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January 5, 2022

Montana water's-edge election due March 31, 2022, for calendar-year taxpayers

Montana's corporate income tax law requires members of a unitary business to file returns on a worldwide combined basis, unless a water's-edge election is made to exclude foreign affiliates from the combined group. A Montana water's-edge group pays tax at an elevated tax rate of 7% instead of the regular rate of 6.75%.

While many states require a water's-edge election to be made by the due date or extended due date of the return for the year for which it is intended to be effective, Montana is unique in that a water's-edge election must be made within 90 days of the beginning of the first year in which it is first intended to become effective. Accordingly, a corporation wishing to make a new water's-edge election, or renew an existing election, for the 2022 tax year must file a Form WE-ELECT by March 31, 2022.

The election is only effective if all affiliated corporations subject to Montana taxes consent. Consent by the common parent of an affiliated group is deemed to be consent by all members of the group. A water's-edge group generally includes corporations organized in the United States that have a unitary relationship and are eligible to be included in a federal consolidated return, except that a greater-than-50% ownership test is substituted for the 80% federal test. Other affiliated corporations that may be included are domestic international sales corporations (DISCs) and foreign sales corporations (FSCs), export trade corporations, foreign corporations that derive gain or loss from real property interests in the United States, corporations incorporated outside the United States that have more than 20% of their average payroll and property assignable to a location inside the United States, and corporations organized in a "tax haven."1

As noted, the Form WE-ELECT must be timely filed and, if approved, is binding for three years unless permission to change the filing methodology is obtained from the Montana Department of Revenue (MT DOR). Taxpayers electing to continue the election for an additional three years must file the Form WE-ELECT within 90 days of the beginning of the new three-year period for which the election is intended to be effective. After an election is filed, the MT DOR will send a letter confirming that the election has been approved or explaining why the election was denied. The MT DOR typically responds to these requests quickly. If a reply is not received within two weeks after submission or within two weeks before the deadline, the taxpayer should contact the MT DOR to ascertain whether there is a problem with the request.


The Montana water's-edge election procedure is one of the most unique and missed state elections. Taxpayers that want to make a water's-edge election for calendar-year 2022 must file the election by the statutory deadline. In our experience, the MT DOR will not waive an untimely water's-edge election unless the taxpayer can establish that the late filing was due to reasonable cause as defined in Section 42.2.304(50) of the Montana Administrative Rules.2 Section 42.26.302 of the rules describes the procedures for obtaining relief for a late filing of a water's edge election. Satisfying any of these reasonable cause conditions is a difficult burden to meet, making it all the more important for taxpayers to timely file the desired election.


Contact Information
For additional information concerning this Alert, please contact:
State and Local Taxation Group
   • Bill Nolan (


1 Mont. Code Ann. §15-31-322(f) defines a "tax haven" to include the countries or territories of Andorra, Anguilla, Antigua and Barbuda, Aruba, the Bahamas, Bahrain, Barbados, Belize, Bermuda, British Virgin Islands, Cayman Islands, Cook Islands, Cyprus, Dominica, Gibraltar, Grenada, Guernsey-Sark-Alderney, Isle of Man, Jersey, Liberia, Liechtenstein, Luxembourg, Malta, Marshall Islands, Mauritius, Monaco, Montserrat, Nauru, Netherlands Antilles, Niue, Panama, Samoa, San Marino, Seychelles, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, Turks and Caicos Islands, U.S. Virgin Islands and Vanuatu.

2 "'Reasonable cause' means the taxpayer exercised ordinary business care and prudence and was nevertheless unable to file the return, pay the tax within the prescribed time, or object to a department action as provided for in [Mont. Admin. Rule] 42.2.510. Examples of what does or does not constitute reasonable cause may be found in [Mont. Admin. Rule] 42.2.512."