BEFORE THE Department of REVENUE
OF THE STATE OF MONTANA
In the matter of the amendment of ARM 42.23.108, 42.23.109, 42.23.112, 42.23.113, 42.23.116, 42.23.212, 42.23.303, 42.23.312, 42.23.313, 42.23.403, 42.23.421, 42.23.424, 42.23.601, 42.23.702, 42.23.802, 42.23.803, 42.23.804, 42.23.805, 42.26.101, 42.26.202, 42.26.301, 42.26.302, 42.26.311, 42.26.313, and 42.26.505 and the repeal of ARM 42.23.117 pertaining to corporate income tax
NOTICE OF AMENDMENT AND REPEAL
TO: All Concerned Persons
1. On September 2, 2016, the Department of Revenue published MAR Notice No. 42-2-960 pertaining to the public hearing on the proposed amendment and repeal of the above-stated rules at page 1539 of the 2016 Montana Administrative Register, Issue Number 17.
2. On September 29, 2016, a public hearing was held to consider the proposed amendment and repeal. No members of the public appeared for the hearing. Written comments were received from Nikki E. Dobay, Council on State Taxation, Walter J. Kero, CPA, and Robert Story, Montana Taxpayers Association.
3. The department amends and repeals the above-stated rules as proposed.
4. The department has thoroughly considered the comments received. A summary of the comments received and the department's responses are as follows:
COMMENT 1: Walter J. Kero, CPA, of Kero Byington and Associates, commented that he has no issue with the concept of changing the titling of the corporation tax to that of an income tax and not a franchise tax. A franchise tax implies a license to do business and, if that were in fact the case, then such a tax could and should only be imposed for conducting business in a future period. The weakness of a license tax is that in the year of termination, for any reason, a corporation should not have to pay a tax to do business in the future. There is no way the tax systems in the U.S. would allow for such a condition. Therefore, he commented that he welcomes the end of the hypocrisy and the corporate tax now being called simply an income tax.
Mr. Kero further commented that the proposed amendments are more than housekeeping, and that he would term them a major change. If the Montana Codes still contain references to corporate license tax, they should be "house-cleaned" as well.
RESPONSE 1: The department appreciates Mr. Kero's comments. The 2013 Montana Legislature passed Senate Bill 361, changing all references of the "corporation license tax" to the "corporate income tax," and the department is updating its rules for consistency with this change in the statute.
COMMENT 2: Mr. Kero also commented that he hopes all of the amended return rules for corporations will mirror the rules for amendments to individual returns. Tax simplification would include the idea of one set of procedural rules for all taxpayers, such as the same penalty provisions, same carryback, and carryover rules (subject to statute). The more the rules are the same between taxpayer types, the better for tax administration and simplification.
RESPONSE 2: The rules adopted by the department reflect and support the statutes enacted by the Montana Legislature. Because there are differences in laws governing different tax types, for example, individual taxpayers, corporate taxpayers, etc., the applicable rules will reflect these differences.
COMMENT 3: Regarding the proposal to strike ARM 42.23.113(2), Mr. Kero asked if the legislature deleted the corporation as a research and development firm. If not, is it proper for the department to delete this section? Mr. Kero further suggested that the outdated language applying to tax periods prior to July 1987 in (2) should be updated, not removed.
RESPONSE 3: The Montana legislature has not repealed 15-1-101(1)(u), MCA, defining "Research and development firm." The language in ARM 42.23.113(2), that the department is striking, applies to a corporation that began operating in Montana prior to July 1, 1987, giving direction to its exemption from the corporate income tax for its first five years of operation, which at the latest would have ended in 1992. This language is outdated and no longer needed.
COMMENT 4: Regarding ARM 42.23.303(1), Mr. Kero asked what "other competent authority" means for the purposes of the rule and stated that it should be defined.
RESPONSE 4: In this context, competent authority refers to the organization with the legal authority or power to adjust or correct an entity's tax filing. For instance, if an entity incorporated in Canada had activity in Montana and received notice from the Canada Revenue Agency regarding its tax filings, there is a requirement for those changes to be reported to the state of Montana.
It may be helpful to review the Montana Supreme Court's decision in Frontier Chevrolet v. Department of Revenue, 2008 MT 191. In that case, the Montana Supreme Court concluded that the United States Tax Court and the Ninth Circuit Court of Appeals represented "competent authorities" for the purposes of 15-31-506, MCA.
The department respectfully disagrees that a rule is needed to define "other competent authority."
COMMENT 5: Robert Story, Executive Director of the Montana Taxpayers Association, commented that his organization agrees with the bulk of the proposed changes as they reflect the intent of the current statutes, but they do have a few concerns.
Regarding ARM 42.23.303(1)(b) and (2)(b), the proposed amendments allow the department to commence action at any time when an amended return is not filed. The rule is based on 15-31-544, MCA, which allows such action for failure to file a return as required. Is it the department's opinion that 15-31-544, MCA, also refers to amended returns? Is it necessary to amend the statute to address the issue of amended returns?
