Montana Administrative Register Notice 42-2-931 No. 1   01/08/2016    
Prev Next




In the matter of the adoption of New Rules I through XI, amendment of ARM 42.15.108 and 42.15.301, and repeal of ARM 42.15.407 and 42.17.316 pertaining to fiduciaries, estates, and trusts








TO: All Concerned Persons


1. On July 16, 2015, the Department of Revenue published MAR Notice No. 42-2-931 pertaining to the public hearing on the proposed adoption, amendment, and repeal of the above-stated rules at page 897 of the 2015 Montana Administrative Register, Issue Number 13.


2. On August 10, 2015, a public hearing was held to consider the proposed adoption, amendment, and repeal. No public testimony was received at the hearing. Pamela Guschausky, with Anderson Zurmuehlen; Patrick Dougherty, with Worden Thane P.C.; Joseph V. Womack, with Waller & Womack P.C.; and Sherill Frickle, submitted written comments.


3. The department adopts New Rule III (42.30.103), New Rule IV (42.30.104), New Rule VI (42.30.107), New Rule VII (42.30.106), New Rule VIII (42.30.202), New Rule IX (42.30.203), New Rule X (42.30.204), and New Rule XI (42.30.110), amends ARM 42.15.108 and 42.15.301, and repeals ARM 42.15.407 and 42.17.316 as proposed.


4. Based upon the comments received and after further review, the department adopts New Rule I (42.30.101), New Rule II (42.30.102), and New Rule V (42.30.105), as proposed, but with the following changes from the original proposal, new matter underlined, deleted matter interlined:

NEW RULE I (42.30.101) DEFINITIONS  (1) through (9) remain as proposed.

(10) "Irrevocable trust" means a trust that cannot be modified or terminated except as provided in 72-38-411, or 72-38-412, MCA.

(11) through (15) remain as proposed.

(16) "Resident trust" means any trust that is principally administered in Montana and includes, establishes a sufficient connection to Montana.  Factors that may be considered to determine whether a trust established sufficient connection to Montana include, but are not limited to, the testator's, grantor's, settlor's, or creator's domicile; the location where the trust was created; the location of trust property; the beneficiaries' domicile; the trustees' domicile; and the location of the trust's administration. Examples of resident trusts include, but is are not limited to:

(a) through (c) remain as proposed.

(d) any trust created by the will of a decedent who was a Montana resident at the time of the decedent's death; and or

(e) through (22) remain as proposed.



(1) through (4)(a) remain as proposed.

(b) A bankruptcy estate of a married couple filing jointly a joint bankruptcy petition must file a Form FID-3, but complete only the heading portion and report the amount of tax computed on the attached copy of the joint Montana tax return. A joint bankruptcy estate is limited to one personal exemption in computing the amount of tax due. A married couple cannot use the filing status of married filing separately on the same return to determine their separate Montana income tax liabilities for a bankruptcy estate. If a married couple does not file a joint return, but both spouses are filing for bankruptcy individually, then each spouse will complete a separate Form FID-3 and an separate individual Montana income tax return. Credits and payments that are applicable to the bankruptcy estate are reported on Form FID-3.

(c) through (6) remain as proposed.

(7) If the fiduciary of a decedent's estate, a bankruptcy estate, or a trust is filing for a short tax year and the applicable tax forms are not available, the fiduciary may use the prior year's tax forms. If the fiduciary uses the prior year's tax forms, the fiduciary must incorporate any tax law changes that are effective for the applicable tax year but may use the prior year's exemption amount and tax rate brackets. A short-year tax return may not be filed electronically.

(8) remains as proposed.



(1) through (6)(b) remain as proposed.

(c) Since the interest income of the estate is 20 percent of the Montana DNI, 20 percent of the distribution to beneficiaries B and C is considered interest income. Likewise, 10 percent of the estate's Montana DNI is dividends and 70 percent is farm income. The estate is entitled to a distribution deduction of $25,000 against gross income in 2016 for the distribution to beneficiaries B and C and computes its own Montana income tax liability on the $25,000 income retained in the estate; and

(i) Beneficiary C, a resident of Montana, must report the entire distribution of $12,500 on a Montana individual income tax return; and

(ii) Beneficiary B, a resident of Arizona, is required to report the entire distribution of $12,500 as Montana source income on a Montana individual income tax return because the income was distributed from a Montana resident estate.


