Title: FIRST FED SAV LOAN ASSN v ST
Citation: N/A
Docket Number: 12939
State: Montana
Issuer: Montana Supreme Court
Date: May 7, 1975

No. 12939 I N THE S U P R E M E C O U R T O F T H E STATE O F MONTANA FIRST FEDERAL SAVINGS & L O A N ASSOCIATION O F BILLINGS e t a l . , Petitioners and Respondents, STATE' T A X APPEAL BOARD O F THE STATE O F M O N T A N A , e t a l , , Appellants and Respondents, Appeal from: D i s t r i c t Court of t h e F i r s t J u d i c i a l D i s t r i c t , 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 M r . J u s t i c e Wesley C a s t l e s delivered t h e Opinion of t h e Court. This i s an appeal by t h e Montana Department of Revenue from a judgment of t h e d i s t r i c t c o u r t , Lewis and Clark County, reversing orders of t h e Montana Department of Revenue and t h e S t a t e Tax Appeal Board. This matter was t r i e d on an agreed statement of f a c t s . P l a i n t i f f s a r e s e v e r a l savings and loan associations located i n Montana. I n t h e i r 1972 Montana corporation l i c e n s e t a x r e t u r n s , they deducted from t h e i r gross incomes t h e bad debt reserve authorized by s e c t i o n s 166 and 593, T i t l e 26, United S t a t e s Code. A t t h e same time, they f i l e d amended r e t u r n s f o r t a x years 1967 through 1971, i n which they a l s o claimed t h e bad debt reserve deduction. The Department of Revenue does n o t question t h e amount of t h e bad debt reserve deduction claimed and admits p l a i n t i f f s a r e e n t i t l e d t o use such a deduction i n computing t h e i r f e d e r a l income t a x r e t u r n s . The Department of Revenue disallowed t h e bad debt reserve deduction f o r a l l t a x years i n which it w a s claimed. P l a i n t i f f s perfected a timely appeal t o t h e S t a t e Tax Appeal Board which, a f t e r hearing, found i n favor of t h e Department. P l a i n t i f f s ap- pealed t h a t r u l i n g t o t h e d i s t r i c t c o u r t which entered judgment f o r t h e p l a i n t i f f s , From t h a t judgment, t h e Department of Rev- enue brings t h i s appeal. I n l i g h t of our treatment of t h i s appeal, w e need discuss but one of t h e i s s u e s r a i s e d by appellant: Whether, i n computing t h e i r Montana corporation l i c e n s e t a x e s f o r taxable years p r i o r t o 1973, Montana savings and loan a s s o c i a t i o n s may deduct t h e bad debt reserve authorized f o r such a s s o c i a t i o n s by s e c t i o n s 166 and 593, T i t l e 26, U.S.C.? During t h e tax years i n question, s e c t i o n 84-1504(2), R.C.M. 1947, defined gross and n e t income as: "The t e r n gross income means t h e income from a l l sources within t h e s t a t e of Montana recognized i n t h e determination of t h e c o r p o r a t i o n ' s f e d e r a l income t a x l i a b i l i t y ; but s h a l l include i n t e r e s t exempt from f e d e r a l income tax. The t e r m ' n e t income' means t h e gross income of t h e corporation less t h e allowable deductions. However, t h e def- i n i t i o n s of gross income and n e t income s e t f o r t h i n t h i s s e c t i o n s h a l l not be construed a s allow- i n g t h e deductions s e t f o r t h i n s e c t i o n 243 of t h e Federal I n t e r n a l Revenue Code * * * " 0 This Court r e c e n t l y construed t h a t language i n Lazy J D C a t t l e Co. v. S t a t e Board of ~ q u a l i z a t i o n , 161 Mont. 4 0 , 45, 504 P.2d 287, wherein we s t a t e d : "Thus t h i s Court has c o n s i s t e n t l y held t h a t t h e d e f i n i t i o n of gross income and net income f o r s t a t e corporation l i c e n s e t a x purposes is dependent upon and incorporates by reference t h e provisions of t h e Federal I n t e r n a l Revenue Code except a s expressly provided otherwise, a s i n t h e c a s e of t h e exempt i n t e r e s t exclusion and t h e dividend deduction." Section 84-1502, R.C.M. 1947, reads, i n p e r t i n e n t p a r t : "In computing t h e net income t h e following deductions s h a l l be allowed from t h e gross income received by such corporation within t h e year from a l l sources: I t * * * 'I 2. A l l l o s s e s a c t u a l l y sustained and charged o f f within t h e year and not compensated by insurance o r otherwise * * *". Although s e c t i o n s 1 6 6 and 593 of t h e Federal I n t e r n a l Revenue Code authorize a deduction from gross income f o r a reserve f o r bad debts, t h e i s s u e , more narrowly s t a t e d , becomes whether our Montana Corporation License Tax s t a t u t e s have "expressly provided otherwise'" we hold t h a t s e c t i o n 84-1502 (2) , R.C.M. 1947, has expressly provided otherwise and respondents may not deduct t h e bad debt reserve deduction, authorized by t h e Federal I n t e r n a l Revenue Code, i n computing t h e i r Montana corporation l i c e n s e taxes f o r taxable years p r i o r