1ST FED S L v DEPT OF REVENUE
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No. 81-528 IN THE SUPREME COURT OF THE STATE OF MONTANA 1982 FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION, A Federally Chartered Association et al., Plaintiffs and Appellants, DEPARTMENT OF REVENUE et al., Defendants and Respondents. Appeal from: District Court of the First Judicial District, In and for the County of Lewis and Clark Honorable Gordon Bennett, Judge presiding Counsel of Record: For Appellants: Cannon and Sheehy, Helena, Montana Edmund F. Sheehy Jr. argued, Helena, Montana For Respondents: Michael J. Rieley argued, Helena, Montana Submitted: June 28, 1982 Decided: September 23, 1982 Filed: SEP 2 3 2982 Honorable Joel 6. Roth, District Judge, delivered Opinion of the Court. the First Federal Savings and Loan Association of Missoula (Missoula First Federal) and Havre Federal Savings and Loan Association (Havre Federal) (hereinafter also referred to as the "taxpayers") appeal from a summary judgment granted to the Department of Revenue (Department) by the District Court of Lewis and Clark County. We reverse. Missoula First Federal and Havre Federal are federally chartered savings and loan associations doing business in the State of Montana. As such, they are subject to the Montana Corporation License Tax pursuant to the provisions of section 15-31-101(4), MCA. the The Department of Revenue is state agency responsible for the administration and collection of the Montana Corporation License Tax pursuant to section 15-31-111, MCA. These two taxpayers are required annually to pay to the state treasurer 6-3/4 percent of their respective net incomes as a license fee for the privilege of carrying on business in Montana. 101(3), MCA. See sections 15-31-121 and 15-31- Each of these taxpayers filed its Montana Corporation License Tax return for the calendar tax year of 1979. In order to arrive at the net income upon which the tax is based, each taxpayer had deducted from its gross income the interest income it had received from its investments in several federal obligations. Additionally, Havre Federal deducted a net operating loss from prior years which wzs carried over to 1979. After the Department of Revenue received the tax returns for 1979 and examined same, the Department disallowed the deduction for interest income on federal obligations on each tax return and also disallowed the deduction of the net operating loss carryover on Havre Federal's return. The Department computed that Missoula First Federal owed an additional license tax of $12,271.00 plus interest and Havre Federal owed an additional license tax of $47,010.78 plus interest. A notice of the disallowances and resulting tax deficiencies was sent to each taxpayer. Each taxpayer filed a written protest pursuant to section 15-31-503, MCA, with the Department and when the Department refused to reconsider its position, the two taxpayers joined together and filed a declaratory judgment action against the Department on November 12, 1980, in the District Court of Lewis and Clark County, seeking a judicial interpretation of the several state and federal statutes involved plus a judgment declaring part of one state statute relating to the calculation of net operating loss carryovers to be unconstitutional because of its retroactive application. Because only questions of law were raised by the allegations in the complaint and answer, the taxpayers filed their motion for summary judgment on April 3, 1981. Subse- quently, the Department filed its motion for summary judgment. Written memoranda were filed by both sides and oral argument was presented on May 28, 1981. The District Court granted the Department's motion, denied the taxpayers ' motion and issued a summary judgment with a memorandum