(2) In order to establish its exemption and thus be relieved of the duty of filing returns and paying the tax, each organization claiming exemption must file with the department an affidavit showing:

(a) the character of the organization;

(b) the purpose for which it was organized;

(c) its actual activities;

(d) the sources and the disposition of its income;

(e) whether or not any of its income may inure to the benefit of any private shareholder or individual;

(f) a copy of the articles of incorporation;

(g) a copy of the by-laws; and

(h) copies of the latest financial statements showing the assets, liabilities, receipts, and disbursements must be submitted with the affidavit.

(3) In addition, if the IRS has granted the organization exemption from the federal income tax, a certified copy of the exemption certificate or letter shall also be filed.

This rule has been repealed.

This rule has been repealed.

(1) Gains resulting from a liquidation pursuant to IRC 331 through 337 are taxable to the liquidating corporation to the extent these gains are attributable to corporate or individual share holders not subject to tax. In the event the liquidating corporation has some shareholders subject to tax in Montana and some who are not, the portion of the gain on liquidation taxable to the liquidating corporation will be determined based on the ratio common stock owned by nontaxable shareholders bears to total common stock issued and outstanding. This applies to all tax years beginning after December 31, 1980.

The following definitions apply to rules found in this chapter:

(1) "Small business investment company" means only those companies approved and licensed to operate as small business investment companies by the federal small business administration.

(1) Dividends and capital gains received by a corporation from an investment in a small business investment company are exempt from tax and the provisions of Title 15, chapter 31, MCA, provided all the following conditions are met:

(a) The small business investment company is organized for the purpose of diversifying and strengthening employment opportunities of companies within Montana.

(b) Within one year of licensing by the federal small business administration, 75 percent of the small business investment company's investments are in manufacturing companies as defined in (i) or timber product companies, or agricultural companies as defined in (ii), and such companies' processing plants are located within Montana. The companies must have at least 50 percent of their employees working in Montana.

(i) Manufacturing, for the purposes of this rule, is defined as engaging in the mechanical or chemical transformation of materials or substances into new products. The manufacturing facilities are usually described as plants, factories, or mills and characteristically use power driven machines and material handling equipment. Businesses engaged in assembling component parts of manufactured products are all considered to be manufacturing if the product is neither a structure affixed to real estate nor a fixed improvement. Manufacturing facilities shall not include facilities engaged in whole or part in the extraction of any mineral or nonrenewable energy resource.

(ii) Agricultural refers to the raising or processing of livestock, swine, poultry, field crops, fruit and other animal, and vegetable matter.

(c) It is substantiated that the taxpayer has invested in the small business investment company and that the small business investment company has invested in companies located within Montana. The small business investment company must provide a report as part of the annual filing of the Montana corporate income tax return.

(1) The small business investment company shall report as part of the corporate income tax return the following information on a form provided for that purpose:

(a) the names of all investors in the small business investment company;

(b) the amount of investment of each of the investors; and

(c) a list of all companies invested and showing:

(i) the name and location of the companies; and

(ii) the amount invested in the company.

(2) If any of the information required to be reported in (1) shall change after the return is made, such changes must be reported to the department by the last day of the month the change occurred.

This rule has been repealed.

(1) The department will certify the eligibility of firms for both the five-year corporation tax exemption and the class five research and development property classification.

(2) A firm may apply for either or both the corporation tax or property tax benefit. Claiming one of the benefits is not a prerequisite to claiming the other.

(3) To qualify for the class five property classification, a firm must apply annually to the department on or before January 1 of the year for which the classification is desired.

(4) To obtain the corporate income tax exemption, the firm must file an annual application with the department before the end of the first calendar quarter during which the firm does business in Montana. The initial application must be filed before the end of the first complete calendar quarter during which the corporation is engaged in business in Montana. For example, if a corporation began operating in Montana on September 15, that corporation would have until December 31 of that year to file for the exemption.

(5) Taxpayers will be required to submit information determined to be necessary by the department for evaluating the eligibility of firms for the research and development tax benefits.

