                         No. 82-121
          IN THE SUPREME COURT OF THE STATE OF MONTANA
                            1982


BAKER BANCORPORATION, INC., et al.,
                            Petitioner and Appellants, and
                             Respondent,


DEPARTMENT OF REVENUE OF THE STATE
OF MONTANA,
                            Respondents and Respondents.


    .1 from:   District Court of the First Judicial District,
               In and for the Oounty of Lewis and Clark
               Honorable Robert M. Holter, Judge presiding.
Counsel of Record:
    For Appellants:
         Harrison, Loendorf & Poston, Helena, Montana
         James T. Harrison, Jr., argued, Helena, Montana
         J. Patrick Giblin argued, Billings, Montana
    For Respondents:
         Michael J. Rieley argued, Helena, Montana


                            Submitted:    November 16, 1982
                              Decided :   December 29, 1982
Filed:
         DEC 2 9 SSEe"
M r . J u s t i c e Gene B.       D a l y d e l i v e r e d t h e O p i n i o n of t h e C o u r t .


       A p p e l l a n t s , s i x h o l d i n g companies, a p p e a l t h e d e n i a l of t h e i r
claim f o r d e d u c t i o n s o f d i v i d e n d s r e c e i v e d from s u b s i d i a r y cor-

porations          i n which       t h e y own 8 0 p e r c e n t or more of                   the     voting
stock.
       The     controversy here              centers        upon    the    interpretation                 of    a

1973      amendment         to    Section        84-1504,        Revised         Codes        of     Montana
(1947),        (recodified         in part         i n s e c t i o n 15-31-113(2),                 MCA)    and
w h e t h e r case law i n t e r p r e t i n g t h a t s e c t i o n p r i o r t o i t s amendment

is     still       controlling.           Old     Revised       Codes      of     Montana           (R.C.M.)

c i t e s w i l l be u s e d s i n c e w e are c o n c e r n e d w i t h p r o v i s i o n s e n a c t e d
p r i o r t o and d u r i n g 1 9 7 3 .

       Section        84-1504,          R.C.M.,         1947,       is     part         of         Montana's
C o r p o r a t i o n L i c e n s e Tax A c t and d e s c r i b e s how t h e l i c e n s e t a x is

computed.

       P r i o r t o 1 9 7 3 , s e c t i o n 84-1504 p r o v i d e d t h e f o l l o w i n g d e f i n i -
t i o n o f g r o s s income and n e t income:
               ". . .           The term g r o s s income means t h e income
                 f r o m a l l s o u r c e s w i t h i n t h e s t a t e of Montana
                 recognized               in     the      determination             of  the
                 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 ;
                b u t s h a l l i n c l u d e i n t e r e s t exempt from f e d e r a l
                 income t a x .            The t e r m
                                           -- -- ' n e t - c o m e ' -
                                                                in -
                                                                 -             means -
                                                                                -       the
                gross -
                -----          income o f t h e c o r p o r a t i o n less -- e
                                -                                                ---    th
                 a l l- a b l e d e d u c t y o n s . -
                 -o w     -      7-
                                                       ~Ger,   - --h e - - f i n i t i o n s
                                                                    t        de
                                                                             --
                o f g r o s s Income - n e t -
                                 ---I
                                                 a n d - income - f o r t h -
                                                                    - set                i%
                 t h i s - E c---- n
                --
                 -
                               tlo            s h a l l n o t be       construed         as
                allowing t h e d e d u c t i o n s s e t f r t h i G & Z t i o T
                                                                  o
               2 4 3 ----- e - ~ e d e r a l -
                   --      of t h                       internal ~ e v e -- u e
                                                        -                    n -    Code a s
                                             or as t h a t
                now w r i t t e n . - - - s e c t i o n s h a l l --                     i3&
               --
                 l- b e l e d --r -----
                --  a            o amended.       ..      " ( E m p h a s i s added.)
       I n i n t e r p r e t i n g t h e above language,             t h i s Court cons ist e n t l y
held     to    the    rule       that    t h e d e f i n i t i o n of     gross       income and           net
income        is     dependent        upon      and     incorporates             by    reference           the
F e d e r a l I n t e r n a l R e v e n u e Code, e x c e p t where Montana l a w e x p r e s s l y
provides        otherwise.              Lazy      JD   Cattle       Co.     v.        State        Board       of

E q u a l i z a t i o n ( 1 9 7 2 ) , 1 6 1 Mont.      43
                                                        i      5 0 4 P.2d 287; F i r s t F e d e r a l
S a v i n g s and Loan A s s o c i a t i o n v.         S t a t e Tax A p p e a l Board              (1975),

167      Mont,        33,   ,   5 3 5 P.2d     1 8 3 ( i n t e r p r e t i n g s e c t i o n 84-1504 f o r

the     tax     years       prior       to     1973).         Any       federal        deduction           was
allowable            in     Montana,            unless          some   section       of       the     Montana
Corporation               License         Tax     Act           expressly     provided          otherwise.

