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Exxon Mobil Corp. v. Montana Department of Revenue

Supreme Court of Montana

July 9, 2019

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

          Submitted on Briefs: May 29, 2019

          APPEAL FROM: District Court of the First Judicial District, In and For the County of Lewis and Clark, Cause No. DDV 2016-1030 Honorable James P. Reynolds, Presiding Judge

          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

          OPINION

          LAURIE MCKINNON JUSTICE

         ¶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 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 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 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 ...


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