(1) An entity that qualifies as a research and development firm as defined in 15-1-101, MCA, and is incorporated or qualified to do business in Montana on or after July 1, 1987, is exempt from the corporate income tax on the net income earned from research and development activities for its first five tax periods.

(1) A corporation which is created through the reorganization of a corporation currently operating in Montana, is not eligible for the research and development tax benefits if the newly created research and development subsidiary is essentially continuing current and past activities of the parent in Montana. If the newly created corporation is carrying on new research and development activities separate and distinct from the operations of the parent, the corporation will be eligible for tax benefits.

(1) Income earned by a research and development firm which is unrelated to research and development activities is not eligible for the five-year exemption from the Montana corporate income tax. In making the determination of whether income earned is related to research and development activities, the department will review the facts presented in each case. However, the following examples demonstrate how the department would decide under certain situations.

(a) If a research and development firm derives income from a contract to perform research and development activities only, all of that income will be eligible for the exemption.

(b) If a research and development firm develops a patent from which it either sells or receives royalties, such income shall be deemed to be research and development income eligible for the exemption.

(c) If a research and development firm is in two distinct businesses, only the income related to the research and development activity shall be exempt.

(d) If a research and development firm develops a product which it then begins to manufacture and sell, a portion of the income from selling the product shall be deemed to be related to the research and development activities. The portion of the total Montana net income deemed to be research and development income activities shall be based upon the average percentage of Montana real and tangible personal property and Montana payroll related to the research and development activities as presented below:

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This rule has been repealed.

This rule has been repealed.

This rule has been repealed.

This rule has been repealed.

This rule has been repealed.

This rule has been repealed.

This rule has been repealed.

(1) In applying the separate accounting method, each item of income is segregated and directly allocated according to its source. Any expense or other deductible items, including a reasonable allowance for general overhead expenses, attributable to the earning of such income are likewise segregated and deducted from such income. Items of nonapportionable income are to be allocated as provided for under 15-31-304, MCA.

(1) The basis for determining gain or loss from the sale or other disposition of property shall be the basis prescribed by the IRC and regulations in effect during the reporting period, except such provisions therein as are inconsistent with the express provisions of these regulations or 15-31-113, MCA. 

(2) A return for a fractional part of a year is required in the following cases:

(a) when a foreign corporation qualifies or a domestic corporation organizes on a day other than the first day of the reporting period it intends to establish;

(b) when a foreign corporation withdraws or when a domestic corporation dissolves on a day other than the last day of its established reporting period; or

(c) when a corporation changes its annual reporting period.

(3) In cases shown in (2) , a return must be filed for the short period beginning with the day following the close of the old period and ending with the day preceding the first day of the new period.

(2) The department may grant additional time for filing a return whenever in its judgment good cause exists.

(1) Taxpayers are required to report to the department adjustments or corrections to their taxable income made by the IRS or other competent authority by filing an amended Montana corporate income tax return within 180 days of the final determination date. If the adjustments or corrections result in an overpayment of tax, the refund claim must be made within the statute of limitation set forth in 15-31-509, MCA.

(a) If the taxpayer files an amended Montana corporate income tax return or a federal adjustment report more than 180 days after the final determination date and has not by written agreement suspended the federal statute of limitations, the period within which a deficiency in tax may be assessed extends for three years from the date the changes or corrections in the taxpayer's federal taxable income become final and are filed with the department or three years from the date the amended federal return was filed.

(b) If the taxpayer fails to file an amended Montana corporate income tax return or a federal adjustments report, the department may at any time assess tax or begin a proceeding in court for the collection of the tax without assessment pursuant to 15-31-544, MCA.

(2) If a taxpayer files an amended federal income tax return for any year changing or correcting its taxable income, the taxpayer is required to file a corresponding amended Montana corporate income tax return within 180 days after filing the amended federal return. If the adjustments or corrections result in an overpayment of tax, the refund claim must be made within the statute of limitations set forth in 15-31-509, MCA.

