American Telephone & Telegraph Co. v. State Tax Appeal Board

No. 88-521
IN THE SUPREME COURT OF THE STATE OF MONTANA
1990

AMERICAN TELEPHONE & TELEGRAPH COMPANY,
a corp., AT&T TECHNOLOGIES, LNC., a corp.,
and MOUNTAIN STATES TELEPHONE & TELEGRAPH
COMPANY, a corp.,
Plaintiffs and Appellants,
-vs-
STATE TAX APPEAL BOARD OF THE STATE OF MONTANA;
ROBERT S. RAUNDAL, MARY E. HEMPLEMAN, and DALE D.
DEAN, as members of and constitute the State Tax
Appeal Board of the State of Montana; DEPARTMENT OF
REVENUE OF THE STATE OF MONTANA; and JOHN D. LaFAT7ER,
in his capacity as Director of the DEPARTMENT OF
REVENUE OF THE STATE OF MONTANA,
Defendants and Respondents.

APPEAL FROM: District Court of the First Judicial District,
In and for the County of Lewis & Clark,
The Honorable Thomas Honzel, Judge presiding.
COUNSEL OF RECORD:

For Appellant:
Terry B. Cosgrove argued & Michael J. Rieley; Luxan
& Murfitt, Helena, Montana
Dennis Lopach, Mountain States Telephone & Telegraph,
Helena, Montana
For Respondent :

David Woodqerd argued, Dept. of Revenue, Helena, Montana

Submitted: December 5, 1989

.
Decided: February 20, 1990

Filed:
Justice John C. Sheehy delivered the Opinion of the Court.

In this case we hold principally that where corporate
taxpayers are engaged in a unitary business, sales by the
corporations of temporary cash investments are not to be reported
by them for Montana's corporation license tax or income tax
purposes as included in gross sales; and, except for the net gain
from such sales, the total amounts of such sales should be excluded
from the formula determining the unitary businessest income for
Montana Corporation License Tax reporting.
The taxpayers here are American Telephone and Telegraph
Company (AT&T), AT&T Technologies (Technologies), formerly known
as Western Electric, and Mountain States Telephone and Telegraph
Company (Mountain Bell). For the tax years involved, AT&T was the
parent corporation of an affiliated group of corporations whose
operations in Montana consisted of providing intrastate and
interstate telecommunications and related activities. Technologies
is a wholly owned subsidiary of AT&T whose operations in Montana
included the sale of telecommunications equipment. Mountain Bell
provided interstate and intrastate telecommunications services and
related activities in Montana and neighboring states, participated
in furnishing long distance interstate and international
telecommunications, and, for the tax years involved was owned in
excess of 50% by AT&T.
Under a past agreement with the Montana Department of Revenue,
corporation license tax returns for the three companies were filed
2
on a "separate company basis." Each taxpayer filed its own
separate return, separately reported its income and expenses and
paid a corporation license tax based upon its separate activity.
In 1984 the Montana Department of Revenue audited the taxpayers,
by reviewing their records maintained in their respective corporate
headquarter offices in New York, New Jersey, and Colorado. The
Montana Department determined that AT&T and its subsidiaries were
engaged in a unitary business. There is no dispute in this case
that the corporations should be considered as a unitary business.
Montana Department of Revenue proposed a deficiency assessment
on July 11, 1985. The Taxpayers protested the assessment and after
an informal conference, supplied additional supporting information
in a letter dated ~ p r i l17, 1986. After a further conference on
June 8, 1986 between representatives of the Department and the
Taxpayers, the Department issued a final deficiency assessment on
July 14, 1986. Taxpayers paid the tax under protest and litigation
in the District Court, First Judicial District, Lewis and Clark
County ensued.
The issues before the District Court were the proper
computation of the sales factor denominator (hereafter explained);
a proper allowance for the depreciation deduction; proper
allowances for Taxpayerst contributions to its Employee Stock
Ownership Plan (ESOP) and Federal Fuel Tax Payment deductions; a
proper deduction for interest income on United States obligations;
and the proper allocation of monies originally paid as interest
owed on overdue taxes. The District Court affirmed the
determinations of the Department in all respects except one. The
District Court allowed the Taxpayers a deduction for contributions
made to its ESOP and for federal fuel tax payments, and ordered a
refund related to those items. The refund was paid and the
Department did not cross-appeal from the ~istrictCourt order on
those issues. Taxpayers appealed to this Court from the judgment
of the District Court on all of the issues except the decision on
ESOP contributions and federal fuel tax payments.
We determine that the ~istrict Court was correct in its
determinations and therefore affirm the same.
I.
A background explanation of Montana's Corporation License Tax
is necessary.
Every corporation engaged in business in the state of Montana
must pay annually to the state treasurer as a license fee for the
privilege of carrying on business in this state a percentage of
its total net income for the preceding taxable year at the rates
required under our statutes. In the case of corporations having
income from business activity which is taxable both within and
without this state, the license fee is measured by the net income
derived from or attributable to Montana sources as determined under
the Corporation License Tax Act. Section 15-31-101(3), MCA.
Montana, to overcome the difficulty, when a corporation
engages in a unitary business in more than one state, of
determining the corporation's income and expenses generated from
its activities in Montana, has adopted the Uniform Division of
Income for Tax Purposes Act (UDITPA) . Under the UDITPA method,
business income is apportioned to each jurisdiction based on a
three-factor apportionment formula. The factors are property,
payroll, and sales. The property, payroll and sales factors are
expressed as a percentage the Montana property, payroll and sales
bear to the total property, payroll and sales of the business. The
formula may be expressed as follows:

Montana Property + Montana Pavroll + Montana Sales
Total Property Total Payroll Total Sales
= Montana
3 Proportion
of Income %
The business income of the corporation is multiplied by the
fraction to determine the amount of income apportioned to Montana
for corporation license tax purposes.
This formula may be applied to a single corporation operating
a unitary business or to a group of separate corporations operating
as a unitary business. When a unitary business operation is found
to exist among a group of separate corporations, the factors
include the total property, payroll and sales of all companies in
the group. In this case the Taxpayers have stipulated that their
operations for the years 1978 through 1982 constitute a unitary
business and have agreed to the filing of a combined or unitary
return as requested by the Department.
The statutory basis for the formula is 5 15-31-305, MCA, which
provides :
Apportionment of business income. All business income
shall be apportioned to this state by multiplying the
income by a fraction, the numerator of which is the
 property factor plus the payroll factor plus the sales
factor and the denominator of which is 3.
We have interpreted the Montana Corporation License Tax and
UDITPA in Montana Department of Revenue v. American Smelting and
Refining Company (1977), 173 Mont. 316, 567 P.2d 901 appeal
dismissed, 434 U.S. 1042 (1978); Ward Paper Box Company v.
Department of Revenue (1981), 196 Mont. 87, 638 P.2d 1053, vacated
and remanded, 459 U.S. 808 (1982), affld on remand sub nom.
Russell Stover Candies v. Department of Revenue (1983), 204 Mont.
122, 665 P.2d 198, appeal dismissed, 464 U.S. 988 (1983), rehlq
denied, 465 U.S. 1014 (1984); Northwest Airlines v. State Tax
Appeal Board and Department of Revenue (1986), 221 Mont. 441, 720

