National Grid Holdings, Inc. v. Commissioner of Revenue , 89 Mass. App. Ct. 506 ( 2016 )

NOTICE: All slip opinions and orders are subject to formal
revision and are superseded by the advance sheets and bound
volumes of the Official Reports. If you find a typographical
error or other formal error, please notify the Reporter of
Decisions, Supreme Judicial Court, John Adams Courthouse, 1
Pemberton Square, Suite 2500, Boston, MA, 02108-1750; (617) 557-
1030; SJCReporter@sjc.state.ma.us
14-P-1662 Appeals Court
NATIONAL GRID HOLDINGS, INC., & others1 vs. COMMISSIONER OF
REVENUE.
No. 14-P-1662.
Suffolk. December 11, 2015. - June 8, 2016.
Present: Cypher, Carhart, & Blake, JJ.
Taxation, Abatement, Corporate excise, Accounting principle.
Public Utilities. Debt. Corporation, Stock. Evidence,
Settlement offer.
Appeal from a decision of the Appellate Tax Board.
John S. Brown (Donald-Bruce Abrams with him) for the
taxpayers.
Brett M. Goldberg for Commissioner of Revenue.
CYPHER, J. The plaintiffs, National Grid Holdings, Inc.
(NGHI), National Grid USA (NGUSA), and National Grid USA Service
Company, Inc. (NG Service) (collectively, taxpayers), appeal
from a decision of the Appellate Tax Board (board) in favor of
1
National Grid USA and National Grid USA Service Company,
Inc.
2
the defendant, Commissioner of Revenue (commissioner), on the
taxpayers' claims for an abatement of corporate excise for the
tax year ended March 31, 2002. Primarily at issue is whether
certain financing transactions, referred to as deferred
subscription arrangements (DSAs), among various subsidiaries of
National Grid plc (NGPLC), constituted true indebtedness so that
the interest paid thereon qualified for the deduction allowed
under the Massachusetts taxation of corporations statute, G. L.
c. 63, § 30(4).
NGPLC is a British electric and gas utility company that
owns numerous entities in the United States (U.S.), the United
Kingdom (U.K.), and beyond (collectively, National Grid). The
DSAs were financing arrangements designed by National Grid to
take advantage of the differences in the U.S. and U.K. tax
codes.2 National Grid attempted to cast the transactions as
indebtedness under U.S. State and Federal tax laws, thereby
reducing National Grid's tax liability in the U.S., and as
equity, under U.K. law, thereby reducing its taxable income in
the U.K. Of overriding concern was the avoidance of any
appearance of indebtedness in the U.K., where a debenture
between a U.K. entity and its foreign subsidiary is strictly
2
The strategy, referred to as international tax arbitrage,
is a tax planning technique in which a multinational corporation
seeks to take advantage of differences in the tax laws of two
countries to gain a tax advantage.
3
prohibited by statute, under threat of criminal sanctions.3 To
that end, National Grid drafted the DSAs as agreements among
various related entities to sell and repurchase shares of stock,
maintaining in these proceedings that the mandatory nature of
the stock repurchase constituted debt under Massachusetts
corporate tax law.
"We will not modify or reverse a decision of the board if
the decision is based on both substantial evidence and the
correct application of the law." Boston Professional Hockey
Assn. v. Commissioner of Rev., 443 Mass. 276, 285 (2005). We
find no error with the board's determination that the taxpayers
failed to satisfy their burden of proving that the critical
provisions of the DSAs, upon which they rely, gave rise to an
unqualified obligation to repay. Accordingly, their claimed
deductions for interest payments under the DSAs were properly
rejected, as was their claim that the DSAs constituted a
liability in calculating net worth.
Background. We summarize the factual and procedural
background from the board's very thorough account, provided in
its June 4, 2014, findings of fact and report, which we
supplement from the record where appropriate.
3
Under that statute, a debenture is defined as any document
that created, acknowledged, or evidenced a debt, as determined
with reference to English common law.
4
National Grid entered the U.S. utility market in 1998, when
it acquired New England Electrical System (NEES) and, shortly
thereafter, Eastern Utilities Association (EUA). Pursuant to
the acquisition, National Grid General Partnership (NGGP) became
the parent of the U.S. group and NEES merged with NGUSA. In
order to achieve tax efficiency in the purchase, National Grid
created a domestic reverse hybrid, a tax structure whereby the
U.S. entity was taxable as a corporation in the U.S. but was
transparent, for tax purposes, in a foreign country.4 The
domestic reverse hybrid was part of a thirty-three-step process
known as Project Mayflower, by which National Grid acquired NEES
and EAU. National Grid used existing affiliates, and also
created several U.K. and U.S. entities in the process that
issued various intercompany loans to finance the acquisition of
NEES and EUA and permitted National Grid to claim interest
deductions in the U.S.