(a) If the taxpayer files an amended Montana corporate income tax return or a federal adjustments report more than 180 days after filing the amended federal return and has not by written agreement suspended the federal statute of limitations, the period within which a deficiency in tax may be assessed extends for three years from the date the amended Montana return is filed.

(b) If the taxpayer fails to file an amended Montana corporate income tax return or a federal adjustments report, the department may at any time assess tax or begin a proceeding in court for the collection of the tax without assessment pursuant to 15-31-544, MCA.

(3) Changes or corrections by a taxpayer to federal taxable income, including changes that increase or decrease a net operating loss must be reported to the department through the filing of an amended Montana corporate income tax return within the time prescribed in 15-31-509, MCA, regardless of whether or not an amended federal income tax return was filed.

(4) No de minimis standard applies to the requirements for reporting changes or corrections to federal taxable income. Taxpayers are required to report all such changes and corrections to the department.

(1) In case of either a merger or a consolidation of corporations, the absorbed corporations must file final returns covering the period between the close of the preceding reporting period and the date of merger or consolidation.   For taxable years beginning after December 31, 1990, the final return filed on a separate company basis for the period prior to the consolidation is due on the fifteenth day of the fifth month following the close of the first taxable period for which a return is filed on a consolidated basis.   A merger will have no effect on the reporting period of the continuing corporation, and it will file its next return on the basis of its regularly established period.   However, in the case of a consolidation of corporations, the consolidated company is treated as a new corporate entity and files its first return for the period commencing with the date of the consolidation.

(2) Any corporation which acquires another corporation, by any available method, shall be required to report that income and shall be liable for the corporate tax due on their combined entire net income for the year ensuing.

(1) Both foreign and domestic corporations which have either qualified to do business in Montana or are registered to do business in Montana and not engaged in business in Montana during the reporting period are required to file either an annual return or an annual affidavit provided by the department for such purposes. No tax is assessable against a corporation which was not engaged in business during the reporting period.

(a) If a return is filed, the return must bear the name and address of the corporation, the signature of an officer, contact information, and a statement on the face of the return or attached to the return to the effect that the corporation was not engaged in business in Montana during the reporting period.

(b) If an affidavit is filed, the corporation must use the affidavit provided by the department. It must be completed and signed by an officer of the corporation.

(1) When a domestic corporation seeks to dissolve, or when a foreign corporation seeks to withdraw or ceases business in Montana, the following requirements must be met for the purpose of obtaining a Dissolution/Withdrawal Certificate:

(a) a completed and signed Application for Tax Certificate (Form CR-T) must be submitted to the department;

(b) all required tax returns must be filed;

(c) all taxes, interest, and penalties must be paid; and

(d) an assumption of Montana tax liabilities must be filed with the department on a Form ATL if the corporation is:

(i) party to a merger or consolidation; or

(ii) included in the combined filing of another corporation subject to tax under 15-31-101, MCA, and a final return is not filed.

(2) When a domestic corporation has completed its dissolution or when a foreign corporation has completed its withdrawal and seeks a Tax Clearance Certificate, the following requirements must be met:

(a) a completed and signed Form CR-T must be submitted to the department;

(b) a return clearly marked "Final Return" must be filed for the short period commencing with the closing date of the last period for which a return was filed and extending to the date of dissolution, withdrawal, or cessation of business in this state;

(c) a schedule must be attached to the final return showing the disposition made of the corporate assets. If the corporation sold its assets, any gain or loss from the disposition thereof must be included in the determination of net income, unless the corporation is not required to report gain pursuant to 15-31-113, MCA; and

(d) all taxes, interest, and penalties must be paid.

(3) If a corporation subject to (2) is party to a merger or consolidation, or is included in the combined filing of another corporation subject to tax under 15-31-101, MCA, and a final return is not filed, a Tax Clearance Certificate will not be issued.

(4) Corporations not engaged in business in Montana during the reporting period may file an annual affidavit in lieu of returns as provided for in ARM 42.23.312.

This rule has been repealed.