First Issue: Did the Department of Revenue lawfully exclude
gross receipts from the sale of intangible assets under the sales
apportionment factor of the Taxpayers1 combined unitary tax return?
This issue is narrowed to the denominator for total sales in
the formula for apportionment of unitary business income.
The specific dispute over the computation of the sales factor
relates to gross receipts from the Taxpayers' sale of cash
management investments, referred to as temporary cash investments
(TCI). TCIs represent Taxpayers1 available cash which has been
invested in various instruments, be they commercial paper issued
by corporations, United States Treasury instruments, or other
readily liquidated investments. Such instruments are bought and
sold to accommodate the working capital needs of the Taxpayers.
6
 Taxpayers contend that the total amount received by Taxpayers
on the sale of a TCI should be included in the total sales receipts
of the Taxpayers which serves as the denominator in the sales
factor of the apportionment formula. The example posed by the
Taxpayers is that if the Taxpayers pay $10,000 for an intangible
asset such as a certificate of deposit and sell it for $11,000, the
"gross receipts1'from the sale is $11,000, which is includable in
the sales factor. The position of the Department, on the other
hand, is that with respect to the sales of intangibles, the ''gross
receipts1' for purposes of the sales factor includes only the gain
on the sale; that is, the difference between the cost of the item
and the sale price, or in the example, the gain of $1,000.
Taxpayers claim that the Department's position is inconsistent with
usual treatment afforded to sales of tangible personal property and
has no statutory support.
In examining the contentions of the parties on this issue, the
District Court sided with the Taxpayers insofar as the statutory
definitions are concerned. The District Court stated that business
income is defined in 5 15-31-302(1), MCA, as ''income arising from
transactions and activity in the regular course of the taxpayer's
trade or business and includes income from tangible and intangible
property if the acquisition, management, and disposition of the
property constitute integral parts of the taxpayer's regular trade
or business operations." The District Court further noted that
llsalesll defined in 5 15-31-302(5), MCA, as Itallgross receipts.''
is
The District Court concluded that receipts from temporary cash
investments come within the statutory definition of sales.
The District Court nevertheless concluded that the Department
has statutory authority to exclude the gross figures derived from
the sale of TCIs by the Taxpayers in the pertinent parts of 15-
31-312, MCA:
If the allocation and apportionment provisions of this
part do not fairly represent the extent of the taxpayer's
business activity in this state, the taxpayer may
petition for or the tax administrator may require, in
respect to all or any part of the taxpayer's business
activity, if reasonable:

(2) The exclusion of any one or more of the factors;
(3) The inclusion of one or more additional factors which
will fairly represent the taxpayer's business activities in
this state; or
(4) The employment of any other method to effectuate an
equitable allocation and apportionment of the taxpayer's
income.

Terming the foregoing statutory provision as a "relief
provision" and that the applicable rules are §§ 42.26.261 and
42.26.263, ARM, the ~istrictCourt looked at Appeals of Pacific
Telephone and Teleqraph Com~anv,CCH California Tax Reports, Part
205-858, 14,907-36 through 14,907-43, an administrative decision
from the California State Board of Equalization in 1978.
Addressing a similar problem, the California agency stated the
issue as: "What we must decide, therefore, is whether § 25137
permits respondent to exclude the return of the capital element of
the investment receipts.It The ~aliforniaBoard held:
In this case we think the answer to that question is
clear. The inclusion of this enormous volume of
 investment receipts substantially overloads the sales
factor in favor of New York, and thereby inadequately
reflects the contributions made by all the other states,
including California, which supply the markets for the
communications services provided by Pacific and its
affiliates. Moreover, we are unable to accept, even for
a moment, the notion that more than 11 percent of the
Bell System's entire unitary business activities should
be attributed to any single state solely because it is
the center of working capital investment activities that
are clearly only an incidental part of one of America's
largest, and most widespread businesses. We conclude,
therefore, thatUDITPA1snormal provisions "do not fairly
represent the extent of the taxpayer's business activity
in this state,'' and that respondent is authorized, under
5 25137 to require a deviation from the normal rules.

