TED SCHWINDEN, IN HIS OFFICIAL CAPACITY AS GOVERNOR OF THE STATE OF MONTANA; ELLEN FEAVER, IN HER OFFICIAL CAPACITY AS DIRECTOR OF REVENUE OF THE STATE OF MONTANA; DEPARTMENT OF REVENUE OF THE STATE OF MONTANA; MONTANA ASSOCIATION OF COUNTIES; MONTANA LEAGUE OF CITIES AND TOWNS; URBAN COALITION; AND MONTANA SCHOOL BOARDS ASSOCIATION, PLAINTIFFS, v. BURLINGTON NORTHERN, INC., DEFENDANT.
No. 83-551
Supreme Court of Montana
Nov. 23, 1984
691 P.2d 1351
Decided Nov. 23, 1984.
David W. Woodgerd argued, Dept. of Revenue, Helena; G. Steven Brown, Mont. Assoc. of Counties, Helena; Robert M. McCarthy, Silver Bow County Atty. for League of Cities & Towns, Butte; Mike McGrath, L. & C. County Atty. for Urban Coalition, Helena; Chip Erdmann, Montana School Boards Assoc., Helena, for plaintiffs.
Stanley T. Kaleczyc argued, Helena, for defendant.
George Bennett argued, Helena, for Montana Bankers.
MR. JUSTICE SHEEHY delivered the Opinion of the Court.
This is an original proceedings in this Court brought by Governor Ted Schwinden, Ellen Feaver, Director of the State Department of Revenue, and interested associations for a declaratory judgment determining the validity of section 15-31-116, MCA. The defendant taxpayer is Burlington Northern, Inc.
We deemed important the issue raised by the complaint for declaratory judgment because it implicated the validity of state corporation license tax statutes which allocate revenue between the state and counties. We therefore accepted jurisdiction of the cause and remanded the case to the District Court, First Judicial District, Lewis and Clark County, to determine any factual controversies involved.
The District Court scheduled hearings, determined facts under our remand, and returned its written findings of fact to this Court on May 25, 1984. Thereafter we provided time for the filing of objections by the parties, submission of briefs by the parties and amici on the issues and findings, and heard oral arguments on the cause. At the conclusion of oral argument, we asked for additional briefs from the parties on an issue raised by an amicus curiae. The cause now deemed submitted for decision, we proceed to our determination.
I.
HISTORY
Prior to 1978, Montana counties were empowered by state law to impose a property tax on bank stock shares. Because federal obligations were included in the calculation of bank assets subject to that tax, the Montana bank shares tax was
The United States Supreme Court made a similar holding with regard to a Texas bank shares tax law in American Bank and Trust Company v. Dallas County (1983), 463 U.S. 855, 103 S.Ct. 3369, 77 L.Ed.2d 1072.
The bank shares tax which was held unconstitutional in Montana Bankers was clearly a property tax. The governing statutes were
Until the Montana Bankers decision, Montana banking institutions paid a bank shares tax but no corporation license tax to the State. Although banks have been subject to the corporation license or income tax statutes since 1971, (
The legislature responded to the tax revenue loss growing out of our decision in Montana Bankers by passing Ch. 634, Laws of Montana (1979). The passage of that act made savings and loans institutions subject to the corporation license
Subjecting savings and loan associations to the corporation license tax brought about First Federal Savings and Loan Association v. Department of Revenue (Mont. 1982), [200 Mont. 358,] 654 P.2d 496, 39 St. Rep. 1802, cert. den. 462 U.S. 1144, 103 S.Ct. 3128, 77 L.Ed.2d 1378 (1983). In First Federal, the savings and loan associations, in computing their corporation license tax, deducted from gross income the interest income earned from federal obligations. The Department of Revenue, in examining their tax returns for the year involved, disallowed the deduction for interest income earned from federal obligations. One of the issues coming before this Court in that case was whether the inclusion of interest from federal obligations in income subject to the corporation license tax violated
After the decision in First Federal, Montana banks and savings and loan associations paid no corporation license tax, no corporation income tax, and no property taxes on their bank shares. The legislature responded in 1983 by passing
Burlington Northern, Inc. is a corporation which operates a railroad and other business interests in and out of Montana. Montana imposes either a license tax or an income tax on corporations. The license tax,
We remind the reader, though it is not an issue in this case, that Montana follows the unitary principles of state taxation where multistate corporations are involved. This method of a taxation has been approved by this Court, Ward Paper Box Co. v. Dept. of Rev. Etc. (1981), 196 Mont. 87, 638 P.2d 1053; and the United States Supreme Court in Mobil Oil Corporation v. Commissioner of Taxes of Vermont (1980), 445 U.S. 425, 436, 100 S.Ct. 1223, 1231, 63 L.Ed.2d 510, 520.