decision on August 19, 1981. The effect of the District Court's summary judgment was that the interest income from the federal obligations was n o t d e d u c t i b l e f r o m g r o s s income i n a r r i v i n g a t t a x a b l e n e t income, t h a t the n e t operating l o s s incurred years not could be carried over and d e d u c t e d in prior in 1 9 7 9 by Ilavre F e d e r a l and t h a t t h e s t a t e s t a t u t o r y p r o v i s i o n r e l a t ing t o net operating l o s s carryovers did constitutional prohibition of a state statute. It against not violate retroactive the application is from t h a t summary judgment and t h e o r d e r d e n y i n g t h e t a x p a y e r s ' m o t i o n f o r summary j u d g m e n t that the taxpayers appeal, raising the following three i s s u e s f o r a p p e l l a t e review: F i r s t Issue: that interest Did t h e D i s t r i c t C o u r t e r r by d e c i d i n g income from certain federal obligations is i n c l u d a b l e i n n e t income and h e n c e s u b j e c t t o t h e Montana W e hold C o r p o r a t i o n L i c e n s e Tax? t h e r e was e r r o r o n t h i s issue. Second I s s u e : Did t h e D i s t r i c t C o u r t e r r i n d e c i d i n g t h a t t h e Montana C o r p o r a t i o n L i c e n s e Tax i s n o t d i s c r i m i n a tory? We hold that this issue i s moot in view of our d e c i s i o n on t h e f i r s t i s s u e . Third Issue: Did t h e D i s t r i c t C o u r t e r r i n d e c i d i n g t h a t s e c t i o n 1 5 - 3 1 - 1 1 4 ( 2 ) ( b ) ( i i ) ( C ) , MCA, tionally retroactive? We hold there is n o t c o n s t i t u - was error on this issue. FIRST I S S U E The taxpayers contend the following from t h e f e d e r a l o b l i g a t i o n s i n d i c a t e d Montana C o r p o r a t i o n L i c e n s e Tax: is interest income exempt f r o m t h e FEDERAL OBLIGATION U.S. INTEREST INCOME Treasury B i l l s 3,843.65 $ F e d e r a l Home Loan Bank N o t e s 38,120.61 F e d e r a l Land Bank O b l i g a t i o n s 118,325.70 F e d e r a l Farm C r e d i t Bank S e c u r i t i e s 4,695.82 F e d e r a l Home Loan Bank D i v i d e n d s on S t o c k s 48,013.00 F e d e r a l S a v i n g s a n d Loan I n s u r a n c e Corporation-30% of I n s u r a n c e Premium and P a r t i a l Payback The income District from t h e Court, federal income f o r p u r p o s e s o f License U.S.C. Tax, cited in holding 8,475.00 that o b l i g a t i o n s was the interest includable i n net c a l c u l a t i n g t h e Montana C o r p o r a t i o n and relied on a federal statute, 31 S 742 ( 1 9 7 6 ) , which p r o v i d e s a s f o l l o w s : " E x c e p t a s o t h e r w i s e p r o v i d e d by l a w , a l l s t o c k s , b o n d s , T r e a s u r y n o t e s , and o t h e r o b l i g a t i o n s of t h e U n i t e d S t a t e s , s h a l l b e exempt f r o m t a x a t i o n by o r u n d e r S t a t e or municipal or l o c a l authority. This e x e m p t i o n e x t e n d s t o e v e r y f o r m of t a x a t i o n t h a t would r e q u i r e t h a t e i t h e r t h e obligations or the i n t e r e s t thereon, or b o t h , be c o n s i d e r e d , d i r e c t l y o r i n d i r e c t l y , i n t h e computation of t h e t a x , except nondiscriminatory franchise or other nonproperty taxes i n l i e u thereof imposed on c o r p o r a t i o n s a n d e x c e p t e s t a t e taxes or inheritance taxes." The D i s t r i c t C o u r t r e a s o n e d t h a t t h e e x c e p t i o n s t a t e d i n t h e a b o v e f e d e r a l s t a t u t e a p p l i e d t o t h e Montana C o r p o r a t i o n L i c e n s e Tax, which i s a d m i t t e d by t h e p a r t i e s h e r e i n t o be a f r a n c h i s e t a x , and h e n c e t h e i n t e r e s t income f r o m t h e f e d e r a l o b l i g a t i o