Petition — Department of Revenue v. First Federal Savings & Loan Ass'n

In The

Supreme Court of the United States

October Term, 1982

oO

THE DEPARTMENT OF REVENUE OF THE

STATE OF MONTANA,

Petitioner,

vs.

FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION

OF MISSOULA, AND HAVRE FEDERAL SAVINGS

AND LOAN ASSOCIATION

Respondents.

oO

Vv

PETITION FOR A WRIT OF CERTIORARI

TO THE SUPREME COURT OF MONTANA

oO

MICHAEL J. RIELEY

Special Assistant

Attorney General

Montana Department of Revenue

Mitchell Building

Helena, Montana 59620

Telephone: (406) 449-2852

TERRY B. COSGROVE

Special Assistant

Attorney General

P.O. Box 1144

Helena, Montana 59624

Attorneys for the State of Montana

STATE PUBLISHING CO., Helena, Montana 59604

i,

QUESTION PRESENTED FOR REVIEW

Whether The State of Montana Can Include Interest In-

come From Certain Federal obligations (i.e., 31 U.S.C.

§769 and 12 U.S.C. §§1433, 1725(e), 2055, 2079, 2134).

in the net income measurement of the Montana Corpora-

tion License Tax imposed by Sections 15-31-101 et seq..

Montana Code Annotated.

A. Whether the Montana Corporation License Tax

Satisfies the Requirements of the Exception Con-

tained in 31 U.S.C. §742, so as to Allow the In-

clusion of Federal Interest Income Within the

Computation of its Tax Base.

B. Whether the Immunity From State Taxation

Described in 31 U.S.C. §769 and 12 U.S.C.

§§1433, 1725(e), 2055, 2079, 2134 is Broader

than that Otherwise Provided by 31 U.S.C. §742.

TABLE OF CONTENTS

Page

Er en ee ee ]

INE 05 hye ahes oy eas 6 A ey 8k Role ek l

Constitutional and Statutory Provisions Involved ... 2

I a5 6 556 ¥:o-80'e 4 oe pn e% 4

Reasons For Granting the Writ of Certiorari ....... 6

ic Gas Gy yn aes ka Coc eae. 5

ORS 853044 0s Scie Khe kinets eee ene 8

I a eae 17

iii,

TABLE OF CASES & AUTHORITIES

Cases: Page

American Bank and Trust Co. v. Dallas County,

U.S. , 51 U.S.L.W. 3339 (1982)

DR EORGEED cc ccucahee ier ieci ache access §

Bank of Texas v. Childs, 615 S.W.2d 810

(Tex. 1981), cert. grantedsubnom............. §

Bartow County Bank v. Bartow County Board of

Tax Assessors, 285 S.E. 2d 920 (Ga. 1982),

appeal docketed, No. 81-1834, 51 U.S.L.W. 3023

EI oi os Ga eee ee 5

Cleveland Trust v. Landers, 184 U.S. 111(1902) ... 15

Cottonwood Coal Co. v. Junod, 73 Mont. 392, 236

i rea aa ear are 1)

East Helena State Bank v. Rodgers, 73 Mont. 210,

Dy PEED fou cn cde eet eene ars ta es 1]

Educational Films Corporation v. Ward, 282 U.S.

IRS is ae 8k cs Gna cok teas bras 15

Equitable Life Assur. Co. v. Hart, 55 Mont. 76,

Set OE RINE cu dre'o'trok de Oo anes acces AL 1]

First Federal Savings & Loan Association v.

Department of Revenue, Mont, , 654 P.2d

Ns is hg natn d ae 2 lamar 0 os 1,6, 12, 14

Flint v. Stone Tracy Co., 220 U.S. lO7(1911)...... 15

Hamilton Co. v. Massachusetts, 6 Wall.

i, FRIES eR enR ST ar ie ID, Gal Badin ie Sipe eae? 10,15

Hicks v. Miranda, 422 U.S. 332 (1975) ........... 1]

iv.

TABLE OF CASES & AUTHORITIES—Continued

Cases: Page

Home Insurance Company v. New York State,

oale et A ea ear eer ae 15

Memphis Bank and Trust Company, v. Riley C.