5. The department has thoroughly considered the comments received. A summary of the comments and the department's responses are as follows:


COMMENT 1: Pamela Guschausky commented that proposed New Rule I(10) should also include trusts modified or terminated under 72-38-412, MCA, in addition to 72-38-411, MCA, as an exception.


RESPONSE 1: The department appreciates Ms. Guschausky's comments and agrees that it is reasonable to include 72-38-412, MCA, as an exception also. The department has amended the rule to include this reference.


COMMENT 2: Regarding the department's proposed definition of "resident trust" in New Rule I(16), the department received comments from Ms. Guschausky and Patrick Dougherty.

Mr. Dougherty contended that the rule could not utilize the terms "resident" and "nonresident" to define a trust because a trust is not a human being. He commented that 15-30-2101(28), MCA, limits the definition of "resident" to natural persons.

Mr. Dougherty also commented that the department has no statutory authority to create definitions in regards to the situs or nexus status of nonhuman entities and such definitions must be addressed by the legislative process.

Mr. Dougherty further commented that he believes the proposed rules violate constitutional due process and protection under the commerce clause.

Ms. Guschausky stated that the proposed definition of "resident trust" is broader than the "resident trust" definition in the Uniform Trust Code, at 72-38-103 and 72-38-108, MCA.


RESPONSE 2: The department appreciates these comments. The department has the statutory authority to adopt definitions of terms it uses in rule. The definition of resident trust does not conflict with 15-30-2101(28), MCA, but instead clarifies what constitutes resident and nonresident trusts and estates as utilized in the proposed rules.  Further, the department's terms are consistent with those used by other states because nearly every state that imposes a fiduciary income tax delineates between nonresident and resident trusts and estates.

The legislature authorized the department to promulgate rules to administer all revenue laws of the state, including fiduciary income tax, and to provide for the corresponding allocation of income, gain, loss, deduction, expense, and/or credit. Further, the legislature directed the department to tax estates and trusts in the same manner as individuals. The proposed rules are consistent with statutory authority and reasonably necessary to effectuate its purpose.

The department disagrees with Mr. Dougherty's position that the proposed rules violate constitutional due process or the commerce clause. A review of applicable jurisprudence and rule provisions demonstrates that the proposed rules are constitutional.

The department agrees with Ms. Guschausky's concern that the resident trust definition, as originally proposed, may cause confusion. The Uniform Probate Code does not define "resident trust," but instead governs a trust's principal place of administration. The Uniform Probate Code provides that it does not preclude any other means for establishing a sufficient connection with the designated jurisdiction. The phrase "principally administered" was not meant to expand the Uniform Probate Code's treatment of a trust's principal place of administration, but instead was intended to clarify that trusts with ties to Montana were principally administered in Montana notwithstanding that their principal places of administration may be located elsewhere. 

To address the potential for confusion in the proposed definition, the department has amended New Rule I to clarify that a trust with sufficient connection to Montana is a "resident trust." The department added some of the factors that it considers in determining whether a trust possesses sufficient connection to Montana to the definition to provide further guidance to taxpayers. The department also added language to clarify that the list of resident trusts in the definition are intended as illustrative examples.


COMMENT 3: Regarding the proposed provisions for bankruptcy estates and short period returns under New Rule II, the department received comments from Ms. Guschausky, Joseph Womack, and Sherill Frickle.

Ms. Frickle requested explanation of the impact on joint bankruptcy estates in regard to filing status. She asked for clarification on the number of personal exemptions required on a return filed "married filing separate on the same form" and filed jointly.

Ms. Frickle, Ms. Guschausky, and Mr. Womack all commented on the department's acceptance of short-year decedent estate returns and further requested that the department make additional changes to the proposed new rule to permit filing of short-year tax returns for decedent estate returns be extended to bankruptcy estate returns.


RESPONSE 3: The department appreciates these comments and agrees that the rules addressing short-year tax returns for decedent estate returns may be extended to bankruptcy estate returns.  The department has amended the language in New Rule II to include bankruptcy estate returns.

