No. 13777
IN THE SUPREME COURT OF THE STATE OF MONTANA
MONTANA BANKERS ASSOCIATION et al.,
Plaintiffs and Respondents,
MONTANA DEPARTMENT OF REVENUE,
Defendant and Appellant.
Appeal from: District Court of the First Judicial District,
Honorable Gordon R. Bennett, Judge presiding
Counsel of Record:
For Appellant:
R. Bruce McGinnis argued, Helena, Montana
For Respondents:
Hughes, Bennett and Cain, Helena, Montana
Luxan, Murfitt and Davis, Helena, Montana
Howard J. Luxan Jr. argued, Helena, Montana
Gough, Shanahan, Johnson and Waterman, Helena,
Montana
Ronald Waterman argued, Helena, Montana
Church, Harris, Johnson and Williams, Great Falls,
Montana
Submitted: March 13, 1978
Decided: JuN - 7 19@
Filed: JUW y 197e
Mr. Chief Justice Frank I. Haswell delivered the Opinion of the
Court.
The Montana Department of Revenue (DOR) appeals from
the judgment of the District Court, Lewis and Clark County,
granting summary judgment and declaratory relief to the Montana
Bankers Association (MBA), various member banks, and an individual
shareholder. The substance of the judgment held that stocks,
bonds, treasury notes and other obligations of the United States
held by Montana banks were exempt from taxation under the "Montana
Bank Shares Tax Act", and implementing provisions of the Montana
Administrative Code.
The procedural history of this case commenced on May 3,
1976, when MBA petitioned DOR for amendment of section 42-2.22(20)-
S22400 of the Montana Administrative Code (MAC) relating to com-
putation of the value of bank stock for assessment purposes. The
amendment sought by MBA would specifically provide a deduction of
the value of United States government obligations held by Montana
banks in computing the value of bank shares for assessment pur-
poses. We note parenthetically that on June 25, 1976, a similar
amendment was granted by DOR to competing financial institutions,
specifically building and loan associations, providing a deduction
of the value of United States government obligations owned by them.
Following a public hearing on MBA's petition, the hearing
officer for DOR denied the banks a similar amendment on the ground
that the Montana Bank Shares Tax is a tax on the owners of the
shares rather than a tax on the bank's assets, the bank simply
being a collection agent for the tax with a right of recourse
against the shareholders in the amount of the tax. This decision
was appealed to the State Tax Appeal Board which affirmed.
On September 27, 1976, MBA filed a petition for judicial
review and declaratory judgment in the District Court of Lewis
and Clark County. Following amendment, the petition of MBA sought
(1) amendment of MAC section 42-2.22 (20)-S22400, (2) a declara-
tory judgment allowing a deduction from the assessed value of
bank shares in an amount equal to the value of bank-held United
States obligations, and (3) reversal of the findings, conclusions
and judgment of the State Tax Appeal Board to the contrary. The
thrust of MBA's position was that taxation of obligations of the
United States was prohibited by the federal exemption statute
(31 U.S.C., 8742) and state taxation of such obligations was
unconstitutional and illegal under the "borrowing" and "supremacy"
clauses of the United States Constitution.
DOR answered seeking a declaratory judgment in its favor.
The substance of DORIS position was that the federal exemption
statute was inapplicable, that Montana's Bank Shares Tax Act and
implementing provisions of the Montana Administrative Code were
valid, and that the tax as assessed was collectible. The District
Court granted ~ ~ A ' s
application for an injunction and stay of
collection of the tax during the pendency of the litigation.
All parties filed a written stipulation of facts with
the District Court. E B and DOR each filed a motion for summary
IA
judgment in its favor. The respective motions for summary judg-
ment were submitted to the District Court as the basis of the
agreed facts, briefs and oral argument.
On January 27, 1977, the District Court entered its find-
ings of fact, conclusions of law and judgment. It granted MBA's
motion for summary judgment; denied DORIS motion for summary judg-
ment; vacated the opinion and order of DORIS hearing officer deny-
ing amendment of MAC section 42-2.22(20)-522400; and reversed the
conclusions of law of the State Tax Appeal Board. The essence
of the District Court's judgment was that Montana banks were
" * * * entitled as a matter of law to claim as a deduction and
to deduct on its bank statement for assessment for the taxable
year 1976 those federal obligations owned by it on assessment
day * * *". The District Court's judgment was based on its
conclusion that the federal obligations were exempt from
state taxation under the federal exemption statute; that a contrary
interpretation of state law would violate such federal exemption
statute; and that the federal exemption statute is paramount
and controlling under the Supremacy Clause of the United States
Constitution.
DOR has appealed from the District Court judgment.
This appeal presents a single issue: Is a Montana bank
entitled as a matter of law to claim and deduct for state "Bank
Shares Tax" purposes those United States government obligations
owned by it on tax assessment day?
It is axiomatic that a state may not encroach upon the
borrowing power of the United States government by taxing federal
obligations. This principle is derived from the "borrowing" and
"supremacy" clauses of the United States Constitution and from
the constitutional doctrines announced by the United States
Supreme Court in McCulloch v. Maryland, (1819), 4 Wheat. 316.
A statutory pronouncement of this rule is found in 31 U.S.C. 742:
"742. Exemption from taxation.
