                                                                                            September 24 2013


                                           DA 12-0768

                  IN THE SUPREME COURT OF THE STATE OF MONTANA

                                           2013 MT 273


GOLD CREEK CELLULAR OF MONTANA
LIMITED PARTNERSHIP d/b/a VERIZON
WIRELESS and AT&T MOBILITY, LLC,

              Plaintiffs and Appellees,

         v.

STATE OF MONTANA, DEPARTMENT
OF REVENUE,

              Defendant and Appellant.



APPEAL FROM:            District Court of the First Judicial District,
                        In and For the County of Lewis and Clark, Cause No. DDV 11-154
                        Honorable James P. Reynolds, Presiding Judge


COUNSEL OF RECORD:

                For Appellant:

                        C. A. Daw, David R. Stewart, Courtney Jenkins, Special Assistant Attorneys
                        General, Montana Department of Revenue, Legal Services Office; Helena,
                        Montana

                For Appellees:

                        Richard G. Smith; Hawley Troxell Ennis & Hawley, LLP; Boise, Idaho
                        (Counsel for Appellee AT & T Mobility)

                        Terry B. Cosgrove; Murry Warhank; Gough, Shanahan, Johnson &
                        Waterman; Helena, Montana (Counsel for Appellee Verizon)

                                                     Submitted on Briefs: August 28, 2013
                                                                Decided: September 24, 2013

Filed:
                        __________________________________________
                                          Clerk
Justice Michael E Wheat delivered the Opinion of the Court.

¶1     Plaintiffs Gold Creek Cellular and AT&T Mobility (Plaintiffs) brought this action for

declaratory judgment alleging that the Department of Revenue’s (Department) regulations

Admin. R. M. 42.22.101(12), 42.22.101(10), and 44.22.109, were invalid. Judge James

Reynolds granted summary judgment to Plaintiffs. The Department of Revenue now appeals

from this order.

                                STATEMENT OF ISSUES

¶2     Issue One: Did the District Court correctly conclude that the Department’s
regulation defining “goodwill” is invalid because it conflicts with § 15-6-218(2)(b), MCA?

¶3     Issue Two: Did the District Court correctly conclude that the Department’s regulation
defining “intangible personal property” is invalid because it conflicts with § 15-6-218(2)(a),
MCA?

¶4    Issue Three: Did the District Court correctly conclude that the valuation manuals
adopted by the Department are invalid to the extent they support its new rules?

                   FACTUAL AND PROCEDURAL BACKGROUND

¶5     Section 15-6-218, MCA, grants tax exemption to intangible personal property.

Intangible personal property is defined as property that is not tangible and (a) has no intrinsic

value but is the representative of value, or (b) property that lacks physical existence. Section

15-6-218(2), MCA. The statute includes a non-exhaustive list of common intangible

personal property items, including “certificates of stock, bonds, promissory notes, licenses,

copyrights, patents, trademarks, contracts, software, and franchises.”           Section 15-6-

218(2)(a), MCA. The statute gives only one non-exhaustive example of intangible property



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that lacks physical existence, “goodwill,” but does not define the term anywhere in Title 15,

MCA.

¶6     The Department of Revenue implements this statute with Admin. R. M. 42.22.110.

That administrative regulation provides default exemptions that a taxpayer may use when

declaring certain intangible items as exempt. If taxpayers disagree with the default

exemption, they may provide the Department with information supporting a higher

exemption. Admin. R. M. 42.22.110(2).

¶7     In 2010, the Department made substantial changes to its regulations implementing

§ 15-6-218, MCA. The Department amended its definition of intangible personal property to

include a requirement that the property “be separable from the other assets in the unit and

capable of being held under separate title or ownership.” Admin. R. M. 42.22.101(12). The

regulation further required that the property be able to be bought and sold separate from the

operating assets, that it be capable of earning income as a standalone entity, and also defined

“intangible value” as separate from intangible property and non-exempt. Admin. R. M.

42.22.101(12).    Finally, the Department defined “goodwill” as goodwill that can be

calculated through the purchase price accounting method. Admin. R. M. 42.22.101(10).

