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 the
Opinion of the Court.
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 Department of Revenue is
the 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 invest-
ments 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 re-
turns 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 ad-
ditional 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 tax-
payers 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 judg-
ment. 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 in prior
years could not be carried over and d e d u c t e d 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 not violate the
constitutional prohibition against retroactive application
of a state statute. It 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: 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
that interest 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
C o r p o r a t i o n L i c e n s e Tax? W e hold 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, is n o t c o n s t i t u -
tionally retroactive? We hold there was error on this
issue.
FIRST I S S U E
The taxpayers contend the following 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 is exempt f r o m t h e
Montana C o r p o r a t i o n L i c e n s e Tax:
FEDERAL OBLIGATION INTEREST INCOME
U.S. 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 8,475.00
The District Court, in holding that the interest
income 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 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
License Tax, cited and relied on a federal statute, 31
U.S.C. 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 from all state taxation except estate and gift
taxes. The federal statutes which created the 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 4 3 3 ( 1 9 7 6 ) , 1 2 U.S.C.
S 1 7 2 5 ( e ) ( 1 9 7 6 ) , 1 2 U.S.C. S 2055 ( 1 9 7 6 ) , 1 2 U.S.C. 5 2079
( 1 9 7 6 ) , 1 2 U.S.C. 5 2134 ( 1 9 7 6 ) a n d 3 1 U.S.C. S 769 (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 argued that the Montana Corporation
L i c e n s e Tax is a 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
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.
and If the net
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 exemp-
tion. 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. It a l s o appears t o t h i s Court t h a t by t h e
Department's including the tax-exempt interest 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 , i n v i o l a t i o n of t h e general r u l e set
forth i n 3 1 U.S.C. S 742 (1976). See, Federal Products
Corp. v . N o r b e r g ( R . I . 1 9 8 1 ) , 429 A.2d 447.
In the 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 . The t a x a d m i n i s -
trator refused to allow the deduction and included the
interest income in the corporation's taxable net income.
The lower court affirmed the tax administrator but, on
appeal to the Rhode Island Supreme Court, the 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 admin-
istrator 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 by
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 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 , the taxpayers1
counsel o r a l l y c i t e d t h e r e c e n t T e n n e s s e e c a s e of Memphis
Bank a n d T r u s t Co. v. G a r n e r (Tenn. 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
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 included i n t e r e s t from t a x -
exempt federal obligations. The Tennessee Supreme C o u r t
said there was nothing in the general federal exemption
statute (31 U.S.C. S 742 (1976)) or in the 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. It is o u r opinion that both the general federal
exemption statute and the individual 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 decided that the interest income from t h e
tax-exempt federal obligations involved 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 , t h e second i s s u e becomes
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 a p p l i c a t i o n of section 15-31-114(2)(b)(ii)(C),
MCA, 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, provides for the
carrying forward of net operating losses. Under that
statute Bavre Federal carried forward its net 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 . I t is t o
be noted that Havre Federal computed its net operating
Losses in 1974 through 1978 p u r s u a n t to the Montana
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 applica-
tion, 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 tax-
payers' 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 con-
formance 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