Administrative Rules of the State of Montana

BEFORE THE DEPARTMENT OF REVENUE

OF THE STATE OF MONTANA

In the matter of the proposed adoption of New Rule I, amendment of ARM 42.15.108, 42.15. 205, 42.15.314, 42.15.315, 42.15.316, 42.15.319, 42.15.321, 42.15.322, 42.15.524, 42.15.525, and repeal of ARM 42.15.406 relating to individual income taxes

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NOTICE OF PUBLIC HEARING ON PROPOSED ADOPTION, AMENDMENT, AND REPEAL

TO: All Concerned Persons

1. On December 14, 2007, at 10:00 a.m., a public hearing will be held in the Director's Office (Fourth Floor) Conference Room of the Sam W. Mitchell Building, at Helena, Montana, to consider the adoption, amendment, and repeal of the above-stated rules.

Individuals planning to attend the hearing shall enter the building through the east doors of the Sam W. Mitchell Building, 125 North Roberts, Helena, Montana.

2. The Department of Revenue will make reasonable accommodations for persons with disabilities who wish to participate in this public hearing or need an alternative accessible format of this notice. If you require an accommodation, contact the Department of Revenue no later than 5:00 p.m., December 5, 2007, to advise us of the nature of the accommodation that you need. Please contact Cleo Anderson, Department of Revenue, Director's Office, P.O. Box 7701, Helena, Montana 59604-7701; telephone (406) 444-5828; fax (406) 444-3696; or e-mail canderson@mt.gov.

3. The proposed new rule does not replace or modify any section currently found in the Administrative Rules of Montana. The proposed new rule provides as follows:

NEW RULE I ADDITIONS AND SUBTRACTIONS FOR MARRIED TAXPAYERS FILING SEPARATE RETURNS (1) Except as provided in (2), married taxpayers who file a joint federal return but separate Montana returns must compute their taxable income using the federal rules for married taxpayers filing separately. Items clearly attributable to one spouse must be claimed by that spouse. An item not clearly attributable to one spouse must be divided equally unless the spouses enter into a binding written agreement providing a different division.

(2) The following items are exceptions to (1) as provided for in 15-30-111, MCA:

(a) Married taxpayers filing a joint federal return allowed a capital loss deduction under section 1211 of the Internal Revenue Code, 26 U.S.C. 1211, and who file separate Montana returns may claim the same amount of capital loss deduction allowed on the federal return. If the allowable capital loss is clearly attributable to one spouse, the loss must be shown on that spouse's return. If the loss is not clearly attributable to one spouse, the loss must be split equally between each return. Under no circumstances can the total capital loss claimed exceed the amount allowed for taxpayers filing a joint federal return.

(b) Married taxpayers filing a joint federal return allowed passive and rental income losses are not required to recompute allowable losses according to the federal rules for married taxpayers filing separately under section 469 of the Internal Revenue Code, 26 U.S.C. 469. If the allowable loss is clearly attributable to one spouse, the loss must be shown on that spouse's return. If the loss is not clearly attributable to one spouse, the loss must be split equally between each return. Under no circumstances can the total passive and rental income losses claimed exceed the amount allowed for taxpayers filing a joint federal return.

(c) Married taxpayers filing a joint federal return in which one or both of the taxpayers are allowed a deduction for an individual retirement contribution under section 219 of the Internal Revenue Code, 26 U.S.C. 219, and who file separate Montana income tax returns may claim the same amount of the deduction that is allowed on the federal return. The deduction must be attributed to the spouse who made the contribution. This provision does not affect any contributions made for tax years beginning before January 1, 2007.

(d) Married taxpayers filing a joint federal return who are allowed a deduction for interest paid for a qualified education loan under section 221 of the Internal Revenue Code, 26 U.S.C. 221, and who file separate Montana income tax returns may claim the same amount of the deduction that is allowed on the federal return. The deduction may be split equally on each return or in proportion to each taxpayer's share of federal adjusted gross income. This provision does not affect any interest paid during tax years beginning before January 1, 2007 for which the deduction was not allowed on the Montana tax return.

(e) Married taxpayers filing a joint federal return who are allowed a deduction for qualified tuition and related expenses under section 222 of the Internal Revenue Code, 26 U.S.C. 222, and who file separate Montana returns may claim the same amount of the deduction that is allowed on the federal return. The deduction may be split equally on each return or in proportion to each taxpayer's share of federal adjusted gross income. This provision does not affect any expenses paid during tax years beginning before January 1, 2007 for which the deduction was not allowed on the Montana tax return.

