Court Opinion

ID: 9838312
Source: CourtListenerOpinion
Date Created: 2023-09-05 21:06:38.42101+00
Date Added: 2024-06-11T17:28:00.446475
License: Public Domain

09/05/2023

                                         DA 21-0570
                                                                                          Case Number: DA 21-0570

              IN THE SUPREME COURT OF THE STATE OF MONTANA
                                        2023 MT 168

FRANKLIN S. & JANET L. TIEGS (PTE)
BAKER PRODUCE, INC.,

               Petitioners and Appellees,

         v.

STATE OF MONTANA,
DEPARTMENT OF REVENUE,

               Respondent and Appellant.

APPEAL FROM:           District Court of the First Judicial District,
                       In and For the County of Lewis and Clark, Cause No. BDV-2021-70
                       Honorable Michael F. McMahon, Presiding Judge

COUNSEL OF RECORD:

                For Appellant:

                       Katherine E. Talley, Matthew T. Cochenour, Montana Department of
                       Revenue, Helena, Montana

                For Appellees:

                       Sean Morrison, Morrison Law Firm, PLLC, Helena, Montana

                                                  Submitted on Briefs: July 27, 2022

                                                             Decided: September 5, 2023

Filed:

                                 Vor-64w—if
                       __________________________________________
                                         Clerk
Justice Jim Rice delivered the Opinion of the Court.

¶1     The Department of Revenue (Department) appeals from the Order on Judicial

Review entered by the First Judicial District Court, which reversed the determination of

the Montana Tax Appeal Board (MTAB) upholding the Department’s decision to deny

nonresident taxpayers Franklin S. and Janet L. Tiegs a carryover net operating loss (NOL)

deduction on their 2014 and 2015 Montana income tax returns, concluding § 15-30-2119,

MCA, was unconstitutional because it authorized taxation of non-Montana income. We

reverse, and state the issues as follows:

       1. Did the District Court err by holding that the general use of out-of-state income
          within the Montana income tax framework violated § 15-30-2102, MCA, and
          federal constitutional principles?

       2. Did the District Court err by holding that § 15-30-2119, MCA, the NOL statute,
          constitutes impermissible taxation of income outside of Montana’s jurisdictional
          reach?

                  FACTUAL AND PROCEDURAL BACKGROUND

¶2     Franklin and Janet Tiegs (Tiegs) are nonresidents.      Franklin Tiegs owns two

businesses, Baker Produce, Inc. (Baker), and Jore Corporation (Jore), and he is the sole

shareholder of both. Baker is a Washington corporation that processes, packages, and

markets produce, and operates an orchard business. Jore is a Delaware corporation that

has its principal place of business in Ronan, Montana, and designs and manufactures power

tool accessories and hand tools.      Both are treated, by election, as individual small

businesses or “S.” corporations pursuant to I.R.C. § 1361 and §§ 15-30-3301, et seq., MCA,

                                             2
and therefore the income and losses from both businesses pass through to Franklin and

Janet Tiegs and are reported on their individual income tax returns.1

1
   Section 15-31-101, et seq., MCA, defines the business organizations that are subject to the
Montana corporate income tax. While S. corporations come within the definition of business
organizations subject to corporate taxation, see § 15-30-101(1), MCA, § 15-30-3302(1)(b), MCA,
provides that an S. corporation’s income or losses may pass through to the entity’s shareholders
and be taxed under Chapter 30, individual taxation, and thus, “an S. corporation is not subject to
the taxes imposed in Title 15, chapter 30 or 31.” Instead, “each shareholder of an S. corporation
. . . is subject to the taxes provided in this chapter, [individual taxation] if an individual, trust, or
estate.” Section 15-30-3302(2), MCA. (Emphasis added.) A shareholder of an S. corporation is
subject to “the taxes provided in Title 15, chapter 31 [corporate taxation], if a C. corporation.”
Section 15-30-3302(2), MCA. As noted, Franklin Tiegs is an individual shareholder, not a C.
corporation, and therefore the Tiegs are subject to taxation for S. corporation pass-through income
and losses on their joint return under Title 15, chapter 30, governing individual taxation.
          In this regard, we note Tiegs’s brief argument that individuals may not constitutionally face
harsher taxing requirements than corporations, citing Comptroller of the Treasury v. Wynne, 575
U.S. 542, 553-56, 135 S. Ct. 1787 (2015), and thus asserting that S. corporation taxation,
specifically, the NOL formula applicable to individuals in pass-through, cannot be stricter than the
NOL formula available to C. corporations. However, Comptroller does not stand for the broad
proposition for which Tiegs offer it. The question presented in Comptroller pertained to a
Maryland tax statute that provided fewer income tax credits for individuals conducting interstate
activity than those conducting only intrastate activity. Wynnes were Maryland residents who
owned stock in Maxim Healthcare Services, Inc., an S. Corporation with income from 39 states
that passed through to the Wynnes. Under the Maryland statute, individuals with Maryland-only
activity could obtain an income tax credit against the two-pronged Maryland taxing scheme, the
first prong being the Maryland State tax and the second prong being the Maryland county-specific
tax. While the Wynnes’ interstate income qualified for an income tax credit against prong one,
the Maryland State tax, they were disallowed from a credit against prong two, the Maryland county
specific tax, while intrastate income would have qualified under both prongs. The U.S. Supreme
Court determined that the tax statute violated the Commerce Clause because it created a
disincentive for individuals to conduct interstate activity. See Comptroller, 575 U.S. at 565-67.
In its Opinion, the Supreme Court considered propositions raised by the Dissent, including one
that noted the distinction between taxes on corporations and on individuals. In so doing, the
Comptroller majority observed that the distinction between individuals and corporations alone
would not be the decisive factor of constitutionality. See Comptroller, 575 U.S. at 553 (“[I]t is
hard to see why the dormant Commerce Clause should treat individuals less favorably than
corporations.”). While the Court’s Opinion could be read as undermining the proposition that the
Commerce Clause provides less protection for natural persons than corporations, it did not broadly
hold, as Tiegs suggest, that individuals and corporations must be subjected to the same taxing
requirements. Therefore, we do not consider the argument further.