(1) Taxes paid within the year, with the exception of the following taxes specifically excluded as deductions by statute are:

(a) Montana corporate income tax;

(b) taxes assessed against local benefits of a kind tending to increase the value of the property assessed;

(c) taxes on or according to or measured by net income or profits, imposed by authority of the government of the United States; or

(d) taxes imposed by any other state or country upon or measured by net income or profits. These taxes are not allowable as deductions irrespective of how characterized by regulations adopted by the IRS for purposes of foreign tax credit calculations. (i.e., 26 CFR 1.901 through 1.903.)

(i) A tax based on or measured by net income is a tax which is based on the residual of gross revenues less expenses.

(ii) To the extent any portion of the tax paid to foreign governments is imposed upon or measured by the difference between the posted price and the market price for a barrel of oil, then the tax attributable to this increment is not a tax based upon or measured by net income or profits and is therefore deductible.

(2) With the exception of the contractor's gross receipts tax, taxes may be claimed only as deductions in determining net income and cannot be converted into a credit against the corporate income tax. See ARM 42.4.3103 for details concerning the credit allowed with respect to the contractor's gross receipts tax.

allowance for the exhaustion, wear and tear, and obsolescence of property arising out of its use or employment in the trade or business is allowed as a depreciation deduction.

(2) The basis upon which depreciation is to be computed shall be the same basis as used for federal income tax purposes.

(3) The method of depreciation used and the amount of the depreciation must be the same as that reported for federal income tax purposes.

(2) The allowance for depletion shall be determined according to the provisions of the IRC relating to the reporting period.

(2) This limitation can create a difference in the amount of the deduction claimed for Montana and federal income tax purposes. When a difference exists, the taxpayer is required to include a reconciliation between the Montana deduction and the federal deduction. If the federal deduction includes any carryover of contributions previously made, a schedule must be included showing the amount and the year of such contributions. The Montana deduction must be adjusted accordingly for any contributions previously deducted for state purposes and not deducted in prior years on the federal return.

(2) No deduction is allowed for a loss which is not bona fide, for anticipated or contingent losses, or for any additions to reserves for such losses.

This rule has been transferred.

This rule has been transferred.

This rule has been transferred.

This rule has been transferred.

This rule has been repealed.

This rule has been repealed.

(a) a complete description of all items donated;

(b) a statement of the fair market value of each item donated;

(c) the date of manufacture for each item donated;

(d) the date the software was developed; and

(e) a copy of the written statement from the donee in which the donee agrees to accept the property and represents that the property will not be transferred by the donee in exchange for money, other property, or services.

(2) For the purposes of the deduction allowed by 15-31-114 , MCA, apparatus intended for use with the computer shall include, but not be limited to, software provided that the software was not developed more than five years prior to the date of its donation to a school.

(1) A deduction is allowed for a portion of expenditures made for the purpose of conserving energy in buildings, both residential and nonresidential, used in the taxpayer's business.

(2) This deduction must be claimed on the form provided by the department. The complete form must be attached to the taxpayer's corporate income tax return for the year in which the deduction is claimed.

(2) In the improvement of existing structures a deduction will be given for capital investments that are recognized to substantially reduce the waste or dissipation of energy or reduce the amount of energy required for proper utilization of the building.

(3) Deductions will not be allowed for capital investments that are directly used in a production or manufacturing processor rendering a service to customers.

(a) insulation in existing buildings of floors, walls, ceilings, and roofs;

(b) insulation in new buildings of floors, walls, ceilings, and roofs insofar as it produces an insulating factor in excess of established standards;

(c) insulation of pipes and ducts located in nonheated areas and of hot water heaters and tanks;

(d) special insulating siding with a certified insulating factor substantially in excess of that of normal siding;

(e) storm or triple glazed windows;

(f) storm doors;

(g) insulated exterior doors;

(h) caulking and weather stripping;

(i) devices which limit the flow of hot water from shower heads and lavatories;

(j) waste heat recovery devices;

(k) glass fireplace doors;

(l) exhaust fans used to reduce air conditioning requirements;

(m) replacement of incandescent light fixtures with light fixtures of a more efficient type;

(n) lighting controls with cutoff switches to permit selective use of lights;

(o) clock regulated thermostats.

