LAZY JD CATTLE CO v ST BOARD OF

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No. 12248 I N THE SUPREME C U T O THE STATE O M N A A OR F F OTN 1972 LAZY J D CATTLE C M A Y e t a l . , O PN P l a i n t i f f s and Respondents, and HERRIN RANCH, I N C . , P l a i n t i f f i n Intervention, - -vs STATE BOARD O EQUALIZATION O T E F F H STATE O M N A A e t a l . , F OTN Defendants and A p p e l l a n t s , Appeal from: D i s t r i c t Court of t h e F i r s t J u d i c i a l D i s t r i c t , Honorable Gordon R. Bennett, Judge p r e s i d i n g . Counsel of Record: For Appellants : Edward Jene B e l l argued, Board o f E q u a l i z a t i o n , Helena, Montana. For Respondents: H 4 d Luxan Helena, Montana. H. J. Luxan appeared, Helena, Montana. John R, K l i n e argued, Helena, Montana. Loble, P i c o t t e and Loble, Helena, Montana. Douglas M. Greenwood appeared, Helena, Montana. Submitted: September 27, 1972 Yr. J u s t i c e Frank I . Yaswell d e l i v e r e d t h e Opinion of t h e C o u r t , P l a i n t i f f s a r e c o r p o r a t e t a x p a y e r s who brought a c l a s s a c t i o n a g d i n s t defendant S t a t e Board of E q u a l i z a t i o n s e e k i n g a d e c l a r a - t o r y judgment e s t a b l i s h i n g t h e i r r i g h t t o n e t o p e r a t i n g l o s s ded u c t i o n s i n computing t h e i r s t a t e c o r p o r a t i o n l i c e n s e t a x e s . The d i s t r i c t c o u r t of Lewis and Clark County, t h e Hon. Gordon B e n n e t t , d i s t r i c t judge, e n t e r e d summary judgment f o r p l a i n t i f f s and denied t h e summary judgment sought by d e f e n d a n t , From t h i s f i n a l judg- ment, defendant S t a t e Board of E q u a l i z a t i o n a p p e a l s . The t h i r t e e n p l a i n t i - f f c o r p o r a t i o n s a r e each s u b j e c t t o payment of f e d e r a l income t a x e s p u r s u a n t t o t h e I n t e r n a l Revenue Code, T i t l e 2 6 , U.S.C., and t o Montana c o r p o r a t i o n l i c e n s e t a x e s pursuant t o s e c t i o n s 84-1501 through 84-1519, R.C.M. 1947. Each ~ f p l a i n t i f f c o r p o r a t i o n s was l a w f u l l y e n t i t l e d t o a n e t o p e r a t i n g l o s s d e d u c t i o n on i t s f e d e r a l t a x r e t u r n s p u r s u a n t t o t h e I n t e r n a l Revenue Code, 26 U.S.C. § 172, c o v e r i n g one o r more of i t s t a x a b l e p e r i o d s ending on o r b e f o r e December 31, 1970. Each f i l e d Montana c o r p o r a t i o n l i c e n s e t a x r e t u r n s (accompanied by c l a i m s f o r r e f u n d ) f o r t a x a b l e p e r i o d s ending on o r b e f o r e December 31, 1970, and edch claimed n e t o p e r a t i n g Loss d e d u c t i o n s under s e c t i o n 84-1504, %.C.M. 19-47, i n computing i t s s t a t e c o r p o r a t i o n t a x l i a b i l i t y . P l a i n t i f f s a s a c l a s s were given a h e a r i n g b e f o r e t h e S t a t e Soard of E q u a l i z a t i o n and t h e r e a f t e r t h e Board d i s a l l o w e d t h e i r claimed d e d u c t i o n s and r e f u n d s . Having exhausted t h e i r adminis- t r d t i v e remedies, p l a i n t i f f s f i l e d a c l a s s a c t i o n i n t h e d i s t r i c t c o u r t of Lewis and C l a r k county s e e k i n g a d e c l a r a t o r y judgment (1) t h a t t h e c o r p o r a t i o n s were e n t i t l e d t o n e t o p e r a t i n g 1-oss ded u c t i o n s i n computing t h e i r s t a t e c o r p o r a t i o n l i c e n s e t a x l i a b i l i t y , (2) a n n u l l i n g a l l r u l e s , o r d e r s , and a c t i o n s of t h e S t a t e Board o f E q u a l i z a t i o n t o t h e c o n t r a r y , and ( 3 ) such a n c i l l a r y r e l i e f i n dicier of judgment a s a p p e a r s proper. ~ e f e n d a n t ' sanswer i n sub- s t a n c e a d m i t t e d t h e f a c t s concerning what was done, b u t denied t h a t