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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. See sections 15-31-121 and 15-31-

101(3), MCA.

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 The District Court

argument was presented on May 28, 1981.

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, years could t h a t the n e t operating l o s s incurred not be carried over and d e d u c t e d in in prior 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

not violate

the

against

retroactive

application and

is from t h a t summary judgment

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 from certain federal obligations
is

income

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 C o r p o r a t i o n L i c e n s e Tax? 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
W e hold

t h e r e was e r r o r o n t h i s

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
is n o t c o n s t i t u -

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 issue. retroactive?
We

hold

there

was

error

on

this

FIRST I S S U E The taxpayers contend the following
is

interest

income

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:

exempt f r o m t h e

FEDERAL OBLIGATION U.S. Treasury B i l l s

INTEREST INCOME
$

3,843.65 38,120.61 118,325.70 4,695.82 48,013.00

F e d e r a l Home Loan Bank N o t e s F e d e r a l Land Bank O b l i g a t i o n s 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 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 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

8,475.00 the interest

District

Court,

in

holding

that

from t h e

federal

o b l i g a t i o n s was

includable i n net

income f o r p u r p o s e s o f License U.S.C. Tax, cited and

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 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 The
all

state

taxation

except

estate the

and

gift

federal

statutes

which

created

federal

o b l i g a t i o n s involved herein,

authorized their

i s s u a n c e and

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.

S 1 4 3 3 ( 1 9 7 6 ) , 1 2 U.S.C.
5 2079

S 2055 ( 1 9 7 6 ) , 1 2 U.S.C.
S 769

( 1 9 7 6 ) , 1 2 U.S.C.

5 2134 ( 1 9 7 6 ) a n d 3 1 U.S.C.

(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 except c e r t a i n taxes not relevant

from a l l s t a t e t a x a t i o n herein. The Department
is a

argued

that

the

Montana

Corporation

L i c e n s e Tax

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. suasive. opinion.
It

T h i s C o u r t f i n d s t h e argument t o be unperis 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

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 h i s Court concludes t h a t If the net

t a x i s b a s e d on t h e n e t i n c o m e ,

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,

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

by t h e in net

including

the

tax-exempt

interest

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 3 1 U.S.C.

i n v i o l a t i o n of

t h e general r u l e set See, Federal Products

S

742

(1976).

Corp. v . N o r b e r g ( R . I . In the

1 9 8 1 ) , 429 A.2d 447. case, a Rhode Island

F e d e r a l P r o d u c t s Corp.

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 interest The lower to refused income court the to in allow the the deduction The t a x a d m i n i s and included net the

corporation's the tax

taxable

income. but, on

affirmed

administrator Court, the

appeal

Rhode

Island

Supreme

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 e d e r a l o b l i g a t i o n s and

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

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 That c o u r t

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 .

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 Bank a n d T r u s t Co. the taxpayers1 Memphis 551, That That

t h e r e c e n t T e n n e s s e e c a s e of (Tenn.

v. G a r n e r

1 9 8 1 ) , 6 2 4 S.W.2d

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 . 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 .

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 federal was obligations. nothing in 742

included The

i n t e r e s t from t a x Supreme C o u r t exemption particular

exempt said

Tennessee

there (31

the

general

federal in the

statute

U.S.C.

S

(1976)) or

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 . court. exemption
It

W e d i s a g r e e with t h e Tennessee

is o u r

opinion and the

that

both

the

general

federal federal

statute

individual

particular

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 that the interest involved income herein from t h e
is

federal

obligations

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 IJlontana C o r p o r a t i o n L i c e n s e T a x , moot. t h e second

computing t h e i s s u e becomes

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), Havre F e d e r a l h a d

t o Havre F e d e r a l ' s 1979 t a x r e t u r n .

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 statute forward Bavre of net operating provides for Under net the that

losses.
its

Federal

carried

forward

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 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

I t is t o

noted in

that 1974

Havre

Federal

computed

its

net the

operating Montana

Losses

through

1978 p u r s u a n t

to

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-

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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