(2) This is not to be considered an exhaustive list of qualifying capital investments. The department will consider other investments that substantially reduce the waste or dissipation of energy or reduce the amount of energy required for the heating, cooling, or lighting of buildings.

(1) A deduction from Montana net income is allowed for each sale of 80 acres or more to a beginning farmer as provided in 80-12-211, MCA, provided the sale is approved by the agricultural loan authority. The deduction is the amount that would have to be included in net income resulting from the sale, up to a maximum deduction of $50,000. The deduction will be taken each year a payment is received until the loan is paid or the deductions for all years equal $50,000.

(2) To the extent that a net operating loss is created as a result of the deduction, such loss is not available for carryover or carryback provisions.

(3) The taxpayer may claim more than one deduction as a result of sales to beginning farmers provided each sale is approved by the agricultural loan authority.

(4) For tax deduction purposes, a copy of the approval of the transaction by the agricultural loan authority must be attached to the return claiming the deduction. The department may also require additional documentation on request to establish the eligibility of the transaction for a tax deduction.

This rule has been transferred.

This rule has been repealed.

This rule has been transferred.

This rule has been transferred.

This rule has been transferred.

This rule has been transferred.

This rule has been transferred.

This rule has been transferred.

This rule has been transferred.

This rule has been transferred.

This rule has been transferred.

This rule has been transferred.

This rule has been repealed.

This rule has been transferred.

This rule has been transferred.

This rule has been transferred.

This rule has been transferred.

This rule has been transferred.

This rule has been repealed.

(1) For tax periods beginning after March 13, 1997, no refund or credit may be allowed or paid with respect to the year for which a return is filed, unless, within three years from the last day prescribed for filing the return or after one year from the date of the overpayment (whichever period expires later), the taxpayer files a claim for refund thereof or the department has determined the existence of the overpayment and has approved refunding or crediting thereof. The three-year period is determined without regard to any extension that may have been granted.

(2) A refund claim made after the expiration of the limitation period set forth in (1) and in 15-31-509, MCA, is limited to payments received after that date.

This rule has been repealed.

This rule has been repealed.

This rule has been repealed.

(2) The $5,000 threshold includes any applicable surtax.

(3) If the $5,000 threshold is met, the taxpayer has the option of submitting 80% of the current year's tax liability in estimated payments or 100% of last year's liability provided that the preceding taxable year was a period of 12 months and a return was filed for the preceding taxable year. By submitting four equal quarterly payments totaling 100% of last year's tax liability, a taxpayer can ensure that no underpayment interest penalty will accrue, regardless of the current year's tax liability. Corporations that file the preceding year's return as an inactive corporation, or as a Subchapter S corporation, must submit 80% of the current year's tax liability in estimated payments if the $5,000 threshold is met.

(1) Except as provided in (2), a taxpayer is presumed to have earned income evenly throughout the year. Accordingly, if the tax liability is $5,000 or more at the end of the year, the taxpayer is required to make estimated tax payments as described in 15-31-502, MCA. If the payments are not made in accordance with 15-31-502, MCA, the taxpayer must compute the quarterly estimated tax underpayment interest on a form provided by the department.

(2) The provisions of (1) will not apply if the taxpayer can establish that it did not earn income evenly throughout the year. To do so, the taxpayer must show on the form provided by the department when the income was earned. Approval of the calculations shown on the form rests with the department. The department may request additional information to support the calculations.

(3) If estimated payments are required and those payments are insufficient, not submitted, or are not submitted timely, the underpayment interest provided in 15-1-216, MCA, will be computed on the lessor of 80% of the current year's liability or 100% of last year's liability, provided that the last year was a period of 12 months and the corporation filed a return.

(2) A taxpayer is not immune from the quarterly estimated payment requirement simply because it did not know its tax liability until the end of the year.

(3) Lack of knowledge about the estimated payment requirement is not a basis for having the underpayment interest waived.