       I n 1 9 7 3 , t h e Montana L e g i s l a t u r e amended s e c t i o n 84-1504                       to

r e a d as f o l l o w s :
                ". . . The           term g r o s s income means a l l income
                 recognized i n determining the corporation's
                g r o s s income f o r f e d e r a l i n c o m e t a x p u r p o s e s ;
                b u t s h a l l i n c l u d e i n t e r e s t exempt f r o m f e d e r a l
                 i n c o m e t a x . N o c o r p o r a t i o n is exempt from t h e
                corporation license tax unless specifically
                p r o v i d e d f o r u n d e r s e c t i o n 84-1501.      Any cor-
                p o r a t i o n n o t s u b j e c t t o or l i a b l e forfedgr-aT
                .
                r-
                 -
                 Income t a x b u t n o t exempt f r o m t h e c o r p o r a t i o n
                l i c e n s e t a x under s e c t i o n 84-1501 - a l l -sh-       corn-
                --
                p u t e - r o s s income -- o r c o r p o r a t i o n l i c e n s e -
                           g                    f                      P




                p u r p o s e s i n --e same manner a s a c o r p o r a t i o n
                                      th
                                                                                    tax
              ---              F                      - -
                                                  t o or
                 t h a t i s ----e c t- - l i a 6 i e - f E r - f x-f 6 i
                                  subj
                 income t a x a c c o r d i n g t o - - i s i o n s f o r
                ----         -7
                                                              the prov
                determininu ---   4
                                     Gross i n c o m e i n t h e f e d e r a l ihter-
                                      4
                                                                                     --   -



                n a l r e v e n u e c o d e - e - £ f < c t t f o ~ ~- t - a-l e
                                                in               -     ee- ax b  -
                - ear.
                y             -- term - income' means t h e G r o s s
                               The    P
                                              'net
                -----c o m e . f t h e c o r p o --t -o n ~ < k deduc?i%-6~
                in            o
                              -                       r a i-       - s ~
                 s e t f o r t h --n s e c t i o n 84-1502."
                         - -       i            -      - - A
                                                        - -
                                                                   (~rnp~a~s-a-fle~.
       The d e d u c t i o n s c l a i m e d b y a p p e l l a n t s a r e p r o v i d e d f o r i n sec-
t i o n 243 o f t h e F e d e r a l I n t e r n a l Revenue Code.                    These d e d u c t i o n s

were     expressly           disallowed           in       the    pre-1973     version          of    section

84-1504.         T h a t d i s a l l o w a n c e was d e l e t e d i n 1 9 7 3 .
       The a p p e l l a n t s h e r e are s i x one-bank                holding companies, each
o f which owns 80 p e r c e n t or more of t h e v o t i n g s t o c k o f a commer-

c i a l bank.        The f o l l o w i n g is a l i s t o f t h e h o l d i n g c o m p a n i e s and

t h e i r r e s p e c t i v e bank s u b s i d i a r i e s :
P a r e n t H o l d i n g Company                          Bank
                                                           --
                                                            -      Subsidiaries

Baker Bancorporat i o n , I n c             .              Montana
                                                           Montana
                                                                       Rank
                                                                       Bank
                                                                              of    B a k e r , N.A.
Bozeman B a n c o r p o r a t i o n , I n c .                                 of    Bozeman, N.A.
B u t t e I n s u r a n c e Agency, I n c .                Montana     Bank   of    B u t t e , N.A.
Mineral County Bancorporation,                             Montana     Bank   of    Mineral County
     Inc.
Red Lodge B a n c o r p o r a t i o n , I n c
Roundup I n s u r a n c e Agency, I n c .
                                                      .    Montana Bank o f Red L o d g e , N.A.
                                                           Montana Bank o f Roundup, N.A.
       From     1973 t o          1979,         the    appellants        consolidated            their     tax
returns with              their       respective           subsidiaries.           The D e p a r t m e n t o f

R e v e n u e , upon e x a m i n i n g t h e r e t u r n s , d e n i e d a p p e l l a n t s p e r m i s s i o n
to     consolidate            them.              In        recalculating        the       returns,         the
Department           did     not      allow       appellants           deduct ions        for       dividends

r e c e i v e d from t h e i r s u b s i d i a r i e s .
       The     appellants             appealed            the    Department's        decision         to   the
S t a t e Tax A p p e a l Board (STAB)                .     STAB o v e r t u r n e d t h e D e p a r t m e n t ' s
d e c i s i o n , and a l l o w e d t h e d e d u c t i o n s .       STAB f o l l o w e d t h e case l a w

w h i c h s t a t e d t h a t t h e C o r p o r a t i o n L i c e n s e Tax A c t 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.                    STAB r e a s o n e d t h a t
s i n c e S e c t i o n 243 o f t h e F e d e r a l I n t e r n a l Revenue Code allows t h e
d e d u c t i o n s , and s i n c e no p r o v i s i o n i n t h e C o r p o r a t i o n L i c e n s e Tax

Act e x p r e s s l y p r o h i b i t s the deductions,                   a p p e l l a n t s could deduct
t h e d i v i d e n d s r e c e i v e d from t h e i r s u b s i d i a r i e s .

