Opinion ID: 878336
Heading Depth: 1
Heading Rank: 2

Heading: is section 15-31-116, mca valid?

Text: As we have said, after our decision in First Federal interest income from federal obligations was not includable in the taxable income of corporations subject to the state corporation license tax. Section 15-31-116, MCA, provides, however, that when a corporate taxpayer computes allowable deductions from gross income, those deductions are decreased by a ratio of the federal interest income to all interest income earned by the corporation. This section provides as follows: (1) A corporation, taxable under this part, that excludes interest from gross income which would be taxable except for federal law must adjust its allowable deductions for all taxable periods for which interest is excluded in the following manner: (a) the total amount of interest excluded from gross income by federal law must be determined; (b) the total amount of all interest income from all sources must be determined; (c) the ratio of excluded interest income to all interest income must be determined; and (d) the total deductions allowable under XX-XX-XXX must be reduced by an amount determined by multiplying the amount of deduction otherwise allowable by the ratio of excluded interest to all interest income; however, the product of this calculation may not exceed the amount of excluded interest income. (2) Allowable deductions must be reduced with respect to all corporations that exclude interest income otherwise taxable upon returns filed for all taxable periods for which such exclusion is claimed and for all taxable periods for which a claim for refund is made. In its findings of fact, the District Court found that an algebraic formula adopted by the state department of revenue in 42.23.417 A.R.M. demonstrates how to compute the deductions disallowed on the basis of federal interest income. That formula follows: Exempt Interest Income X Total Deductions = Deductions Disallowed Total Interest Income For the year 1982 (the only year which we are concerned with) BN's total interest income from all sources constituted 1.74% of its gross income; the percentage of BN's total interest income made up of federally exempt income was 20.4%. Application of the section 15-31-116, MCA formula to BN's 1982 interest and expense data produces the following result: $18,328,000 × $4,677,639,000 $ $952,765,750 $89,982,000 Because, however, section 15-31-116, MCA, limits the amount of disallowed deductions to the amount of the federal interest income received, the amount of deductions actually disallowed BN in tax year 1982 is $18,328,000. The District Court found that the effect of the statutory formula, combined with the statutory limit, is to add back to BN's taxable income 100% of BN's federal interest in tax year 1982. The Department of Revenue argues that (1) deductions allowable to compute state taxable income are a matter of legislative grace; (2) there is precedent for section 15-31-116, MCA, in the Internal Revenue Code, 26 U.S.C. 291; and, (3) the exception enacted in 31 U.S.C. § 742 (1976), (now 31 U.S.C. § 3124), shows that federal interest can be taxed in some instances. BN responds that 31 U.S.C. § 3124 forbids circuitous as well as direct attempts to tax federal interest income, citing American Bank and Trust Company v. Dallas County (1983), 463 U.S. 855, 103 S.Ct. 3369, 77 L.Ed.2d 1072 to the effect that Congress intended to sweep away formal distinctions and to invalidate all taxes measured directly or indirectly by the value of federal obligations, except those specified in the amendment. 463 U.S. at ___, 103 S.Ct. at 3377, 77 L.Ed.2d at 1082. We determine that the net effect of section 15-31-116, MCA, is to add back to taxable income interest income from federal obligations for the purpose of determining state corporation license tax. This, states are not permitted to do. Under 31 U.S.C. § 3124 both federal obligations and interest therefrom are exempt from taxation by states directly or indirectly in the computation of tax, unless the tax is specifically excepted in 3124(a)(1) or (2). Because our holding in First Federal was that the corporation license tax was not a franchise tax, section 15-31-116, MCA, standing alone, is invalid. It directly contravenes a federal law and as such violates the supremacy clause of the federal Constitution (Art. VI, Cl. 2).