p l a i n t i f f s were e n t i - t l e d t o t h e r e l i e f r e q u e s t e d . U l t i m a t e l y b o t h p a r t i e s moved f o r summary judgment. The d i s t r i c t c o u r t denied summary judgment t o defendant and g r a n t e d summary judgment t o p l a i n t i f f s . The d i s t r i c t c o u r t e x p r e s s l y r u l e d , i n t e r a l i a , t h a t t h e c o r p o r a t i o n s were e n t i t l e d t o n e t o p e r a t i n g l o s s deductions a s computed by them f o r t a x a b l e y e a r s p r i o r t o 1971; d e c l a r e d c e r t a i n r e g u l a t i o n s of t h e Board c o n t r a r y t h e r e t o i n v a l i d ; d e c l a r e d t h e f i n d i n g s , conclusions and o r d e r of t h e Board i n t h e a d m i n i s t r a t i v e proceeding i n v a l i d ; voided Board d e f i c i e n c y assessments of $55,824.14 a g a i n s t s i x of p l a i n t i f f corporati-ons, and cxckredthe Board t o refund $25,627.03 w i t h i n t e r e s t t o t e n of p l a i n t i f f c o r p o r a t i o n s . Defendant S t a t e Board of E q u a l i z a t i o n now a p p e a l s from t h i s f i n a l judgment. The u l t i m a t e i s s u e f o r review i s whether t h e Montana c o r p o r a t i o n l i c e n s e t a x law permits n e t o p e r a t i n g l o s s deductions f o r t a x a b l e y e a r s p r i o r t o 1971, The S t a t e Board of E q u a l i z a t i o n argues t h a t t h e s t a t e c o r p o r a t i o n l i c e n s e t a x law ( s e c t i o n 84-1501, e t s e q . , R.C.M. 1947), both p r i o r and subsequent t o i t s amendment i n 1971, d i d n o t permit n e t o p e r a t i n g l o s s deductions because (1) t h e d e f i n i t i o n s of g r o s s income and n e t income i n s e c t i o n 84-1504, R.C.M. 1947, do n o t i n c l u d e a deduction f o r n e t o p e r a t i n g l o s s e s , (2) s e c t i o n 84-1502, R , C . M . 1947, does n o t s p e c i f i c a l l y provide f o r a n e t o p e r a t i n g l o s s d e d u c t i o n , and ( 3 ) t h e l e g i s l a t u r e i n i t s 1971 amendment i n d i c a t e d t h a t s e c t i o n s 84-1502 and 84-1504 d i d n o t provide f o r n e t o p e r a t i n g l o s s deductions p r i o r t o such amendment, The Board f u r t h e r argues t h a t t o permit such deduction i s t o permit a double allowance f o r t h e same t h i n g , a s such allowance i s already incorporated i n t h e s t a t e corporation l i c e n s e tax a c t , P l a i n t i f f s , on t h e o t h e r hand, contend t h a t they a r e e n t i t l e d t o a n e t o p e r a t i n g l o s s deduction and t o t h e carry-over and c a r r y back p r o v i s i o n s of t h e f e d e r a l income t a x law i n computing t h e i r s t a t e c o r p o r a t i o n l i c e n s e t a x e s f o r t a x a b l e y e a r s p r i o r t o 1971. They argue t h a t g r o s s income and n e t income f o r Montana corporat i o n l i c e n s e t a x purposes i s d e f i n e d w i t h r e f e r e n c e t o t h e Federal l n t e r n a l Revenue Code and by v i r t u e t h e r e o f they a r e e n t i t l e d t o t h e n e t o p e r a t i n g l o s s deduction provided i n T i t l e 26, U . S . C . 9 172, and t h e c a r r y - o v e r and carry-back p r o v i s i o n s t h e r e i n . They f u r t h e r t a k e t h e p o s i t i o n t h a t t h e 1971 amendment by t h e Montana l e g i s l a t u r e r e d e f i n e d "net o p e r a t i n g l o s s " and "net o p e r a t i n g l o s s deduction1' i n terms of s e c t i o n 84-1502, R,C.M. 1947, and a p p l i e d t h i s new d e f i n i t i o n t o l o s s e s o c c u r r i n g i n 1971 and subsequent y e a r s , I n determining t h e i s s u e b e f o r e u s , we n o t e a t t h e o u t s e t t h a t s e c t i o n 84-1504, R.C.M. 1947, i s t h e b a s i s of p l a i n t i f f s ' c l a i m t h a t they a r e e n t i t l e d t o those n e t o p e r a t i n g l o