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| Montana Administrative Register Notice 42-2-863 | No. 12 06/23/2011 | |
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BEFORE THE DEPARTMENT OF REVENUE OF THE STATE OF MONTANA
TO: All Concerned Persons
1. On July 21, 2011, at 9:00 a.m., a public hearing will be held in the Third Floor Reception Area Conference Room of the Sam W. Mitchell Building, at Helena, Montana, to consider the adoption, amendment, amendment and transfer, transfer, and repeal of the above-stated rules. Individuals planning to attend the hearing shall enter the building through the east doors of the Sam W. Mitchell Building, 125 North Roberts, Helena, Montana.
2. The Department of Revenue will make reasonable accommodations for persons with disabilities who wish to participate in this public hearing or need an alternative accessible format of this notice. If you require an accommodation, contact the Department of Revenue no later than 5:00 p.m., July 13, 2011, to advise us of the nature of the accommodation that you need. Please contact Cleo Anderson, Department of Revenue, Director's Office, P.O. Box 7701, Helena, Montana 59604-7701; telephone (406) 444-5828; fax (406) 444-4375; or e-mail [email protected].
3. The proposed new rules do not replace or modify any section currently found in the Administrative Rules of Montana. The proposed new rules provide as follows:
NEW RULE I TREATMENT OF NET OPERATING LOSSES SPANNING A CHANGE IN REPORTING METHODS (1) For purposes of this rule: (a) "combined year" means a taxable period in which a corporation filed a unitary combined report as set forth in ARM 42.26.204; (b) "water's-edge year" means a taxable period in which a corporation filed a valid water's-edge combined report as set forth in ARM 42.26.301; and (c) "separate company year" means a taxable period in which a corporation filed as a separate and distinct entity, not as part of a unitary group. (2) A corporation that makes a valid water's-edge election or does not renew a prior election is agreeing that unused net operating loss carryover from a water's-edge year may only be carried to a water's-edge year, and unused net operating loss carryover from a non-water's-edge year may only be carried to a non-water's-edge year. When applying the three-year carry-back, and seven-year carry-forward limitations, provided for in 15-31-119, MCA, all taxable periods are included, even though the loss can only be deducted in those periods in which the filing method is the same. (3) Except as provided in (2), if a corporation incurs a net operating loss and files a return for the year to which the loss is carried under a different filing method, the net operating loss deduction may be limited. The net operating loss must be recalculated to the filing method of the year in which the loss is being deducted. For example, if a corporation incurs a net operating loss in a prior separate company year, and wishes to carry that loss to a future combined year, the loss must be recalculated as if it were filed on a combined, unitary basis before being carried to the combined year.
AUTH: 15-31-501 MCA IMP: 15-31-119, 15-31-312, 15-31-322 MCA
REASONABLE NECESSITY: The department is proposing to adopt New Rule I in response to concerns expressed by taxpayers and department personnel about the administrative complexity of recalculating net operating losses for tax periods in which changes in filing methods occurred. This proposed new rule simplifies the net operating loss calculation for multinational taxpayers. To achieve this simplification the proposed rule changes the application of a net operating loss carry-back and carryover to tax periods that include the water's-edge and non-water's-edge years. Specifically, the rule states that you can apply a net operating loss incurred in a water's-edge year only to tax periods within the statutorily prescribed carry-back and carryover period in which a water's-edge election is in effect. Likewise, net operating losses incurred during tax periods filed on a combined basis can only be applied to tax periods, without recalculation of the net operating loss, within the carry-back and carryover period that are also filed on a combined basis. The department is also proposing to implement New Rule I to ensure that the application of net operating losses is consistent with Montana law in that when a net operating loss is applied, the net result provides an equitable allocation and apportionment of the taxpayer's income. The application of a net operating loss when an entity changes from a worldwide combined filing method to a water's-edge election does not provide an equitable allocation and apportionment of the taxpayer's income because the taxpayer's filed return does not consist of the same affiliates that it filed on the previous return when it created the net operating loss. The language in (3) addresses the treatment of net operating losses for all other changes in filing methods. This language reflects current department practice and is included to inform the public of that practice.
NEW RULE II REORGANIZATIONS OF WATER'S-EDGE TAXPAYERS (1) A taxpayer who becomes a member of a water's-edge group, subsequent to an election by the group, will be deemed to have elected and will be bound by the election. Procedures provided in ARM 42.26.302 for renewal of a water's-edge election would apply. (2) If a water's-edge taxpayer is purchased or otherwise acquired by an entity not subject to tax under 15-31-101, MCA, and whose parent and affiliates are not subject to tax under 15-31-101, MCA, the water's-edge election carries over to each member of the new affiliated group. (3) If a water's-edge taxpayer is purchased or otherwise acquired by a non-water's-edge taxpayer, who is subject to tax under 15-31-101, MCA, the water's-edge election will be terminated as of the purchase date. (4) If a water's-edge taxpayer is a party to reorganization, and as a result ceases to exist, the water's-edge election will be terminated as of the date of the reorganization. (5) If a water's-edge taxpayer is a party to a reorganization, and survives the reorganization, the water's-edge election carries over to the new affiliated group. Procedures provided for in ARM 42.26.302 for renewal of a water's-edge election would apply.
