                                        No.     13608

          I N THE SUPREME COURT OF THE STATE OF M N A A
                                                 O T N




BAKER NATIONAL INSURANCE AGENCY,                            e t al.,

                                  P l a i n t i f f s and A p p e l l a n t s ,



M N A A DEPARTMENT OF REVENUE,
 O T N

                                  Defendant and Respondent.




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 ,
                        H o n o r a b l e Gordon R.           Bennett,        Judge p r e s i d i n g .

Counsel o f Record:

     For Appellants:

           Towe, B a l l & E n r i g h t , B i l l i n g s , Montana
           N e i l Enright argued, B i l l i n g s , Montana

     For Respondent :

           R.      B.    McGinnis a r g u e d , H e l e n a , Montana



                                              Submitted:           September 26,           1977


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                                                 Decided:         N ( j V 22      jn
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Filed:   '$b\' d   ~ d d!]
Mr. Justice Frank I. Haswell delivered the Opinion of the Court.



          Appellants appeal from the denial of their petition to file
consolidated tax returns for the taxable year 1972.    We affirm.

          On June 29, 1973, the Department of Revenue issued deter-
mination letters on appellants Bozeman Insurance Agency, Inc.,

Baker National Insurance Agency, Inc., and Baker National Bank,

denying them permission to consolidate for the taxable year 1972.
On July 25, 1973, these appellants filed timely protests and petitioned

for a re-evaluation of the determination letters.    The petition was

denied.

          On September 11, 1973, respondent issued determination let-
ters on appellants Roundup Insurance Agency, Inc., Miners   &   Merchants
Bank, Robert Agency, Inc., First Security Bank of Red Lodge and Red
Lodge Insurance Agency, Inc., denying them permission to file con-
solidated returns.    Again, protests were timely filed and denied by
respondent.

          Subsequently, all appellants were joined for a single appeal
before the State Tax Appeal Board (STAB) on December 18, 1973.      On
March 19, 1974, following submission of briefs by both parties, STAB

rendered its opinion and order, wherein it found appellants were not
eligible to file consolidated returns because:

          (1) Permission was not granted by respondent pursuant to
section 84-1509, R.C.M.   1947; and

          (2) Appellants do not qualify as a "unitary business" as
defined by section 84-1509, R.C.M. 1947.
          Appellants' request for reconsideration by STAB was denied
by an order dated May 13, 1974.    Thereafter, on May 17, pursuant to

the provisions of section 84-709.1, R.C.M. 1947, as amended, appel-
lants petitioned the District Court of the FhstJudicial District for
review of the STAB decision.   The STAB decision was affirmed by the

District Court on September 23, 1976.
            During the tax year in question, the controlling interest
in all corporations involved herein was owned by one entity.                   The
appellant corporations were engaged in the banking and insurance
businesses in four Montana cities.             A similar mode of operation
was used in each of these cities whereby a parent-subsidiary
relationship was created between the insurance agency and the bank.
Each insurance agency acted as a one-bank-holding-company and owned
in excess of 80 percent of the stock of its subsidiary bank.                   The
insurance agencies provided managerial services to their respec-
tive banks and charged a fee for the services rendered.                 Each bank
owned its building and provided office space to the insurance agency
through a rental agreement.        The relationship of the appellant cor-
porations may be set forth as follows:

Tax year in      Parent Company                   Subsidiary           Lowest % of
question                                                                ownership
                                         (1)                        (2)
1968-1972     Roundup Insurance Agency          Robert Agency, Inc.        100%
              Robert Agency                     Montana Nat'l Bank
                                                of Roundup (3)              91% (1969)

1970-1972     Red Lodge Ins. Agency, Inc.       Mont. Nat'l Bk of
                                                Red Lodge(4)               87.3%

1972          Bozeman Ins. Agency, Inc.         Mont. Nat'l Bk of
                                                Bozeman                    96.6%

1972          Baker Nat'l Ins. Agency         Baker Nat'l Bk           94.4%
       [l] Formerly Woodbury Investment Corporation - renamed in 1969.
       [2] ~i~uidated 1969 by transferring all assets to Woodbury Invest. Corp.
                      in
       [3] Formerly Miners & Merchants Bank.
       [4] Formerly First Security Bank of Red Lodge.

            The management fees paid by the banks to the insurance
agencies were arbitrarily determined and not at arms length.
Similarly, the rent paid by the insurance agencies to the banks
was arbitrarily determined.        The acknowledged purpose for the bank-
insurance agency relationship was to provide a medium by which pro-
fit and loss could be shifted between the corporations by means of
the management fees and rent.
            Appellants sought permission from respondent to file con-
s o l i d a t e d corporate l i c e n s e t a x r e t u r n s f o r each insurance

agency and i t s s u b s i d i a r y bank.              Respondent t o o k t h e p o s i t i o n

appellants did not qualify t o f i l e consolidated returns pursuant

t o t h e r e q u i r e m e n t s o f s e c t i o n 84-1509,        R.C.M.      1947.