(a) Corporation X, a calendar year corporation, changes to a fiscal year starting September 1. Corporation X was required to make estimated payments for the short tax year covering the periods from January 1 through August 31. Corporation X was required to make two 25% installments of estimated tax, the first on or before April 15, and the second on or before June 15, and had to pay 50% of the estimated tax on or before August 15 (the 15th day of the last month of the short tax year) , as the last installment.

(2) If the tax period was three months or less, there would be no quarterly estimated payment requirement.

(1) The taxation of a limited liability company in Montana depends upon its federal classification as a corporation or a partnership as determined by the IRS, regardless of whether an entity is recognized as a limited liability company under the Montana Limited Liability Company Act. For example, a limited liability company may be formed in Montana with one member; however, in order to be taxed as a partnership for federal purposes, and consequently for Montana purposes, the limited liability company must have at least two members. If the limited liability company is taxed as a "C" or "S" corporation for federal tax purposes, then it must file the corresponding Montana corporate income tax return with the department as provided for under Title 15, chapter 31, MCA. If a limited liability company is treated as a partnership for federal tax purposes, then it must file a partnership return reflecting each member's share of the income/loss, and also, the members must file Montana individual income tax returns reflecting their share of the income/loss of the limited liability company. These returns are to be filed with the department as provided for under Title 15, chapter 30, MCA.

(2) A copy of the limited liability company's federal return must be attached with the tax return required for Montana purposes.

(1) The net operating loss deduction is allowed as provided in the rules contained in this subchapter.

(2)(a) The term "net operating loss deduction" means the aggregate of the net operating loss carryovers plus the net operating loss carrybacks applicable to the taxable period.

(b) The term "net operating loss" means the excess of deductions over the gross income for a particular taxable period with the following modifications:

(i) No deduction is allowed for any net operating loss carryover or carryback from another year.

(ii) Any excess of percentage depletion over cost depletion must be added back to net income. 

(1) For taxable periods beginning before January 1, 2018, a net operating loss is carried back to the third preceding taxable period from which it was incurred. Any balance remaining must be carried to the second preceding taxable period, then to the first preceding taxable period, and then forward to the next seven succeeding taxable periods in the order of their occurrence.

(2) For taxable periods beginning after December 31, 2017, a net operating loss is carried back to the third preceding taxable period from which it was incurred. Any balance remaining must be carried to the second preceding taxable period, then to the first preceding taxable period, and then forward to the next ten succeeding taxable periods in the order of their occurrence. A net operating loss carryback provided in this subsection may not exceed $500,000 per taxable period. If a combined report that is filed includes more than one entity with Montana activity, the total net operating loss carryback for all entities cannot exceed $500,000 per taxable period.

(3) When a net operating loss exceeds the net income of the year to which it is carried, the net income for such year must be adjusted by making the following modifications to determine the unused portion of the net operating loss to be carried forward:

(a) No deduction is allowed for any net operating loss carryover or carryback from another year.

(b) Any excess of percentage depletion over cost depletion must be eliminated.

(4) The taxable income as modified by the adjustments shown in (3) shall not be considered to be less than zero. The amount of the net operating loss which may be carried forward is the excess of the loss over the modified net income.

(5) A taxpayer may elect to forgo the entire carryback period. Montana corporate income tax Form CIT provides an area to perfect this election. When Form CIT is filed with the department, the election must be clearly marked in the area provided on that form. If no indication is made in the area provided on Form CIT, the net operating loss will be carried back and applied as provided in (1) and (2). For state purposes, an election to forgo a federal net operating loss carryback provision will not be accepted as a valid election.

(6) If a taxpayer files an amended Montana return under 15-31-506, MCA, and reports a net operating loss, the time to perfect the election in (5) may be extended. If the taxpayer failed to make the election on its originally filed return, and the original return reported net income, an election may be made by filing an amended return if it is clearly marked in the area provided on the return. If more than one amended return is filed for a taxable period, the election must be made on the first return reporting a net operating loss.

