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Montana Supreme Court 80/20 cash dividends are excludable

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July 2019


The Montana Supreme Court on July 9 held that a taxpayer is entitled to federal deductions for purposes of computing its Montana tax liability, including the IRC Sec. 243 dividend received deduction, unless Montana law expressly provides otherwise.

The plain language of Montana’s water’s-edge provision does not expressly proscribe IRC Sec. 243 deductions, nor does it address whether water's-edge combined groups should include or exclude 80/20 corporations' actual dividends from the group's combined income. The Court held that taxpayers filing Montana water's-edge combined returns may exclude actual dividends they receive from 80/20 corporations under IRC Sec. 243.

The takeaway

Montana’s 80/20 rule is unique.  As noted above, the 80/20 entities at issue in this decision involved domestic entities with less than 20% of their payroll and property assignable to locations within the US (80/20 companies).  Another type of 80/20 entity involves a foreign incorporated entity with more than 20% of its average property and payroll assignable to locations within the United States.  Such a foreign 80/20 entity would be subject to similar treatment as a domestic 80/20; however, IRC Sec. 243 would not be applicable to the foreign 80/20 company.

Montana taxpayers should consider whether refund claims are available regarding actual dividends from domestic 80/20 subsidiaries consistent with the holding this in opinion.

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Peter Michalowski

Peter Michalowski

Partner, State and Local Tax Consulting Leader, PwC US

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