Garner, U.S. $1 U.S.L.W.

ie SE ORE Ce eee 6, 7,11, 13, 14

Montana Bank v. Casey, 135 Mont. 104, 337 P.2d

NES ow coe Ws ees hoe ree eee Rees ll

Montana Bankers Association v. Montana

Department of Revenue, 177 Mont. 112, 580 P.2d

EE ie Sage ite ie ae Oe ere 7,8

O’Connell v. State Board of Equalization, 95 Mont.

ee Pt Sr ree 11

Pacific Co. v. Johnson, 285 U.S, 480(1932)........ 15

Plummer v. Coler, 178 U.S. 115(1900)........... 10

Provident Institution for Savings v. Massachusetts,

a a ee ee 10, 15

Reuben L. Andersen-Cherne, Inc. v. The

Commissioner of Revenue of Minnesota, 423 U.S.

EN oo asd Fd Wie ela aes «viele + oa 11

Society for Savings v. Coite, 6 Wall. 594 (1867) ...10,15

State v. J. C. Maguire Const. Co., 113 Mont. 324,

Pe OND Sic veh tet tae er eorrs vanes 1]

Werner Machine Co. v. Director of Taxation, 350

| re chr a re re ree 15, 16

Statutes: Page

Montana Code Annotated ;

a wiia's Sak dd «4 Rada S aed ae oe OO 13

I eg Pe 13

RE 6g kes uk as- oh VE boa kee es 13

NS 6g ns 6 awe as > Wo KEK Ske COARSE 13

res 6 56a eben eve ees ace~e es 13

POG cD eae aes ued dw veran ee con 2,3, 11

ID 500.5 0 obo se nave codes akened 2,3

Seba care kas a 404 ence eee oe 2,3, 11

ant Cage tls exes ata kaa eee 13

a ee err ee). 13

a ere rne 13

Nc irkwss ss ates s Ace awake cea 13

United States Code

NONE 6.000 6 60-600 see's case veenen 2,5, 14

PUREE UTED veccsccsucceesccececen 2,5, 14

oS rr rere eee 2,5, 7, 14

IEEE 6 von sesnedwawenec tween 2,5, 7,14

4 rrr 2,5, 7,14

oS re 2

rears 2

ES Ss veins op tases ues bean eu we 2-16

rare 2,5, 14

Statutes at Large

NG ac sah Bake ne eke eK eae wee 10

Other Authorities

S.Rep. No. 909, 86th Cong., Ist Sess. ........... )

Supreme Court Rule 20 .............c.c cc ceee 2

Symons, State Taxation of Banks: Federal Limitations,

99 Banking L.J. 817 (1982)................00. 9

No.

In The

Supreme Court of the United States

October Term. 1982

THE DEPARTMENT OF REVENUE OF THE

STATE OF MONTANA,

Petitioner,

VS.

FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION

OF MISSOULA, AND HAVRE FEDERAL SAVINGS

AND LOAN ASSOCIATION

Respondents.

fal

Vv

PETITION FOR A WRIT OF CERTIORARI

TO THE SUPREME COURT OF MONTANA

oO

The Petitioner, the State of Montana, respectfully prays

that a Writ of Certiorari issue to review the judgment and

opinion of the Supreme Court of Montana entered in this

case.

OPINION BELOW

The Opinion of the Montana Supreme Court is reported

at First Federal Savings & Loan Association v. Depart-

ment of Revenue, Mont. , 654 P.2d 496 (1982). A

copy of the Opinion of the Montana Court appears in the

Appendix, pp. la-10a.

JURISDICTION

The Opinion of the Montana Supreme Court was

entered on September 23, 1982. A timely Petition for

Rehearing was denied by a split court on December 6,

2

1982, Appendix pp. 1] la-12a, and this Petition for Cer-

tiorari was filed within 90 days of that date. Accordingly,

this Petition is timely under 28 U.S.C. §2101(c) and

Supreme Court Rule 20.