                                                   3
¶3     In 2009, Baker purchased business operating equipment from Jore, and then leased

the purchased equipment back to Jore. The equipment continued to be sited in Montana.

This purchase and leaseback (Jore Lease) effectuated a $16 million investment in Jore’s

operations and was Baker’s only Montana economic activity. Outside of the 2009 Jore

Lease, Baker and Jore are not connected other than by their common shareholder. For each

year between 2009 and 2013, Jore earned and reported Montana source income from its

Montana operations.       Also for those years, Baker depreciated the equipment it had

purchased as a business expense, and thus reported a Montana source loss from that

expense for each individual year. Baker advised the Montana Department of Revenue that

leasing the equipment to Jore was an activity unrelated to and not within Baker’s “normal

course of business.” From 2009-2013, Baker’s Montana source losses generated by the

depreciation of the equipment under the Jore Lease were greater than Jore’s Montana

source income, and thus, Tiegs’s Montana tax returns reported no Montana source income

for each individual year in that period, and Tiegs incurred no Montana income tax liability

in each of those years.

¶4     In 2014 and 2015—the years of the current dispute—Jore and Baker had Montana

source income that was not reduced to zero by Baker’s depreciation expense under the Jore

Lease, or other deductions, and thus generated potential pass-through income to the Tiegs

in those years. However, instead of reporting this as Montana source income on their

returns, the Tiegs claimed to “carry forward” raw excess Montana losses incurred for years

2009-2013, or, in other words, losses beyond those they had used to completely offset their

                                            4
Montana income during those years, and directly applied these losses against their Montana

source income for 2014 and 2015, thus lowering their Montana income in these years to

zero. As will be discussed further herein, in taking this claimed deduction and carryover,

Tiegs did not utilize the statutory formula governing the deduction and carry-forward of a

“net operating loss” that is part of the calculation of taxable income. Rather, they asserted

entitlement to a Montana-specific carryover of raw Montana losses from prior years that

would reduce their current year Montana income without regard to the operation of these

statutory provisions.2

2
  Technical issues related to the Tiegs’s tax return filings give rise to arguments over several
ancillary issues, none of which are determinative of the outcome. First, no findings were entered
in the proceeding, either by MTAB or the District Court, regarding the specific amount of the prior
years’ excess losses that Tiegs carried forward to reduce their reported 2014 and 2015 income to
zero. MTAB simply found that “nothing was reported” as income on Tiegs’s Montana income tax
returns for those years because they claimed a carryforward deduction. For their part, Tiegs’s
briefing offers simply that “Tiegs’ losses from 2009 and 2013 greatly exceeded their Montana
source income.” As the parties do not dispute that Tiegs had some amount of raw losses during
the individual years from 2009-2013 in excess of those which they used to offset their income in
those individual years, which they are now attempting to carry forward and apply directly to their
2014 and 2015 Montana income calculation, we conclude determination of the specific amount is
unnecessary to resolve the issues raised here.
        The manner in which Tiegs’s completed their 2009-2013 returns, simply listing their
Montana income as zero, prompts the Department’s argument faulting the Tiegs for “not
report[ing] an NOL on their Montana individual tax returns in any year from 2009-2013.” In other
words, the Department asserts Tiegs’s annual returns during those years failed to indicate the NOL
they claimed to have accumulated and the amount they were carrying forward each year—
assuming a proper NOL deduction was available to them under the statutes. Tiegs respond that
the Montana tax return forms did not ask for or provide a space for such calculations or disclosures,
but merely provided a line to declare their income amount, which they listed as zero. We cannot
fault Tiegs for failing to provide information on their returns that was not requested by the
Department. The Department’s audit of the returns brought the issue to light.
        Finally, the Department argues that Tiegs are attempting to improperly “double count”
their losses in violation of § 15-30-2104(1)(b), MCA (the nonresident tax statute “does not permit
any items of income, gain, loss, deduction, expense, or credit to be counted more than once in
determining the amount of Montana source income”). (Emphasis added.) This argument can be
confusing because, under the factual assumptions discussed above, Tiegs are not attempting to
                                                 5
¶5     The Montana Department of Revenue first confronted this issue in this case during

an audit of the Tiegs’s 2014 and 2015 Montana income tax returns. The Department

disallowed Tiegs’s carry-forward of raw losses for those years and determined Tiegs had

failed to properly declare their Montana income and pay appropriate taxes.                      The

Department disallowed the Tiegs’s claimed deduction because, while Tiegs had properly

deducted their Montana losses during individual tax years from 2009 to 2013, they did not

qualify under the Montana NOL and nonresident taxation statutes in those years for

carryforward of an NOL deduction to succeeding years.                 The Tiegs challenged the

Department’s audit determination, and the Department of Revenue Office of Dispute

Resolution (ODR) and the Montana Tax Appeal Board (MTAB) affirmed the Department’s

decision. Tiegs appealed to the District Court, arguing primarily that the Department’s

disallowance of the NOL under § 15-30-2119, MCA, the Montana NOL statute, was error

either because the Department incorrectly interpreted and applied the statute to require

consideration of out-of-state income in the NOL calculation or, alternatively, that the

statute’s consideration of out-of-state income within its formula for determining the NOL

deduction was unconstitutional.

deduct the same raw losses in more than one year, but only those losses they did not previously
use to bring their income to zero during 2009-2013. The Department’s double dipping argument
is premised upon its position that Tiegs did not qualify for a properly calculated NOL from
2009-2013 that could be carried forward to 2014 and 2015, that the statute does not permit Tiegs
to carry forward raw Montana-source losses to obtain a deduction in 2014 and 2015, and thus Tiegs
are endeavoring to improperly benefit “twice” from the losses. However, the issue correctly
understood is whether Tiegs are entitled to carry forward unused, raw Montana losses to later
years, and whether any restriction by the State upon doing so is unconstitutional, not that Tiegs are
attempting to deduct the same loss twice.