AUTH: 15-30-305, MCA

IMP: 15-30-111, MCA

REASONABLE NECESSITY: The department is proposing New Rule I because the 60th Legislature enacted Senate Bill 281, which allows married taxpayers who file a joint federal return but separate Montana returns to use the federal rules for taxpayers filing a joint return for certain items when determining Montana adjusted gross income. This rule will provide clarification on the calculations and the applicability of the change in the law.

4. The rules proposed to be amended provide as follows, stricken matter interlined, new matter underlined:

42.15.108 DETERMINING TAX LIABILITY (1) and (2) remain the same.

(3) The starting point for computing Montana individual income tax liability is usually adjusted gross income as determined for federal income tax purposes. If a taxpayer is not required to, or does not, file a federal income tax return for a tax year for which the taxpayer is required to file a Montana individual income tax return, the taxpayer shall compute federal adjusted gross income and complete the applicable federal schedules. A married taxpayer not filing a federal income tax return who files a separate Montana income tax return must compute federal adjusted gross income as if a married individual filing a separate federal return. The federal computations and tax schedules required by this rule are tax records the taxpayer must retain and provide the department on request.

(4) through (11) remain the same.

AUTH: 15-30-305, MCA

IMP: 15-30-101, 15-30-102, 15-30-103, 15-30-105, 15-30-111, 15-30-112, 15-30-121, 15-30-137, MCA

REASONABLE NECESSITY: The department is proposing to amend ARM 42.15.108 to conform to the amendments of Senate Bill 281 as enacted by the 60th Legislature as it applies to married taxpayers.

42.15.205 REFUNDS OF FEDERAL INCOME TAX (1) through (2)(c) remain the same.

(3) ~~This rule~~ The provisions under (1) and (2) shall be effective for tax year 2006 forward.

(4) Unless clearly attributable to one spouse, married taxpayers who filed a joint federal return but separate Montana returns in the prior year and received a federal refund are required to prorate the federal income tax refund between spouses by applying the ratio of the federal income tax deduction claimed on the Montana return in the prior year.

(a) Example: Spouses A and B filed a joint federal return but separate Montana returns for 2006. Spouse A claimed a deduction for federal income taxes of $5,000 and spouse B claimed a deduction of $3,000 for a total of $8,000. If the taxpayers received a federal refund in the amount of $1,000, spouse A would use $625 ($5,000/8,000 * $1,000) and spouse B would use $375 ($3,000/8,000 * $1,000) in calculating how much of their federal refund is taxable in Montana under the tax benefit rule.

AUTH: 15-30-305, MCA

IMP: 15-30-111, 15-30-121, MCA

REASONABLE NECESSITY: The department is proposing to amend ARM 42.15.205 in order to provide further guidance to the taxpayers regarding the calculation of the taxable amount of a federal income tax refund in certain instances where taxpayers file a joint federal return but separate Montana returns.

42.15.314 CHANGES IN FEDERAL TAXABLE INCOME (1) When a taxpayer's federal taxable income is changed or corrected by the ~~Internal Revenue Service~~ IRS, or other authority, the taxpayer must file an amended return~~, Montana Form 2X,~~ within 90 days after receiving notice from the IRS.

(2) When a taxpayer changes his or her own federal taxable income by amending his or her federal income tax return, the taxpayer must file an amended return~~, Montana Form 2X,~~ reporting these changes within 90 days after filing the federal amended tax return.

(3) remains the same.

AUTH: 15-30-305, MCA

IMP: 15-1-216, 15-30-145, 15-30-146, 15-30-304, MCA

REASONABLE NECESSITY: The department is proposing to amend ARM 42.15.314 to delete the reference to a form that is no longer used by the department.

42.15.315 ORIGINAL AND AMENDED RETURNS (1) remains the same.

(2) Original returns are Montana Forms 2, ~~2S ,~~ 2M, 2EZ, and FID-3 only. Form 2S is also used for tax years prior to 2006 as an original return.

(3) through (5) remain the same.

~~(6) Amended returns filed for tax years beginning before January 1, 2001, will not change the calculation of the late file penalty on the original return.~~

~~(7)~~ (6) ~~For tax years beginning on January 1, 2001, the~~ The late file and late pay penalties will be adjusted based on the corrected amount of tax due, which results from an amended return, adjustment from an audit, or correction to the original return.

(8) through (11) remain the same but are renumbered (7) through (10).