The jurisdiction of this Court is invoked under 28 U.S.C.

§1257(3).

CONSTITUTIONAL AND STATUTORY

PROVISIONS INVOLVED

This case concerns the tax exception contained in 31

U.S.C. §742. Also involved are certain provisions of the

Montana Corporation License Tax, in particular

§§15-31-101(3), 15-31-143(1) and 15-31-113(1)(a)(i), of the

Montana Code Annotated. The following statutes are also

involved in this case, but because of their length are set out

verbatim in the Appendix, pp. 34a-36a: 31 U.S.C. §769

(United States Treasury Bills); 12 U.S.C. §§ 1433 (Federal

Home Loan Bank Notes), 1725(e) (Federal Savings & Loan

Insurance Corporation Notes), 2055 Federal Land Bank

Obligations), 2079 (Federal Farm Credit Bank Securities),

and 2134 (Federal Home Loan Stock Dividends).

31 U.S.C. §742:

Exemption From ‘Taxation

Except as otherwise provided by law, all stocks, bonds,

Treasury notes, and other obligations of the United States,

shall be exempt from taxation by or under State or

municipal or local authority. This exemption extends to

every form of taxation that would require that either the

obligations or the interest thereon, or both, be considered,

directly or indirectly, in the computation of the tax, except

nondiscriminatory franchise or other nonproperty taxes in

lieu thereof imposed on corporations and except estate

taxes or inheritance taxes.

\fontana Code Annotated:

3

15-31-101. Organizations subject to tax

(3) Every corporation, except as hereinafter provided and

except as provided in 33-2-705(6), 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

hereinaiter set forth. In the case of corporations having in-

come from business activity which is taxable both within

and without this state, the license fee shall be measured by

the net income derived from or attributable to Montana

sources as determined under part 3. This tax is due and

payable on the 15th day of the 5th month following the

close of the taxable year of the corporation; however, the

tax becomes a lien as provided in this chapter on the last

day of the taxable year in which the income was earned

and is for the privilege of carrying on business in this state

for the taxable year in which the income was earned.

15-31-143. Return and payment on corporate dissolution.

(1) It is hereby declared that the policy of the State of Mon-

tana, both at the time of the enactment of the corporation

license tax law and at all times since, has been and still is

that every corporation doing business in Montana shall

pay an excise tax for the exercise of such privilege and that

the amount of such tax shall be based upon the total tax-

able net income of such corporations during the entire

period of time they are engaged in business in this state. No

remission of that obligation for the last year in which a

corporation engages in business in Montana was intended

by the original enactment of this section.

15-31-113. Gross income and net income. (1) The term

“gross income” means all income recognized in determin-

ing the corporation's gross income for federal income tax

purposes and: (a) including: (i) interest exempt from

federal income tax;

4

STATEMENT OF THE CASE

Respondents, First Federal Savings and Loan Associa-

tion of Missoula and Havre Federal Savings and Loan

Association are federally chartered savings and loan

associations doing business in the State of Montana in cor-

porate form. As such, Respondents are subject to the Mon-

tana Corporation License Tax provided for in Title 15,

Chapter 31 of the Montana Code Annotated (MCA).

In their respective corporation license tax returns for tax

year 1979, Respondents deducted the interest income

derived from certain federal obligations from their gross

income to arrive at net income for purposes of measuring

the Montana Corporation License Tax. Subsequently,

Petitioner, the Montana Department of Revenue audited

the returns, disallowed the deduction taken for interest in-

come on certain United States obligations and issued

notices of resulting tax deficiencies.

Thereafter, Respondents filed suit in the District Court

of the First Judicial District of the State of Montana for the

County of Lewis and Clark, contending in their complaint

for Declaratory Judgment as follows:

16. Plaintiffs contend that while 31 U.S.C. Section 742, as

a general rule, authorizes the inclusion of interest income

from United States obligations in the calculation of net in-

come for purposes of a nondiscriminatory corporation

license tax, this federal statute does not repeal, amend,

nullify or control the specific federal statutes relating to

the federal securities listed on “Exhibit A’’ wherein it is

provided that the interest income from these securities is

specifically exempted from any form of state taxation

which would include corporation license taxes.