Another case relied on by the ~istrict Court was ~merican
Telephone and Telesraph Company v. Director, Division of Taxation,
476 A.2d 800 (N.J. Super. A.D. 1984).
But the Taxpayers object to the District Court's reliance on
the relief provision to exclude gross income from TCIs from the
formula. Their argument is that the Department's authority, from
the testimony in the case, was based on a "practice1' of the
Department to exclude such sales figures as to all taxpayers.
Originally, the Department official testified that the Department
had a regulation to support the practice. However it appears that
ARM § 42.26.263 is not by its terms applicable here, and that the
Department cannot retroactively rely on its new regulation, ARM 5
42.26.259(1)(a) which was promulgated by the Department after the
problem in this case arose. Under ARM § 42.26.261(2), the relief
section may be invoked only in specific cases of unusual fact
situations which will be unique and nonrecurring. Taxpayers argue
that if the Department is relying on a "practicew which is an
unwritten internal policy that applies to all taxpayers in all
situations, it is a statement of general applicability that
implements or prescribes a law or policy and thereby is a llrule.ll
Section 2-4-102(10), MCA. Therefore Taxpayers contend that the
Department should have promulgated beforehand a rule of general
applicability, and since it did not, it may not rely on the
In support of this contention, Taxpayers rely on
Patterson v. State Department of Revenue (1976), 171 Mont. 168, 557
P.2d 798; Northwest Airlines v. State Tax Appeal Board and
Department of Revenue (1986), 221 Mont. 441, 720 P.2d 676, and CBS,
Inc. v. Comptroller of the Treasury, Maryland Tax Rep. (CCH) Income
Tax Number 2300 A & B, § 201-305, page 12009 (Dec. 2, 1988). These
cases, Taxpayers contend, require a properly adopted rule as first
necessary to exclude from gross sales the receipts from sales of
TCIs.
Additionally, Taxpayers contend that before the Department
may apply the relief provision statute, the Department, which had
the burden of proof, must first establish that the standard three-
factor formula does not accurately reflect the business activity
of the Taxpayers within the state. Taxpayers argue that the
Department showed nothing in the administrative proceedings before
the District Court of an actual distortion of Montana income
because of the TCIS, and instead relied on a blanket exclusion as
to all taxpayers. The Department claimed it made no difference
whether the distortion was 2 percent or 20 percent, all gross
proceeds from TCIS must be excluded. The United States Supreme
Court held in Container Corporation v. Franchise Tax Board (1983),
463 U.S. 159, 103 S.Ct. 2933, 77 L.Ed.2d 545, that under a due
process challenge, a 14 percent change in taxable income was not
sufficient to permit a change in the apportionment formula.
The District Court did not accept these arguments respecting
the necessity of a rule before the apportionment formula could be
modified. The ~istrict Court looked instead at the goals of
UDITPA, and its effect on multistate taxpayers as applied by the
Department in this type of case. UDITPA was drafted as a practical
means of assuring that a multistate taxpayer is not taxed on more
than its total net income. A basic purpose of the Uniform Act is
uniformity among those states which have adopted it. Atlantic
Richfield Company v. Department of Revenue (Or. 1986), 717 P.2d
613. The Oregon Supreme Court stated in an earlier case that there
are two basic goals in UDIPTA:
(1) Fair apportionment of income among the taxing
jurisdictions; and (2) uniformity of application of the
statutes.
Twentieth Century-Fox v. Department of Revenue (Or. 1985), 700 P.2d
1035, 1039.
Two representatives of the Department testified that the
universally accepted interpretation of tax administrators in UDITPA
states is not to include gross receipts from sales of temporary
cash investments in the sales factor. Otherwise, a substantial
distortion of the Taxpayer's business activity in the state would
result.
Thus the District Court had testimonial support for its
determination that the position of the Department was founded on
statutory authority. Under 5 15-31-312, MCA, if the allocation and
apportionment provisions (the formula) do not fairly represent the
extent of the taxpayer's business activity in the state, the tax
administrator is authorized to require, if reasonable, !'the
employment of any other method to effectuate an equitable
allocation and apportionment of the taxpayer ' s income. While the
Department is authorized and directed to prescribe regulations to
carry out the purposes of 5 15-31-312, MCA, and other parts of the
Act (see 5 15-31-313, MCA), still the statutory goal that the tax
administrator interpret the Act so as to achieve equitable
apportionment of the taxpayer's income generated in the state has
been attained in this case. The Taxpayers here are not being
treated differently from other taxpayers in similar situations.
The repeated investment short term by the Taxpayers in New York of
cash monies, which if not invested would be merely cash on hand or
cash in till, skews the strict application of the formula, because
the gross receipts must be allocated to New York. That
interpretation would not truly reflect the income generated by the
Taxpayers in doing business in Montana. Strict adherence to the
UDITPA formula alone does not result in allocation to Montana a
fair portion of the Taxpayers1 income generated by doing business
in this state. Therefore the relief statute comes into play and
was properly applied by the Department of Revenue. Accordingly,
we uphold the District Court which in turn upheld the position of
the Department of Revenue on this issue.
 Taxpayers state the next issue in this manner:
Is the Taxpayer entitled to claim the amount of
depreciation expense for Montana State Tax purposes that
is statutorily allowable under the Internal Revenue Code
or is it limited to the amount that was claimed on its
federal tax return?
It appears that for 1954 and subsequent years, at the urging
of the Federal Communications Commission, AT&T and the Internal
Revenue Service entered into a closing agreement under which inter-
company profits were eliminated from the regulated telephone
company's consolidated accounts for federal income tax purposes.
Under the provision of the closing agreement, AT&T did not claim
on its federal returns the full amount of depreciation it could
otherwise have claimed under the Internal Revenue Code.
In Montana, for the years from 1967 to 1978, Taxpayers were
filing on a separate company basis, and each Taxpayer was reporting
its full gain from the sale of an asset and deducting depreciation
in the full allowable amount for the asset. As a result, Western
Electric paid a tax to Montana on the actual profit it made from
selling an asset to Mountain Bell and AT&T. Mountain Bell and AT&T
took a deduction on separate Montana returns for the full amount
paid for such assets in conformance with 5 167 of the Federal
Internal Revenue Code, but different from the deduction taken on
the AT&T consolidated federal return which was in compliance with
the closing agreement. When the Montana Department required
Mountain Bell and the other Taxpayers to make a combined state
filing, the depreciation claimed by Taxpayers was not the same as
if they had filed separate returns. ~eductions in the federal
consolidated tax return were computed in accordance with the
closing agreement and not 5 167 of the Federal Internal Revenue
Code. Taxpayers contend that the Montana Departmentls mandated
requirement of a unitary business report denied the Taxpayers the
ability to fully depreciate their assets as 5 167 allowed.
The Montana Department took the position that Taxpayers were
limited to the depreciation deduction reported on line 20 of their
federal income tax return, and not such other deductions as 5 167
of the Internal Revenue Code may permit. Taxpayers contend that
15-31-114(2)(a), MCA, incorporates the Federal Internal Revenue
Code § 167 into Montana law, and thereby allows a taxpayer to take
all the deductions allowed pursuant to 5 167.
Taxpayers further point out that the District Court placed
great weight on the fact that the Taxpayers requested the federal
closing agreement. They also contend that the District Court
confused, or appeared to confuse, the closing agreement with an
llelectionll
authorized under various provisions of the Federal
Internal Revenue Code and that a closing agreement is not such an
election.
The Taxpayers also contend that the applicable regulation
promulgated by the Montana Department in effect during the taxable
years involved here was ARM § 42.23.212(1) which established the
basis for determining gain or loss as the Ifbasisprescribed by the
Internal Revenue Code," and that again, the Department, after this
case was submitted, promulgated a proposal to amend 5 42.23.404,
ARM, to provide that depreciation shall be the same as I1reported
for federal income tax purposes."
Additionally, Taxpayers rely on Baker Bancorportion v.
Department of Revenue (1983), 202 Mont. 94, 657 P.2d 89. That case
confirms that a taxpayer is allowed all federal deductions unless
the Montana legislature provided otherwise.
The statute which is applicable is 5 1 - 3 1 - 1 4 2 (a), MCA,
which allows corporations the following deductions in computing
net business income:

(2)(a) All losses actually sustained and charged
off within the year and not compensated by insurance
or otherwise, including a reasonable allowance for
the wear and tear and obsolescence of property used
in the trade or business, such allowance to be
determined according to the provisions of 9 167 of
the Internal Revenue Code in effect with respect to
the taxable year. All elections for depreciation
shall be the same as the elections made for federal
income tax purposes. No deduction shall be allowed
for any amount paid out for any buildings, permanent
improvements, or betterments made to increase the
value of any property or estate, and no deductions
shall be made for any amount of expense of restoring
property or making good the exhaustion thereof for
which an allowance is or has been made. (Emphasis
supplied.)
The District Court determined that the underlined language in
the above statute sets forth a clear legislative intent that a
corporate taxpayer is required to report the same amount of
depreciation on its state return as it did on its federal return.
The Department concedes that a closing agreement is not an
llelectionll that term is used in the Federal Revenue Codes. This
as
is not conclusive of the issue, however. The clear intent of 5 15-
31-114(2)(a), MCA, is that there should be uniformity in the
depreciation amounts claimed for federal income tax purposes and
for state corporation license tax purposes. We hold that the
statute requires that the same figures be used for depreciation on
the state corporation license tax returns as on the federal income
tax returns and so uphold the District Court.
IV.
Should the Department limit interest expense to the extent
that federal interest income is excluded in the state returns for
1979 thru 1982?
Prior to 1982, corporations filing Montana corporation license
tax returns included in their net income, interest income from
federal obligations.
In 1982, this Court in First Federal Savings and Loan
Association v. Department of Revenue (1982), 200 Mont. 358, 654
P.2d 496, cert den. 462 U.S. 1144, 103 S.Ct. 3128, 77 L.Ed.2d 1378
(1983), held that federal interest income received by corporate
taxpayers was not includable in the net income for purposes of
calculating the Montana tax. Taxpayers state that in conformance
with the First Federal decision, the Taxpayers excluded federal
interest income from their Montana corporation license tax returns.
The legislature responded to the First Federal decision by
enacting § 15-31-116, MCA (1983), which provided an equal reduction
of allowed interest expense for corporations which excluded federal
interest income. To implement 5 15-31-116, MCA, the Department
promulgated two rules, 8 9 42.23.416 and 42.23.417, ARM.
 On November 23, 1984, this Court reversed the First Federal
decision in Schwinden v. Burlington Northern (1984), 213 Mont. 382,
691 P.2d 1351. As part of that decision, this Court determined
that 5 15-31-116, MCA, was unconstitutional. The Court then went
on to discuss the application of the Schwinden case regarding
Montana corporation license tax filings before or after the
issuance of that opinion:
We order that the tax obligations of Burlington Northern,
Inc. for the taxable year 1982 shall be determined under
the Montana corporation license tax as interpreted by
this Court in this Opinion, as well as the corporation's
future Montana corporation license tax returns while said
tax remains in effect. As to all other corporate
taxpayers, filing under the Montana corporation license
tax provisions, their returns shall be filed with taxes
computed according to this Opinion for taxable years
ending after the date of this Opinion and for any
amendment of tax returns for earlier years . . ..