While the Department has used the purchase price accounting process for goodwill since

1999, this change in the definition of goodwill prohibits any other method for valuing this

specific intangible. The Department also adopted tax assessment methods from the Western

States Association of Tax Administrators Handbook (WSATA) and the National Conference



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of Unit Value States (NCUVS) in conjunction with the regulations on goodwill and

intangibles.

¶8     The District Court considered cross-motions for summary judgment concerning the

validity of the Department’s new regulations. The District Court granted Plaintiffs’ motion

upon concluding that the new definitions of intangibles and goodwill imposed additional and

contradictory requirements on state law, and that the WSATA and NCUVS handbooks were

invalid as applied to the new regulations. The Department now appeals from this order.

                              STANDARD OF REVIEW

¶9     Whether an administrative regulation impermissibly conflicts with a statute is a

question of law to be decided by the court. Thompson v. J.C. Billion, Inc., 2013 MT 20, ¶

11, 368 Mont. 299, 294 P.3d 397. We review a district court’s conclusions of law to

determine if they are correct. Talon Plumbing & Heating v. Dept. of Lab. & Indus., 2008

MT 376, ¶ 19, 346 Mont. 499, 198 P.3d 213.

                                     DISCUSSION

¶10    The Department of Revenue argues that its interpretations of “intangible personal

property” and “goodwill” are compatible with the statute, and at any rate, are entitled to

administrative deference pursuant to Chevron v. Nat. Resources Def. Council, 467 U.S. 837,

104 S. Ct. 2778 (1984). Plaintiffs argue that Chevron deference applies only to a state or

federal agency’s implementation of federal law, or of state law companions to federal law.

¶11    When examining regulations from a state agency implementing purely state law, we

have applied the standard of deference set forth in the Montana Administrative Procedures
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Act (MAPA), § 2-4-305, MCA. See Musselshell Co. v. Yellowstone Co., 2012 MT 292, 367

Mont. 350, 291 P.3d 579 (DOR implementing state tax on coal gross proceeds); City of

Great Falls v. Mont. Dep’t of Pub. Serv. Reg., 2011 MT 144, 361 Mont. 69, 254 P.3d 595

(Public Service Commission implementing state Deregulation Act); Fallon Co. v. State, 2009

MT 454, 354 Mont. 347, 223 P.3d 886 (DOR implementing state tax). In contrast, we have

only relied on Chevron deference when a federal or state agency interprets federal law or a

state law companion to federal law.         See Thompson, (State Department of Labor

implementing federal Fair Labor Standards Act and Montana Wage Protection Act); BNSF

Ry. Co. v. Feit, 2012 MT 147, ¶ 8, 365 Mont. 359, 281 P.3d 225 (“The Montana Legislature

has indicated clear intent that the MHRA be interpreted consistently with federal

discrimination statutes and case law.”). Finally, our Legislature passed MAPA with the clear

purpose to preserve legislative intent and to curb “the undisciplined growth of administrative

powers. . . .” Mont. Sen. Admin. P. Subcomm. Rpt. No. 33, 7, 42d Legis., Reg. Sess.

(December, 1970) (quoting the Revised Model State Administrative Procedure Act).

¶12    The issues on appeal concern a state agency’s implementation of purely state law, a

law that has no federal counterpart. Thus, the District Court correctly declined to apply

Chevron’s standard for administrative deference in this case, and examined this case under

Montana’s deference standard. Administrative rules are invalid when they “(1) engraft

additional and contradictory requirements on the statute; or (2) if they engraft additional,

noncontradictory requirements on the statute which were not envisioned by the legislature.”

Bell v. Dep’t of Licensing, 182 Mont. 21, 23, 594 P.2d 331, 333 (1979) (citations and
                                              5
quotations omitted); Safeway, Inc. v. Montana Petroleum Release Compensation Bd., 281

Mont. 189, 194, 931 P.2d 1327, 1330 (1997). Regulations that are consistent with the statute

must also be reasonably necessary to effectuate the statute’s purpose. Section 2-4-305(6)(b),

MCA; Michels v. Dep’t of Social and Rehabilitation Servs., 187 Mont. 173, 177-78, 609

P.2d 271, 273 (1980).