17. The federal statutes pertaining to the federal securities

shown on “Exhibit A’’, being more specific than the

general statute regarding state taxation of interest income

from obligations of the United States must be, and are,

5

controlling in determining whether the interest income

from such securities is taxable.

In answer to the Respondents’ Complaint, the Montana

Department of Revenue contended that the inclusion of in-

terest income from federal obligations in the net income

measurement of a corporation franchise tax is permissible

under the express language of 31 U.S.C. §742 and pur-

suant to a long line of decisions of this Court interpreting

the exemption language of §742 as not extending to a non-

discriminatory franchise tax.

The Respondents never questioned that the Montana

Corporation License Tax is anything other than an excise

tax on the corporate franchise. See Items 13, 15 and 18 of

Complaint, Appendix, pp. 38a-50a.

Pursuant to the filing of a Motion for Summary Judg-

ment by each party the trial court held that interest in-

come from the specified federal obligations were in-

cludable in the computation of the Montana Corporation

License Tax pursuant to 31 U.S.C. §742 as well as the

established line of case law emanating from this Court in-

terpreting this section, and entered judgment on behalf of

the Petitioner.

The Memorandum and Order of the District Court ap-

pears in the Appendix at pp. 13a-27a.

The Respondents herein appealed the order of the

District Court to the Montana Supreme Court which

reversed and held that the inclusion of the interest income

from the specified federal obligations in the net income

measurement of the Montana Corporation License Tax

violated both 31 U.S.C. §742 and the federal agency

statutes providing for issuance of such obligations (31

U.S.C. §769; 12 U.S.C. §§1433, 1725(e), 2055, 2079, and

2134). In reaching that conclusion the Montana court

declined to address, discuss or recognize the 100 plus year

6

interpretation given to the exemption language contained

in 31 U.S.C. §742 by this Court, upholding inclusior: of

federal interest income in the measure of a state franchise

tax,

A second issue presented to the Montana Supreme Court

by the Respondent but left undecided was whether the

Montana Corporation License Tax is discriminatory. The

Montana Court determined this second issue to be moot in

light of its decision on the first issue, 654 P.2d at 499,

however it will be addressed in this Petition. The Montana

Court also addressed a third issue concerning the applica-

tion of a 1979 legislative amendment to the net loss car-

ryover provisions of the Montana Corporation License

Tax statutes. This third issue being solely a matter of state

law is not raised into issue in this Petition.

REASONS FOR GRANTING THE WRIT

OF CERTIORARI

A. THE MONTANA SUPREME COURT'S DECI-

SION ON THE FEDERAL QUESTION CON-

FLICTS WITH APPLICABLE DECISIONS OF

THIS COURT AND OTHER STATE COURTS

OF LAST RESORT.

INTRODUCTION

This Court issued a decision on January 24, 1983 in

Memphis Bank and Trust Company v. Riley C.

Garner, US. , 51 U.S.L.W. 4104, which held a

Tennessee franchise tax law imposing a 3% tax on the net

earnings of banks doing business within the state, un-

constitutionally discriminatory under the Supremacy

Clause. The rationale of this Court's holding was that

although interest income from federal obligations is in-

cludable in certain instances in the base of the tax, since

interest income from otherwise comparable state and

local obligations was excluded therefrom the state tax was

7

discriminatory. The issue now presented to this Court for

review was not directly addressed in Memphis Bank and

Trust Company but was specifically referred to and set

forth in Footnote 5 to the Opinion, 51 U.S.L.W. at 4105,

as follows:

In establishing the Federal Credit Banks, Congress made

clear that the obligations of these banks would be immune

from taxation by the States. 12 U.S.C. §§2055, 2079 and

2134. We have no occasion to determine whether the im-

munity described in these provisions is broader than that

otherwise provided by 31 U.S.C. §742. ...