n s is i n c l u d a b l e i n t h e n e t income w h i c h i s t h e b a s i s upon which t h e l i c e n s e t a x is computed. The t a x p a y e r s had u n s u c c e s s f u l l y c o n t e n d e d i n t h e D i s t r i c t C o u r t t h a t t h e s p e c i f i c f e d e r a l s t a t u t e s which c r e a t e d the federal obligations and authorized their issuance e x p r e s s l y e x e m p t e d b o t h t h e p r i n c i p a l and t h e i n t e r e s t p a i d thereon taxes. from all The state federal taxation statutes o b l i g a t i o n s involved herein, which estate created gift federal i s s u a n c e and S 1 4 3 3 ( 1 9 7 6 ) , 1 2 U.S.C. S 2055 ( 1 9 7 6 ) , 1 2 U.S.C. 5 2134 ( 1 9 7 6 ) a n d 3 1 U.S.C. ( 1 9 7 6 ) , 1 2 U.S.C. and the authorized their c o n t a i n t h e e x e m p t i o n a r e 1 2 U.S.C. S 1 7 2 5 ( e ) ( 1 9 7 6 ) , 1 2 U.S.C. except S 769 5 2079 (1976). Those f e d e r a l s t a t u t e s e x p r e s s l y p r o v i d e t h a t t h e p r i n c i p a l and i n t e r e s t of t h e v a r i o u s f e d e r a l o b l i g a t i o n s a r e exempt from a l l s t a t e t a x a t i o n except c e r t a i n taxes not relevant herein. The Department L i c e n s e Tax is a argued that the Montana Corporation f r a n c h i s e t a x on t h e p r i v i l e g e o f d o i n g b u s i n e s s i n Montana w i t h t h e t a x b a s e d upon o r m e a s u r e d by t h e n e t income o f t h e t a x p a y e r . Hence, i t was a r g u e d , t h a t t h e t a x is n o t on t h e p r o p e r t y ( i n t e r e s t i n c o m e ) b u t is on the privilege. T h i s C o u r t f i n d s t h e argument t o be unper- suasive. It is a d i s t i n c t i o n w i t h o u t a d i f f e r e n c e i n o u r opinion. If t h e f r a n c h i s e t a x is on t h e p r i v i l e g e and t h e t a x i s b a s e d on t h e n e t i n c o m e , t h i s Court concludes t h a t and t h e t a x is on t h e p r i v i l e g e - t h e n e t income. income i n c l u d e s t a x - e x e m p t interest, If the net t h e t a x is on e x e m p t income w h i c h is p r o h i b i t e d by t h e s p e c i f i c f e d e r a l s t a t u t e s c r e a t i n g t h e f e d e r a l o b l i g a t i o n s and g r a n t i n g t h e t a x exemption. The Montana Supreme C o u r t h e l d i n 1 9 7 6 i n t h e case o f S e c u r i t y Bank v. C o n n o r s a n d C o l b o ( 1 9 7 6 ) , 1 7 0 Mont. 5 9 , 550 P.2d 1 3 1 3 , t h a t t h e Montana C o r p o r a t i o n L i c e n s e Tax i s a t a x on n e t income. Department's It a l s o appears t o t h i s Court t h a t including the tax-exempt interest by t h e in net income, t h e Department is s e e k i n g t o t a x i n d i r e c t l y what it cannot tax d i r e c t l y , forth i n v i o l a t i o n of S i n 3 1 U.S.C. Corp. v . N o r b e r g ( R . I . In the 742 t h e general r u l e set (1976). See, Federal Products 1 9 8 1 ) , 429 A.2d 447. F e d e r a l P r o d u c t s Corp. case, a Rhode Island i n d u s t r i a l c o r p o r a t i o n had i n v e s t e d c a s h i n f e d e r a l o b l i g a t i o n s which w e r e exempt f r o m s t a t e t a x e s . The c o r p o r a t i o n was s u b j e c t t o t h e Rhode I s l a n d B u s i n e s s C o r p o r a t i o n T a x , which was n o t a f r a n c h i s e t a x b u t r a t h e r was a t a x on t h e n e t income o f t h e c o r p o r a t i o n . The c o r p o r a t i o n had d e d u c t e d t h e i n t e r e s t income f r o m i t s g r o s s r e c e i p t s i n a r r i v i n g a t t h e n e t income s u b j e c t t o t h e s t a t e t a x . trator refused interest The income lower appeal to to in court the allow the affirmed Rhode deduction corporation's the The t a x a d m i n i s - the Island tax and taxable included net income. administrator Supreme Court, the the but, on