Exxon Mobil Corp. v. Mont. Dep't of Revenue

• Decision Date: 09 July 2019
• Docket Number: DA 18-0541
• Citation: 2019 MT 156,444 P.3d 407,396 Mont. 298
• Parties: EXXON MOBIL CORPORATION, Petitioner and Appellant, v. MONTANA DEPARTMENT OF REVENUE, Respondent and Appellee.
• Court: Montana Supreme Court

396 Mont. 298
444 P.3d 407
2019 MT 156

EXXON MOBIL CORPORATION, Petitioner and Appellant,
v.
MONTANA DEPARTMENT OF REVENUE, Respondent and Appellee.

DA 18-0541

Supreme Court of Montana.

Submitted on Briefs: May 29, 2019
Decided: July 9, 2019

For Appellant: Terrence B. Cosgrove, Murry Warhank, Jackson, Murdo & Grant, P.C., Helena, Montana

For Appellee: Brendan R. Beatty, Derek R. Bell, Special Assistant Attorneys General, Helena, Montana

For Amicus Council on State Taxation: Brianne C. McClafferty, Frans A. Andersson, Holland & Hart, Billings, Montana

Justice Laurie McKinnon delivered the Opinion of the Court.

396 Mont. 303

¶1 Exxon Mobil Corporation (ExxonMobil) appeals an order from the First Judicial District Court, Lewis and Clark County, denying ExxonMobil’s petition for interlocutory adjudication and affirming the Department of Revenue's (Department) determination that ExxonMobil is entitled to an 80% exclusion from income for the dividends it received from several of its domestic subsidiaries. We reverse.

¶2 ExxonMobil presents three issues for review, but we conclude the following issue is dispositive:

Did the District Court err when it held the dividends at issue were expressly apportionable as income under § 15-31-325, MCA, and therefore, ExxonMobil was not entitled to a 100% income exclusion for the dividends under Internal Revenue Code § 243 ?

¶3 The Department also filed a motion to strike certain portions of ExxonMobil's Reply Brief, which we took under advisement pending our full consideration of this appeal. Because we do not rely on the portions of ExxonMobil's Reply Brief that the Department takes issue with in this Opinion, we do not reach the merits of the Department's motion to strike.

FACTUAL AND PROCEDURAL BACKGROUND

¶4 The material facts in this case are undisputed. In Montana, multinational corporations like ExxonMobil may elect to file their tax returns by apportioning their income attributable to Montana from their domestic subsidiaries while excluding certain activities from their foreign subsidiaries. The Legislature codified this election—known as a water's-edge election —in §§ 15-31-321 to -326, MCA, in 1987. 1987 Mont. Laws 1689 (Ch. 616). A multinational corporation filing under the water’s-edge election files a combined return for its affiliated corporations and itself, which the provisions collectively define as the water's-edge combined group . Sections 15-31-321(3), -322, MCA.

¶5 Between 2008 and 2010, the tax years at issue, ExxonMobil engaged in a unitary business in Montana. In 2008, ExxonMobil made a water's-edge election effective for tax years 2008–2010, which

396 Mont. 304

allowed it to exclude foreign subsidiaries from its water's-edge combined group return. During that time, ExxonMobil owned several domestic subsidiaries (that is, other corporations incorporated in the United States) that had 20% or less of their payroll and property located inside the United States. These entities are commonly known as 80/20 corporations . Pursuant to applicable Montana law, ExxonMobil excluded both its foreign subsidiaries and its 80/20 corporations from its water’s-edge combined group return. These 80/20 corporations earned income and paid dividends to ExxonMobil's

444 P.3d 409

water's-edge combined group members.

¶6 On ExxonMobil's 2008–2010 water’s-edge combined group returns, it claimed an 80% income exclusion for its 80/20 corporations' after-tax net income under § 15-31-325(2), MCA, but it also claimed a 100% income exclusion for the dividends it actually received by applying a federal deduction for the dividends— Internal Revenue Code (I.R.C.) § 243 —to its Montana taxes. The Department audited ExxonMobil's 2008–2010 water’s-edge combined group returns and determined it was only entitled to an 80% exclusion for dividends it actually received from its 80/20 corporations, the same exclusion ExxonMobil received for the 80/20 corporations' after-tax net income. Therefore, the Department found ExxonMobil needed to apportion and pay taxes on 20% of the dividends it actually received from its 80/20 corporations. The parties do not dispute that ExxonMobil should have paid taxes on the remaining 20% of its 80/20 corporations' after-tax net income; however, ExxonMobil argues it should not have to also pay taxes on 20% of the dividends it actually received from its 80/20 corporations. As a result of the audit for those years, the Department assessed ExxonMobil an additional tax of over $4 million.

¶7 ExxonMobil challenged the Department's adjustment after its audit by filing timely appeals with the Department's Office of Dispute Resolution and later the Montana Tax Appeal Board. The parties were unable to reach an agreement on the issue of whether the Department properly denied ExxonMobil's claimed 100% exclusion for dividends received from its 80/20 corporations. As the issue presented a pure legal question of statutory interpretation, ExxonMobil filed a petition for interlocutory adjudication with the District Court. The District Court entered judgment in favor of the Department. ExxonMobil appeals.

STANDARD OF REVIEW

¶8 This case solely presents a legal question of statutory

396 Mont. 305

construction.¹ When reviewing an agency's or a district court's conclusion of law, we review the conclusion of law to determine whether it is correct. Bitterroot River Protective Ass'n , ¶ 18 ; Steer, Inc. , 245 Mont. at 474-75, 803 P.2d at 603.

DISCUSSION

¶9 ExxonMobil contends the Department erred by including the actual dividends ExxonMobil received from its 80/20 corporations in its apportionable taxable income. As the parties argue over highly technical provisions in Montana's corporate tax scheme, some background information is helpful to understand the parties' positions.

¶10 Montana imposes an income tax on corporations and similar entities. Section 15-31-101, MCA ; see generally Title 15, chapter 31, MCA. A corporation's income tax is based on its total net income for the taxable period. A corporation computes its net income by first determining its gross income according to the I.R.C. The corporation then adjusts that figure according to specifically enumerated items under § 15-31-113(1), MCA, and applies any pertinent Montana-specific deductions under § 15-31-114, MCA, to reach its net income for Montana tax purposes.

¶11 When corporations like ExxonMobil conduct business outside of Montana, the Legislature may only tax income earned within Montana's boundaries—income attributable to Montana. See

444 P.3d 410

Moorman Mfg. Co. v. Bair , 437 U.S. 267, 272-273, 98 S. Ct. 2340, 2344, 57 L.Ed.2d 197 (1978). Any corporation with business activities that are taxable both inside and outside the state must allocate and apportion its net income to Montana to determine its income subject to state taxation. Section 15-31-301(1), MCA. The rule applies to any corporation engaged in a multistate or multinational unitary business encompassing Montana; that is, when "the operation of the business within the state is

396 Mont. 306

dependent upon or contributory to the operation of the business outside the state or if the units of the business within and without the state are closely allied and not capable of separate maintenance as independent businesses." Section 15-31-301(2), MCA. To determine the percentage of apportionable income or loss to Montana sources, corporations calculate the average of three figures: their respective percentages of property, payroll, and sales located in or attributable to Montana. Section 15-1-601 art. IV(9), MCA ; see §§ 15-31-305 to -311, MCA.

¶12 A corporation like ExxonMobil carrying on a unitary business must file a combined report based on the income of its unitary business group . The unitary business group comprises the corporation, all unitary affiliates in which the corporation owns more than a 50% interest, and all unitary affiliates owning more than a 50% interest in the corporation. Admin. R. M. 42.26.204. The combined report for unitary business groups is the default method for multistate and multinational corporations to determine their tax liability to Montana. See §§ 15-31-301, -305, MCA.

¶13 Notwithstanding, a multinational corporation may make a water's-edge election, which generally allows it to exclude, for Montana tax purposes, its foreign operations' income or loss from its apportionable income. Section 15-31-322, MCA. The water's-edge election allows a multinational corporation to simplify its reporting requirements and, in many cases, reduces its overall tax burden by allowing the corporation to exclude its foreign subsidiaries' income that it may have already paid foreign taxes on. A multinational corporation making a water's-edge election files taxes on behalf of its water's-edge combined group—all the affiliated corporations § 15-31-322, MCA, requires a return under a water's-edge...