RESPONSE 5: The department appreciates Mr. Story's comments. The Montana First Judicial District Court ruled that 15-31-544, MCA, does apply to amended returns in its decision in Northwest Farm Credit Services, ACA v. Montana Department of Revenue and State Tax Appeal Board (Cause No. BDV-2006-884, June 23, 2007). The department does not believe it is necessary to amend the statute.
COMMENT 6: Nikki E. Dobay, Tax Counsel with the Council on State Taxation (COST), stated that COST urges the department to reconsider certain proposed changes to ARM 42.23.303, which address reporting requirements for corporate taxpayers following a change in federal tax.
Ms. Dobay commented that the department's proposed amendment of (1) is overly vague, requiring an amended return to be filed when an "official notice" has been received. More guidance should be provided as to what constitutes an "official notice." She stated that pursuant to COST's policy statement, a state should provide clear definition of what constitutes a "final determination," which is the trigger for the requirement to report a federal change. Therefore, COST recommends the department consider changing "official notice" to "final determination" and adding a definition of "final determination" to its proposed rules. To sufficiently apprise taxpayers of what constitutes a "final determination," they recommend the following definition as a best practice:
"A 'final determination' is deemed to occur when the latest of any of the following circumstances exist with respect to a federal taxable year:
(1) The taxpayer: (i) has a final income tax liability resulting from a federal audit including any requisite review by the congressional Joint Committee on taxation; (ii) has not filed a petition for redetermination or claim for refund for any portion of the audit; and (iii) has allowed the time to file such petition or claim to lapse.
(2) The taxpayer has signed all federal Forms 870, closing agreement(s), or other IRS forms(s) for the tax period consenting to the deficiency or consenting to any over-assessment that are final for all issues and no longer subject to appeal.
(3) A decision from the U.S. Tax Court, District Court, Court of Appeals, Court of Claims, or Supreme Court becomes final.
(4) The taxpayer has exhausted all rights to protest an assessment or claim a refund for all entities that are included in, or have income or factors that are reflected in, the taxpayer's returns that are filed with the state."
RESPONSE 6: The department appreciates Ms. Dobay's comments. The language used in ARM 42.23.303 is consistent with the language in 15-31-506, MCA. The department is not changing the terminology, as you propose, because it has the potential to change the language context and it is important that the department's rule language remain consistent with the language in statute.
COMMENT 7: Regarding ARM 42.23.303(2), Ms. Dobay commented that the timeframe provided to file an amended return should be 180 days instead of 90. State reporting requirements for federal tax changes is a complicated area and large multistate taxpayers may be required to report hundreds of changes to multiple states. To ease this substantial burden, COST considers 180 days a more reasonable reporting period. Cutting that time in half is likely to cause taxpayers to hurry through this process, potentially resulting in errors that will consume resources of both the state and the taxpayer and further delay proper reporting.
RESPONSE 7: The 90-day requirement is in statute and beyond the scope of the department's rulemaking authority to change. Please refer to 15-31-506, MCA.
COMMENT 8: Regarding ARM 42.23.303(2), Mr. Kero commented that any such rule should be the same between the department and taxpayers. In other words, the time available for payment of a tax due and the refund of an overpaid tax should be the same unless the taxpayer is beyond the original statute of limitations. Mr. Kero stated that he has seen situations where the statutes have been used against taxpayers with no remedy and the state gets different treatment. Mr. Kero further commented that we cannot have a tax system with two sets of rules, such as one for taxpayers and one for the state.
RESPONSE 8: The statute of limitations related to corporate income tax is different for assessing deficiencies and filing refund claims; however, these periods of limitation are set forth in statute and go beyond the department's rulemaking authority to change. Please refer to 15-31-509, MCA.
COMMENT 9: Ms. Dobay, Mr. Story, and Mr. Kero all commented on the proposed amendment of ARM 42.23.303(4).
Ms. Dobay stated that COST opposes the proposed amendment which provides that there is no de minimis standard for purposes of reporting changes and corrections to a corporation's federal tax or return. Requiring a taxpayer to prepare and file an amended Montana return where there is little or no change to the Montana return is an onerous burden to place on corporate taxpayers, likely with no resulting benefit to the state. She further commented that COST understands why the department may be fearful that this could become a slippery slope with taxpayers taking aggressive positions. However, they recommend amending the proposal to set an amount as being "de minimis" to address this concern.
Mr. Story also commented that they are concerned that the rule does not provide for a de minimis standard when reporting changes. It seems that there would be a practical standard that could be adopted to prevent the cost to both the taxpayer and the department in dealing with changes that are of such a small amount that they have almost no impact on taxes owed.
Mr. Kero stated that a de minimis standard is proposed to the reporting requirements for changes or corrections to corporations and asked if this also applies to individuals. He stated that he could not find a code or administrative rule or a comparable rule for individuals other than a reference at 15-30-2605, MCA, but it did not contain a de minimis provision.