This Court now has the opportunity to directly address

this particular issue which possesses significant import for

~ not only the State of Montana and its citizens, but all

states which levy a “nondiscriminatory franchise tax or

other nonproperty tax in lieu thereof on corporations” and

include in the measure of such tax interest income from

otherwise tax exempt federal obligations. In addition, this

issue affects more than 120 years of jurisprudence from

this Court in the federal and state franchise taxation area.

If the issue is left unaddressed, states such as Montana

will continue to endure the dilemma of finding a method

which effectively taxes financial institutions engaged in

business within the state so as to truly reflect such institu-

tions’ fiscal responsibilities to the state and more impor-

tantly to its fellow citizens. Historically, this has been an

ongoing and frustrating problem for the State of Montana.

See, Montana Bankers Association v. Montana Depart-

ment of Revenue, 177 Mont. 112, 580 P.2d 909 (1978)

(holding that the 1959 congressional amendment to 31

U.S.C. §742 prohibits the inclusion of the value of federal

obligations in the assets of a national bank for purposes of

computing a bank shares tax).

Section 742, after being amended in 1959, was marked

by an absence of litigation for more than 20 years. The

8

Montana Supreme Court's interpretation of 31 U.S.C.

§742 in the Montana Bankers Association case supra, ap-

pears to be one of the first state court decisions since the

amendment on what was thought to be a settled issue.

Since then however, numerous cases relating to that

specific issue have arisen. It must be noted the issue has

not been resolved uniformly since the highest courts in

these states have opted for an interpretation of 31 U.S.C.

§742 contra to that of the Montana Court. Cf.: Bartow

County Bank v. Bartow County Board of Tax Assessors;

285 S.E. 2d 920 (Ga. 1982), appeal docketed, No.

81-1834, 51 U.S.L.W. 3023 (April 5, 1982) (holding

Georgia bank shares tax consistent with 31 U.S.C. §742);

and also Bank of Texas v. Childs, 615 S.W. 2d 810 (Tex.

1981), cert. granted sub nom. American Bank and Trust

Co. v. Dallas County, USS. 51 U.S.L.W. 3339

(1982) (No. 81-1717) (holding that the State of Texas’

property tax on bank shares which is computed on a

bank’s net assets without any deduction for tax-exempt

United States obligations owned by a national bank is not

violative of 31 U.S.C. §742).

As can be noted, the effects of the Montana Supreme

Court’s construction of 31 U.S.C. §742 are beginning to

surface in this Court in the bank shares tax area and are

requiring the attention of this Court to settle. Now, this

unprecedented interpretation of 31 U.S.C. §742 threatens

to permeate the area of state franchise taxation. If left

unaddressed from this Petition, the Montana Supreme

Court's interpretation of 31 U.S.C. §742 will once again

pervade the courts of other states and ultimately wind

themselves to this Court. This Court can speak definitively

on this most important issue by granting this Petition.

DISCUSSIO!*

The decision of the Montana Supreme Court that in-

terest income from certain federal obligations is not in-

9

cludable in net income for purposes of calculating the

Montana Corporation License Tax (which is a franchise

income tax), is in derogation of the long established

judicial interpretation of 31 U.S.C. §742 developed by

this Court, affirming the inclusion of otherwise tax exempt

obligations or interest therefrom in the measure of a cor-

porate franchise tax pursuant to 31 U.S.C. §742. In addi-

tion, the decision of the Montana Supreme Court is con-

trary to the recorded congressional intent enacting the

1959 amendment to §742.!- See, also, Symons, State Tax-

ation of Banks: Federal Limitations, 99 Banking L.J. 817

(1982).

The issue before the Court in this petition involves the

question of when a state can levy a tax involving obliga-

tions of the United States. Initially, any state tax must

meet the requirements of the exception contained in 31

U.S.C. §742 which expressly provides that such state taxa-

tion must first be nondiscriminatory and second must be

either a “franchise tax’’ or “other nonproperty tax in lieu

thereof imposed on corporations’’.?: It is after these two

requirements are satisfied that the subsequent federal issue

of this Petition presents itself, i.e., the interpretation to be

given to exemption language contained in the federal

agency statutes.