                                                 6
¶6     The District Court broadly held that the State cannot incorporate out-of-state income

within the income tax framework generally, and particularly within the NOL statute, as to

do so would permit unconstitutional taxation on income outside of the State’s jurisdiction

because these statutes “can result in an increased tax liability based solely on the receipt of

non-Montana source income.” Second, more specifically, the District Court held that the

Department’s utilization of out-of-state income to calculate a nonresident’s Montana NOL

carryover deduction under § 15-30-2119, MCA, functioned as a dollar-for-dollar offset of

a permissible deduction that was unconstitutional, citing Hunt-Wesson, Inc. v. Franchise

Tax Bd., 528 U.S. 458, 120 S. Ct. 1022 (2000), and reasoning, “[t]he effect [here] is no

different than a law that says, ‘For every $1 dollar of out of state income earned, a

taxpayer’s Montana taxable income is increased $1.’” Lastly, the District Court reasoned

that any constitutional defect within § 15-30-2119, MCA, could be cured administratively

by the Department’s adoption of limiting regulations. The District Court’s reasoning will

be further discussed herein.

¶7     On appeal, the Department argues all of the subject statutes constitutionally utilize

out-of-state income within formulas that permissibly determine the measure of a

nonresident’s Montana income tax. The Department argues the District Court erred by

holding that § 15-30-2119, MCA, the Montana NOL statute, constitutes an unconstitutional

dollar-for-dollar offset of a nonresident’s established deduction that must be read to

consider only Montana income.         Lastly, the Department argues the District Court

incorrectly held that any defect within the application of § 15-30-2119, MCA, could be

                                              7
cured by administrative or regulative action.       Because we reverse on the first two

arguments, it is not necessary to reach the last argument.

                              STANDARDS OF REVIEW

¶8     This case involves interpretation of the U.S. Constitution and Montana statutes,

therefore, this Court exercises plenary review. Espinoza v. Mont. Dep’t. of Revenue, 2018

MT 306, ¶ 13, 393 Mont. 446, 458, 435 P.3d 603, 608, rev’d on other grounds, 140 S. Ct.

2246 (2020). The District Court’s conclusions of law are reviewed for correctness.

PacifiCorp v. State, 2011 MT 93, ¶ 15, 360 Mont. 259, 262, 253 P.3d 847. The statutes at

issue are reviewed deferentially, keeping in accord with this Court’s position that “the

interpretation by administrative boards over statutes under their respective domains should

be given deference.” Mont. Soc’y of Anesthesiologists v. Mont. Bd. of Nursing, 2007 MT

290, ¶ 37, 339 Mont. 472, 483, 171 P.3d 704.

                                      DISCUSSION

¶9     As a preliminary matter, we note that Tiegs’s arguments on appeal propose a

disposition of the case on narrower grounds or reasoning than employed by the District

Court, offering that, “Tiegs do not argue it is unconstitutional for Montana to use a

nonresident’s total income in the nonresident ratio [§ 15-30-2104, MCA, nonresident

taxation] or to determine [their] rate of tax [§ 15-30-2103, MCA, rate of tax] . . . . The

Tiegs’s narrow challenge is to the calculation of Montana’s NOL deduction under

§ 15-30-2119, MCA.”       (Emphasis in original.)     In its reply brief, the Department

acknowledges Tiegs’s position that a nonresident’s income is a component of Montana’s

                                             8
income tax framework, and that Montana may constitutionally consider out-of-state

income for some purposes therein, but explains that “because the Department is appealing

the court’s decision, not the Tiegs’s arguments . . . [t]he Department needs this Court to

correct” the District Court’s broader ruling.       We agree with the Department and,

additionally, observe that understanding the framework of the Montana nonresident

income tax, including the operation of the NOL statute therein, is necessary and critical to

a determination of constitutionality.

¶10    The U.S. Supreme Court has held that, “[i]t is not to be disputed that, consistently

with the Federal Constitution, a State may not tax property beyond its territorial

jurisdiction.” Maxwell v. Bugbee, 250 U.S. 525, 539-40, 40 S. Ct. 2, 23-25, 63 L. Ed. 1124

(1919). In Okla. Tax Comm’n v. Chickasaw Nation, 515 U.S. 450, 462-63, 115 S. Ct. 2214,

2222, 132 L. Ed. 2d 400 (1995), the Court stated that a taxing jurisdiction, there the State

of Oklahoma, “may tax all the income of its residents, even income earned outside the

taxing jurisdiction,” but that “[f]or nonresidents, [] jurisdictions generally may tax only

income earned within the jurisdiction.” Chickasaw Nation, 515 U.S. at 462-63, n.11, 115

S. Ct. at 2222. (Emphasis omitted.) However, as the Supreme Court has also explained, a

nonresident taxpayer’s extra-jurisdictional property can be properly utilized in determining

the measure of the assessment of a state tax:

       When the State levies taxes within its authority, property not in itself taxable
       by the State may be used as a measure of the tax imposed. . . . It is only in
       instances where the State exceeds its authority in imposing a tax upon a
       subject-matter within its jurisdiction in such a way as to really amount to
       taxing that which is beyond its authority, that such exercise of power by the
       State is held void. In cases of that character the attempted taxation must fail.
                                                9
Maxwell, 250 U.S. at 539-40, 40 S. Ct. at 24-25. (Emphasis added.) Thus, the question

here ultimately will be, does Montana’s use of out-of-state income within its income tax

framework “really amount to taxing that which is beyond its authority?” Maxwell, 250

U.S. at 539-40, 40 S. Ct. at 24-25. We thus turn to Montana’s framework, and the District

Court’s rulings in that regard.3

¶11    1. Did the District Court err by holding that the general use of out-of-state income
       within the Montana income tax framework violated § 15-30-2102, MCA, and federal
       constitutional principles?

¶12    The calculation of a nonresident’s Montana income tax is governed by several

statutes, is significantly tied in substance and methodology to the calculation of the federal

income tax, and is identical in methodology to calculation of a resident’s Montana income

tax, until the final step in the calculation under § 15-30-2104, MCA. That provision, “Tax

on nonresident,” incorporates the same determinations of income and deductions

applicable to residents, beginning with gross income under § 15-30-2101(10), MCA, and

continuing thereafter. Thus, the same income determination process is applicable to all

taxpayers, resident and nonresident, and we begin our analysis there.

3
  Maxwell was a New Jersey estate case involving a challenge to a state inheritance tax statute.
The statute “ascertained the entire estate,” whether situated in or out of the state, for purposes of
assessing the appropriate rate of tax applicable to estates of that total size, and then assessed the
tax in the proportion that the New Jersey-situated property bore to the entire estate. The U.S.
Supreme Court upheld the statute, reasoning that “[t]he transfer of certain property within the State
is taxed by a rule which considers the entire estate in arriving at the amount of the tax. It is in no
just sense a tax upon the foreign property.” Maxwell, 250 U.S. at 539, 40 S. Ct. at 24-25.

                                                 10
¶13    Section 15-30-2101(10), MCA, defines “Gross income” as “the taxpayer’s gross

income for federal income tax purposes as defined in section 61 of the Internal Revenue

Code, 26 U.S.C. 61 . . .”4 Section 15-30-2110(1), MCA, defines “adjusted gross income”

as “the taxpayer’s federal adjusted gross income as defined in section 62 of the Internal

Revenue Code, 26 U.S.C. 62 . . .,” as further adjusted by certain state-law income additions

and deductions specified in that provision.5                Correspondingly for nonresidents,

§ 15-30-2111, MCA, provides that, “[i]n the case of a taxpayer other than a resident of this

state, adjusted gross income includes the entire amount of adjusted gross income as

provided for in 15-30-2110,” and thus, adjusted gross income is determined in the same

manner for residents and nonresidents. Then, “Taxable income” means “the adjusted gross

income of a taxpayer less deductions and exemptions provided for in this chapter,”

§ 15-30-2101(32), MCA (emphasis added), which necessarily, and notably for this case,

includes the deduction for NOL, in the manner that deduction is calculated in the chapter,

which will be discussed hereinafter. After “taxable income” has been determined, up to

seven tax rates are applied against what is referred to as “brackets” or levels of taxable

income, again “after making allowance for exemptions and deductions as provided in this

4
  We are applying here the language of the versions of the statutes applicable to the years covering
the parties’ dispute. Notably, subsequent legislation has scheduled revision of all of these statutes,
effective January 1, 2024. See generally Chap. 503, Laws of Montana 2021.

5
  For example, “[a] taxpayer who, in determining federal adjusted gross income, has reduced the
taxpayer’s business deductions . . . for which a federal tax credit was elected under the Internal
Revenue Code is allowed to deduct the amount of the business expense paid when there is no
corresponding state income tax credit or deduction, regardless of the credit taken.” Section
15-30-2110(4)(a)(ii), MCA.

                                                 11
chapter.” Section 15-30-2103(1), MCA (2013). For example, the statute provides, “on the

first $2,300 of taxable income or any part of that income, 1%; on the next $1,800 of taxable

income or any part of that income, 2%;” and so on, up to the highest rate of 6.9%.6 Section

15-30-2103(1)(a-g), MCA (2013). The ensuing product(s) of these individual bracket

calculations and their cumulative addition is the amount of a resident taxpayer’s Montana

income tax. The final step for calculation of a nonresident’s Montana income tax is

provided by § 15-30-2104, MCA, which states, “[a] tax is imposed upon each nonresident

equal to the tax computed under § 15-30-2103 as if the nonresident were a resident during

the entire tax year, multiplied by the ratio of Montana source income to total income from

all sources.” Section 15-30-2104, MCA. (Emphasis added.) Thus, the same computation

of the nonresident’s tax is made under § 15-30-2103, MCA, as for a resident. Then, that

amount is multiplied by the ratio of the nonresident’s Montana source income to his total

income from all sources. Expressed in a formula, the nonresident tax is calculated as

follows:

      Total taxable income x tax rate under 15-30-2103 x Montana source income
                                                         Income from all sources

For simple illustration, the Montana income tax for a nonresident with total taxable income

from all sources of $100,000, including $20,000 of Montana source income, would be

$1,380, calculated as follows: $6,900 [$100,000 x 6.9% under 15-30-2103] times

6
 The number of tax rates applied to a particular taxpayer is dependent upon the number of brackets
his or her taxable income covers. See § 15-30-2103, MCA.