II
IS SECTION 15-31-116, MCA, VALID?
As we have said, after our decision in First Federal interest income from federal obligations was not includable in the taxable income of corporations subject to the state corporation license tax.
“(1) A corporation, taxable under this part, that excludes interest from gross income which would be taxable except for federal law must adjust its allowable deductions for all taxable periods for which interest is excluded in the following manner:
“(a) the total amount of interest excluded from gross income by federal law must be determined;
“(b) the total amount of all interest income from all sources must be determined;
“(c) the ratio of excluded interest income to all interest income must be determined; and
“(d) the total deductions allowable under
15-31-114 must be reduced by an amount determined by multiplying the amount of deduction otherwise allowable by the ratio of excluded interest to all interest income; however, the product of this calculation may not exceed the amount of excluded interest income.“(2) Allowable deductions must be reduced with respect to all corporations that exclude interest income otherwise taxable upon returns filed for all taxable periods for which such exclusion is claimed and for all taxable periods for which a claim for refund is made.”
In its findings of fact, the District Court found that an algebraic formula adopted by the state department of revenue in 42.23.417 A.R.M. demonstrates how to compute the deductions disallowed on the basis of federal interest income. That formula follows:
Exempt Interest Income × Total Deductions = Deductions Disallowed
Total Interest Income
For the year 1982 (the only year which we are concerned with) BN‘s total interest income from all sources constituted 1.74% of its gross income; the percentage of BN‘s total interest income made up of federally exempt income was 20.4%. Application of the
$18,328,000 × $4,677,639,000 = $952,765,750
$89,982,000
Because, however,
The Department of Revenue argues that (1) deductions allowable to compute state taxable income are a matter of legislative grace; (2) there is precedent for
BN responds that
We determine that the net effect of
Because our holding in First Federal was that the corporation license tax was not a franchise tax,
III.
OUR DECISION IN FIRST FEDERAL
The issuance of our decision in First Federal created an
The legislature disagreed with our decision in First Federal and said so in its preface to the adoption of Ch. 673, Laws of Montana (1983), which became
Thus, our decision today that
We have determined to reexamine First Federal, though over the objection of BN that we should not consider an issue raised by an amicus curiae, the Montana Bankers Association.
A. First Federal was incorrect.
In First Federal we held that under
“The Department argued that the Montana Corporation License Tax is a franchise tax on the privilege of doing business in Montana with the tax based upon or measured by the net income of the taxpayer. Hence, it was argued, that the tax is not on the property (interest income), but is
on the privilege. This Court finds the argument to be unpersuasive. It is a distinction without a difference in our opinion. If the franchise tax is on the privilege and the tax is based on the net income, this Court concludes that the tax is on the privilege and the net income. If the net income includes tax-exempt interest, the tax is on exempt income which is prohibited by the specific federal statutes creating the federal obligations and granting the tax exemption . . . It also appears to this Court that by the Department‘s including the tax-exempt interest in net income, the Department is seeking to tax indirectly what it cannot tax directly, in violation of the general rule set forth in 31 U.S.C. 742 (1976) . . .” 654 P.2d at 498.
It is apparent that this Court concluded that, because the corporation license tax laws of this state provided a tax that was measured by net income, the corporation license tax violated federal law in that regard. We now determine that we were erroneous in that conclusion and that the holding in First Federal should be reversed.