The holding of the Montana Supreme Court in this mat-

ter ignores the historical treatment of state excise taxation

by this Court and fails to recognize that under certain

parameters federal interest income can be legally em-

braced in state taxation according to 31 U.S.C. §742. The

|. See, S.Rep. No. 909, 86th Cong., Ist Sess., reprinted in 1959, U.S.

Code Cong. & Ad. News, 2769, 2773-74, and 2777.

2. 31 U.S.C. §742 also excepts “estate taxes or inheritance taxes”

but are not at issue in this Petition.

10

statute under consideration, 31 U.S.C. §742 was enacted

in 1862 and provided that ‘‘all stocks, bonds, and other

securities of the United States held by individuals, cor-

porations, or associations within the United States shall be

exempt from taxation by or under state authority.” Act of

Feb. 25, 1862, Ch. 33, §2, 12, Stat. 346.

An initial reading of the express words of the statute ap-

peared to indicate ..n all encompassing prohibition of any

state taxation which utilized federal obligations or interest

therefrom. However in early watershed decisions, this

Court clarified construction of the statute and sanctioned

certain areas of exception regarding state taxation,

thereby curtailing an overly broad interpretation of §742.

Two general areas regarding the taxation of state granted

privileges have been recognized by this Court as being

allowable, netwithstanding the prohibition of §742. The

two areas of allowable taxation are the franchise and in-

heritance tax areas, in which the state levies a tax for the

respective privileges of doing business within the state,

Society for Savings v. Coite, 6 Wall. 594 (i867); Provident

Institution for Savings v. Massachusetts, 6 Wall. 611

(1867); Hamilton Co. v. Massachusetts, 6 Wall. 632

(1867), and transmitting or receiving of property via a

testamentary or intestate devise, Plummer v. Coler, 178

U.S. 115 (1900).

Congress amended 31 U.S.C. §742 in 1959 so as to ex-

pressly ratify and thereby reinforce the judicially

developed exceptions to the state taxation exemption con-

tained in §742. The amendment enumerated two re-

quirements which must be satisfied in order to qualify as

an exception to the §742 state taxation exemption. The tax

must first be either a ‘franchise tax’’ or ‘‘other nonproper-

ty tax in lieu thereof’ imposed on corporations. Subse-

quent to the 1959 amendment this Court upheld a fran-

chise tax utilizing a net income measure that included

1]

interest income from federal obligations. See, Reuben L.

Andersen-Cherne, Inc. v. The Commissioner of Revenue of

Minnesota, 423 U.S. 886 (1975) (Appeal dismissed for

lack of a substantial federal question, and thus con-

stituting a disposition on the merits of the case and con-

comitantly binding precedent for all courts. See, Hicks v.

Miranda, 422 U.S. 332 (1975)). Secondly the tax must be

“nondiscriminatory”. See, Memphis Bank and Trust,

supra. The Montana Corporation License Tax fulfills both

of these requirements.

The Montana Corporation License Tax constitutes a

“franchise or other nonproperty tax in lieu thereof im-

posed on corporations” within the meaning of 31 U.S.C.

§742. Montana statutes expressly describe the tax as a

license fee for the privilege of carrying on business within

the state in corporate form. See, §§15-31-143(1) and

15-31-101(3), MCA, supra. The Montana Supreme court

has held innumerable times that the corporate license tax

is a franchise tax upon the privilege of doing business in

the State in a corporate capacity. Montana Bank v. Casey,

135 Mont. 104, 337 P.2d 935 (1959); State v. J. C.

Maguire Const. Co., 113 Mont. 324, 125 P.2d 433 (1942);

O’Connell v. State Board of Equalization, 95 Mont. 91, 25

P.2d 114 (1933); East Helena State Bank v. Rodgers, 73

Mont. 210, 236 P. 1090 (1925); Cottonwood Coal Co. v.

Junod, 73 Mont. 392, 236 P. 1080 (1925); Equitable Life

Assur. Co. v. Hart, 55 Mont. 76, 173 P. 1062 (1918). As

already noted the Respondents never questioned the

nature of the Montana corporation license tax in their

Complaint?- or otherwise and conceded in their

3. See, generally, Respondent's Complaint, reproduced in Appen-

dix, pp. 38a-50a.

