BEFORE THE DEPARTMENT OF REVENUE
OF THE STATE OF MONTANA
TO: All Concerned Persons
1. On October 25, 2007, the department published MAR Notice No. 42-2-778 regarding the proposed adoption and amendment of the above-stated rules at page 1647 of the 2007 Montana Administrative Register, issue no. 20.
2. A public hearing was held on November 15, 2007, to consider the proposed adoption and amendment. Oral testimony received at the hearing and written comments received after the hearing is summarized as follows along with the response of the department:
COMMENT NO. 1: Gayle Abercrombie, representing the Montana Petroleum Association, stated the association appreciated the department's work on these rules and the opportunity provided by the department to comment during the rule development process. The only concern they had regarding the rules as published has been addressed by the department with the proposed amendment to New Rule I(3).
RESPONSE NO. 1: The department appreciates the assistance provided by the Montana Petroleum Association and others during the development of these rules.
COMMENT NO. 2: Jane Egan, Executive Director, Montana Society of Certified Public Accountants and Dwaine Iverson, CPA, both submitted written comments concerning the requirement in New Rule II to attach the federal form K-1 in order to claim credit for the tax withheld will mean that none of these returns can be e-filed. This will defeat the purpose of encouraging e-filing of returns.
Mr. Iverson stated that there will be no method available for preparers to send this information and for the department to "capture" the information. He further stated the same problem will occur with the requirement to attach the Form 1099-MISC to the return.
RESPONSE NO. 2: The department appreciates Mr. Iverson and Ms. Egan's comments on this issue. The department agrees with the comments and the rule has been amended to state that the department will not require the filing of a K-1 or Form 1099-MISC with the royalty owner's tax return. The department is moving rapidly to the electronic filing of all tax returns and does not want to develop practices that create obstacles which prevent taxpayers from such filing. Therefore, the department is only requiring that taxpayers maintain a copy of the federal form K-1 or Form 1099-MISC.
COMMENT NO. 3: Mr. Iverson suggested the department exempt partnerships, trusts, estates, and S-corps, if all the proper paper work has been filed by all the partners agreeing to be taxed by Montana. If there were compliance in filing tax returns reporting this information, then the burden on trying to track the withheld tax would be eased. The system is already in place for all out of state taxpayers that have not signed an agreement to have withholding for state income taxes. He stated that the department needs to make sure that it is not placing unfair burdens on the taxpayers that are complying to try to catch the small percentage that are not.
RESPONSE NO. 3: The department understands the concerns of Mr. Iverson, however the language of the law as enacted only provides for specific withholding exemptions for certain entities. The law did not grant partnerships, trusts, estates, and S corporations the exemption.
COMMENT NO. 4: Ms. Egan questioned how withholding will be handled with pass-through entities. For example, if a limited liability company (LLC) has royalty income of $25,000, the withholding on this would be $1,500. Assuming that there are 5 members, the 1099 would go to the LLC showing the royalty and withholding. How will that withholding information be provided to the members of the LLC?
RESPONSE NO. 4: As illustrated in the original language in New Rule II the department was intending to request a copy of the K-1 to identify the taxpayers that have interest in the limited liability company and therefore subject to Mineral Royalty Withholding Act.
However, in comments to New Rule II the department recognized the issue associated with electronic filings and attaching the federal form K-1 and Form 1099-MISC. Therefore, the department is only requesting a copy of the K-1 or 1099-MISC be retained by the taxpayer in the instance the department requests verification of the amount withheld.
The limited liability company will need to, along with the distribution of the income, provide the members with the appropriate withholding information. The department believes this will be a combination of a K-1 and a 1099-MISC.
3. The department amends the rules as follows:
NEW RULE I (42.17.601) ADVANCE PAYMENTS AND FURTHER DISTRIBUTIONS (1) and (2) remain as proposed.