AUTH: 15-31-501, MCA IMP: 15-31-324, MCA
REASONABLE NECESSITY: The department proposes to adopt New Rule II to create more tax administration transparency and to inform the public of the department's current practice regarding reorganizations of water's-edge taxpayers and how reorganizations affect their water's-edge elections.
4. The rules proposed to be amended provide as follows, stricken matter interlined, new matter underlined:
42.23.107 DEFINITIONS The following definitions apply to rules found in this chapter:
(2) remains the same but is renumbered (1).
AUTH: 15-33-105, MCA IMP: 15-33-103, MCA
REASONABLE NECESSITY: The department proposes to amend ARM 42.23.107 to delete the definition of "gross income," because this term is now defined in 15-31-113, MCA.
42.23.605 PENALTY AND INTEREST (1) through (3) remain the same. (4) The department will adjust interest based on the corrected amount of tax due, which results from an amended return, adjustment from an audit, or correction to the original return, unless the change in tax due arises from a net operating loss or a tax credit. (5) remains the same but is renumbered (6). AUTH: 15-31-501, MCA IMP: 15-1-216, 15-1-222, 15-31-502, 15-31-503, 15-31-510, MCA
REASONABLE NECESSITY: The department proposes changes to ARM 42.23.605 to better explain when it is not appropriate for the department to pay interest on a corrected tax liability. Existing Montana law prohibits the payment of interest with respect to a corrected tax liability that is derived from a net operating loss. The department currently applies the same policy to tax credits. Section (5) of the proposed rule regarding the underpayment penalty is necessary to support proper compliance by corporate taxpayers with estimated payment requirements of current Montana law. It is also even-handed and fair because events subsequent to the filing of a return will not increase or decrease the calculation of the penalty after the filing of the original return.
42.26.201 INTENT (1) and (2) remain the same. (3) The only exceptions to these allocation and apportionment rules contained in these rules are set forth in ARM 42.26.261 through (4) remains the same.
AUTH: 15-1-201, 15-31-313, 15-31-501, MCA IMP: 15-1-601, 15-31-301, 15-31-302, 15-31-303, 15-31-304, 15-31-305, 15-31-306, 15-31-307, 15-31-308, 15-31-309, 15-31-310, 15-31-311, 15-31-312, 15-31-321, 15-31-322, 15-31-323, 15-31-324, 15-31-325, 15-31-326, MCA
REASONABLE NECESSITY: The department proposes to amend ARM 42.26.201 to cite the correct administrative rule.
42.26.202 DEFINITIONS The following definitions apply to this subchapter: (1) through (10) remain the same. (11) "Gross receipts" means the (a) Intercompany revenues between members of the unitary group are eliminated from gross receipts. Examples of intercompany revenues include, but are not limited to: (i) sales; (ii) dividends; (iii) service fees; (iv) rents; (v) management fees; (vi) royalties; (vii) interest; and (viii) administrative fees. (b) Gross receipts, even if business income, do not include, for example, such items as: (i) repayment, maturity, or redemption of the principal of a loan, bond, or mutual fund or certificate of deposit or similar marketable instrument; (ii) the principal amount received under a repurchase agreement or other transaction properly characterized as a loan; (iii) proceeds from issuance of the taxpayer's own stock or from sale of treasury stock; (iv) damages and other amounts received as the result of litigation; (v) property acquired by an agent on behalf of another; (vi) tax refunds and other tax benefits recoveries; (vii) pension reversions; (viii) contributions to capital (except for sales of securities by securities dealers); (ix) income from forgiveness or discharge of indebtedness; (x) amounts realized from the exchange of inventory, except those amounts actually received by the taxpayer and that exceeded any corresponding amounts paid to the other party, and which were to account for excess deliveries under the exchange agreement, as calculated on an annual basis. Thus, the net amount of payments received in excess of the net payments made during the year may be included in the sales factor; and (xi) amounts received from hedging transactions involving intangible assets. For purposes of this subsection, a "hedging transaction" means a transaction related to the taxpayer's trading function involving futures and options transactions for the purpose of hedging price risk of the products or commodities consumed, produced, or sold by the taxpayer. (c) Exclusion of an item from the definition of "gross receipts" is not determinative of its character as business or nonbusiness income. (12) through (23) remain the same. (24) "To contribute materially" includes, without limitation, "to be used operationally in the taxpayer's trade or business." Whether property materially contributes is not determined by reference to the property's value or percentage of use. If an item of property materially contributes to the taxpayer's trade or business, the attributes, rights, or components of that property are also operationally used in that business. (25) "Trade or business" means the unitary business of the taxpayer, part of which is conducted in this state.