12

Complaint*. as well as in their briefs5- to both the Mon-

tana Supreme Court and the State District Court that the

tax was a franchise tax.

The Montana Supreme Court described the tax in its

Opinion issued in this matter as follows, 654 P.2d at 498:

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 the exempt in-

come which is prohibited by the specific federal statutes

creating the federal obligations and granting the tax ex-

emption.

It appears clear that the Montana corporation license tax

is a franchise tax. However, if the tax is somehow con-

strued not to be a franchise tax, at very least it is a ‘‘non-

property tax in lieu thereof imposed on corporations’ and

still falls within the §742 exception.

In addition to the Montana Corporation License Tax

constituting the type of tax contained within the exception

4. See, Respondent's initial Protest to the Department specifically

incorporated as Exhibit “C” via item 13 of the Complaint which

states: “taxpayer admits that generally interest income from United

States obligations is taxable for purposes of the Montana Corporation

License Tax”.

5. See, e.g., Respondent's Reply Brief to Montana Supreme Court, p.

2; Reply Brief to Montana District Court, p. 3, both reproduced in Ap-

pendix, pp. 5la-52a.

13

to 31 U.S.C. §742, it also meets the second requirement in

that it is nondiscriminatory. As has been already noted, a

second issue presented to the Montana Supreme Court in

this matter was whether the Montana corporation license

tax is discriminatory. Although the Montana court deter-

mined this second issue to be moot in light of its decision

on the first issue, the Department successfully prevailed at

District Court that the Montana tax is not discriminatory

since it includes interest income derived from all obliga-

tions issued by the State of Montana or any political sub-

division thereof, any sister state, or the United States. This

is all that is required by §742 according to Memphis Bank

and Trust Company, 51 U.S.L.W. at 4105:

It is clear that under the principles established in our

previous cases, the Tennessee bank tax cannot be

characterized as nondiscriminatory under §742. Ten-

nessee discriminates in favor of securities issued by Ten-

nessee and its political subdivisions and against federal

obligations. The State does so by including in the tax base

income from federal obligations while excluding income

from otherwise comparable state and local obligations.

We conclude, therefore, that the Tennessee bank tax im-

permissibly discriminates 2gainst the Federal Government

and those with whom it deus.

Notwithstanding that interest income from all obliga-

tions are included in the base of the Montana tax, it was

argued by the Respondents that because statutes providing

for issuance of certain Montana obligations®. contain tax

exempting language, the result is a discriminatory tax.

The District Court affirmed the position of the Depart-

ment that the Montana Corporation License Tax clearly

6. §§ 7-7-4607. 7-13-2330, 7-14-4654, 7-15-4307, 7-34-2416,

60-11-1110, 60-11-1210, 67-11-306, and 90-6-125, MCA. See Appen-

dix, pp. 53a-54a, for Complete Text of Statutes.

14

includes in the measurement of the tax, interest income

from all Montana obligations. The basis of the District

Court's holding, and the Petitioner's argument is that the

statutes’ tax exempting language prohibits all forms of

state taxation except a franchise tax, since such tax does

not tax the income but taxes the corporate privilege. Such

rationale is supported by decisions of this Court inter-

preting §742 prior to the 1959 amendment, and the Mon-

tana Supreme Court, as well as other federal excise tax

decisions.

B. THE MONTANA SUPREME COURT DECIDED

AN IMPORTANT QUESTION OF FEDERAL

LAW WHICH HAS NOT BEEN BUT SHOULD

BE SETTLED BY THIS COURT.

The imposition by the State of Montana of a corporation

license tax which includes interest income from federal

obligations in its measuring base is plainly in accord with

31 U.S.C. §742. It is at this point that a question of

uniform interpretation of federal statutes presents itself.