s s deductions a1.lowable under § 172 of t h e I n t e r n a l Revenue Code. Section 84-1504 provides 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 t a x s h a l l b e computed "upon t h e t o t a l n e t income of t h e c o r p o r a t i o n " f o r t h e preceding c a l e n d a r o r f i s c a l y e a r ; d e f i n e s "net income" a s "gross income of t h e c o r p o r a t i o n l e s s t h e allowable deductions"; and d e f i n e s "gross income" a s income from a l l sources w i t h i n t h e s t a t e "recognized i n t h e d e t e r m i n a t i o n of t h e c o r p o r a t i o n ' s f e d e r a l income t a x l i a b i l i t y " i n c l u d i n g i n a d d i t i o n i n t e r e s t exempt from f e d e r a l income t a x . I t s p e c i f i c a l l y provides t h a t t h e d e f i n i t i o n of g r o s s income and n e t income " s h a l l n o t be construed a s a l l o w i n g t h e deductions s e t f o r t h i n s e c t i o n 243 of t h e F e d e r a l I n t e r n a l Revenue Code a s now w r i t t e n , o r a s t h a t s e c t i o n s h a l l be l a b e l e d o r amended. I t Thus t h e l e g i s l a t u r e i n s e c t i o n 84-1504, R.C.M. 1947, p r i o r t o i t s 1971 amendment s t a t e d , i n e f f e c t , t h a t g r o s s income f o r s t a t e c o r p o r a t i o n l i c e n s e t a x purposes means t h e same t h i n g a s g r o s s income f o r f e d e r a l income t a x purposes (excepting i n t e r e s t exempt from f e d e r a l income t a x which i s n o t p e r t i n e n t h e r e ) ; t h a t n e t income f o r c o r p o r a t i o n l i c e n s e t a x purposes i s e q u i v a l e n t t o f e d e r a l g r o s s income l e s s allowable deductions; and, t h a t allowable deductions do n o t i n c l u d e t h e dividend deduction under 9 243 of t h e Federal I n t e r n a l Revenue Code. "Gross income", II n e t income1', and "allowable deductions" f o r s t a t e c o r p o r a t i o n l i c e n s e t a x purposes a r e thus d e f i n e d w i t h r e f e r e n c e t o t h e g e n e r a l s t r u c t u r e of t h e F e d e r a l I n t e r n a l Revenue Code. With t h e e x c e p t i o n o f t h e exempt i n t e r e s t e x c l u s i o n and dividend deduction contained i n t h e F e d e r a l I n t e r n a l Revenue Code, t h e legislature l e f t i n t a c t t h e i n t e r r e l a t i o n of s t a t e c o r p o r a t i o n l i c e n s e t a x g r o s s and n e t income and f e d e r a l income t a x g r o s s and n e t income a s provided i n t h e F e d e r a l I n t e r n a l Revenue Code. Thus t h e conclusion t h a t s t a t e g r o s s income and n e t income f o r c o r p o r a t i o n l i c e n s e t a x purposes a r e based on t h e F e d e r a l I n t e r n a l Revenue Code i s a p p a r e n t . Three d e c i s i o n s of t h i s Court c o n s t r u i n g s e c t i o n 84-1504, p r i o r t o t h e 1971 amendment b e a r t h i s o u t . I n Board of Equali- z a t i o n v. Farmers Union, 140 Mont. 523, 374 P.2d 231, we h e l d t h a t co-ops s u b j e c t t o Montana c o r p o r a t i o n l i c e n s e t a x e s a r e e n t i t l e d t o deduct patronage dividends from g r o s s income because s e c t i o n 84-1504 i n c o r p o r a t e s by r e f e r e n c e t h e F e d e r a l I n t e r n a l Revenue Code i n which 522 allows t h e s e deductions i n d e t e r - mining f e d e r a l income t a x l i a b i l i t y , I n Home Bldg. & Loan v . Board of E q u a l i z a t i o n , 141 Mont. 113, 375 P.2d 312, t h i s Court h e l d t h a t b u i l d i n g and loan a s s o c i a t i o n s s u b j e c t t o Montana c o r p o r a t i o n l i c e n s e t a x were e n t i t l e d under s e c t i o n 84-1504 t o deduct dividends p a i d , because t h e I n t e r n a l Revenue Code was i n c o r p o r a t e d by r e f e r e n c e i n t o t h a t s e c t i o n and ! 