(3) If a mineral is taken in-kind by a royalty owner, the
remittor take-in-kind owner must forward 6% of the net value of the mineral that was taken in-kind to the department on behalf of that royalty owner unless they are exempt from withholding due to 15-30-264 or 15-31-102, MCA. The value of the mineral is calculated by multiplying the volume of the mineral that was taken in-kind with a market or going rate for the mineral. For instance, if a royalty owner takes in-kind 100 barrels of oil, the remittor will multiply the 100 barrels of oil to the sales price of the other barrels of oil sold from the lease to establish the net value of the mineral taken in-kind.
(4) remains as proposed.
AUTH: 15-30-272, MCA
IMP: 15-30-266, MCA
NEW RULE II (42.17.602) CLAIMING THE CREDIT FOR TAX WITHHELD (1) Claiming credit for the tax withheld shall be accomplished as follows:
(a) Credit may be claimed for the tax withheld on a Montana Individual Income Tax Return or a Montana Corporation License Tax Return
, with a copy of Form 1099-MISC attached to substantiate the amount claimed.
(b) Taxpayers who are shareholders in a corporation taxed under Subchapter S of the Internal Revenue Code
and are Montana residents, members of a Montana limited liability company, or members of a partnership doing business in this state must attach maintain a copy of federal form K-1 to their Montana individual income tax return. They may claim credit for the amount shown as their percentage share of the tax withheld from Montana net royalty payments by the corporation, limited liability company, or partnership.
(c) An estate or trust is entitled to credit for the tax withheld in proportion to its share of federal distributable net income. The remaining credit must be passed through to the beneficiaries in proportion to their respective shares of federal distributable net income of the estate or trust. To claim the credit, the beneficiaries must
attach maintain a copy of federal form K-1 to their Montana Individual Income Tax Return for Fiduciaries and Trusts (FID-3) and claim credit for the amount shown by the fiduciary as their percentage share of the tax withheld from Montana mineral production payments.
(d) Any person filing on a fiscal year ending other than December 31 must claim a credit for the withholding tax shown on the personal income tax return required to be filed during the year following the December closing period of the Montana Mineral Royalty Withholding Tax Reconciliation Return (Form RW-3).
AUTH: 15-30-272, MCA
IMP: 15-30-264, MCA
NEW RULE III (42.17.603) APPLICABLE THRESHOLDS – CHANGE OF OWNERSHIP – PUBLICLY TRADED PARTNERSHIPS – NONPROFIT ORGANIZATIONS – EXEMPT ROYALTY OWNERS (1) through (10) remain as proposed.
(11) Section 15-30-264, MCA, allows for an organization that is exempt from taxation under 15-31-102, MCA, to be exempt from the withholding requirements of 15-30-261, MCA, provided the exempt organization, who is a royalty owner, submits a report to both the remittor and the department. The report, which can be in the form of a letter, must contain the exempt organization's letterhead and requests exemption from 15-30-261, MCA. The request must be received by the remittor and the department prior to November 1 of the year prior to the calendar year in which the exempt organization requests exemption. Upon receipt of the report, the department shall notify the exempt organization and the remittor of either acceptance or denial of the request within thirty days. The election does not need to be repeated annually unless requested by the department.
(12) and (13) remain as proposed.
AUTH: 15-30-272, MCA
IMP: 15-30-264, MCA
NEW RULE V (42.17.605) FILING REQUIREMENTS (1) and (2) remain as proposed.
(3) If a remittor does not withhold on a royalty interest owner who in the previous year met the exemption requirement in 15-30-264, MCA, but exceeded that requirement in the current year, the department will not penalize the remittor for the lack of withholding in that current year.
AUTH: 15-30-272, MCA
IMP: 15-30-266, 15-30-268, 15-30-269, MCA
4. Therefore, the department adopts New Rule I (42.17.601); II (42.17.602); III (42.17.603); and V (42.17.605) with the amendments listed above and adopts New Rule IV (42.17.604) and amends ARM 42.17.101 as proposed.
5. An electronic copy of this Adoption Notice 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 Adoption Notice 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.
/s/ Cleo Anderson /s/ Dan R. Bucks
CLEO ANDERSON DAN R. BUCKS
Rule Reviewer Director of Revenue
Certified to Secretary of State December 10, 2007