interest income f r o m t h e f e d e r a l o b l i g a t i o n s was h e l d t o b e e x e m p t from t h e s t a t e t a x . The d e c i s i o n e m p h a s i z e s t h a t t h e t a x a d m i n i s t r a t o r was a t t e m p t i n g t o d o i n d i r e c t l y what h e c o u l d n o t do d i r e c t l y , i.e., l e v y a s t a t e t a x on i n t e r e s t income f r o m f e d e r a l o b l i g a t i o n s when t h e f e d e r a l o b l i g a t i o n s and t h e i n t e r e s t t h e r e f r o m w e r e e x p r e s s l y d e c l a r e d t o b e exempt from s t a t e t a x a t i o n p u r s u a n t t o 3 1 U.S.C. S 742 ( 1 9 7 6 ) . The Rhode I s l a n d Supreme C o u r t s a i d t h a t a l t h o u g h t h e t a x administrator contended that he included the interest income m e r e l y a s a m e a s u r e t o d e t e r m i n e t h e c o r p o r a t e income t a x d u e t o t h e s t a t e , he o v e r l o o k e d t h e f a c t t h a t t h e amount o f t h e t a x a s s e s s e d was i n c r e a s e d by more t h a n $11,000.00 t h e i n c l u s i o n of t h e t a x - e x e m p t by i n t e r e s t from t h e tax-exempt f e d e r a l o b l i g a t i o n s i n t h e m e a s u r e of t h e t a x . That c o u r t c o n c l u d e d by s a y i n g t h a t t h e o n l y c o n c l u s i o n t o d r a w is t h a t t h e s t a t e t a x was a n i n d i r e c t t a x on e x e m p t f e d e r a l o b l i g a t i o n s and t h e i r i n t e r e s t and hence i n v a l i d . D u r i n g o r a l a r g u m e n t on t h i s a p p e a l , counsel o r a l l y c i t e d the taxpayers1 t h e r e c e n t T e n n e s s e e c a s e of 1 9 8 1 ) , 6 2 4 S.W.2d 551, a s a c a s e f o u n d a f t e r t h e b r i e f s on a p p e a l w e r e f i l e d . That c a s e is c o n t r a r y t o t h e t a x p a y e r s 1 p o s i t i o n h e r e i n . That Bank a n d T r u s t Co. v. G a r n e r (Tenn. Memphis c a s e i n v o l v e d a l o c a l bank e x c i s e t a x which was computed o n the b a n k ' s n e t e a r n i n g s which exempt said federal there statute obligations. was (31 nothing U.S.C. S included The in the 742 i n t e r e s t from t a x - Tennessee general (1976)) or Supreme C o u r t federal in the exemption particular f e d e r a l exemption s t a t u t e s p e r t a i n i n g t o t h e f e d e r a l o b l i gations involved that prohibited t h e s t a t e from m e a s u r i n g t h e bank e x c i s e t a x on n e t e a r n i n g s w h i c h i n c l u d e d i n t e r e s t on f e d e r a l o b l i g a t i o n s . Counsel s t a t e d t h a t t h e c a s e h a s b e e n a p p e a l e d t o t h e U n i t e d S t a t e s Supreme C o u r t and c e r t i o r a r i h a s been g r a n t e d . W e d i s a g r e e with t h e Tennessee court. that It exemption is o u r statute opinion and the both individual the general federal particular federal e x e m p t i o n s t a t u t e s c l e a r l y exempt t h e i n t e r e s t income o f t h e federal obligations involved in the i n s t a n t c a s e from t h e Montana C o r p o r a t i o n L i c e n s e Tax. I n summary on t h e f i r s t i s s u e , w e h o l d t h a t t h e D i s t r i c t C o u r t e r r e d and t h a t t h e i n t e r e s t income r e c e i v e d by the taxpayers on the exempt federal obligations is not i n c l u d a b l e i n n e t income f o r t h e p u r p o s e o f c a l c u l a t i n g t h e Montana C o r p o r a t i o n L i c e n s e Tax. SECOND ISSUE Since we tax-exempt decided federal that the obligations interest income involved from t h e herein is not i n c l u d a b l e i n n e t income f o r t h e p u r p o s e o f computing t h e IJlontana C o r p o r a t i o n L i c e n s e T a x , i s s u e becomes t h e second moot. THIRD ISSUE The D i s t r i c t C o u r t h e l d t h e r e was no u n