This Court has never directly addressed the issue of

whether the tax immunity described in the specified

statutes (31 U.S.C. §769 and 12 U.S.C. §§1433, 1725(e),

2055, 2079, 2134) is broader than that otherwise pro-

vided by 31 U.S.C. §742. See, Memphis Bank and Trust

Company v. Riley C. Garner, supra, fn. 5. This Petitioner

believes that the tax exempting language in §742 provides

clear guidance as to the interpretation to be given to the

exemption language contained in those statutes. The Mon-

tana Supreme Court held otherwise and ruled without

stating its reason that the specific federal statutes creating

the federal obligations prohibit the inclusion of federal in-

terest in the net income measure of the Montana corpora-

tion license tax, notwithstanding the interpretation given

to the tax exemption language in §742 by this Court. 654

P.2d at 498.

15

It must be noted that the specific statutes providing for

issuance of certain federal obligations contain language

exempting the obligations from state taxation. That

language is virtually identical to the exempting language

contained in the first sentence of 31 U.S.C. §742, which

prior to 1959 comprised the entire statute. Because the

language is so similar, the same interpretation of the ex-

empting language given to §742 is applicable to the in-

dividual agency statutes. The prohibition on state taxation

of federal obligations as contained in §742 does not apply

to state franchise taxation. The state tax prohibitions con-

tained in the issuing statutes likewise does not apply to a

state franchise tax such as the Montana Corporation

License Tax.

Beginning in 1862 this Court interpreted §742 and in-

stituted a long line of decisions upholding the position that

states could levy a franchise or excise tax for a granted

privilege such as operation in corporate form, and that in

computing the value of that privilege consideration of the

value of federal obligations held as assets did not violate

§742. Jn short, states could tax the franchise and include

the value of interest income from federal obligations in the

income measurement. See, Society for Savings v. Coite, 6

Wall. 594 (1867); Provident Institution for Savings v.

Massachusetts, 6 Wall. 611 (1867); Hamilton Co. v.

Massachusetts, 6 Wall. 632 (1867); Home Insurance Com-

pany v. New York State, 134 U.S. 594 (1890); Cleveland

Trust v. Landers, 184 U.S. 111 (1902); Flint v. Stone

Tracy Co., 220 U.S. 107 (1911); Educational Films Cor-

poration v. Ward, 282 U.S. 379 (1931); Pacific Co. v.

Johnson, 285 U.S. 480 (1932), and Werner Machine Co. v.

Director of Taxation, 350 U.S. 492 (1956). Succinctly

stated, the latest ruling announced in these cases was that

a franchise tax does not violate 31 U.S.C, §742 merely

because it is measured by a yardstick which includes tax-

16

exempt income or property, even though a part of the

economic impact of the tax may be said to bear directly

upon such income or property. See, Werner Machine Co.,

350 U.S. at 494.

In 1959 the second sentence was added to 31 U.S.C.

§742. As noted in the legislative history, treatises, and by

the Montana District Court, althougl: not addressed by the

Montana Supreme Court, this second sentence was but a

clarification of the exemptive provision contained in the

original sentence which expressly ratifies and reinforces

the line of decisions announced by this Court interpreting

§742. That line of cases specifically allows a state to levy a

nondiscriminatory franchise tax which includes federal

interest income in its measure.

In none of these cases, however, was the argument

directly addressed as to whether the exempting language

contained in the individual statutes providing for issuance

of federal obligations is broader than the exemption pro-

vided for in 31 U.S.C. §742. A need for guidance from this

Court is evident since the issue presented by this petition is

significant and potentially far reaching. The issue of a

state’s ability to levy a corporate franchise tax and choose

a method of measurement which it considers the most ap-

propriate to the exercise of that corporate franchise,

deserves plenary consideration by this Court. This case of-

fers a timely opportunity for the court to set the matter to

rest,

17

CONCLUSION

For these reasons, a writ of certiorari should issue to

review the judgment and opinion of the Supreme Court of

Montana.

Respectfully submitted,

MICHAEL J. RIELEY

Special Assistant

Attorney General

Montana Department of Revenue

Mitchell Building

Helena, Montana 59620

Telephone: (406) 449-2852

TERRY B, COSGROVE

Special Assistant

Attorney General

P.O. Box 1144

Helena, MT 59624