AUTH: 15-1-201, 15-31-313, 15-31-501, MCA IMP: 15-1-601, 15-31-301, 15-31-302, 15-31-303, 15-31-304, 15-31-305, 15-31-306, 15-31-307, 15-31-308, 15-31-309, 15-31-310, 15-31-311, 15-31-312, 15-31-321, 15-31-322, 15-31-323, 15-31-324, 15-31-325, 15-31-326, MCA
REASONABLE NECESSITY: The department proposes amending ARM 42.26.202 to provide improved guidance for corporation taxpayers in reporting complex business transactions and circumstances. The existing brief definition of gross receipts does not adequately account for evolving situations occurring in today's complex global economy. The department seeks to provide reasonable consistency with other states by basing these definitions on recommendations from the Multistate Tax Commission (MTC) with additional detail added to assist taxpayers with facts not addressed by the MTC. ARM 42.26.202 adopts definitions for the following: "gross receipts," "trade or business," and "to contribute materially."
42.26.206 BUSINESS AND NONBUSINESS INCOME DEFINED (1) Section (2)
(3) Under the transactional test, business income includes income arising from transactions and activity in the regular course of the taxpayer's trade or business. (a) If the transaction or activity is in the regular course of the taxpayer's trade or business, part of which trade or business is conducted within this state, the resulting income of the transaction or activity is business income for this state. Income may be business income even though the actual transaction or activity that gives rise to the income does not occur in this state. (b) For a transaction or activity to be in the regular course of the taxpayer's trade or business, the transaction or activity need not be one that frequently occurs in the trade or business. Most, but not all, frequently occurring transactions or activities will be in the regular course of that trade or business and will, therefore, satisfy the transactional test. It is sufficient to classify a transaction or activity as being in the regular course of a trade or business, if it is reasonable to conclude transactions of that type are customary in the kind of trade or business being conducted or are within the scope of what that kind of trade or business does. The transactional test includes, but is not limited to: (i) income from sales of inventory; (ii) property held for sale to customers; and (iii) services which are commonly sold by the trade or business. (c) The transactional test also includes, but is not limited to: income from the sale of property used in the production of business income of a kind that is sold and replaced with some regularity, even if replaced less frequently than once a year. (4) Under the functional test, business income includes income from tangible and intangible property, if the acquisition, management, and disposition of the property constitute integral parts of the taxpayer's regular trade or business operations. (a) Business income need not be derived from transactions or activities that are in the regular course of the taxpayer's own particular trade or business. It is sufficient, if the property from which the income is derived is or was an integral, functional, or operative component used in the taxpayer's trade or business operations, or otherwise materially contributed to the production of business income of the trade or business, part of which trade or business is or was conducted within this state. Property that has been converted to nonbusiness use through the passage of a sufficiently lengthy period of time, generally, five years is sufficient, has lost its character as a business asset and is not subject to the rule of the preceding sentence. (b) Income that is derived from isolated sales, leases, assignments, licenses, and other infrequently occurring dispositions, transfers, or transactions involving property, including transactions made in liquidation, including complete or partial liquidations, or the winding-up of business, is business income, if the property is or was used in the taxpayer's trade or business operations. (i) Property that has been converted to nonbusiness use has lost its character as a business asset and is not subject to (4)(b). (ii) Income from the licensing of an intangible asset, such as a patent, copyright, trademark, service mark, know-how, trade secrets, or the like, that was developed or acquired for use by the taxpayer in its trade or business operations, constitutes business income whether or not the licensing itself constituted the operation of a trade or business, and whether or not the taxpayer remains in the same trade or business from or for which the intangible asset was developed or acquired. (c) Under the functional test, income from intangible property is business income when the intangible property serves an operational function. The relevant inquiry focuses on whether the property is or was held in furtherance of the taxpayer's trade or business, that is, on the objective characteristics of the intangible property's use or acquisition and its relation to the taxpayer and the taxpayer's activities. (d) If the property is or was held in furtherance of the taxpayer's trade or business then income from that property may be business income even though the actual transaction or activity involving the property that gives rise to the income does not occur in this state. (e) If, with respect to an item of property, a taxpayer takes a deduction from business income that is apportioned to this state or includes the original cost in the property factor, it is presumed that the item or property is or was integral to the taxpayer's trade or business operations. No presumption arises from the absence of any of these actions. (f) Application of the functional test is generally unaffected by the form of the property (e.g., tangible or intangible property, real or personal property). Income arising from an intangible interest, as, for example, corporate stock or other intangible interest in a business or a group of assets, is business income when the intangible itself or the property underlying or associated with the intangible is or was an integral, functional, or operative component to the taxpayer's trade or business operations. (g) Property that has been converted to nonbusiness use has lost its character as a business asset and is not subject to (4)(f).
AUTH: 15-1-201, 15-31-313, 15-31-501, MCA IMP: 15-1-601,
REASONABLE NECESSITY: The department proposes to amend ARM 42.26.206 to help achieve consistency, uniformity, and equity in Montana's corporation license tax and to adopt language recommended by the MTC in its model allocation and apportionment regulations and that are reflective of the department's current practices. Additionally, the department's proposed amendments are intended to reflect the outcome of Gannett Satellite Information Network, Inc. v. State of Montana, Department of Revenue. In that case, the court agreed with the department that "business income," as it is defined in 15-31-302, MCA, contains two independent tests, a transactional test and a functional test. Now that the department's interpretation of 15-31-302, MCA, has been ratified, the department believes it is appropriate to amend ARM 42.26.206, to reflect its long-standing practice insofar as the application of those tests are concerned. While the department's practice is consistent with the MTC regulations, the department has not adopted the MTC's language, in its entirety, because the department views certain departures from the MTC regulations to be necessary. For instance the MTC language, in general, is too ambiguous when stating that the functional test is not satisfied when the holding of property is limited to solely an investment function as is the case where the holding of the property is limited to mere financial betterment of the taxpayer. Importantly, the Montana State Tax Appeal Board has found, in more than one instance, that income from property serving an investment function is business income under Montana law. The MTC language omitted in these rules directly conflicts with these Montana decisions, which the department judges take precedence over MTC advisory recommendations. Please see Gallagher, Inc. v. Department of Revenue and Decatur Development, Inc. v. Department of Revenue. The proposed amendments also eliminate original department rule language that addresses the same topics as the inserted MTC language. The proposed rules did not incorporate the due process clause language from the MTC language as the department already has a due process clause in 15-1-211, MCA. The rule improves guidance to the taxpayer by specifying that every type of income be classified as business or nonbusiness income. The rule improves guidance to taxpayer's by specifying that: · business income is apportioned to multiple jurisdictions, and nonbusiness income is allocated to the specific jurisdiction to which the income is earned; · income is assigned as nonbusiness income only if it doesn't meet the qualifications of business income; · the type of income or the description of the income does not affect whether the income is business or nonbusiness income; and · explains the transactional test and the functional test as used in current practice by the department.
42.26.207 DETERMINATION OF BUSINESS AND NONBUSINESS INCOME (1) Rental income from real and tangible property is characterized as business income if the property with respect to which the rental income was received is, or was, used in the taxpayer's trade or business (2) Gain or loss from the sale, exchange, or other dispositions of real property or of tangible or intangible personal property constitutes business income if the property while owned by the taxpayer was used in, or was otherwise included in the property factor of, the taxpayer's trade or business. However, if such property was utilized for the production of nonbusiness income or otherwise was removed from the property factor before its sale, exchange, or other disposition, the gain or loss will constitute nonbusiness income. See ARM 42.26.232. (3) Interest income is characterized as business income where the intangible with respect to which the interest was received arises out of or was created in the regular course of the taxpayer's trade or business operations or where the (4) Dividends (5) Patent and copyright royalties are characterized as business income where the patent or copyright with respect to which the royalties were received arises out of or was created in the regular course of the taxpayer's trade or business operations or where the
AUTH: 15-1-201, 15-31-313, 15-31-501, MCA
REASONABLE NECESSITY: The proposed amendment to ARM 42.26.207 arises from the biennial review requirements listed in 2-4-314, MCA. One of the goals of the biennial review is to address issues that the department encounters regularly from taxpayers and provide guidance on these issues. The proposed amendments to ARM 42.26.207 provide guidance on the treatment of the gain or loss from the sale of intangible assets as required by 15-31-302, MCA. The rule states that property that has been converted into nonbusiness use is not business income when sold. The rule states that interest, dividends, or royalties are business income if they are derived from intangibles that are within the scope of the company's regular course of business. The proposed language was recommended by the MTC in an effort to provide uniformity with other states.
42.26.208 (4) If two or more entities, whether or not organized or doing business in this state, are owned or controlled directly or indirectly by the same interest, the taxpayer may petition or the department may require adjustments that distribute, apportion, or allocate gross income or deductions between or among such entities, if it determines that such distribution, apportionment, or allocation is necessary in order to prevent evasion of taxes, or to fairly represent the income of any such entities.
AUTH: 15-1-201, 15-31-313, 15-31-501, MCA IMP: 15-1-601,
REASONABLE NECESSITY: The department is proposing to amend ARM 42.26.208 to ensure equitable reporting among corporate taxpayers of income earned in Montana and to inform taxpayers of the actions the department or taxpayers may take to achieve proper income reporting. The department is amending the rule to also provide guidance to taxpayers on how to address situations when income and/or deductions, as filed on the Montana return, do not clearly reflect the Montana income of the entities included in the return. The department is also proposing to update the implementing citations.
42.26.234 NUMERATOR OF PROPERTY FACTOR (1) and (2) remain the same. (3) The value of mobile or movable property such as construction equipment, trucks, or leased electronic equipment which
AUTH: 15-1-201, 15-31-313, 5-31-501, MCA IMP: 15-1-601,
REASONABLE NECESSITY: The department proposes to amend ARM 42.26.234 to correct a grammatical error and to update the implementing citations.
42.26.237 AVERAGING PROPERTY VALUES (1) through (3) remain the same.
AUTH: 15-1-201, 15-31-313, 15-31-501, MCA IMP: 15-1-601,
REASONABLE NECESSITY: The department is proposing to amend ARM 42.26.237 to update the implementing citations.
42.26.241 PAYROLL FACTOR IN GENERAL (1) through (3) remain the same. (4) ARM 42.26.202 provides the definitions applicable to this
AUTH: 15-1-201, 15-31-313, 15-31-501, MCA IMP: 15-1-601, 15-31-305, 15-31-308, 15-31-309, MCA
REASONABLE NECESSITY: The department proposes to amend ARM 42.26.241 to correct a grammatical error.
42.26.242 CONSISTENCY IN REPORTING WITH RESPECT TO PAYROLL (1) and (2) remain the same.
AUTH: 15-1-201, 15-31-313, 15-31-501, MCA IMP: 15-1-601,
REASONABLE NECESSITY: The department proposes to amend ARM 42.26.242 to update the implementing citations.
42.26.244 NUMERATOR OF PAYROLL FACTOR (1) and (2) remain the same. (3) Payroll associated with the operation or transportation of mobile or movable property, as described in ARM 42.26.234, shall be assigned to this state on the proportion of mileage traveled within the state to mileage traveled everywhere during the tax period.
AUTH: 15-1-201, 15-31-313, 15-31-501, MCA IMP: 15-1-601, 15-31-305, 15-31-308, 15-31-309, MCA
REASONABLE NECESSITY: The department proposes to amend ARM 42.26.244 to explain how to account for payroll associated with mobile and/or moveable property in the apportionment factor. The rule describes the current practice of the department.
42.26.253 DENOMINATOR OF SALES FACTOR (1) remains the same.
AUTH: 15-1-201, 15-31-313, 15-31-501, MCA IMP: 15-1-601,
REASONABLE NECESSITY: The department proposes to amend ARM 42.26.253 to update the implementing citations.
42.26.254 NUMERATOR OF SALES FACTOR (1) remains the same. (2) Intercompany revenues between members of the unitary group that are attributable to this state shall be excluded from the numerator of the sales factor.
AUTH: 15-1-201, 15-31-313, 15-31-501, MCA IMP: 15-1-601,
REASONABLE NECESSITY: The department is proposing to amend ARM 42.26.254 to inform corporate taxpayers of current department practice concerning the exclusion of intercompany receipts from gross receipts that were included in the sales factor. The department has determined that intercompany sales is the shifting of inventory between affiliates, not sales, as described in 15-31-311, MCA. Taxpayers need to be aware of this determination to properly prepare their returns in Montana. The department is also proposing to update the implementing citations.
42.26.255 SALES OF TANGIBLE PERSONAL PROPERTY (1) through (6) remain the same. (7) If a taxpayer whose salesman operates from an office located in this state makes a sale to a purchaser in another state in which the taxpayer is not taxable and the property is shipped directly by a third party to the purchaser, the following rules apply: (a) If the taxpayer is taxable in the state from which (b) If the taxpayer is not taxable in the state from which the property is shipped, then the sale is in this state.
AUTH: 15-1-201, 15-31-313, 15-31-501, MCA IMP: 15-1-601, 15-31-305, 15-31-310, 15-31-311, MCA
REASONABLE NECESSITY: The department proposes to amend ARM 42.26.255 to correct a grammatical error.
42.26.256 SALES OF TANGIBLE PERSONAL PROPERTY TO FEDERAL GOVERNMENT (1) and (2) remain the same.
AUTH: 15-1-201, 15-31-313, 15-31-501, MCA IMP: 15-1-601,
REASONABLE NECESSITY: The department proposes to amend ARM 42.26.256 to update the implementing citations.
42.26.261 SPECIAL APPORTIONMENT AND ALLOCATION COMPUTATIONS (2) remains the same but is renumbered (1).
AUTH: 15-1-201, 15-31-313, 15-31-501, MCA IMP: 15-1-601, 15-31-305, 15-31-312, MCA
REASONABLE NECESSITY: This proposed rule amendment is a continuation of the department's effort to provide tax administration transparency. Because the standard found in 15-31-312, MCA is clear, the department believes that ARM 42.26.261(1) creates confusion rather than providing additional clarity or guidance with regard to the administration of Montana's corporation license tax. Thus, the department is proposing to delete the text in (1).
42.26.262 SPECIAL COMPUTATIONS RELATED TO PROPERTY FACTOR (1) The following special rules are established in respect to the property factor of the apportionment formula: (a) If the sub-rents taken into account in determining the net annual rental rate under ARM 42.26.236 produce a negative or clearly inaccurate value for any item of property, another method which will properly reflect the value of rented property may be required by the department or requested by the taxpayer. (b) In no case, however, shall such value be less than an amount which bears the same ratio to the annual rental rate paid by the taxpayer for such property as the fair market value of that portion of the property used by the taxpayer bears to the total fair market value of the rented property. (2) remains the same.
AUTH: 15-1-201, 15-31-313, 15-31-501, MCA IMP: 15-1-601,
REASONABLE NECESSITY: The department proposes to amend ARM 42.26.262 to correct a grammatical error and to update the implementing citations.
42.26.263 SPECIAL COMPUTATIONS RELATED TO SALES FACTOR (1) The following special criteria are established in respect to the sales factor of the apportionment formula: (a) Insubstantial amounts of gross receipts arising from incidental or occasional transactions or activities may be excluded from the sales factor unless such exclusion would materially affect the amount of income apportioned to this state. (b) Where the income-producing activity in respect to business income from intangible personal property can be readily identified, such income is included in the denominator of the sales factor and, if the income-producing activity occurs in this state, in the numerator of the sales factor as well. For example, usually the income-producing activity can be readily identified in respect to interest income received on deferred payments on sales of tangible property (ARM 42.26.251) and income from sale, licensing, or other use of intangible personal property (ARM 42.26.257). (2) and (3) remain the same.
AUTH: 15-1-201, 15-31-313, 15-31-501, MCA IMP: 15-1-601, 15-31-305, 15-31-310, 15-31-311, 15-31-312, MCA
REASONABLE NECESSITY: The department is proposing to amend ARM 42.26.263 to remove the example in (1)(a), which does not follow the provisions set forth in ARM 42.26.259.
42.26.264 SPECIAL COMPUTATIONS RELATED TO FREIGHT AND PASSENGER CARRIERS (1) and (2) remain the same.
AUTH: 15-1-201, 15-31-313, 15-31-501, MCA IMP: 15-1-601,
REASONABLE NECESSITY: The department proposes to amend ARM 42.26.264 to update the implementing citations.
42.26.302 PROCEDURE (1) To perfect a water's-edge election a taxpayer must (2) The provisions of (1) provide the only way to perfect a water's-edge election. Filing returns and paying tax under the water's-edge method without perfecting the election as provided for in (1) will not be accepted as a valid election.
AUTH: 15-31-501, MCA IMP: 15-31-324, MCA
REASONABLE NECESSITY: The department is proposing to amend ARM 42.26.302 to reduce future taxpayer error in complying with the water's-edge election. The rule accomplishes this purpose by establishing that filing returns on a water's-edge basis, without going through the written election process, does not perfect a water's-edge election and will not be accepted by the department as a substitute for filing Form WE – ELECT. The rule provides assistance to the taxpayers in making an election by requiring the department to provide a specific form for that purpose.
42.26.303 REVOCATION OR NONRENEWAL OF WATER'S-EDGE ELECTIONS (1) remains the same.
AUTH: 15-31-501, MCA IMP: 15-31-324, MCA
REASONABLE NECESSITY: The department is proposing to amend ARM 42.26.303 because the rule was originally adopted in response to the change in 15-31-322, MCA, which required the inclusion in the water's-edge group of entities incorporated in tax havens, and a portion of the rules is no longer applicable. Because there was a change in the composition of the water's-edge group, the department gave consent to those taxpayers with water's-edge elections applying to tax periods both before and after 2003 to opt out of the election. This section does not apply to elections made for three-year periods after 2003. This is addressed in 15-31-324, MCA.
42.26.310 DISREGARDING OR MODIFYING A WATER'S-EDGE ELECTION (1) The department shall review for completeness the domestic disclosure spreadsheets that are filed as required by ARM (2) remains the same. (3) The calculation of water's-edge combined income may be modified to reflect adjustments to transfer prices, royalty rates, allocation of common expenses, and similar adjustments necessary to reflect a proper apportionment of income. (4) remains the same. (5) Limitations of net operating loss deductions of a water's-edge group are addressed in [NEW RULE I].
AUTH: 15-31-501, MCA IMP: 15-31-301, 15-31-322, 15-31-326, 15-31-505, MCA
REASONABLE NECESSITY: The department proposes to amend ARM 42.26.310 to correct the reference to ARM 42.26.217 because that rule was repealed and replaced by ARM 42.26.304 in 2001. The department is also proposing to move all provisions dealing with net operating loss issues to chapter 23, subchapter 8 and adding the reference to NEW RULE I, which now addresses net operating losses.
42.26.311 CERTAIN CORPORATIONS INCLUDABLE IN A WATER'S-EDGE COMBINED RETURN (1) Domestic international sales corporations (DISCs), as defined in sections 991 through 994 of the IRC, export trade corporations, as described in sections 970 and 971 of the IRC, and foreign sales corporations, as defined in sections 921 through 927 of the IRC, are included in a water's-edge return. DISCs are specifically taxable (2) (3) A corporation incorporated in the United States, if the denominator of both the property and payroll factor is zero, is included in a water's-edge return. (4) A corporation incorporated outside the United States, if "engaged in business" or "doing business" pursuant to 15-31-101, MCA, in this state, is included in a water's-edge return.
AUTH: 15-31-501, MCA IMP: 15-31-322, MCA
REASONABLE NECESSITY: The department is proposing to amend ARM 42.26.311 to inform taxpayers of the department's current practice regarding the inclusion of corporations in the water's-edge group, and to correct grammatical errors.
42.26.312 TREATMENT OF DIVIDENDS FOR PURPOSES OF A WATER'S-EDGE COMBINED RETURN (1) Eighty percent of the dividends apportionable under this rule are to be excluded from income subject to apportionment where: (a) dividends received from foreign corporations, taxable for federal purposes, are considered to be income subject to apportionment; (b) amounts included in income under sections 951 through 962 and 964 of the IRC are considered taxable foreign dividends; (c) the after-tax net income of United States corporations excluded from eligibility as affiliated corporations under ARM 42.26.311 and possession corporations defined in sections 931 through 934 and 936 of the IRC, is considered to be a dividend for purposes of this rule; (i) In calculating the after tax net income, where the corporation is included in a federal consolidated income tax return, the consolidated tax liability shall be apportioned among the members of the group in accord with the ratio which that portion of the consolidated taxable income attributable to each member of the group having positive taxable income, bears to the total consolidated taxable income of all companies in the consolidated group having positive taxable income. For purposes of this calculation, the consolidated tax liability shall be the tax liability calculated on the federal consolidated income tax return after application of federal tax credits. (ii) Where such corporations have no net income for the taxable year in question, the amount to be included as dividends received from corporations outside the United States shall equal zero. (d) dividends between members in the water's-edge combinable group are eliminated from the calculation of apportionable income; (e) deemed dividend distributions pursuant to section 78 of the IRC are excluded from the calculation of apportionable income; and (f) the limited inclusion of dividend income specified in this rule is in lieu of attempts to allocate expenses attributable to the generation of such dividend income. For apportionment factor purposes only the dividend income considered to be business income shall be included in the receipts factor numerator or denominator as appropriate.
AUTH: 15-31-501, MCA IMP: 15-31-325, MCA
REASONABLE NECESSITY: The department is proposing to amend ARM 42.26.312 to inform taxpayers of the department's current practice regarding the treatment of dividends for purposes of water's-edge combined returns. In the calculation of the water's-edge deemed dividend, when using the amount for the federal consolidated tax liability, it shall be the tax liability after application of federal tax credits.
5. The rule proposed to be amended and transferred provides as follows, stricken matter interlined, new matter underlined:
42.23.414 FILINGS IN CONNECTION WITH NET OPERATING LOSSES (1) remains the same. (2) Corporations that are members of a unitary group filing a single return must use intrastate apportionment to calculate the net operating loss and net operating loss deduction for each member of the unitary group that is engaged in business in the state. A net operating loss for one member of a unitary group cannot be carried back or carried over to offset the income of another member included in the unitary group. (a) Each member of a unitary group engaged in business in this state must calculate its individual share of the unitary group's net operating loss by applying its individual apportionment factor to the net operating loss of the unitary group. (b) For purposes of calculating the net operating loss deduction, each member of a unitary group engaged in business in this state must calculate its individual share of the unitary group's net income by applying its individual apportionment factor to the net income of the unitary group, then applying its individual net operating loss available as calculated in (2)(a). (2) and (3) remain the same, but are renumbered (3) and (4).