AUTH: 15-30-305, MCA

IMP: 15-1-216, 15-30-142, 15-30-149, 15-30-241, 15-30-321, MCA

REASONABLE NECESSITY: The department is proposing to amend ARM 42.15.315 to delete the reference to a form that is no longer used by the department and add the reference to new forms. The rule is also amended to clarify that the Form 2S only applies to years prior to 2006. The reference to the calculation of penalties before and after January 1, 2001 is now considered outdated and has been deleted. Regardless of the tax year, the late file and late pay penalties are adjusted as set forth in (6) as renumbered.

42.15.316 EXTENSIONS AND ESTIMATED PAYMENTS (1) through (7) remain the same.

AUTH: 15-30-305, MCA

IMP: 15-1-201, 15-1-216, 15-30-144, 15-30-331, MCA

REASONABLE NECESSITY: The department is proposing to amend ARM 42.15.316 to add "and estimated payments" to the title since this rule also deals with that subject.

42.15.319 DATE AND PLACE OF FILING AND PAYMENT (1) through (2)(c) remain the same.

(3) Every taxpayer must compute their tax liability and pay the balance of any tax due in full on or before the prescribed due date as stated in 15-30-142, MCA. If the balance due is less than $1, payment is not required. If full payment of the balance due is not made on or before the prescribed due date, interest and penalty accrue from the prescribed due date of the return until paid as provided in 15-1-216, MCA.

(a) If tax is paid by check or money order, the check or money order should be made payable to the "~~State Treasurer~~ Montana Department of Revenue."

(b) The rules for paying a tax electronically are located in ARM Title 42, chapter 5, subchapter 2.

AUTH: 15-30-305, MCA

IMP: 15-30-142, 15-30-144, MCA

REASONABLE NECESSITY: The department is proposing to amend ARM 42.15.319 because checks and money orders for tax payments should be made payable to the "Montana Department of Revenue" rather than the "State Treasurer" as referenced in the rule.

42.15.321 JOINT RETURNS (1) A joint return may be filed even though one of the spouses has no income or deductions. However, a joint return is not permitted if any of the following apply:

(a) the spouses have different taxable years,;

(b) if one is a resident and one is a nonresident,; or

(2) A joint return must include all income and deductions of both spouses. If a joint return is filed, both the husband and the wife must sign the return, and both are jointly and severally liable for the tax.

(2) through (2)(c) remain the same but are renumbered (3) through (3)(c).

AUTH: 15-30-305, MCA

IMP: 15-30-142, MCA

REASONABLE NECESSITY: The department is proposing to amend ARM 42.15.321 to clarify that for a joint return both the husband and wife must sign the return and that they are both liable for the tax.

42.15.322 SEPARATE RETURNS FOR MARRIED TAXPAYERS (1) through (6) remain the same.

(7) A joint return is not allowed and separate returns must be filed by each spouse if they have different taxable years, or one is a resident and one is a nonresident or either is a part-year resident.

AUTH: 15-30-305, MCA

IMP: 15-30-111, 15-30-142, MCA

REASONABLE NECESSITY: The department is proposing to amend ARM 42.15.322 to add 15-30-111, MCA, as an implementation cite because that statute covers adjusted gross income which this rule also addresses. The department is proposing to delete (7) because the topic is addressed in ARM 42.15.321 and is therefore redundant.

42.15.524 ITEMIZED DEDUCTIONS OF MARRIED TAXPAYERS (1) through (3)(d) remain the same.

(4) Except as provided in 15-30-111, [NEW RULE I], and (5), if If a taxpayer files a Montana return claiming ~~an adjustment to gross income or~~ an itemized deduction that is allowed only to taxpayers claiming a specific federal filing status, ~~except as follows, the adjustment~~ the deduction is disallowed unless the taxpayer files their Montana income tax return using the same status:.

~~(a) a capital loss of up to $1,500 is allowed a married taxpayer filing separately but must be calculated using only that spouse's gains and losses; and~~

~~(b) a taxpayer who converted an IRA to a Roth IRA and elected to defer the income ratably may file separately and defer the gain.~~

(5) Married taxpayers who file separate Montana returns and are allowed a deduction for mortgage insurance premiums paid under section 163 of the Internal Revenue Code, 26 U.S.C. 163, are allowed the same deduction calculated using the federal rules for married taxpayers filing a joint return.