¶13    When a department’s regulation restricts a broad statutory exemption, that regulation

is in direct conflict with the statute. Thompson, ¶¶ 19-23. In Bell, the statute required that a

barber college operator have 10 years’ experience and be able to withstand character

investigation by the Board of Barbers. Bell, 182 Mont. at 23, 594 P.2d at 333. When the

Department of Licensing required these same operators to pass an examination, we found

that this additional requirement was not contemplated by the Legislature, and was therefore

invalid. Bell, 182 Mont. at 23, 594 P.2d at 333. In Michels, a regulation required indigent

persons to provide notice within five days of medical care in order for the State to cover the

costs of such care. Michels, 187 Mont. at 173, 609 P.2d at 271. The statute in that case

provided broad medical coverage for indigent persons, so we invalidated the five day limit,

holding that such regulations were not reasonable to effectuate the purpose of the statute.

Michels, 187 Mont. at 178, 609 P.2d at 273 (“[I]n what way is this ideal [providing medical

care to indigent persons] furthered by distinguishing between those who apply for the

benefits within five days of receiving medical services and those who apply after five

days?”).



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¶14 Did the District Court correctly conclude that the Department’s regulation defining
“goodwill” is invalid because it conflicts with § 15-6-218(2)(b), MCA?

¶15    Section 15-6-218(2)(b), MCA, broadly exempts goodwill as a subclass of intangible

personal property. The Department’s regulation defines goodwill as “booked goodwill” that

can only be valued with the purchase price accounting method.                 Admin. R. M.

42.22.101(10). We read § 15-6-218(2), MCA, as a broad statutory tax exemption for all

valuable goodwill.

¶16    The requirement for purchase price accounting of goodwill imposes a restriction on a

broad statutory exemption, and thus constitutes an additional requirement. While the

Department’s method of valuation is the most common way to measure goodwill, it is not the

only acceptable method. Baldwin v. Stuber, 187 Mont. 430, 433, 610 P.2d 160, 162 (1980).

Because of the difficulty in valuing this particular intangible, we have held that “each

goodwill case must be determined on its own facts and circumstances, and the determination

of the value of goodwill is a question for the trier of fact. . . .” Baldwin, 187 Mont. at 432,

610 P.2d at 161. But the Department’s regulation allows for no such leeway, and restricts

goodwill to calculation by only one method. This restriction constitutes an additional

requirement analogous to the barber’s test in Bell or the five day rule in Michels.

¶17    The Department argues that it must specify the type of information that taxpayers

provide to demonstrate the value of intangibles. But this does not grant the Department

authority to entirely exclude alternative methods of valuation. Plaintiffs are entitled to have

their goodwill valued in a method of their choosing, and the Department is free to dispute


                                              7
that valuation by relying on its preferred accounting method. However, the actual value of

goodwill is left to the trier of fact, not the rulemaking processes of the Department.

¶18    Finally, the Department contends that its additional standard is reasonable to

effectuate the purpose of the statute because the purchase price accounting method provides

certainty and consistency in the valuation of goodwill. But the goodwill exemption’s

statutory purpose is to give a broad exemption to all intangible personal property, including

valuable goodwill. As in Michels, we question whether mandating a specific accounting

method and prohibiting taxpayers from using alternative methods in any way furthers the

Legislature’s purpose of granting broad exemption to goodwill. We conclude it does not.

The regulation restricts a taxpayer’s ability to consult other methods for valuation, and could

hinder a fair and accurate determination of value. This was not the original purpose of the

exemption as contemplated by the Legislature.

¶19    We do not rule that the Department must use all available methods to value goodwill.

We simply hold that the Department may not define goodwill in a way that precludes a

taxpayer from proposing alternative methodology or information relating to valuable

goodwill.

¶20 Did the District Court correctly conclude that the Department’s regulation defining
“intangible personal property” is invalid because it conflicts with § 15-6-218(2)(a), MCA?