c o n s t i t u t i o n a l retroactive MCA, a p p l i c a t i o n of section 15-31-114(2)(b)(ii)(C), t o Havre F e d e r a l ' s 1979 t a x r e t u r n . Havre F e d e r a l h a d i n c u r r e d a n e t o p e r a t i n g l o s s i n e a c h o f t h e f i v e y e a r s from 1974 t h r o u g h 1978. Those l o s s e s o c c u r r e d b e c a u s e , p r i o r t o 1 9 7 9 , i n t e r e s t income f r o m f e d e r a l o b l i g a t i o n s was n o t s u b j e c t t o t h e Montana C o r p o r a t i o n L i c e n s e Tax b e c a u s e i n t e r e s t income f r o m s t a t e o b l i g a t i o n s was s p e c i f i c a l l y exempt f r o m said tax. Hence, when H a v r s F e d e r a l d e d u c t e d t h e f e d e r a l i n t e r e s t income f r o m g r o s s income i n a r r i v i n g a t n e t income on i t s t a x r e t u r n s f o r t h o s e e a r l i e r y e a r s , a n e t o p e r a t i n g loss resulted. S e c t i o n 1 - 3 - 1 1 4 ( 2 ) ( b ) ( ) MCA, carrying forward statute Bavre of Federal net operating carried provides for losses. forward its Under net the that operating l o s s e s f r o m 1 9 7 4 t h r o u g h 1 9 7 8 and a p p l i e d same .to i t s 1 9 7 9 I t is t o r e t u r n which r e s u l t e d i n no n e t income f o r 1 9 7 9 . be noted Losses in that 1974 Havre Federal through computed its 1978 p u r s u a n t net to operating the C o r p o r a t i o n L i c e n s e Tax s t a t u t e s t h e n i n e f f e c t . S e c t i o n 1 5 - 3 1 - 1 1 4 ( 2 ) ( b ) ( i i ) ( C ) , MCA, p r o v i d e s : "Any n e t o p e r a t i n g l o s s c a r r i e d o v e r t o a n y t a x a b l e y e a r s b e g i n n i n g a f t e r Decem- Montana ber 31, 1978, must be calculared under the provisions of this section effective for the taxable year for which the return claiming the net operating loss carryover is filed." The Department, acting under the authority of the above-quoted statute, recalculated the net income of Havre Federal for the years 1974 through 1978 based upon the 1979 law, which resulted in the adding back of the deducted federal interest income in each of the earlier years which further resulted in the elimination of the net operating losses for each of the earlier years. Hence, there were no operating losses to carry forward to 1979. It seems clear to this Court that the retroactive application of a 1979 law to the years 1974 through 1978 is unconstitutional. Havre Federal made investment decisions and financial plans based on the tax laws in effect in the years involved. The state cannot change a law in 1979 and compel a recalculation of tax returns filed for 1974 through 1978 based upon the new law effective for the first time in This Court stated in the case of Castles v. State ex , rel. Department of Highways (1980), - Mont. - 609 P.2d 1223, 1225, 37 St.Rep. 734, 736: "A retroactive law is one that takes away or impairs vested rights acquired under existing laws or creates new obligations or imposes new duties in respect to transactions already past." We conclude that section 15-31-114(2)(b)(ii)(C), MCA, is unconstitutional because it requires retroactive application, it is in violation of the uue process clause of the federal and state constitutions, and it imposes a new duty on Havre Federal. CONCLUSION We reverse the District Court's order denying the taxpayers' motion for summary judgment and reverse the District Court's order granting the Department's motion for summary judgment and remand this case to the District Court for the purpose of entering new orders and summary judgment in conformance with this decision. tricy Judge, sitting in place of Mr. Justice Fred J. Weber We concur: %ceg,wm, W e f Justice trict Judge, sittihg in place of Mr. Justice John C. Sheehy I
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