             A p p e l l a n t s a p p e a l e d t o STAB and STAB h e l d t h a t s e c t i o n
84-1509 d o e s n o t g r a n t t a x p a y e r s a n a b s o l u t e r i g h t t o f i l e

consolidated r e t u r n s , b u t r a t h e r gives respondent t h e d i s c r e t i o n -

a r y a u t h o r i t y t o d e t e r m i n e when c o n s o l i d a t e d r e t u r n s a r e appro-

priate.        STAB c o n c l u d e d by h o l d i n g a p p e l l a n t s d i d n o t q u a l i f y a s

a u n i t a r y b u s i n e s s a n d , t h e r e f o r e , were n o t e l i g i b l e t o f i l e con-

solidated returns.

             Two i s s u e s a r e b e f o r e t h i s C o u r t on a p p e a l :

             1.     Whether t h e p a r e n t - s u b s i d i a r y c o r p o r a t i o n s a r e con-

d u c t i n g a u n i t a r y b u s i n e s s a s d e f i n e d by s e c t i o n 84-1509,        R.C.M.



             2.     Whether r e s p o n d e n t h a s t h e d i s c r e t i o n a r y a u t h o r i t y t o

d e t e r m i n e when c o n s o l i d a t e d r e t u r n s are a p p r o p r i a t e .

             T h i s c a s e c e n t e r s around an i n t e r p r e t a t i o n of s e c t i o n
84-1509,       R.C.M.      1947, which s t a t e s i n p a r t :

             " ( 1 ) C o r p o r a t i o n s which a r e a f f i l i a t e d may n o t
             f i l e a consolidated return unless a t l e a s t
             e i g h t y p e r c e n t ( 8 0 % ) o f a l l classes o f s t o c k o f
             e a c h c o r p o r a t i o n i n v o l v e d i s owned d i r e c t l y o r
             i n d i r e c t l y by o n e (1) o r more members of t h e
             a f f i l i a t e d group.

             " ( 2 ) C o r p o r a t i o n s may n o t f i l e a c o n s o l i d a t e d
             return unless the operation of the a f f i l i a t e d
             g r o u p c o n s t i t u t e s a u n i t a r y b u s i n e s s and p e r m i s -
             s i o n t o f i l e a c o n s o l i d a t e d r e t u r n i s g i v e n by
             t h e s t a t e department of revenue. For purposes
             of t h i s section, a ' u n i t a r y business operation'
             means o n e i n which t h e b u s i n e s s o p e r a t i o n s con-
             d u c t e d by t h e c o r p o r a t i o n s i n t h e a f f i l i a t e d
             group a r e i n t e r r e l a t e d o r i n t e r d e p e n d e n t t o t h e
             e x t e n t t h a t t h e n e t income o f o n e c o r p o r a t i o n
             cannot reasonably be determined without r e f e r e n c e
             t o t h e o p e r a t i o n s c o n d u c t e d by t h e o t h e r c o r p o r -
             ations.

             " ( 3 ) I f t h e c o n d i t i o n s o f s u b s e c t i o n s (1) and ( 2 )
             of t h i s s e c t i o n a r e m e t , t h e state department of
             r e v e n u e may r e q u i r e c o r p o r a t i o n s t o f i l e a con-
             s o l i d a t e d r e t u r n when t h e d e p a r t m e n t c o n s i d e r s a
             consolidated r e t u r n necessary."
        Section 84-1509 contains three conditions that must be
fulfilled prior to filing a consolidated tax return:
        (1) Common ownership of at least 80% of all
classes of stock of each affiliated corporation;
        (2) A unitary business operation; and
        (3) Permission from the Department of Revenue to file a