       The D e p a r t m e n t a p p e a l e d STAB's d e c i s i o n t o t h e D i s t r i c t C o u r t
of    the      First       Judicial          District,           Lewis       &     Clark       County.           The
District          Court        reversed         STAB's           decision,             stating       that       STAB
i n c o r r e c t l y a p p l i e d pre-1973          s t a t u t o r y and case l a w i n c o m p u t i n g

t a x r e t u r n s f o r t h e y e a r s 1973 t h r o u g h 1979.                     The D i s t r i c t C o u r t

c o n c l u d e d t h a t s e c t i o n 84-1504            a s amended i n 1 9 7 3 , i n i t s p l a i n

meaning,          limits        deductions            to    - -o s e
                                                            o n l y t h-            allowed         in    section
84-1502.          S i n c e t h e d e d u c t i o n claimed by a p p e l l a n t s w a s n o t pro-
v i d e d f o r i n s e c t i o n 84-1502,                 the District Court disallowed the
d e d u c t i o n , r e g a r d l e s s of     the provision i n the federal tax code.
      The s o l e i s s u e o n r e v i e w is w h e t h e r u n d e r s e c t i o n 84-1504,
R.C.M.,       1947, ( r e c o d i f i e d i n p a r t i n s e c t i o n 15-31-113(2),                          MCA)   ,
appellants          are allowed              to deduct d i v i d e n d s received                     from      sub-
sidiaries         i n which           they     own 80 p e r c e n t o r more of                     the     voting
stock.
       I n i n t e r p r e t i n g s e c t i o n 84-1504 p r i o r to i t s 1 9 7 3 amendment,

t h i s Court acknowledged                     that    the       F e d e r a l I n t e r n a l Revenue Code

would b e u s e d          t o define "gross                income,"         " n e t income,"            and    "all

allowable         d e d u c t i o n s ,*I   unless         another provision                  e x p r e s s l y pro-
vided       otherwise.                  Lazy     JD        Cattle      Co.        v.      State       Board       of

Equalization            ( 1 9 7 2 ) , 1 6 1 Mont.          40,     5 0 4 P.2d          287;    F i r s t Federal
Savings       &   Loan v.          S t a t e Tax A p p e a l Board               ( 1 9 7 5 ) r 1 6 7 Mont.       33,
5 3 5 P.2d 1 8 3 ( a p p l y i n g p r e - 1 9 7 3         statutes).               Lazy J D - a t t l e --
                                                                                 In --       C--         Co.

w e s t a t e d t h e r u l e as f o l l o w s :

               "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 o f 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 p u r p o s e s is
               d e p e n d e n t upon and 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 p r o v i s i o n s o f t h e F e d e r a l I n t e r n a l Revenue
               Code e x c e p t as e x p r e s s l y p r o v i d e d o t h e r w i s e ,
               a s i n t h e case o f 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 d i v i d e n d d e d u c t i o n . "          504 P.2d
               a t 290.
S e e a l s o Board o f         E q u a l i z a t i o n v.    F a r m e r ' s Union G r a i n T e r m i n a l

A s s l n ( 1 9 6 2 ) , 1 4 0 Mont. 5 2 3 , 374 P.2d                 231;   Home B u i l d i n g    &   Loan
A s s l n of Helena v.              Board o f E q u a l i z a t i o n ( 1 9 6 2 ) , 1 4 1 Mont. 1 1 3 ,
3 7 5 P.2d        312;    and B a r t h v .      S t a t e Board o f         Equalization          (1966),

1 4 8 Mont. 2 5 9 , 419 P.2d 484.                  T h e s e cases h a v e n o t b e e n o v e r r u l e d
a n d are s t i l l good l a w i n Montana.
       STAB b a s e d      its decision            on        the   above     cases;      the    District

Court       did    not.       We      agree with             the   STAB r e a s o n i n g   and     hereby
r e i n s t a t e its o r d e r .
       The    1 9 7 3 amendment            to    s e c t i o n 84-1504          did   not      alter     the

interrelationship               that       exists        be t w e e n     the     Federal       Internal
Revenue Code and              t h e Montana C o r p o r a t i o n L i c e n s e Tax A c t .             The

I n t e r n a l Revenue Code i n s e c t i o n 243 p e r m i t s c o r p o r a t i o n s t o t a k e

a    d e d u c t i o n f o r 1 0 0 p e r c e n t of      the dividends received                    by them
f r o m s u b s i d i a r y c o r p o r a t i o n s i n which t h e y own 8 0 p e r c e n t o r more
of    the    voting       stock.         No     provision          i n t h e Montana C o r p o r a t i o n

L i c e n s e Tax A c t e x p r e s s l y p r o h i b i t s t h e s e c t i o n 2 4 3 d e d u c t i o n .
Appellants          are      therefore          entitled           to     deduct      all      dividends
r e c e i v e d b y them from s u b s i d i a r y c o r p o r a t i o n s i n which t h e y own

8 0 p e r c e n t or more of t h e s t o c k .
       The D i s t r i c t C o u r t ' s    judgment          i         a t e d and t h e STAB o r d e r
reinstated.




      Chief Ju'sticc