After the Schwinden decision, the Department promulgated
amendments to 3 5 42.23.416 and 42.23.417, ARM and also adopted a
new rule, § 42.23.111, ARM. This last rule required that corporate
filings before the issuance of the Schwinden decision, which had
excluded federal interest income pursuant to First Federal must
still reflect reduced reductions for interest expense as provided
in the statute declared unconstitutional, 15-31-116, MCA.
In a later case (unpublished), this Court in Cause No. 86-
490, entitled Ted Schwinden, Governor of the State of Montana,
Ellen Feaver, Director of Revenue of the State of Montana, Montana
Association of Counties, Montana League of Cities and Towns, Urban
coalition and Montana School Board Association, as plaintiffs vs.
Burlington Northern, Inc., defendant, at the behest of Daniels
County, referred to the foregoing language in Schwinden with
respect to the prospective or retroactive effect of that case as
follows:
As a matter of interpretation of our decision in
Schwinden, the critical factor as to whether income from
federal obligations should betaxed for corporate license
tax purposes under our decision in Schwinden, or under
our decision in First Federal is the date of filing the
corporate tax return by the taxpayer. Returns or amended
returns filed before November 23, 1984 are entitled to
compute their corporate license taxes in accordance with
the decision of First Federal. Returns or amended
returns filed after November 23, 1984, are to have
corporate license taxes computed according to Schwinden.