In response to Ms. Frickle's request for explanation in regard to the filing status and allowed exemptions for joint bankruptcy estates, the department has amended the language in New Rule II to clarify the requirements. Specifically, as amended, the rule now explains that married couples filing a joint bankruptcy petition may file a joint bankruptcy estate return; however, only one personal exemption is allowed on such return. Married couples filing a joint bankruptcy petition may not use the filing status "married filing separately on the same form."


COMMENT 4: Ms. Guschausky asked for an explanation of the supporting statement required in proposed New Rule II(4)(l).  She further asked for explanation regarding the purpose of a Montana supporting statement beyond a complete federal Split-Interest Trust Information return (Form 5227).


RESPONSE 4: The department is requesting a supporting statement because the federal Form 5227 may not adequately address differences for Montana purposes. For example, if there are distributions to a taxable beneficiary that is a nonresident individual, the federal Form 5227 and Schedule K-1 would not differentiate Montana source income from non-Montana source income.


COMMENT 5: Ms. Guschausky expressed her support for New Rule II(7), as proposed, suggested adding trusts as well, and not limiting it to a decedent's estate. She explained that many trusts are closed and final during the year as well including grantor trusts.


RESPONSE 5:  The department agrees that it is reasonable to include trusts in New Rule II(7). The department has amended the rule to reference this inclusion.


COMMENT 6: Regarding proposed New Rule V(5), Ms. Guschausky commented that short-term versus long-term has no relevance for Montana tax purposes and proposed changes create an unnecessary adjustment between federal and state when preparing the Montana fiduciary return and resulting form K-1s.  She also states that the instructions for Form CLT-4 state that a capital loss must be deducted in the year incurred and asked for explanation of intent in regard to carryover losses for corporate entities.


RESPONSE 6: The department appreciates the comment from Ms. Guschausky. Internal Revenue Code (IRC) Reg 1.642(h)-1(b) directs that "the net operating loss carryover and the capital loss carryover are the same in the hands of a beneficiary as in the estate or trust, except that the capital loss carryover in the hands of a beneficiary which is a corporation is a short-term loss irrespective of whether it would have been a long-term or short-term capital loss in the hands of the estate or trust."

Thereby, the rule stays in line with federal reporting requirements, rather than requiring different reporting standards for the same capital loss carryover.


COMMENT 7: Ms. Guschausky commented that New Rule V(6) changes the definition of Montana source income as defined in ARM 42.2.304 and 15-30-2101, MCA.


RESPONSE 7: The rule was not intended to change the definition of Montana source income and appears to be confusing. Because the other provisions exemplify the intention of New Rule V(6), the department has amended the rule to remove the confusing language.


COMMENT 8: Regarding proposed New Rule VI(4), Ms. Guschausky commented that the proposed rule does not seem to incorporate the exemption pertaining to an Internal Revenue Code (IRC) 645 election which provides a temporary exemption from estimated tax payment requirements for the tax years ending two years after the decedent's or grantor's death.


RESPONSE 8: Section 15-30-2512, MCA, provides guidance on the requirement for estimated tax payments. While the IRC provides an exception for decedent estates, and by extension section 645 electing trusts, the Montana Code Annotated contains no such exception and thereby the standard rules for estimated payments apply. The IRC exception is not binding for Montana purposes because Montana law addresses the requirement for estimated tax payments.


COMMENT 9: Mr. Dougherty commented that the department made no clear attempt to comply with the requirements of 2-4-111, MCA, or address the issue of the proposed rules' effect on small businesses.


RESPONSE 9: The department complied with the requirements of 2-4-111, MCA. The department stated its findings in paragraph 12 of proposal notice MAR 42-2-931 and included the online location for documentation of its findings and the contact information to request a copy of the documentation directly from the department.

The two-page impact study was prepared by department senior economist Dan Dodds and remains available at revenue.mt.gov/rules at this time, and is also available upon request from Laurie Logan at lalogan@mt.gov.



/s/ Laurie Logan                                    /s/ Mike Kadas

Laurie Logan                                         Mike Kadas

Rule Reviewer                                       Director of Revenue



Certified to the Secretary of State December 28, 2015.



Home  |   Search  |   About Us  |   Contact Us  |   Help  |   Disclaimer  |   Privacy & Security