We base our determination on these factors: (a) the Montana corporation license tax was fashioned after the federal corporation franchise tax statutes; (b) several of our cases preceding First Federal had held the Montana corporation license tax to be a franchise tax; (c) Congress has amended
We want it understood that we do not reach our determination reversing First Federal because of the tax loss to the state and counties if we were to continue First Federal in effect. If we were not convinced of the error in First Federal, we would reluctantly but candidly advise the legislature to look to other sources of tax revenues.
By its terms,
“(3) Every corporation . . . engaged in business in the state of Montana shall annually pay to the state treasurer as a license fee for the privilege of carrying on business in this state such percentage or percentages of its total net income for the preceding taxable year at the rate hereinafter set forth . . .”
The precursor of
“. . . In the present case the tax is not payable unless there is a carrying on or doing of business in the designated capacity, and this is made the occasion for the tax, measured by the standard prescribed . . . the tax is laid upon the privileges which exist in conducting business with the advantages which inhere in the corporate capacity of those taxed, and which are not enjoyed by private firms or individuals . . . It is this distinctive privilege which is the subject of taxation . . .” 55 Mont. 76, 83, 173 P. 1062, quoting Flint in part.
In State v. J.C. Maguire Construction Company (1942), 113 Mont. 324, 328, 125 P.2d 433, 434, this Court said:
“In all later decisions of this court wherein this tax has been under consideration or has been referred to in any way
it has been spoken of as a franchise tax, or license tax, an excise upon the privilege of doing business in the state in a corporate capacity. Cottonwood Coal Company v. Junod, 73 Mont. 392, at page 398, 236 P. 1080; East Helena State Bank v. Rogers, 73 Mont. 210, at page 213, 236 P. 1090; O‘Connell v. State Board of Equalization, 95 Mont. 91 at page 118, 25 P.2d 114. It has been clearly distinguished from the license fees exacted upon the grant of privilege and from taxes imposed upon income or property. With the history of judicial interpretation of the act as we have it thus harmonized with other tax measures, and the administration of the law in accordance therewith, the question of the character of the tax is so well settled as to leave no room for doubt or speculation.” (Emphasis added.)
In Montana Bankers Association v. Department of Revenue (1978), 177 Mont. 112, 580 P.2d 909, this Court construed the Montana bank shares tax act, a property tax, as valid only if it be interpreted to authorize a deduction for the value of federal obligations in computing the bank shares tax basis. This Court relied on the 1959 amendment to
The Montana corporation license tax is not to be considered a property tax. O‘Connell v. State Board of Equalization (1933), 95 Mont. 91, 25 P.2d 114.
It is quite clear from our holdings prior to First Federal that the Montana corporation license tax was determined by this Court to be a franchise tax and a nonproperty tax. Therefore, our decision in First Federal needs to be reexamined in the light of the language of
“(a) Stocks and obligations of the United States Government are exempt from taxation by a State or political subdivision of a State. The exemption applies to each form of taxation that would require the obligation, the interest on the obligation, or both, to be considered in computing a tax, except—
“(1) a nondiscriminatory franchise tax or another nonproperty tax instead of a franchise tax, imposed on a corporation; and
“(2) an estate or inheritance tax.”
(The language found in subdivision (1) and (2) of
It was the intention of Congress in
In American Bank and Trust Company v. Dallas County (1983), 463 U.S. 855, 103 S.Ct. 3369, 77 L.Ed.2d 1072, the United States Supreme Court had before it the validity of the Texas tax on bank shares, a property tax. The court considered the Texas tax in the light of the 1959 federal amendment which is now a part of
The first part of
“Prior to the 1959 amendment, franchise and estate and inheritance taxes measured by the value of federal obliga-
tions, like bank shares taxes, were upheld on the theory that the tax was levied on the franchise or the transfer of the property rather than on the ownership interest in the federal securities themselves. By expressly exempting franchise and estate and inheritance taxes from the amended section 3701, Congress manifested its awareness that the new language would broaden significantly the prohibition as it had been construed by the courts. Congress must have believed that franchise and estate and inheritance taxes required federal obligations to ‘be considered, directly or indirectly, in the computation of the tax‘; otherwise, the specific exemptions for these taxes would have been superfluous . . .” (Emphasis added.) 463 U.S. at 864, 103 S.Ct. at 3375, 77 L.Ed.2d at 1079.