                                               12
$20,000/$100,000 [.2] equals $1,380 [$6,900 x .2]. In contrast, the tax for a resident with

$100,000 in all Montana-source income would be $6,900 under § 15-30-2103, MCA. As

can be seen, a non-resident’s non-Montana income is screened out from taxation by

application of the ratio in § 15-30-2104, MCA.

¶14    Consequently, out-of-state income is utilized at multiple points in the determination

of a nonresident’s Montana income tax, including gross income, which incorporates federal

gross income; adjusted gross income, which incorporates federal adjusted gross income

before state-law adjustments; Montana taxable income, which is adjusted gross income less

state deductions, including the NOL, discussed below, against which the tax rate under

§ 15-30-2103, MCA, is multiplied; within the calculation of individual deductions; and

lastly, within the ratio of Montana source income to total income to proportionalize the

Montana income tax to the nonresident’s Montana income.

¶15    The utilization of out-of-state income for purposes of the Montana income tax is

explicitly authorized and “shall be included and considered” to the extent it is permissible

under both the laws and constitutions of Montana and the United States:

       All income except what has been expressly exempted under the provisions
       of this chapter and income not permitted to be taxed under the constitution
       of this state or the constitution or laws of the United States shall be included
       and considered in determining the net income of taxpayers within the
       provision of this chapter.

Section 15-30-2102, MCA. Noting that, by this provision, Montana has incorporated

federal constitutional restraints upon taxation of out-of-state income, the District Court

broadly held that out-of-state income “must be excluded from both elements of net income

                                             13
(adjusted gross income and deductions) or the tax will violate Mont. Code. Ann.

§ 15-30-2102, MCA.” (Parenthesis in original.) In this regard, the District Court further

reasoned, noting that the definition of “taxable income” under § 15-30-2101(32), MCA, is

the adjusted gross income of a taxpayer less deductions and exemptions, that “[t]his

calculation makes sense for federal income tax where the federal government exerts almost

unlimited taxing authority not only across the country but worldwide.          The federal

government can consider all sources of income because it has the authority to tax all those

sources of income. But Montana is constitutionally restrained from taxing income outside

its jurisdiction.” Finally, concluding that Montana had not engaged in “reasonable efforts

[to] properly allocate [] deduction[s] between taxable and tax-exempt income,” citing

Hunt-Wesson, 528 U.S. at 466, 120 S. Ct. at 1027, the District Court held that the State’s

use of out-of-state income within the statutory formula for determination of the NOL

deduction was also unconstitutional.

¶16    In its challenge to these holdings premised upon the tax statutes, particularly,

§ 15-30-2102, MCA, the Department has first argued to this Court that the District Court

erred in statutory interpretation:

       The [D]istrict [C]ourt’s determination that Montana cannot consider out-of-
       state income when determining a taxpayer’s net income is based on its
       misreading of the statutes governing nonresident taxes. The [D]istrict
       [C]ourt seized on a general statutory provision that excludes ‘income not
       [constitutionally] permitted to be taxed’ from net income to essentially
       supersede the statutes that govern nonresident income tax. The court’s
       approach abandoned statutory interpretation principles and led it to ignore or
       omit significant language from these statutes—language that requires the
       Department to consider non-Montana source income for appropriate limited
       purposes.
                                            14
¶17    In response to the Department’s appellate statutory arguments, the Tiegs have

elected not to defend the District Court’s broader ruling that implicated the State’s general

use of out-of-state income within the tax framework. That includes § 15-30-2104, MCA,

the nonresident tax statute, which incorporates out-of-state income within a nonresident’s

taxable income for purposes of the initial calculation step, but then screens that income

back out by way of the ratio for purposes of the final calculation of the nonresident’s

Montana tax. The Department has argued that the District Court’s decision would “render

[§ 15-30-2104, MCA] inoperable.”7 However, except for the particular issue Tiegs have

pursued, there is an essential concession to the Department’s statutory arguments. Tiegs

also state, as noted above, that they “do not argue it is unconstitutional for Montana to use

a nonresident’s total income” generally within the income tax framework. (Emphasis

added.)     Rather, Tiegs have explained that their “narrow challenge” is to the

constitutionality of Montana’s NOL deduction under § 15-30-2119, MCA. For these

reasons, and upon the Department’s arguments, we reverse the broader ruling of the District

Court that appears to prohibit general uses of out-of-state income within the Montana

7
  More specifically, the Department’s argument is that, “[i]f the carryover of Montana source losses
were allowed, as the [D]istrict [C]ourt would have it, but the nonresident tax remained in place,
then carryover losses would reduce the numerator, but not the denominator of the ratio. . . . [T]he
nonresident ratio would be corrupted, and generally result in nonresidents paying proportionately
less than residents, contrary to legislative intent.”

                                                15
income tax structure, which uses we have detailed above, and turn to the particular

challenge Tiegs have pursued on appeal.8

¶18    2. Did the District Court err by holding that § 15-30-2119, MCA, the NOL statute,
       constitutes impermissible taxation of income outside of Montana’s jurisdictional
       reach?

¶19    Net operating losses and their carryover are generally explained by a tax treatise as

follows:

       The Internal Revenue Code permits the carryover of net operating losses
       (NOLs) incurred in one taxable year to offset net income in previous and
       future years. The NOL deduction is a response to what can be the harsh
       results of the annual accounting concept when a taxpayer has gains in some
       years and losses in others. The NOL deduction allows a taxpayer with such
       an uneven pattern of income to bear an equivalent tax burden to the tax
       burden borne by the taxpayer who earns the same amount of income ratably
       over the same period. In effect, the NOL deduction provides a rough form
       of averaging income across a number of years.

                                            .   .    .