AUTH: 15-30-305, MCA

IMP: 15-30-111, 15-30-121 ~~15-30-122~~, MCA

REASONABLE NECESSITY The department is proposing to amend ARM 42.15.524 to add section (5) in order to address a new, temporary, one-year itemized deduction allowed under federal law that is incorporated into the Montana tax calculation under 15-30-121, MCA, and was enacted after the 2007 Legislature substantially revised the provisions related to deductions of married taxpayers. The federal law contains a deduction phase-out provision that has a lower income threshold for married taxpayers filing separate returns than those who file joint returns. Because the department has determined that the administrative and programming costs that would be involved in requiring the small number of married taxpayers filing separate Montana returns whose income exceeds the phase-out thresholds to recalculate the allowable deduction using the lower income threshold phase-out under this one-year temporary deduction and making form and software changes to accommodate the temporary change which would generally result in immaterial differences, the department is proposing to permit federal filing status conformity for the phase-out threshold for the temporary deduction.

42.15.525 MONTANA ADJUSTED GROSS INCOME TO BE USED WHEN CALCULATING ITEMIZED DEDUCTIONS (1) Except as provided in (2), Wwhen the deductions allowed under 15-30-121, MCA, are limited to a percent of adjusted gross income by reference to the IRC, Montana adjusted gross income must be used when calculating the deductions limitation for the Montana return. Montana adjusted gross income is defined in 15-30-111, MCA.

(2) Taxpayers who are allowed a deduction for mortgage insurance premiums paid under section 163 of the Internal Revenue Code, 26 U.S.C. 163, may use their federal adjusted gross income when computing the allowable amount for the Montana return.

AUTH: 15-30-305, MCA

IMP: 15-30-121, MCA

REASONABLE NECESSITY The department is proposing to amend ARM 42.15.525 in order to accommodate a new itemized deduction allowed under federal law. The department has determined that requiring taxpayers to recalculate the allowable deduction using Montana adjusted gross income would generally result in immaterial differences and so would be inefficient to enforce strictly.

5. The department proposes to repeal the following rule:

42.15.406 DEDUCTION FOR HEALTH INSURANCE PREMIUMS which can be found on page 42-1546 of the Administrative Rules of Montana.

AUTH: 15-30-305, MCA

IMP: 15-30-121, MCA

REASONABLE NECESSITY: The department is proposing to repeal ARM 42.15.406 because the law is clear and the information contained in the rule is no longer necessary.

6. Concerned persons may submit their data, views, or arguments, either orally or in writing, at the hearing. Written data, views, or arguments may also be submitted to: Cleo Anderson, Department of Revenue, Director's Office, P.O. Box 7701, Helena, Montana 59604-7701; telephone (406) 444-5828; fax (406) 444-3696; or e-mail canderson@mt.gov and must be received no later than December 21, 2007.

7. Cleo Anderson, Department of Revenue, Director's Office, has been designated to preside over and conduct the hearing.

8. An electronic copy of this Notice of Public Hearing is available through the department's site on the World Wide Web at www.mt.gov/revenue, under "for your reference"; "DOR administrative rules"; and "upcoming events and proposed rule changes." The department strives to make the electronic copy of this Notice of Public Hearing conform to the official version of the Notice, as printed in the Montana Administrative Register, but advises all concerned persons that in the event of a discrepancy between the official printed text of the Notice and the electronic version of the Notice, only the official printed text will be considered. In addition, although the department strives to keep its web site accessible at all times, concerned persons should be aware that the web site may be unavailable during some periods, due to system maintenance or technical problems.

9. The Department of Revenue maintains a list of interested persons who wish to receive notices of rulemaking actions proposed by this agency. Persons who wish to have their name added to the list shall make a written request, which includes the name and e-mail or mailing address of the person to receive notices and specifies that the person wishes to receive notices regarding particular subject matter or matters. Notices will be sent by e-mail unless a mailing preference is noted in the request. Such written request may be mailed or delivered to the person in 6 above or faxed to the office at (406) 444-3696, or may be made by completing a request form at any rules hearing held by the Department of Revenue.

10. The bill sponsor notice requirements of 2-4-302, MCA, apply and have been fulfilled. The primary bill sponsor, Senator Joe Balyeat, was notified on August 10, 2007, by regular mail, and subsequently on November 1, 2007, by electronic mail.

/s/ Cleo Anderson /s/ Dan R. Bucks

CLEO ANDERSON DAN R. BUCKS

Rule Reviewer Director of Revenue

Certified to Secretary of State November 13, 2007