RESPONSE 9: The Montana Code does not provide for a de minimis standard related to reporting requirements. The department believes all changes and corrections to federal taxable income are required to be reported under the current law.
In regards to Mr. Kero's inquiry about the reporting requirements for individual income tax, there is no de minimis standard that applies.
COMMENT 10: Regarding ARM 42.23.312, in which an inactive corporation is required to file one of two returns, either a CLR-4 (now CIT) form or an affidavit provided by the department, Mr. Kero commented that it would be best to utilize one form and if a CIT form is required, then the minimum tax of $50 should be waived for an inactive corporation. If a CIT form with no tax due is a problem for administration, then the affidavit from the department should be changed into an actual tax form for the purpose of an inactive corporation filing and not having to pay $50.
RESPONSE 10: The affidavit was made available to taxpayers as an alternative filing mechanism to filling out the longer Form CIT. It is the department's experience that taxpayers appreciate having the option of using either form. The minimum tax of $50 does not apply to inactive corporations. ARM 42.23.312(1).
COMMENT 11: Mr. Kero commented that the provision in ARM 42.23.313 is fine for dissolutions, withdrawal, or cessation of business. However, there is no discussion or provision for insolvent, bankrupt, or just plain broke corporations. Corporations in this circumstance have no resources for filing any paperwork and just walking away from reporting. A provision should be in place to assist these taxpayers with compliance. The proposed rule changes cover mergers and consolidations, but should also include a provision for bankruptcies and insolvencies.
RESPONSE 11: The department respectfully disagrees and does not believe that ARM 42.23.313 is the proper place to address bankrupt and insolvent entities. ARM 42.23.313 provides guidance for corporations seeking to obtain a dissolution, withdrawal, or tax clearance certificate.
There are federal guidelines that must be followed regarding bankrupt corporations that go beyond the issues addressed in ARM 42.23.313.
COMMENT 12: Mr. Kero indicated that a reference to the tax benefit rule needs to be added to ARM 42.23.601(2).
RESPONSE 12: The department does not believe what is known as the "tax benefit rule" is applicable to ARM 42.23.601(2). The "tax benefit rule" provides that the amount of an expense recovered must be included in income in the year of the recovery to the extent the original expense resulted in a tax benefit. This concept does not apply to the language in the rule.
ARM 42.23.601(2) does not address changes to taxable income, but rather addresses the amount of refund claim available, if any, for a year in which the statute of limitations for refunds has run under 15-31-509, MCA.
COMMENT 13: Mr. Story commented that the change of the spelling of "forego" to "forgo" in ARM 42.23.802(4) does not look right to him, but is apparently an acceptable form of the word.
RESPONSE 13: The recommendation to make this change came from the Secretary of State's ARM Bureau, noting that as per the Gregg Reference Manual (11th edition), paragraph 719, on page 236, "forgo" means to relinquish, to let pass, and "forego" means to go before.
The Gregg Reference Manual is adopted by reference in ARM 1.2.519, which sets forth the basic formatting requirements for rulemaking. Therefore, the department considered the recommendation and agreed that given the context of the language in this section of the rule, "forgo" is the proper version of the word to use.
COMMENT 14: Regarding ARM 42.23.804(3), Mr. Story commented that this change precludes a parent corporation from succeeding to net operating loss carryover from the liquidation of a subsidiary (i.e., the tax fiction created under the check-the-box regime under U.S. Treasury Reg. 301.7701-3(g)(1)(iii)).
Section 15-31-119(8), MCA, precludes the survivor of a merger or consolidation from succeeding to net operating losses of a nonsurviving entity, but it does not preclude a parent corporation from succeeding to the net operation losses from a liquidating subsidiary. What authority does the department believe exists to apply the statute to the case of the liquidation of a subsidiary?
RESPONSE 14: For Montana purposes, a net operating loss for one member of a group cannot be carried back or carried over to offset the income of another member of the group, as specified in ARM 42.23.803(2). When a subsidiary is liquidated or converted to a disregarded entity, it loses its identity as an individual member of the group and is considered a branch or division of the corporate owner. It no longer has its own identifiable income or loss for years after the liquidation or conversion. Consequently, any net operating losses incurred prior to the date of liquidation or conversion cannot be carried forward.
COMMENT 15: Mr. Kero stated that he does not have any comments on the multi-state definition of terms found in ARM 42.26.202; however, he stated that it would be extremely beneficial if all tax terms were used between all taxes and taxpayer types. Apportionment is an example of a definition that could be used and be applicable between individual, corporation, trust, partnership, and nonprofit taxpayers/tax reporters.
RESPONSE 15: The definitions provided for in ARM 42.26.202 apply to corporate taxpayers as well as pass-through entities and nonprofit taxpayers. The use of apportionment and allocation of income as it relates to multistate taxpayers does not apply to individual taxpayers, as the Montana statute does not provide for their use.
/s/ Laurie Logan /s/ Mike Kadas
Laurie Logan Mike Kadas
Rule Reviewer Director of Revenue
Certified to the Secretary of State November 14, 2016.