BEFORE THE DEPARTMENT OF REVENUE

OF THE STATE OF MONTANA

TO: All Concerned Persons

1. On March 16, 2007, at 2:00 p.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 of the above-stated rule.

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., March 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.

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

REASONABLE NECESSITY: The department is proposing to adopt New Rule I to replace the temporary emergency rule published in Issue 4 of the 2007 Montana Administrative Register dealing with this same information. It is necessary to adopt this rule as a permanent rule in order to assist individual and professional tax preparers with computing the taxable refund based on the instructions contained in the individual income tax booklets.

3. 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 March 23, 2007.

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

5. 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.

6. 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 notices regarding particular subject matter or matters. Such written request may be mailed or delivered to the person in 3 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.

7. 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