       Although all states with corporate income taxes currently provide some kind
       of NOL carryover deduction, there is considerable diversity among the states
       in their treatment of these deductions.

Hellerstein, State Taxation: Third Edition, Chap. 7. Corporate Taxes Measured by Net
Income: The Tax Base, ¶ 7.16 Deduction for Net Operating Losses, (2023 Thomson
Reuters) (footnotes omitted).

8
  The District Court acknowledged, “[i]t is not that Montana must ignore out-of-state income . . .
but rather that Montana is precluded from imposing a tax based only upon receipt of out-of-state
income.” (Emphasis in original.) Having determined that the Montana income tax statutes did so,
particularly the NOL statute, it held the State was engaging in “impermissible taxation of income
outside its jurisdictional reach and [which] conflicts with the Constitution’s Due Process and
Commerce Clauses.”

                                                16
¶20    The Department argues the District Court’s holding that Montana’s NOL statute

constitutes an impermissible taxation of out-of-state income was premised, first, upon an

incorrect understanding of how the Montana tax framework works, including

§ 15-30-2119, MCA, the NOL statute. The Department explains, “[t]o be sure, the

nonresident income tax framework clearly incorporates income from all sources, but not

for the purpose of taxing it,” rather, only as an “initial measure” to determine the tax rate

to be applied, after which the ratio “eliminates out of state income from being taxed.” Tiegs

answer that “[t]he inclusion of non-Montana source income in the Montana NOL

calculation reduces the amount of the deduction and consequently increase[s] the amount

of taxable income.      This is an indirect and unconstitutional tax on a nonresident’s

non-Montana source income,” in violation of the U.S. Supreme Court’s holding in

Hunt-Wesson.

¶21    A correct understanding of how the NOL statute works has been a practical and

legal issue throughout this litigation. Prior to the District Court’s decision, Tiegs’s counsel

argued at length to MTAB, after noting that a tax treatise “calls this one of the most

complex and difficult issues in the area of state taxation,” that Tiegs read Montana’s NOL

statute to say, “Montana calculates a net operating loss, a separate Montana net operating

loss” based only on Montana-source income, such that, “[i]f a taxpayer has a loss in

Montana, they are able to carry forward and offset it against a future Montana tax liability.”

In other words, Tiegs were then arguing that the Montana NOL statute did not incorporate

or consider out-of-state income at all, or, at least, that the statute should be interpreted that

                                               17
way. This interpretation reflects what Tiegs attempted to claim on their tax returns. They

carried over raw, unused Montana losses from 2009-2013 and deducted them directly from

their 2014 and 2015 Montana income amounts, which reduced their Montana income in

those years to zero. However, taking that direct deduction was unauthorized—Tiegs failed

to follow the formula for calculation and carryover of the NOL deduction under the statute,

and thus the Department denied it when conducting the audit.

¶22    Section 15-30-2119, MCA, entitled Net operating loss—computation, provides as

follows:

       A Montana net operating loss must be determined in accordance with section
       172 of the Internal Revenue Code of 1986 (26 U.S.C. 172) or as that section
       may be labeled or amended except that the net operating loss determined
       under section 172(c) of the Internal Revenue Code (26 U.S.C. 172(c)) means
       taxable income, as defined in 15-30-2101, computed with the modifications
       specified in section 172(d) of the Internal Revenue Code (26 U.S.C. 172(d))
       as they relate to items provided for in this chapter.

¶23    26 U.S.C. § 172, the referenced statute authorizing the federal net operating loss

deduction, contains extensive provisions governing the calculation of the amount of net

operating losses, the allowable NOL deduction, and the carryover and carryback of that

deduction.9 Notably, a proper NOL deduction is determined by applying requisite statutory

conditions and restrictions to a net operating loss. The federal statute defines “net operating

loss” as “the excess of the deductions allowed by this chapter over the gross income.”

9
 Modification of the statute by Congress after the years of this dispute limited the federal NOL
deduction to 80 percent of the taxpayer’s taxable income for the taxable year, repealing NOL
carryback, and expanding NOL carryforward. Hellerstein, State Taxation: Third Edition, § 7.16.

                                              18
26 U.S.C. § 172(c). (Emphasis added.) Thus, a federal net operating loss may be present

if the corporation’s or individual’s permissible deductions for the year are greater than the

taxpayer’s gross income for the year. Although linked to 26 U.S.C. § 172, § 15-30-2119,

MCA, departs from the federal statute’s gross income benchmark and instead utilizes

“taxable income.” As discussed above, Montana’s definition of “taxable income” is the

taxpayer’s federal adjusted gross income, as further adjusted by certain state-law income

additions and deductions. This includes out-of-state income and, here, must include

Tiegs’s out-of-state income. Section 15-30-2119, MCA, further correlates with 26 U.S.C.

§ 172 by incorporating the federal statute’s NOL modifications from subsection (d), “as

they relate to items provided for in this chapter.” This is Montana’s NOL formula. In

summary, Montana’s NOL carryover deduction constitutes “the excess of the deductions

allowed by this chapter” over a taxpayer’s taxable income in any given year, subject to

restrictions in amount and ability to carry those forward. Clearly, this statute does not

permit direct carryover of Montana-only raw unused losses for a deduction from Montana

income in future years, without regard to application of statutory parameters for the NOL

deduction, including its application within the taxable income of a taxpayer.10

10
   As stated earlier, all states utilize an NOL deduction, and they do so with varying degrees of
connection to the federal NOL deduction. The “science” or analysis of those varying connections
is called “conformity,” and states are generally categorized as “amount conformity” states, which
allow an NOL deduction strictly in the same amount as the federal NOL deduction, “manner
conformity” states, which allow an NOL deduction calculated with the same methodology as used
by the federal NOL statute, or “hybrid conformity” states, which combine elements of the first two
categories. Hellerstein, State Taxation: Third Edition, § 7.16. Before MTAB, Tiegs
unsuccessfully argued, since abandoned, that Montana was a “manner conformity” state, meaning
that while the Montana NOL deduction was calculated using the same manner or methodology as
                                                 19
¶24    Given this understanding of § 15-30-2119, MCA, the Tiegs’s argument is now that

the inclusion of their out-of-state income within the “taxable income” the State uses to

determine an NOL deduction is unconstitutional. Their contention is based heavily on