591 t h e r e o f allowed such deduction i n determining j f e d e r a l income t a x , * i a b i l i t y . F i n a l l y i n Barth v . S t a t e Board of Equal., 148 Mant. 259, 2 6 1 , 419 P.2d 484, w e a g a i n recognized t h a t s e c t i o n 84-1504 i n c o r p o r a t e d by r e f e r e n c e t h e F e d e r a l I n t e r n a l Revenue Code i n h o l d i n g t h a t a g a i n r e a l i z e d i n a l i q u i d a t i o n s a l e was n o t recognized f o r Montana c o r p o r a t i o n l i c e n s e t a x purposes because i t was n o t recognized f o r f e d e r a l c o r p o r a t i o n income t a x purposes. I n Barth we s a i d : tI Thus, when Sweetheart [a 5reait company ] Ji.ssoFvrd, i t had t o pay a Montana c o r p o r a t i o n l i c e n s e t a x , and t h i s t a x was t o be based upon i t s ' n e t income. t S e c t i o n 84-1504 d e f i n e s 1 n e t income' i n terms o f g r o s s income and r e f e r s t o f e d e r a l law f o r a d e f i n i t i o n of g r o s s income. "Under s e c t i o n 337, I . R . C . 1954, t h e g a i n r e a l i z e d b y Sweetheart i n i t s l i q u i d a t i o n s a l e was n o t recognized f o r income t a x purposes. T h e r e f o r e , t h e g a i n r e a l i z e d upon t h e s a l e i s n o t recognized f o r Montana c o r p o r a t i o n l i c e n s e t a x purposes. I I Thus t h i s Court h a s c o n s i s t e n t l y h e l d t h a t t h e d e f i n i t i o n of g r o s s income and n e t income f o r s t a t e c o r p o r a t i o n l i c e n s e t a x purposes i s dependent upon and i n c o r p o r a t e s by r e f e r e n c e the p r o v i s i o n s of t h e F e d e r a l I n t e r n a l Revenue Code except a s e x p r e s s l y provided o t h e r w i s e , a s i n t h e c a s e of t h e exempt i n t e r e s t e x c l u s i o n and t h e dividend deduction. Apply t h e foregoing r a t i o n a l e t o t h e i n s t a n t c a s e , t h e n e t o p e r a t i n g l o s s deduction i s allowable i n computing p l a i n t i f f c o r p o r a t i o n s ' s t a t e c o r p o r a t i o n t a x l i a b i l i t y because s e c t i o n 84-1504, R.C.M. 1947, i n c o r p o r a t e s by r e f e r e n c e 1.72 of t h e F e d e r a l I n t e r n a l Revenue Code i n determining n e t income f o r f e d e r a l income t a x purposes which p e r m i t s such deduction. However, t h e Board u r g e s t h a t i f a n e t o p e r a t i n g l o s s deduction i s allowed t o p l a i n t i f f c o r p o r a t i o n s under s e c t i o n 84-1504, then t h e c o r p o r a t i o n s w i l l be p e r m i t t e d t o c l a i m a second n e t o p e r a t i n g l o s s deduction under s e c t i o n 84-1502, a s amended by t h e 1971 l e g i s l a t u r e . This c o n t e n t i o n i s specious. The 1971 amendment p r o h i b i t s a double deduction f o r n e t o p e r a t i n g bosses by d e f i n i t i o n : "The term ' n e t o p e r a t i n g l o s s ' means t h e excess of t h e deductions allowed by t h i s s e c t i o n , 84-1502, over t h e g r o s s income, w i t h t h e m o d i f i c a t i o n s s p e c i f i e d i n paragraph (b) of t h i s subsection." (Ch. 358,L. 1971). Thus any n e t o p e r a t i n g l o s s deduction t h e r e t o f o r e p e r m i t t e d under s e c t i o n 84-1504, i n c l u d i n g by r e f e r e n c e n e t o p e r a t i n g l o s s e s allowable under 5 172 of t h e I n t e r n a l Revenue Code, would be e l i m i n a t e d under t h e new and amended d e f i n i t i o n of n e t o p e r a t i n g l o s s contained i n t h e 1971 amendment t o s e c t i o n 84-1502. F i n a l l y , t h e Board contends t h a t t h e 1971 amendment t o s e c t i o n 84-1502, R,C.M. 1947, c o n s t i t u t e d a l e g i s l a t i v e d e c l a r a - t i o n of i t s i n t e n t w i t h r e s p e c t t o n e t o p e r a t i n g l o s s deductions. The 1971 amendment provides i n p e r t i n e n t p a r t : "The n e t o p e r a t i n g l o s s