                               No. 8 8 - 2 4 4
               IN THE SUPREME COURT OF THE STATE OF MONTANA
                                    1988




BILLY M. FROMAN and BERTIE FROMAN,
husband and wife,
                Petitioners and Appellants,
       -vs-
DEPARTMENT OF REVENUE OF THE STATE OF
MONTANA,
              Respondent and Respondent.




APPEAL FROM:    District Court of the Ninth Judicial District,
                In and for the County of Glacier,
                The Honorable R . D . McPhillips, Judge presiding.
COUNSEL OF RECORD:
       For Appellant:

                Marc G. Euvske; Anderson, Beatty        &   Buyske, Shelby,
                Montana
       For Respondent:

                David W. Woodgerd, Legal Counsel, Dept. of Revenue,
                Helena, Montana



                                   Submitted on Briefs:          Sept. 15, 1 9 8 8
                                       Decided: ~ o v e m b e r29, 1 9 8 8




                                   Clerk
Mr. Justice John C.   Sheehy delivered the Opinion of the
Court.


     Billy M. and Bertie Froman (hereinafter referred to as
the taxpayers) appealed the d-ecision by the State Tax Appeal
Board (hereinafter referred to as STAB) that the taxpayers
failed to file the required election form with the Department
of Revenue (DOR) for Production Systems, Inc. (PSI) to be
treated as a small business corporation. The District Court,
Ninth Judicial District, Glacier County upheld the decision
by STAB. The taxpayers appealed the decision of the District
Court to this Court. We affirm.
     The issue is whether the District Court erred in
upholding the decision of STAB.
     This case involves three separate corporations.      The
first corporation was Orbit Explosives, Inc. (hereinafter
OEI), incorporated in the state of Montana on November 17,
1977.    OEI validly elected to he treated as a "small
business" corporation or S corporation.           The second
corporation was Orbit Penetration, Inc. (hereinafter OPI),
incorporated in the state of Delaware on January 17, 1978,
which conducted its business outside the state of Montana.
OPI made a valid election to be treated for federal tax
purposes under Subchapter S of the Internal Revenue Code of
1954, as amended. OPI did not file a specific election under
5 15-31-202, MCA, to be treated as an S corporation for state
tax purposes.
     The third corporation, PSI was incorporated in the state
of Montana on September 7, 1978. Following the incorporation
of PSI, it assumed the business activities of OEI and the
accounting records of OEI were continued in the name of PSI.
No formal articles of merger or consolidation were ever filed
on behalf of OEI or PSI.   Neither OPI or OEI were formally
liquidated; they were involuntarily dissolved.
     On January 29, 1978, the Department of Revenue received
an "Employer's Quarterly Withholding Tax Report" from OEI
bearing the message: "Due to organizational changes, Orbit
Explosives is no longer paying any payroll and will not be in
existence."   PSI's accountant testified that he sent to the
DOR on October 31, 1978, a copy of the federal tax election
for PSI to be treated as an S corporation.       However, DOR
denies having received this election and DOR regularly
acknowledges such elections. STAB found that there was not a
properly filed election and also that the testimony of PSI's
accountant was not credible.
     In 1982, DOR assessed PSI for delinquent corporation
license taxes as a non-S corporation or C corporation. PSI
paid these taxes and never claimed it was exempt from such
tax. In January, 1983, the accountant sent the proper form
for state S corporation election but stated. the effective
date as October, 1978.

     Did the District Court err by upholding the decision of
the STAB?
     Tax law is primarily statutory. Therefore to qualify as
an S corporation, PSI had to meet the qualifications set out
in the statute. Section 15-31-210, MCA, provides:
     Definitions.   (1) For the purpose of this part,
     the term "small business corporation" means a
     corporation doing business in Montana and which
     does not have:
     (a) more than 10 shareholders;
    ( b ) as a shareholder a person (other than      an
    estate and other than a trust described          in
    15-31-207) who is not an individual;
     Ic)   a   nonresident alien   as   a   shareholder; a.nd
     (d) more than one class of stock.

     (2) For purposes of this part, the term "electing
     small business corporation" means, with respect to
     any taxable year, a small business corporation
     which has made an election under this part in
     effect for such taxable year.
     One of the advantages of making such an election is that
the corporation for state income tax purposes is essentially
treated as a partnership and corporate losses are deducted
pro-rata from the shareholder's income, thereby reducing the
individual shareholder's income tax liability.        Another
result is that if the corporation has profits in a particular
tax year, the individual shareholders are liable for personal
income taxes due and owing on their pro-rata shares of the
profits.   Hence, the requirement that the election be made
before the start of the tax year.
     Section 15-31-202, MCA, requires that the election be
made in accordance with the rules prescribed by the DOR. The
pertinent administrative rules are found in         42.24.101
through -.I23 ARM. Section 42.24.103, ARM provides:
     PROCEDURE TO MAKE ELECTION. (1) The election must
     be made by the corporation filing form CT-3,
     containing the information required by such form,
     including   a   statement of    consent   of   each
     shareholder of the corporation, in the manner
     provided in ARM 42.24.105.   The election shall he
     signed by one of the following: the president,
     vice president, or other principal officer or the
     treasurer, assistant treasurer, or chief accounting
     officer   . The form shall be filed with the
     department.
Section 42.24.104 ARM provides:
                           -
     TIME OF MAKING ELECTION. (1)       The election   shall
     be filed either:
    (a) during the     first   calendar   month   of   such
    taxable year; or
    (b) during the calendar month preceding such first
    month.
    (2) In the case of a new corporation which has a
    year beginning after the first day of a particular
    month, the term "month" means the period commencing
    with the first day of the taxable year and end.ing
    on the day preceding the numerically corresponding
    day of the succeeding calendar month.
    (3) Should a corporation fail to physically tender
    to the department its election in the manner and
    within the time specified by 15-31-202(3), MCA, the
    department   shall   nevertheless   consider   such
    election to have, constructively been properly and
    timely made:
    (a) if the election was made within the taxable
    year for which the election is desired to take
    effect; and
    (b) if the corporation can substantiate its intent
    to file the election for the year in which the
    election is desired to take effect.
    (4) an election shall not be deemed made within
    the contemplation of subsection (3), above, and
    15-31-202 (3), MCA, unless:
    (a) the corporation has an acknowledgement from
    the department that the election was received; or
    (b) the corporation has proof by return receipt,
    that the election was sent to the department by
    certified mail.
    (5) Any election sought to he effective by a
    corporation in any manner other than is herein
    provided or by the provisions of 15-31-202(3), MCA,
    shall not be recognized.
    The rules above clearly set out the procedure which is
required for a corporation to      be considered a "small
business" corporation. PSI did     not follow the required
procedure. Based on the findings made by STAB, PSI failed to
elect to be treated as an S corporation for state income tax
purposes as a matter of law.    On judicial review of state
agency action, this Court may not substitute its judgment for
that of the agency as to the weight of the evidence on
questions of fact. We may not reverse the agency unless its
findings are "clearly erroneous in view of the reliable,
probative and substantial evidence on the whole record."
Section 2 - 4 - 7 0 4 ( 2 ) (e), MCA.

                                        c
                                      I-&        &...-,
     Accordingly, we uphold the findings made by STAB in this
case, and thereupon affirm the Dis5riqt C

                                            Justice



i   Chief Justice




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