BEFORE THE DEPARTMENT OF REVENUE

OF THE STATE OF MONTANA

TO: All Concerned Persons

1. The Department of Revenue believes the following reasons justify the adoption of a temporary emergency rule:

(a) Because it will ensure consistent and equitable taxpayer compliance with the Montana income tax code and to minimize disruptions to the current income tax filing season that could adversely affect all taxpayers. The rule will clarify and modify Form W of the Montana Individual Income Tax Booklets which have been distributed to taxpayers and tax practitioners for preparation of tax returns for tax year ending December 31, 2006, and impacts a subset of taxpayers whose federal tax liabilities exceed the limits of the state tax deduction for such liabilities and who receive federal income tax refunds.

(b) The rule will decrease the potential for tax preparers to compute the taxable refund in error, thus eliminating the potential for a significant number of improperly filed or amended returns that the department would have to process at a significant cost to the state. Because of limited staff resources, the department would need to delay the processing of refunds for other taxpayers whose returns are not directly affected by this issue. The result would be to delay, unfairly, the payment of refunds to a broader set of taxpayers, many of whom rely on refunds to pay essential costs of housing, food, and medical care. The delay in the payment of refunds can also result in costs to the state for paying interest or refunds delayed past 45 days.

(c) To avoid unnecessary delay and expense for taxpayers who would otherwise be required to amend their returns because individuals who prepare their own returns are at a distinct disadvantage without guidance as soon as possible.

(d) Because small practitioners do not have access to the same resources as large certified public accounting (CPA) firms and may miss the change, or because in addition to the cost of preparing and processing amended returns, there is a possibility that taxpayers may forego a refund due to the cost and benefit of amending their return.

(e) Because software programmers need the format so they can make the necessary changes to accommodate the effect of the new rule.

(f) Therefore, the department believes this situation constitutes an imminent peril to the public welfare, and this threat cannot be averted or remedied any other way, the department intends to adopt the following temporary emergency rule. The temporary emergency rule will be sent as a press release to newspapers throughout the state. Also, the Montana Society of Certified Public Accountants will be notified and notification will be provided to all other known tax practitioners and software vendors. The department will post the change on the department’s web site and in any place where Form W is referenced. The notice will be sent to all interested parties on the department’s Interested Parties Lists, and published as a temporary emergency rule in Issue No. 4 of the 2007 Montana Administrative Register.

2. The department will make reasonable accommodations for persons with disabilities who wish to participate in the rulemaking process and 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. on February 12, 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) 444-5825; fax (406) 444-3696; e-mail canderson@mt.gov.

3. The temporary emergency rule is applied retroactively to January 1, 2007.

4. The text of the temporary emergency rule provides as follows:

NEW RULE I REFUNDS OF FEDERAL INCOME TAX (1) If a taxpayer claims an itemized deduction for federal income taxes paid under 15-30-121(1)(b), MCA, in one tax period and subsequently receives a refund of those taxes paid in another tax period, the amount of refund that is taxable under 15-30-111(1)(b), MCA, is computed as though the taxpayer had paid the proper amount of federal tax and claimed the appropriate deduction during the period. A taxpayer whose deduction for federal income taxes was limited under 15-30-121(1)(b), MCA, for tax years beginning after December 31, 2004, would only report the portion of their refund that reduces their tax paid below the applicable limitation.

(2) The following examples illustrate the application of this rule:

(a) Example 1 - Taxpayer A pays $15,000 in federal income taxes in 2005, has no other itemized deductions, files as 'single' on his Montana state income tax return, and receives a federal refund in 2006 of $8,000. If the taxpayer had paid the proper tax during 2005, his federal taxes paid would have been $7,000. Since his Montana deduction for federal taxes is limited to $5,000 in both situations, none of the refund would be included in Montana taxable income.

(b) Example 2 - Married taxpayers B and C pay $20,000 in federal income taxes in 2005, have no other itemized deductions, file as 'joint' on their Montana state income tax return, and receive a federal refund in 2006 of $12,500. If the taxpayers had paid the proper tax during 2005, their federal taxes paid would have been $7,500. Since their Montana deduction for federal income taxes was limited to $10,000, only $2,500 of their federal refund would be included in Montana taxable income.

(c) Example 3 - Taxpayer D pays $6,500 in federal income taxes in 2005, has other itemized deductions totaling $4,500, files as 'single' on her Montana state income tax return, and receives a federal refund in 2006 of $4,100. If the taxpayer had paid the proper tax during 2005, her federal taxes paid would have been $2,400. Since her Montana deduction for federal income taxes was limited to $5,000, only $2,600 of her federal refund would be included in Montana taxable income.

(3) This rule shall be effective for tax year 2006 forward.

AUTH: 15-30-305, MCA

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

5. The rationale for the temporary emergency rule is stated in paragraph 1.

6. The department is filing MAR Notice No. 42-2-774, which addresses a public hearing on this same subject to adopt this rule as a permanent rule. That notice is also available in Issue No. 4 of the 2007 Montana Administrative Register.

7. 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.

8. 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.

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 mailing address of the person to receive notices and specifies that the person wishes to receive notice regarding particular subject matter or matters. Such written request may be mailed or delivered to the person in 7 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, do not apply.

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

CLEO ANDERSON                                                    DAN R. BUCKS

Rule Reviewer                                                              Director of Revenue

Certified to Secretary of State February 12, 2007