deduction s h a l l n o t be allowed w i t h r e s p e c t t o t a x a b l e p e r i o d s which end on o r b e f o r e December 31, 1970, b u t s h a l l be allowed only with r e s p e c t t o t a x a b l e p e r i o d s beginning on o r a f t e r January 1, 1971." [Ch. 358, L. 1971, c o d i f i e d a s s e c t i o n 84-1502 (2) (B) ( f ) , R.C.M. 1947. ] A t i s s u e i s t h e e f f e c t of t h i s amendment on n e t o p e r a t i n g l o s s deductions f o r t a x a b l e y e a r s p r i o r t o 1971 pursuant t o s e c t i o n 84-1504. I n i t i a l l y , we observe t h a t t h e 1971 amendment d i d n o t amend n o r p u r p o r t t o amend s e c t i o n 84-1504. The n e t o p e r a t i n g l o s s deductions provided f o r t h e r e i n were a l l o w a b l e pursuant t o 5 172 of t h e F e d e r a l I n t e r n a l Revenue Code, i n c o r porated t h e r e i n by r e f e r e n c e . What t h e l e g i s l a t u r e d i d by t h e 1.971 amendment was t o comprehensively r e d e f i n e t h e n e t o p e r a t i n g l o s s deduction f o r s t a t e c o r p o r a t i o n l i c e n s e t a x purposes without r e f e r e n c e t o t h e p r o v i s i o n s governing n e t o p e r a t i n g l o s s deductions i n 5 172 of t h e F e d e r a l I n t e r n a l Revenue Code. The l e g i s l a t u r e simply adapted t h e n e t o p e r a t i n g l o s s deduction t o our s t a t e s i t u a t i o n i n an e f f o r t t o c r e a t e a balanced, r e a s o n a b l e t a x structure, But was t h i s zmendment intended t o have a r e t r o a c t i v e effect? W p e r c e i v e no such i n t e n t i o n on t h e p a r t of t h e l e g i s e lature. It d i d n o t amend s e c t i o n 84-1504, under which p l a i n t i f f s c l a i m t h e n e t o p e r a t i n g l o s s deduction f o r t h e i r t a x a b l e y e a r s p r i o r t o 1971. It s p e c i f i c a l l y applied t o n e t operating l o s s deductions a s t h e r e i n d e f i n e d which were s u s t a i n e d a f t e r December 31, 1970. I t changed t h e law w i t h r e s p e c t t o computation o f n e t o p e r a t i n g l o s s e s , w h a t was included t h e r e i n and what was n o t all.owable, f o r t a x a b l e y e a r s a f t e r 1970. Aside from t h e q u e s t i o n of t h e c o n s t i t u t i o n a l power of t h e l e g i s l a t u r e t o g i v e r e t r o a c t i v e e f f e c t t o t h i s kind of l e g i s l a t i o n , t h e r e i s simply no i n d i c a t i o n i t intended t o do so. S e c t i o n 12-201, K.C.M. 1947, provides : 1I N law contained i n any of t h e codes o r o t h e r o s t a t u t e s of Montana i s r e t r o a c t i v e u n l e s s expressly so declared. " This p r o v i s i o n was h e l d t o b e " e s p e c i a l l y a p p l i c a b l e " t o t h e Montana Corporation License Tax Act i n S t a t e v , J , C. Maguire Construction Co., 113 Mont. 324, 331, 125 P.2d 4 3 3 , where we said: ** "9; t h e fundamental r u l e of c o n s t r u c t i o n i s t h a t r e t r o a c t i v e e f f e c t i s n o t t o be given t o a s t a t u t e u n l e s s commanded by i t s c o n t e x t , terms, o r manifest purpose. I t Here, t h e n e t o p e r a t i n g l o s s e s were d e d u c t i b l e under s e c t i o n There i s n o t h i n g i n 84-1504 a t t h e time they were i n c u r r e d . the 1971 amendment t o s e c t i o n 84-1502 i n d i c a t i n g an i n t e n t i o n on t h e p a r t of t h e l e g i s l a t u r e t o r e t r o a c t i v e l y r e p e a l t h e s e c t i o n 85-1504 o p e r a t i n g l o s s deduction. W e d e c l i n e t o so c o n s t r u e t h e 1971 amendment under t h e a u t h o r i t i e s s e t f o r t h above. The summary judgment of t h e d i s t r i c t c o u r t i s a f f i r m e d , Associate J u s t i c e / , Chief J u s t i c e ~ s s o c d eu s t i c e s , J

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