Hunt-Wesson, on which the District Court likewise premised its holding. Hunt-Wesson

involved a challenge to California’s taxation of the “unitary” income of a nondomiciliary,

or out-of-state, corporation, which did business both inside and outside the State. A state

may permissibly tax a proportionate share of a nondomiciliary corporation’s unitary

income if “there is a ‘minimal connection’ or ‘nexus’ between the interstate activities and

the taxing State, and ‘a rational relationship between the income attributed to the State and

the intrastate values of the enterprise.’” Hunt-Wesson, 528 U.S. at 464, 120 S. Ct. at 1026

(internal citation omitted). “Unitary income” includes all income from the corporation’s

business activities related to the business occurring in the taxing state, which excludes

“nonunitary income,” or the income that “derives from unrelated business activity which

constitutes a discrete business enterprise.” Hunt-Wesson, 528 U.S. at 461, 120 S. Ct. at

1024-25 (internal citation omitted). Without a connection to the state, a state may not

constitutionally tax nonunitary income. Hunt-Wesson, 528 U.S. at 464, 120 S. Ct. at 1026.

¶25    The provision challenged in the case was California’s interest expense deduction.

While this deduction was generally available to all taxpayers, California “carve[d] out an

exception” and disallowed the deduction in the amount of “nonunitary dividend and

the federal NOL deduction, it included only Montana income. Beyond explaining the workings
of the Montana NOL statute, we need not address this issue to resolve the appeal.

                                             20
interest income” the taxpayer had received. Hunt-Wesson, 528 U.S. at 463, 120 S. Ct. at

1026.    Hunt-Wesson, the nondomiciliary corporation taxpayer, had incurred interest

expenses during the years in question, but California disallowed the available deduction to

the extent Hunt-Wesson had received nonunitary dividend and interest income, or, in other

words, dividend and interest income unrelated to Hunt-Wesson’s business activities within

California, which California could not tax. Hunt-Wesson, 528 U.S. at 464, 120 S. Ct. at

1026.

¶26     The U.S. Supreme Court struck down California’s statute, reasoning that while the

statute did not “directly impose a tax” on nonunitary income, it nonetheless had imposed

an indirect tax on nonunitary income by “den[ying] the taxpayer[’s] use of a portion of a

deduction from unitary income” based upon the taxpayer’s nonunitary income.

Hunt-Wesson, 528 U.S. at 464, 120 S. Ct. at 1026. California had done so by “measur[ing]

the amount of additional unitary income that becomes subject to its taxation (through

reducing the deduction) by precisely the amount of nonunitary income that the taxpayer

has received . . . [F]or that reason, that which California calls a deduction limitation would

seem, in fact, to amount to an impermissible tax.” Hunt-Wesson, 528 U.S. at 464-65, 120

S. Ct. at 1026. (Emphasis added.) (Parenthesis in original.) Consequently, the U.S.

Supreme Court concluded the statute “constitutes impermissible taxation of income outside

its jurisdictional reach . . . [and] violates the Due Process and Commerce Clauses of the

Constitution.” Hunt-Wesson, 528 U.S. at 468, 120 S. Ct. at 1028.

                                             21
¶27    We first address the Department’s argument that Hunt-Wesson is inapplicable

because it involved “corporate tax concepts, including unitary business principles . . . [that]

do not apply to the individual . . . income tax NOL deduction” at issue here. While it is

correct that Hunt-Wesson involved multi-state unitary corporate income and C. corporation

taxation that is not at issue here, we see no reason why the federal constitutional principles

circumscribing a state’s tax jurisdiction do not apply equally to Montana’s tax framework

for nonresident individuals, here taxed individually through S. corporation elections, and

find no basis to reject their application here. The constitutional principle remains, and

cannot be violated by Montana, that a state “may tax all the income of its residents, even

income earned outside the taxing jurisdiction,” but that “[f]or nonresidents, [] jurisdictions

generally may tax only income earned within the jurisdiction.” Chickasaw Nation, 515

U.S. at 462-63, n.11, 115 S. Ct. at 2222. (Emphasis omitted.) We thus turn to Tiegs’s

arguments.

¶28    The Tiegs draw parallels between the California statute and the Montana NOL

statute, and contend the same result should issue as in Hunt-Wesson. They repeat that the

Montana NOL statute works as an “offset,” evoking the U.S. Supreme Court’s reasoning

that the California statute offset an allowable deduction against unitary income by a

dollar-for-dollar amount of impermissibly taxed nonunitary income received by the

taxpayer, acting as an indirect tax. Tiegs argue, “[t]hus, like the interest deduction at issue

in Hunt-Wesson, the Montana NOL deduction is an ‘offset deduction’ which

‘impermissibly tax[es] extra-jurisdictional income.’” In sum, Tiegs’s position is: because

                                              22
the Montana NOL formula utilizes “taxable income,” which includes their income from all

sources, to determine their eligibility for, and amount of, an NOL deduction, that deduction

is reduced or eliminated, thereby increasing their taxable income and indirectly taxing their

out-of-state income. However, neither the Tiegs’s offered parallels to Hunt-Wesson nor

their conclusions hold up.