Daniels County case at 5.
Taxpayers now contend that with respect to their returns filed
prior to the Schwinden decision, November 23, 1984, it is improper
for the Department, under 5 15-31-116, MCA, to offset the interest
expense sustained during the taxable year by the Taxpayers to the
amount of federal obligations income which is deducted from the
Montana returns. They further contend that the application of
the regulations in the ARM are now founded upon a statute, 5 15-
31-116, MCA, which has been held unconstitutional, and so should
have no effect as to the computation of their corporate license
taxes in those applicable years. [Section 15-31-116 has since been
repealed. 5 1, Ch. 125, Laws of Montana (1989)l.
There is possible merit in the contention of the Taxpayers
that the Department is applying regulations founded on an
unconstitutional statute which would be therefore improper.
However, the language of Schwinden applies here and the computation
of the corporate license taxes for the Taxpayers for the years
prior to Schwinden is controlled by the language of the Schwinden
case. The tax returns which the Taxpayers had filed before
Schwinden were for the single entities here involved and not for
the unitary or combined business. The result of the audit of the
years here in question is that the Taxpayers should have filed a
unitary return before Schwinden showing the combined results of the
corporate entities. Thus, the computation of license taxes for the
years involved is being modified substantially because the results
are taken from a unified business now instead of from each of the
separate corporations that made the initial returns. A complete
amendment of the earlier filed returns has occurred, and that
amendment has taken place after November 23, 1984. Therefore,
under Schwinden, the taxes owing shall be computed as an llamendment
of tax returns for the earlier years." On this basis we again
uphold the determination of the District Court.
v.

Does Montana allow the Department to reclassify interest
payments as tax payments?
Because AT&T obtained extensions prior to filing its original
tax returns for the years involved here, it was required to pay
interest on overdue taxes pursuant to 5 15-31-502, MCA. Under the
statute, interest was added at the statutory rate from the date due
until paid.
Under 5 15-31-503 (2), MCA, interest on a deficiency assessment
is computed pursuant to 5 15-31-502.
 Taxpayers argue that all of the interest paid when filing the
original returns must now be reclassified as taxes paid. The
Taxpayers want the interest payment credited against the tax due
under the Department's deficiency assessment of additional
corporate license taxes. The ~istrictCourt concluded that the
statutes relating to interest were clear and that the Taxpayers
could not obtain a credit against the tax deficiency for the
interest previously paid.
The interest which the Taxpayers originally paid for the
single entity returns was computed on the amount of taxes then due
but which were not paid within the statutory period. The
Department is mandated under the provisions of 5 15-31-502, and 5
15-31-503, MCA, to collect interest on the deficiency assessment

amounts at the statutory rate from the date due until paid. The
Department is not empowered under the statutes to reclassify
interest paid as tax paid nor is it authorized to apply the amount
of interest paid as a credit against a deficiency assessment.
It is the contention of the Taxpayers that because the
sections are unclear as to whether the Department has the power to
reclassify such interest payments and consider them as credits
against the taxes, that the statutes must be construed against the
taxing authority and for the Taxpayers. The contention that the
statutes are unclear is based upon the Taxpayers' argument that the
statutes do not prohibit the Department from classifying the
initial payment of interest as tax.
We regard the statutes as affirmatively requiring the
Department to collect interest on overdue taxes when paid, and also
on deficiency assessments when determined.
The District Court reasoned that 5 15-31-502 and 5 15-31-503,
MCA, required interest payments to be treated as the Department
applied them and we uphold the decision of the District Court.
VI .
The judgment of the District Court on all issues upon which
an appeal is taken in this case is affirmed.

'j I Justice I

We Concur: