Montana: Taxpayer Entitled to Deduct 100 Percent of Dividends Received from 80/20 Corporations

The Montana Supreme Court recently addressed whether a taxpayer—a combined group—was entitled to deduct 100 percent of the dividends received from 80/20 subsidiaries that were excluded from the group’s water’s-edge combined report. The 80/20 companies were domestic entities that had less than 20 percent of their property and payroll in the United States. For the tax years at issue, the taxpayer excluded 80 percent of the after tax net income of the 80/20 companies and 100 percent of the dividends actually received from the 80/20 companies. On audit, the Department asserted that the taxpayer was entitled to only an 80 percent deduction for the dividends received. The matter eventually came before the state’s highest court.

Under Montana law, the after-tax net income of an 80/20 corporation is treated as a foreign dividend and is 80 percent excludable from the apportionable income of the water's-edge combined group. The key issue before the court was whether actual dividends paid by an 80/20 company to its parent were 100 percent excluded under IRC section 243, or were they treated as foreign dividends that were 80 percent excluded under Montana law. The court, after reviewing (1) a case holding that a corporation is entitled to the federal deduction under IRC section 243 and (2) the statute addressing the treatment of various types of dividends and deemed dividends, concluded that there was nothing in the law that precluded a taxpayer filing a water’s-edge combined report from deducting the dividends actually received from 80/20 companies under IRC section 243.  Please contact Rob Passmore at 503-820-6844 with questions on Exon Mobil Corp. v. Montana Dep’t of Revenue.