t o 1973. While it is t r u e t h e Federal I n t e r n a l Revenue Code has broken t h e l o s s provisions i n t o two s e p a r a t e sections, section 165 f o r casualty l o s s e s and section 166 f o r bad debts, it does not n e c e s s a r i l y follow t h a t Montana's s e c t i o n 84-1502(2) r e f e r s s o l e l y t o c a s u a l t y l o s s e s and not t o bad d e b t s . A c l e a r reading of t h e words " A l l l o s s e s " has t h e p l a i n and obvious meaning t h a t a l l l o s s e s , including bad d e b t s , a r e t o be deducted under t h i s s e c t i o n of Montana's code. A bad debt i s a " l o s s " . The predecessor of s e c t i o n 84-1502(2) was enacted by our l e g i s l a t u r e i n 1917. Section 2 , Chapter 79, Laws of 1917. It w a s l i f t e d almost verbatim from Sec. 12(a) of t h e Federal Revenue Act of 1916, 39 S t a t . 767, which read: " I n t h e c a s e of a corporation * * * such n e t income s h a l l be a s c e r t a i n e d by deducting from t h e g r o s s amount of i t s income received within t h e year from a l l sources--- "Second. A l l l o s s e s a c t u a l l y s u s t a i n e d and charged o f f within t h e year and not compensated by insurance o r otherwise * * *." The provisions r e l a t i n g t o corporate deductions d i d n o t s p e c i f i - c a l l y mention bad d e b t s , a s such, u n t i l a s e p a r a t e bad debt pro- v i s i o n w a s added a s Sec. 234(a) of t h e Federal Eevenue Act of 1918, 40 S t a t . 1077. While t h e Revenue A c t of 1916 d i d not spec- i f i c a l l y mention bad d e b t s a s being deductible, t h e r e g u l a t i o n s promulgated pursuant t h e r e t o d i d recognize t h e i r d e d u c t i b i l i t y . A r t . 151 of Regulations No. 33, Revised, 20 Treasury Decisions I n t e r n a l Revenue 126, 199, s t a t e s : "Bad Debts.--Losses which may be properly deducted from g r o s s income on account of bad d e b t s o r doubtful accounts a r e those l o s s e s which have been d e f i n i t e l y a s c e r t a i n e d t o have occurred and which were charged o f f during t h e year f o r which t h e r e t u r n i s made." While Regulations No. 33, Revised, w a s promulgated on January 2 , 1918, following t h e enactment of t h e predecessor of our s e c t i o n 84-1502 ( 2 ) , R.C.M. 1947, a similar i n t e r p r e t a t i o n of Sec. I1 G (b) of t h e Federal Revenue Act of 1913, 38 S t a t . 172, can be found i n A r t i c l e 125 of Regulations No. 33, 16 Treasury Decisions I n t e r n a l Revenue, T.D. No. 1944. Thus, not only t h e p l a i n meaning of t h e words "All l o s s e s " , but a l s o t h e i n t e r p r e t a t i o n given t o t h e f e d e r a l s t a t - i u t e , from whence our s t a t u t e was drawn, i n d i c a t e s t h a t bad d e b t s a r e deductible under s e c t i o n 84-1502(2). I n allowing f o r a deduction f o r bad debts, t h e l e g i s l a t u r e has provided a spec- i f i c method f o r deducting t h e bad debts which must be followed: Bad debts a r e deductible only when "actually sustained and charged o f f within t h e year". Where t h e Montana code has a t - tempted t o s p e c i f i c a l l y d e a l with a p a r t i c u l a r deduction, i n t h i s case bad d e b t s , then t h e provisions of t h e Montana code govern, t o t h e exclusion of methods permitted by t h e Federal I n t e r n a l Revenue Code, i n t h i s case deduction by t h e reserve method. Respondents next contend t h a t s e c t i o n 84-1502(2), R.C.M. 1947, does not l i m i t a l l deductible l o s s e s t o those a c t u a l l y sus- tained during t h e taxable year because i n Lazy J D C a t t l e Co. t h i s Court permitted t h e taxpayer t o c a r r y forward and c a r r y back "losses" pursuant t o t h e net operating l o s s deduction allow- ed by s e c t i o n 172 of t h e Federal I n t e r n a l Revenue Code. The n e t operating l o s s deduction is a d i f f e r e n t concept. It i s not a "loss". The term "net operating l o s s " means t h e excess of a l l - t h e deductions allowed by Chapter 1 of S u b t i t l e A of t h e Federal I n t e r n a l Revenue Code over t h e gross income. That amount can e i t h e r be c a r r i e d back o r c a r r i e d forward according t o t h e pro- v i s i o n s of t h e s t a t u t e . But, an individual bad debt l o s s may not be c a r r i e d back o r forward independently i n and of i t s e l f . Pursuant t o section 84-1502(2), it must be deducted i n t h e year " a c t u a l l y sustained and charged o f f " . I n o t h e r words, i n com- puting t h e n e t operating l o s s f o r any given year t h e bad debt l o s s e s u t i l i z e d i n t h e computation would be only those " a c t u a l l y sustained and charged off within t h e year". The judgment of t h e d i s t r i c t c o u r t is reversed. W e concur: L - r , . cJ \ - M r . Chief J u s t i c e James T. Harrison.