¶29    The challenged statute in Hunt-Wesson was a generally available deduction statute

from which California had “carve[d] out an exception” and reduced the deduction

dollar-for-dollar for the amount of certain kinds of nonunitary income the corporation had

received in the tax year. Notably, a California taxpayer with only California-source income

would not be affected by the “carve-out,” but could claim the full amount of the deduction

without offset. The statute had thus resulted in an “impermissible tax,” because California

had imposed the tax “in such a way as to really amount to taxing that which is beyond its

authority,” that being indirect taxation of unrelated nonunitary income. Maxwell, 250 U.S.

at 539-40, 40 S. Ct. at 24-25. Here, however, unlike in Hunt-Wesson, there are no

“carve-outs,” exceptions or distinctions in the Montana NOL statute linked to income that

cannot be permissibly taxed. There is no “dollar-for-dollar offset” from a generally

permissible deduction for such income. The District Court’s concerns that the tax statutes

“can result in an increased tax liability based solely on the receipt of non-Montana source

income” (emphasis added), and that “[t]he effect [here] is no different than a law that says,

‘For every $1 dollar of out of state income earned, a taxpayer’s Montana taxable income

is increased $1’” (emphasis added), are incorrect assessments of the effect of the statutes.

                                             23
Rather, for all taxpayers, eligibility for an NOL deduction is based upon their “taxable

income,” including all of their income—as with every stage of the tax computation

framework—which is the uniform measure by which the NOL deduction and eligibility for

carryforward are determined. While it is correct that inclusion of Tiegs’s out-of-state

income within the “taxable income” benchmark used by the NOL statute decreases their

eligibility for a Montana NOL deduction and carryforward, that effect does not occur

because the statute targets their out-of-state income, but because “taxable income” is the

uniform measure for the deduction.        That same decrease in eligibility for the NOL

deduction occurs to all taxpayers, including residents, based upon their “taxable income.”

In this regard, the NOL statute is neutral regarding the source and character of income.

“Using federal taxable income for a particular tax year as a starting point for calculating

taxable income in a state does not . . . violate the Constitution.” Somerset Tel. Co. v. State

Tax Assessor, 259 A.3d 97, 110-11, 2021 ME 26 (2020). Thus, while out-of-state income

is incorporated within the formula to determine the NOL deduction, it does not act as a tax

on that income, as the statute did in Hunt-Wesson. See Hunt-Wesson, 528 U.S. at 465, 120

S. Ct. at 1026 (“[T]hat which California calls a deduction limitation would seem, in fact,

to amount to an impermissible tax.”); Somerset Tel. Co., 259 A.3d 97, 110 (In

Hunt-Wesson, “the existence of the out-of-state income in that tax year directly and

explicitly increased the taxpayer’s tax burden for that tax year.”). It is certainly within the

Legislature’s prerogative to set the measure of the income tax by determining the extent to

which a deduction is available, if it has done so in a constitutional manner. Robison v.

                                              24
Dept. of Revenue, 2012 MT 145, ¶ 12, 365 Mont. 336, 340, 281 P.3d 218 (“Tax deductions

are a matter of legislative grace.”).

¶30    Further, the fact that Tiegs’s taxable income includes non-Montana sources does not

subject them to improper taxation because, when calculating their tax using the ratio under

§ 15-30-2104, MCA, their non-Montana source income is screened from taxation,

eliminating that income from Montana taxation and avoiding the indirect but impactful

taxation that had occurred within the tax year in Hunt-Wesson.          This is illustrated

numerically in the simple example provided in Paragraph 13 of Montana’s taxation of a

resident and nonresident. Nonresidents pay Montana income taxes based only on their

Montana-source income.

¶31    It is a correct observation that out-of-state income has an incremental effect upon

the determination of the tax rate under § 15-30-2103, MCA.            This may result in

nonresidents taxpayers being “lifted” into a higher tax rate assessed against their taxable

income, but the Tiegs concede they have “not challenged the use of their total income to

determine the rate of tax,” because “the [U.S.] Supreme Court has expressly allowed a state

to use a nonresident’s income to determine the applicable rate,” in Maxwell. Therefore,

the use of out-of-state income by the Montana NOL statute properly operates, in

conjunction with the entire framework, “as a measure of the tax imposed.” Maxwell, 250

U.S. at 539-40, 40 S. Ct. at 24-25; see also Stevens v. State Tax Assessor, 571 A.2d 1195

(Maine 1990) (“The Stevenses’ contention is that inclusion of their non-Maine source

income to determine the rate at which their Maine income is to be taxed violates their due

                                            25
process, privileges and immunities, and equal protection rights under the Constitution of

the United States. That contention has been squarely addressed and clearly rejected,” citing

Maxwell). (Emphasis in original.)

¶32    We conclude the District Court erred by concluding the NOL statute operates as a

dollar-for-dollar offset provision that indirectly taxes out-of-state income. We conclude

the NOL statute does not “really amount to taxing that which is beyond its authority,” but

rather serves a proper purpose within the tax framework of determining the measure of the

income tax. Maxwell, 250 U.S. at 539-40, 40 S. Ct. at 24-25; see also Somerset Tel. Co.,

259 A.3d 97 (rejecting constitutional challenge to denial of a carryforward NOL by unitary

income taxpayer).

¶33    The District Court’s order is reversed, and the Department’s determination is

reinstated.

                                                 /S/ JIM RICE

We concur:

/S/ MIKE McGRATH
/S/ LAURIE McKINNON
/S/ BETH BAKER
/S/ DIRK M. SANDEFUR

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