¶21    Section 15-6-218, MCA, imposes two requirements on intangible personal property:

That it have no intrinsic value but is the representative of value, or that it lack physical

existence. The statute also contains a non-exhaustive list of property that is considered


                                              8
intangible personal property. The Department’s regulation requires that intangible personal

property satisfy all of the following: (1) Be separable from the other assets in the unit; (2) be

able to be bought and sold without impairing value of assets; (3) must create earnings that

exceed their contributory value to the unit, and; (4) must not have “intangible value,” which

is the value of an entity to make excess revenues over the normal rate of return. Admin. R.

M. 42.22.101(12).

¶22    The Department’s definitions impose requirements that directly contradict the

statute’s non-exhaustive list of intangible personal property. Plaintiffs’ FCC licenses may be

exempted by the statute, but under the Department’s rules are only exempt if they can be

bought and sold without destroying the unit value of assets. Other intangible personal

property, like trade names or an assembled workforce, also fit the statutory definition, but do

not fit the Department’s rules because they are either inseparable from the business’ asset, or

their separation will impair the business asset. The Department’s distinction between

intangible property and intangible value appears to sweep up goodwill, as goodwill is often

defined by its ability to make excess revenues over the normal rate of return. See In re

Marriage of Hull, 219 Mont. 480, 487-88, 712 P.2d 1317, 1322-23 (1985).

¶23    The Department contends that, although its regulations read alone would contradict

the statutory list, it would never interpret its regulations to tax any of the items on the list.

Further, the Department states that it did not incorporate the list because it is bound against

repeating statutory language in its regulations under § 2-4-305(2),MCA. This position

suffers from two flaws of reasoning. First, and crucial to this issue, the Department’s
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argument misunderstands the nature of a non-exhaustive list. The list itself illustrates

applicable examples of the Legislature’s chosen definition; it does not merely designate

those few items that must be exempted by the Department. State v. Good, 2004 MT 296, ¶

17, 323 Mont. 378, 100 P.3d 644; Federal Land Bank v. Bismarck Lumber Co., 314 U.S. 95,

100, 61 S. Ct. 1, 4 (1941) (“[T]he term ‘including’ is not one of all-embracing definition, but

connotes simply an illustrative application of the general principle.”). Accordingly, any rule

defining intangible personal property must be consistent with the principle that the list

represents. The Department cannot save its regulations by declining to enforce them against

items on the statutory list; the fact that it must decline enforcement proves non-conformity

with the statute’s definitions.

¶24    Second, the prohibition on repeating statutory language limits “unnecessarily”

repeating the statutory language. Section 2-4-305(2), MCA. Here, even the Department’s

own administrators misunderstand how the new regulations interact with the statutory list.

(“Q: So, applying this definition to an FCC license, an FCC license would not be exempt if

you apply this? A: Yeah, the FCC license would be exempt because it meets the list.” “Q:

[I]s it your understanding that goodwill would satisfy that part of the intangible personal

property definition? A: I don’t believe you can hold goodwill separate, no.”). In this

instance, repetition of the statute is needed to ensure consistent and clear application of the

statute and regulation. However, even if the Department repeated the statutory list in its

regulations, it is still prohibited from formulating rules contradictory to that list, or the law

illustrated by the list.
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¶25    The District Court correctly determined that the Department’s definition of intangible

personal property contradicted state law, and was invalid under MAPA.

¶26 Did the District Court correctly conclude that the valuation manuals adopted by
the Department are invalid to the extent they support its new rules?

¶27    Both parties agree that the NCUVS and WSATA handbooks are only challenged to

the extent that they are used to enforce the Department’s new definitions of intangible

personal property and goodwill. Because we find those definitions invalid, these handbooks

are also invalid to the extent that they conflict with state law.

                                      CONCLUSION

¶28    The judgment of the District Court is affirmed.


                                                   /S/ MICHAEL E WHEAT



We concur:

/S/ JIM RICE
/S/ LAURIE McKINNON
/S/ PATRICIA COTTER




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