consolidated tax return.
        The record reflects appellants fulfill the 80%   ownership
requirement as to all the involved corporations.   The crux of
appellants' first issue, however, is the District Court's finding
that appellants were not conducting a unitary business for the
tax year in question.
       A test for the identification of a unitary business oper-
ation is found in section 84-1509(2) wherein it is stated:
        " * * * a 'unitary business operation' means one
        in which the business operations conducted by the
        corporations in the affiliated group are inter-
        related or interdependent to the extent that the
        net income of one corporation cannot reasonably be
        determined without reference to the operations
        conducted by the other corporations."
        Substantial and convincing evidence is found in the record
to support the District Court's finding that appellants were not
conducting a unitary business operation for the taxable year 1972.
       Examples of such evidence are:
        (1) Mr. Les Alke, the Administrator of the Financial
Division of the Department of Business Regulations of the State
of Montana, testified as follows:
       "Q. Would you say that in the case of one of the
       banks in question, you could reasonably determine
       its net income, standing alone and separate --
       just of the banking institution, itself? A. It's
       practically a requirement in reporting income
       expense and performance and solvency and what have
       you. We do not allow them to intermingle other
       business accounting or operations with the bank's
       records.
        "Q. Even if it's an insurance agency operating
        in the same building, they would have to keep
        their books and records separate? A. Absolutely.
        "Q. Are you familiar with Section 84-1509, R.C.M.
        1947, dealing with consolidated returns? A. To
        some extent, yes.
        "Q.   You have read the statute? A.   Yes, I have.
        "Q. Would it be your opinion, based on some 20
        years as a bank examiner and working in this field,
        that with a bank and an insurance company in this
        situation, you could reasonably determine the net
        income of the bank without reference to the operations
        conducted by the insurance company? A. Without a
        question. "
        (2)   Harry A. Maschera, Chief Insurance Examiner for
the Montana State ~uditor'sOffice, testified in regard to the
independence of the insurance agencies' net income:
        "Q. Is it your opinion, as a regulation of the in-
       surance agencies, that a corporation which is an
       insurance agency and a parent holding company of a
       bank, is it your opinion that they would not be able
       to file or would not be able to determine their net
       income without reference to the operations of the
       bank? A. The insurance company would be required
       to determine their net income."
        (3) Mantz Hutchinson, Assistant Administrator of the
property assessment division, Department of Revenue, who had
recently completed an audit of one of the appellant banks was also
called to testify.   Upon questioning, Mr. Hutchinson stated in his
opinion the income of the banks could be determined standing alone:
       "Q. In determining the net income of the bank
       in question, was it necessary for you to look at
       the activities of the insurance company located
       with that bank? A. No, it was not.
        "Q. Are you familiar with Section 84-1509,
        R.C.M. 1947? A. I am.
       "Q. Would it be your opinion after just recently
       conducting an audit of this corporation, that you
       were able to determine the net income of that cor-
       poration without reference to the operations con-
       ducted by the other corporations; namely, the
       insurance company? A. Yes, we were."
        The evidence is abundantly clear the business operations
of the insurance agencies are not so interrelated or interdependent
with the banks' operations that the net income of such agencies
cannot reasonably be determined without reference to the banks'
operations.    Conversely, the banks' operations are not inter-
dependent on the operations of its parent insurance agencies.
We, therefore, hold the record contains substantial evidence to
support the District Court's finding that appellants were not
conducting a unitary business operation.
          Appellants' second issue is that the District Court
erred by holding respondent did not abuse its discretion by
denying appellants' request for permission to file a consolidated
tax return.    The crux of this issue i.s a determination of whether
the Department of Revenue may exercise its discretion in grant-
ing permission to file a consolidated tax return to an otherwise
qualified unitary business, or whether it is mandatory that such
permission be granted once the business meets the 80% common stock
ownership test and proves its business operation is unitary in
nature.
          The cardinal principle of statutory construction is that
the intent of the legislature is controlling.        Section 93-401-16,
R.C.M. 1947; Montana Association of Underwriters v. State of
Montana,      Mont.     ,   563 P.2d 577, 34 St.Rep. 297 (1977); Keller
v. Smith,       Mont.       ,   553 P.2d 1002, 33 St.Rep. 828 (1976);
Dunphy v. Anaconda Co., 151 Mont. 76, 438 P.2d 660 (1968), and
cases cited therein.    In the instant case, the plain meaning of
the statute is not readily gleaned from its language.        We, there-
fore, resort to material supplementary to the statute in order
to detern~inelegislative intent.        The committee records maintained

in conjunction with the consideration of and the ultimate passage
of section 84-1509 clearly reveal the legislative intent of this
section.    The following entry, which relates to the section in-
volved herein, is found in the January 23, 1969, record of the
Ways and Means Committee meeting:
            "Howard Vralstad, Director of Income and
            License Tax Department spoke briefly and stated
            under existing law it is left entirely up to
            the State Board of Equalization whether to allow
            a corporation to file a consolidated return. This
            bill just makes into law the regulations the Board
            is now following."
           We, therefore, hold section 84-1509, R.C.M. 1947, is
    permissive rather than mandatory and respondent did not abuse
    its discretion in denying appellants' request for permission to
    file a consolidated return.
           Affirmed.

                                               Justice




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