(1) Every corporation claiming a net operating loss deduction for any taxable period must file with its return for such period a schedule showing in detail the computation of the net operating loss deduction claimed.

(2) Corporations that are members of a unitary group filing a single return must use intrastate apportionment to calculate the net operating loss and net operating loss deduction for each member of the unitary group that is engaged in business in the state. A net operating loss for one member of a unitary group cannot be carried back or carried over to offset the income of another member included in the unitary group.

(a) Each member of a unitary group engaged in business in this state must calculate its individual share of the unitary group's net operating loss by applying its individual apportionment factor to the net operating loss of the unitary group.

(b) For purposes of calculating the net operating loss deduction, each member of a unitary group engaged in business in this state must calculate its individual share of the unitary group's net income by applying its individual apportionment factor to the net income of the unitary group, then applying its individual net operating loss available as calculated in (a).

(3) If a corporation has a net operating loss which when carried back to a prior taxable period results in an overpayment of tax for such taxable period, a refund may be obtained by filing an amended return for that period claiming the net accordingly. Interest does not accrue on overpayments of tax resulting from a net operating loss carryback or carryover.

(a) For tax periods beginning after March 13, 1997, claims for refund of tax resulting from a net operating loss carryback must be filed in accordance with 15-31-509, MCA.

(4) Any net operating loss carried over to any taxable years beginning after December 31, 1978, must be calculated under the provisions of 15-31-114, MCA, and the rules promulgated thereunder that are effective for the taxable year for which the return claiming the net operating loss carryover is filed.

(1) In the case of a merger of corporations, the surviving corporation may not claim a net operating loss deduction for net operating losses incurred by any of the merged corporations prior to the date of merger.

(2) Similarly, in the case of a consolidation of corporations, the new corporate entity may not claim a net operating loss deduction for net operating losses incurred by the dissolved corporations prior to the date of consolidation.

(3) In the case of a corporate entity that has converted to a disregarded entity, no net operating loss deduction may be claimed for net operating losses incurred by the corporate entity prior to the date of conversion.

(1) For purposes of this rule:

(a) "combined year" means a taxable period in which a corporation filed a unitary combined report as set forth in ARM 42.26.204;

(b) "water's-edge year" means a taxable period in which a corporation filed a valid water's-edge combined report as set forth in ARM 42.26.301; and

(c) "separate company year" means a taxable period in which a corporation filed as a separate and distinct entity, not as part of a unitary group.

(2) A corporation that makes a valid water's-edge election or does not renew a prior election is agreeing that unused net operating loss carryover from a water's-edge year may only be carried to a water's-edge year, and unused net operating loss carryover from a non-water's-edge year may only be carried to a non-water's-edge year. When applying the three-year carry-back, and seven-year or ten-year carry-forward limitations, provided for in 15-31-119, MCA, all taxable periods are included, even though the loss can only be deducted in those periods in which the filing method is the same.

(3) Except as provided in (2), if a corporation incurs a net operating loss and carries that loss to a year that was filed under a different filing method, the net operating loss deduction may be limited. Both the tax period in which the net operating loss is being deducted and the net operating loss must be recalculated using the correct filing method before the deduction is allowed. For example:

(a) if a corporation incurs a net operating loss in a prior separate company year, and wishes to carry that loss forward or back to a combined year and a combined return is the taxpayer's proper filing method for each period, the loss must be recalculated as if it were filed on a combined, unitary basis before being carried to the combined year; or

(b) if a corporation incurs a net operating loss in a combined year filed correctly on a unitary basis, and wishes to carry back that loss to a prior, incorrectly filed, separate company year (or other incorrect filing method), the separate company year must be recalculated as if it were filed on a combined, unitary basis before the deduction is allowed.

(4) For purposes of applying a net operating loss deduction, a taxpayer or the department may undertake the necessary corrections described in (3) even if the affected tax year has already closed via the expiration of the statute of limitations. By correcting the filing method (or net operating loss), neither the taxpayer nor the department is reopening a closed year, but rather is deriving the correct figure to use for an open-year claim.