Administrative Rules of the State of Montana

BEFORE THE DEPARTMENT OF REVENUE

OF THE STATE OF MONTANA

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In the matter of the proposed amendment of ARM 42.4.502 relating to the capital gain credit

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NOTICE OF PUBLIC HEARING ON PROPOSED AMENDMENT

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TO: All Concerned Persons

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1. On December 13, 2007, at 2:30 p.m., a public hearing will be held in the 4 East (Fourth Floor) Conference Room of the Sam W. Mitchell Building, at Helena, Montana, to consider the amendment of the above-stated rule.

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.

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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., December 5, 2007, 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) 444-3696; or e-mail [email protected].

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3. The rules proposed to be amended provide as follows, stricken matter interlined, new matter underlined:

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42.4.502 CAPITAL GAIN CREDIT (1) For the applicable tax years ~~2005 and 2006~~ shown below, an individual may claim a credit against their Montana individual income tax of up to 1% of their net capital gain. For tax years beginning after December 31, 2006, an individual may claim a credit against their Montana individual income tax of up to 2% of their net capital gain. The credit is nonrefundable and may not be carried back or carried forward to any other tax year. The credit must be applied before any other credit.

(2) A nonresident or a part-year resident must apply the credit to Montana tax computed as if he or she were a resident during the entire tax year.

(3) Married taxpayers filing separately must compute and report their capital gains and losses as provided in ~~ARM 42.15.423~~ [NEW RULE I as shown in MAR Notice No. 42-2-789].

(4) The following are examples of how the credit is applied:

(a) Example: For tax year 2005, John and Barbara file a joint 2005 Federal Income Tax Return reporting $5,000 of net capital gain. John's income consists of $50,000 in wages and $8,000 of net capital gain. Barbara's income consists of $35,000 in wages and $3,000 of net capital loss. If they file separately rather than jointly for Montana, they must separately compute and report their capital gains and losses as provided in ~~ARM 42.15.423~~ [NEW RULE I as shown in MAR Notice No. 42-2-789]. John may claim a capital gain credit of up to $80 against his Montana income tax. Barbara is not entitled to claim any credit against her tax.

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�� Federal Return�� Montana Return

�� Column A�� Column B

Wages�� $85,000�� $50,000�� $35,000

Sch. D capital gain (loss)�� $��5,000�� $� 8,000�� ($ 3,000)

Fed. adjusted gross income�� $90,000�� $58,000�� $32,000

Montana adjustment for

capital loss limit��$� 1,500

Montana adjusted gross income��$~~91,000~~ 91,500�� $58,000�� $33,500

Capital loss carryover�� ($ 1,500)

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(b) Example: For tax year 2006, John, a single Montana resident with $1,300 of net capital gain, is entitled to an elderly homeowner credit of $500. His Montana tax, before credits, is $400. He may claim the $13 capital gain credit before determining the amount of his refundable elderly homeowner tax credit.

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Montana tax before credits�� $ 400

Capital gain credit��($ 13)

Montana tax after capital gain credit�� $ 387

Elderly homeowner credit�� ($ 500)

Refund��$ 113

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(c) Example: For tax year 2006, Mary has wages of $80,000 and has $50,000 of net capital gain, $30,000 of which was realized from an investment in a small business investment corporation that is exempt from Montana income tax as provided in 15-33-106, MCA. Mary is entitled to a capital gain credit of $200, 1% of the $20,000 net capital gain included in her Montana adjusted gross income.

(d) Example: For tax year 2006, Patrick, a nonresident, has wages of $50,000, net capital gain of $8,000, and a distributive share of $10,000 of ordinary income from an S corporation. The $10,000 ordinary income from the S corporation is Montana source income. The wages and capital gain are not Montana source income. Assume that his Montana tax, computed as if he were a resident, on his taxable income after Montana exemptions, exclusions, and deductions, is $3,000. The capital gain credit of $80 is applied against the tax determined as if he were a resident.

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Montana tax determined as if resident�� $3,000

Capital gain credit�� ($ 80)

Tax to which nonresident ratio applied�� $2,920

Ratio of Montana source income to income

from all sources ($10,000/$68,000)�� .147

Montana tax ($2,920 x .147)��$ 429

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(e) Example: For tax year 2007, John and Barbara file a joint 2007 federal income tax return reporting $5,000 of net capital gain. John's income consists of $50,000 in wages and $8,000 of net capital gain. Barbara's income consists of $35,000 in wages and $3,000 of net capital loss. If they file separately rather than jointly for Montana, they must separately compute and report their capital gains and losses as provided in [NEW RULE I as shown in MAR Notice No. 42-2-789]. John may claim a capital gain credit of up to $160 against his Montana income tax. Barbara is not entitled to claim any credit against her tax.

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�� Federal Return�� Montana Return

�� Column A�� Column B

Wages�� $85,000�� $50,000�� $35,000

Sch. D capital gain (loss)��$��5,000��$� 8,000�� $(3,000)

Fed. adjusted gross income�� $90,000�� $58,000�� $32,000

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Montana adjusted gross income�� $90,000��$58,000�� $32,000

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AUTH: 15-30-303, MCA

IMP: 15-30-103, 15-30-105, 15-30-183, MCA

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REASONABLE NECESSITY: The department is proposing to update ARM 42.4.502 to reflect the change in the capital gains credit from 1% to 2% effective for the 2007 tax year. The changes also correct some minor errors in the examples in the current rule.

Finally, internal references were added that reflect a reference to New Rule I as shown in MAR Notice No. 42-2-789, which is being proposed due to the enactment of Senate Bill 281 by the 60th Legislature. This law allows married taxpayers who file a joint federal return but separate Montana returns to use the federal rules for certain items when determining Montana adjusted gross income. These changes would provide clarification of the capital gains credit calculations and the applicability of the change.

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4. 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) 444-3696; or e-mail [email protected] and must be received no later than December 21, 2007.

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5. Cleo Anderson, Department of Revenue, Director's Office, has been designated to preside over and conduct the hearing.

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6. An electronic copy of this Notice of Public Hearing is available through the department's site on the World Wide Web at www.mt.gov/revenue, under "for your reference"; "DOR administrative rules"; and "upcoming events and proposed rule changes." The department strives to make the electronic copy of this Notice of Public Hearing 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.

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7. 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 4 above or faxed to the office at (406) 444-3696, or may be made by completing a request form at any rules hearing held by the Department of Revenue.

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8. The bill sponsor notice requirements of 2-4-302, MCA, apply and have been fulfilled. The primary bill sponsor, Senator Joe Balyeat, was notified on August 10, 2007, by regular mail.

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�� /s/ Cleo Anderson��/s/ Dan R. Bucks

��CLEO ANDERSON��DAN R. BUCKS

�� Rule Reviewer��Director of Revenue

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Certified to Secretary of State November 13, 2007