AUTH: 15-31-501, MCA IMP: 15-31-119, 15-31-509, MCA
REASONABLE NECESSITY: The department proposes to amend ARM 42.23.414 to inform taxpayers of the department's current practice with regard to net operating losses. Members of a unitary group must use intrastate apportionment to calculate and apply net operating losses. Even though unitary income is apportioned on the basis of a combined report, each taxpayer member of a combined group is subject to its own tax liability. The minimum tax, net operating loss deduction, and tax credits are applied on an individual entity basis. Since unitary business income is combined and apportioned on a group basis, it is necessary to further apportion the Montana income among the taxpayer members of the group – those that are engaged in business in the state. The department also proposes to transfer ARM 42.23.414, as amended, to new subchapter 8 – Net Operating Losses.
6. The rules proposed to be transferred provide as follows:
42.23.412 NET OPERATING LOSSES (1) and (2) remain the same.
AUTH: 15-31-501, MCA IMP: 15-31-114, MCA
REASONABLE NECESSITY: The department proposes to transfer ARM 42.23.412 to new subchapter 8 – Net Operating Losses.
42.23.413 CARRYOVERS OF NET OPERATING LOSSES (1) through (4) remain the same.
AUTH: 15-31-501, MCA IMP: 15-31-119, MCA
REASONABLE NECESSITY: The department proposes to transfer ARM 42.23.413 to new subchapter 8 – Net Operating Losses.
42.23.415 TREATMENT OF MERGERS AND CONSOLIDATIONS (1) and (2) remain the same.
AUTH: 15-31-501, MCA IMP: 15-31-114, MCA
REASONABLE NECESSITY: The department proposes to transfer ARM 42.23.415 to new subchapter 8 – Net Operating Losses.
7. The department proposes to repeal the following rules:
42.23.105 DISCLOSURE OF INFORMATION which can be found on page 42-2306 of the Administrative Rules of Montana.
AUTH: 15-31-501, MCA IMP: 15-31-507, MCA
REASONABLE NECESSITY: The department proposes to repeal ARM 42.23.105 because the implementing statute 15-31-507, MCA, was repealed by the 1993 Legislature and the disclosure of confidential corporation license tax returns is now covered in statute, 15-31-511, MCA.
42.26.305 TAX RATES which can be found on page 42-2660 of the Administrative Rules of Montana.
AUTH: 15-31-501, MCA IMP: 15-31-121, MCA
REASONABLE NECESSITY: The department proposes to repeal ARM 42.26.305, because it provides the same language as 15-31-121, MCA.
8. Concerned persons may submit their data, views, or arguments, either orally or in writing, at the hearing. Written data, views, or arguments may also be submitted to: Cleo Anderson, Department of Revenue, Director's Office, P.O. Box 7701, Helena, Montana 59604-7701; telephone (406) 444-5828; fax (406) 444-4375; or e-mail [email protected] and must be received no later than July 29, 2011.
9. Cleo Anderson, Department of Revenue, Director's Office, has been designated to preside over and conduct the hearing.
10. An electronic copy of this notice is available on the department's web site at www.revenue.mt.gov. Locate "Legal Resources" in the left hand column, select the "Rules" link and view the options under the "Notice of Proposed Rulemaking" heading. The department strives to make the electronic copy of this notice conform to the official version of the notice, as printed in the Montana Administrative Register, but advises all concerned persons that in the event of a discrepancy between the official printed text of the notice and the electronic version of the notice, only the official printed text will be considered. In addition, although the department strives to keep its web site accessible at all times, concerned persons should be aware that the web site may be unavailable during some periods, due to system maintenance or technical problems.
11. The Department of Revenue maintains a list of interested persons who wish to receive notices of rulemaking actions proposed by this agency. Persons who wish to have their name added to the list shall make a written request, which includes the name and e-mail or mailing address of the person to receive notices and specifies that the person wishes to receive notices regarding particular subject matter or matters. Notices will be sent by e-mail unless a mailing preference is noted in the request. Such written request may be mailed or delivered to the person in 8 above, or faxed to the office at (406) 444-4375, or may be made by completing a request form at any rules hearing held by the Department of Revenue.
12. The bill sponsor contact requirements of 2-4-302, MCA, do not apply.
/s/ Cleo Anderson /s/ Dan R. Bucks CLEO ANDERSON DAN R. BUCKS Rule Reviewer Director of Revenue
Certified to Secretary of State June 13, 2011
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A directory of state agencies is available online at http://www.mt.gov/govt/agencylisting.asp.
For questions about the organization of the ARM or this web site, contact [email protected].