"Except as otherwise provided by law, all stocks,
bonds, treasury notes, and other obligations of
the United States, shall be exempt from taxation
by or under State or municipal or local authority.
This exemption extends to every form of taxation
that would require that either the obligations or
the interest thereon, or both, be considered,
directly or indirectly, in the computation of the
tax * * *. [subject to certain exceptions not
relevant to the case on appeal]" (Bracketed phrase
substituted.)
The first sentence of this statute comprised the entire
statute prior to 1959. In 1959 the statute was amended by
adding the second sentence.
An exception to this principle exists where Congress has
consented to the State's imposition of a tax upon stockholders'
interests in a national bank, measured by corporate asset values,
without making any deduction for federal obligations owned by
the banks. 12 U.S.C. 548. Van Allen v. The Assessors, (18651,
3 Wall. 573; National Bank v. Commonwealth, (1869), 9 Mall.
353; Des Moines National Bank v. Fairweather, (1923), 263 U.S.
" * * * This result was reached in part on the
theory that the stockholders' interests in a
corporation represent a separate property interest
from the corporation's ownership of its assets,
so that a tax on the stockholders' interests is
not a tax on the federal obligations which are
included in the corporate property. This rationale
has been carried over to cases involving stock of
state-created banks, and thus a tax on their share-
holders, though measured by corporate assets which
include federal obligations, is held not to offend
the rule immunizing such obligations from state
taxation. (Citation omitted.) Further, in levying
a tax on shareholders, a state may require its pay-
ment by the corporation, as a collecting agent.
(Citation omitted.)" Society for Sav. v. Bowers,
(1955), 349 U.S. 143, 75 S.Ct. 607, 99 L.Ed. 950.
Bowers established the criteria for determining whether
state statutes authorize a valid bank shares tax:
(1) Whether there is a provision entitling the state
to collect the bank shares tax from depositors?
(2) Whether the statute relieves the bank from having
to pay the tax for a depositor who withdrew his account between
tax assessment day and collection day, or if the bank is required
to pay, is it entitled to reimbursement from the depositor?
(3) If the tax is on the depositor, does the bank have
the right to make itself whole, i.e. is there an express or
implied right of reimbursement?
We conclude that Montana's statutes imposing a bank shares
tax comply with these guidelines in Bowers.
All of the foregoing cases were decided before the 1959
amendment to 31 U.S.C. 742. That amendment added the following
sentence to the federal exemption statute:
"This exemption extends to every form of taxation
that would require that either the obligations or
the interest thereon, or both, be considered,
directly or indirectly, in the computation of the
tax * * * [subject to certain exemptions not relevant
to the case on appeal]". (Bracketed phrase substituted.)
The language of the 1959 amendment is clear, unambiguous,
direct and certain. The plain language provides an exemption
to every form of state taxation that requires United States
obligations or interest to be considered directly or indirectly
in the computation of the tax. The statute speaks for itself.
DOR argues that the federal exception statute must be
construed strictly against the taxpayer, citing a line of cases
holding that tax statutes granting exemptions and deductions must
be strictly construed against the taxpayer claiming them. This
rule of statutory construction, however, applies only to ambiguous
statutes where legislative intent is not clear from the language
of the statute and has no application where, as here, the meaning
of the statute is clear from its language.
Our holding is further strengthened by House Report No.
1148, September 3, 1959 and Senate Report No. 909, September 5,
1959. The Senate Report and Conference Report on the 1959 amend-
ment indicates five purposes of the amendment, one of which reads
as follows:
"Fourth, the bill makes it clear that both the princi-
pal and interest on U. S. obligations are exempt
from all State taxes except nondiscriminatory franchise,
etc., taxes."
In more detail the Report continues with this language:
"D. CLARIFYING EXEMPTION OF U. S. OBLIGATIONS FROM
STATE OR LOCAL TAXATION
"Present law provides that obligations of the United
States are to be exempt from taxation by or under
State or local authority. The Supreme Court has
held that this includes the exemption of interest on
U. S. obligations from taxation by or under State or
local authority. It has been pointed out to your
committee, however, that one State has taken the posi-
tion that the statute as now worded does not prohibit
a State from including interest on Federal obligations
in computing 'gross income' upon which taxable net
income is determined. The bill (sec. 105) makes it
clear that the exemption for Federal obligations
extends to every form of taxation that would require
either the obligation, or the interest on it, or both
to be considered directly or indirectly in the com-
putation of the tax, except nondiscriminatory franchise
taxes (or other nondiscriminatory nonproperty taxes
imposed in lieu thereof) on corporations and except
estate or inheritance taxes."
Thus, it appears to us that Congress intended to prohibit
state inroads on the federal exemption statute by enacting an
all-inclusive prohibition against any form of state taxation
that requires United States obligations to be considered, direct-
ly or indirectly, in computing the state tax.
We note that neither the applicable Montana statutes
nor administrative regulations expressly authorizes a deduction
for the value of federal obligations in computing the bank shares
tax. However, the Montana statute must be construed as permitting
such deduction and administrative regulations to the contrary must
fall. Any other construction would violate the federal exemption
statute and be unconstitutional under the Supremacy Clause of
the United States Constitution.
The judgment of the District Court is affirmed.
\
Chief Justice
We concur:
District
Mr. Justice Daly and Mr. Justice Shea, dissenting.
We dissent to
our views in a written
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