by ASARCO for 

the subsidiaries. 

4. Legal services are provided by ASARCO for the subsidiaries 
whenever necessary. 

5. Essential capital is provided for the subsidiaries, who do not 

go to outside sources without first going to ASARCO. 

Coca Cola Company v. Department of Revenue, 271 Or. 517, 533 P.2d 

788, 790, 792, is on all fours with the instant case. There the Oregon 

court said: 

"The principal issue in this case is whether the income 

from Coca Cola and its wholly owned subsidiaries may 

be combined and the apportionment formula applied to the 

sum to determine the income properly attributable to 

Oregon. " 533 P. 2d 790. 

The Oregon court first stated that in order to properly combine the incomes 

of the parent and subsidiary, the business operation must be unitary. The 

unitary test was defined as whether the business units, or in this case 

corporations, are dependent upon each other and contribute to the operation 

of the other's business. Zale-Salem, Inc. v. Tax Com., 237 Or. 261, 391 

P.2d 601. Unquestionably this test is met in the instant case. The Oregon 

court in Coca Cola Company then stated: 

"We must now decide whether the fact that Coca Cola 

and its wholly owned subsidiaries are organized as 

separate corporate entities precludes the Department 

of Revenue from combining their incomes to reflect 

the true character of their unitary business. We hold 

that it does not. 

"The question is fundamentally one of whether a business should stand in a better position for purposes of 

determining income merely because it chooses to use a 

mu1 tiple corporation organizational scheme. We do 

not feel that it should. We agree with the following 

statement of the California Supreme Court: 

"' * * * [Alccepting, as we must, the application of 

the law to unincorporated wholly controlled branches or 

businesses located in other jurisdictions as set forth 

in Butler Brothers v. McColgan, 17 Cal.2d 664, 111 P.2d 

334; Id., 315 U.S. 501, 62 S.Ct. 701, 86 L.Ed. 991, the 

conclusion is irresistible that the same rule should 

apply to incorporated wholly controlled branches or 

businesses so located. * * *' Edison California Stores 

v. McColgan, supra at 473-74, 183 P.2d at 17." 

The decision of the district court is reversed. This case is remanded 

to the district court with instructions to enter judgment in favor of the 
Montana Department of Revenue in the amount 07 the original defi iency 5 

assessment. 

Chief Justice / i 

Justices