Thus, a nondiscriminatory franchise tax levied by a state on a corporation for the privilege of doing business in the state is valid even though, in computing the tax, interest income from federal obligations is included.
The reasoning of the United States Supreme Court in American Bank makes it clear that a state may use, directly or indirectly, the interest income on federal obligations to determine corporate nondiscriminatory franchise taxes levied by the state.
In Garfield Trust Company v. Director, Division of Taxation, 6 N.J. Tax 464 (1984), a cause in the New Jersey court upheld the validity of a New Jersey franchise tax in light of
The legal theory adopted by the New Jersey tax court in reaching its decision is the same as we have expounded
We also determine that the Montana corporation license tax is a nondiscriminatory franchise tax. The term “nondiscriminatory” was made clear by the United States Supreme Court in Memphis Bank and Trust Company v. Garner (1983), 459 U.S. 392, 103 S.Ct. 692, 74 L.Ed.2d 562. The Court said:
“A state tax that imposes a greater burden on holders of federal property than on holders of similar state property impermissibly discriminates against federal obligations. See, e.g., United States v. County of Fresno, supra, [429 U.S. 452] at 462, 50 L.Ed.2d 683, 97 S.Ct. 699 [at 704 (1977)] (‘a state tax on those who deal with the Federal Government’ is unconstitutional if the tax’ is imposed [un]equally on . . . similarly situated constituents of the State‘). Our cases establish, however, that if the ‘tax remains the same whatever the character of the [property] may be, no claim can be sustained that this taxing statute discriminates against the federal obligations.’ Werner Machine Company v. Director of Division of Taxation, supra, [350 U.S. 492] at 493-94, 76 S.Ct. 534 [at 535], 100 L.Ed. 634[(1956)].” 459 U.S. at 397, 103 S.Ct. at 696, 74 L.Ed.2d at 567.
Montana‘s corporation license tax does not discriminate against holders of federal obligations. It taxes the interest earned by corporate holders of state obligations.
“Notwithstanding the provision of any other law, the income from bonds or other obligations issued by any state or political subdivision of a state are included in gross and net income for purposes of the corporation license tax . . .”
B. May the Court reverse First Federal, as the issue was
Reversal of our First Federal decision was first suggested in this cause by Montana Bankers Association, appearing amicus curiae. It is contended therefore that the rectitude of our holding in First Federal cannot be examined in this case, as the issue was first raised by one not a party to the action.
We determine here not to follow the usual rule that issues raised by amici that are not part of the underlying action will not be considered by this Court. Compelling reasons not to follow that rule include (a) the binding effect of First Federal on state officials, (b) the validity of
First Federal, when decided by this Court, was binding on the state officials who were charged by law with the collection of the Montana corporation license tax. The state officials therefore were not in a position to relitigate the validity of the holding in First Federal. Their duty instead required them to uphold the provisions of
The validity of the Montana corporation license tax, with or without
Finally, it must be remembered that this cause is an original proceeding in this Court and the legal issues that arise belong and pertain to this Court. We remanded this cause to the First Judicial District Court for fact-finding procedures, but reserved to ourselves the legal issues involved. In entering judgment, our powers in an original proceedings are not less than those given a district court under
We are not barred in this case, therefore, from reversing First Federal by the rule that amici may not raise issues not raised by the parties.
IV.
APPLICATION
We therefore hold and determine that
Each party shall pay its own costs.
MR. JUSTICES HARRISON, SHEA, GULBRANDSON and MORRISON concur.
MR. CHIEF JUSTICE HASWELL, dissenting:
I respectfully dissent.
In my view,
Furthermore,
Finally, I would not reexamine, much less overrule, our prior decision in First Federal, supra. This issue was not raised by any party to this action. It was raised by amicus curiae Montana Bankers Association and under well settled rules of law, amici are not permitted to raise additional issues not raised by the parties to the lawsuit.