In February, 2001, the U.S. Treasury proposed regulations
to restrict the use of domestic reverse hybrids. Under the new
regulations, the interest payments made by the National Grid
subsidiary would be treated as payment of dividends and subject
to U.S. tax withholding. In the face of the proposed changes,
4
NGGP did so by electing to be treated as a corporation in
the U.S., able to deduct interest it paid on loans on its U.S.
tax returns, without a corresponding recognition of income in
the U.K.
5
National Grid sought to replace the domestic reverse hybrid with
a different structure that would maintain its tax advantages,
that is, the deductibility of interest payments in the U.S., and
avoidance of income recognition in the U.K. Also to be avoided
was running afoul of §§ 765-766 of the United Kingdom Income and
Corporation Taxes Act 1988 (§ 765), which prohibits debentures
between U.K. entities and foreign subsidiaries, and which
carries criminal penalties.
The result was known as Project Spam and Project Spa.
Project Spam was a forty-seven-step series of transactions that
refinanced the $2.68 billion indebtedness incurred in the NEES
acquisition. Project Spa was a forty-four-step series of
transactions created soon after the Project Spam financing to
finance National Grid's acquisition of Niagara Mohawk Holdings,
Inc. (Niagara Mohawk), a New York utility company. The projects
utilized the DSAs, which were structured as stock purchases, to
retain the interest deductions and other tax benefits of the
domestic reverse hybrid while avoiding creation of a debenture,
as prohibited under U.K law. The relevant documents and
provisions of the two projects being similar, we principally
focus on Project Spam.
National Grid Eight Limited (NG8), was a U.K. entity
created as part of Project Spam. The NG8 DSA was designed to
reflect NGHI's $2.68 billion of outstanding debt for U.S tax
6
purposes. We are directed to three documents critical to the
dispute: the articles of association of NG8 (articles); a
December 20, 2001, offer for subscription of ordinary share
capital; and an agreement for the sale and purchase of shares in
NG8 (S&P agreement). The offer letter extended to NGHI the
opportunity to subscribe for 10 million shares of NG8, for
$2.695 billion, with an initial payment of $15 million and three
additional payments, referred to as call payments, on or after
the dates and in the amounts specified in the NG8 article. NG8
could make those calls only in the amounts and on dates
specified in the documents. The offer letter required that any
acceptance be oral, thereby avoiding a document that might be
construed as a debenture under § 765.
Upon NGHI's oral acceptance of the offer, NGHI paid $15
million to NG8 for 10 million NG8 shares, and then sold the
shares for $2.695 billion to National Grid (US) Investments 4
(NGUSI4). NGHI used the proceeds, totaling $2.68 billion
($2.695 billion minus the $15 million it paid to NG8), to repay
the loans for Project Mayflower, now refinanced.
As noted, the articles provided that NG8 could make calls
on NGHI for four call payments on or after specified dates. The
first three payments represented interest, and the final payment
was principal and interest. The S&P agreement provided that
NGHI remain liable for the call payments, and that if NG8 failed
7
to make a call according to the schedule in the articles, NGHI
was entitled to procure, through NGUSI4, that NG8 make the call
(thereby avoiding interest at a higher rate). However, NGHI was
under no obligation to exercise that right.
At the heart of this dispute is the nature of NGHI's
obligation to repurchase the NG8 shares, and whether that
obligation constituted the repayment of a debt, as determined by
whether NGHI4's service of the notice to repurchase was
discretionary or mandatory. Clause 2.9 of the S&P agreement
provided that if NGHI failed to make a call payment within seven
days of the call, or if NG8 made no call and NGHI failed to
exercise its right to procure a call, NGUSI4 was "entitled to
serve a notice" on NGHI requiring NGHI to repurchase the [NG8]
shares. The parties agree that, under clause 2.9, NGUSI4's
right to serve notice requiring NGHI to repurchase the shares
was discretionary, as per the "shall be entitled to serve"
language. Hence, clause 2.9 did not impose an unqualified
obligation on NGHI to repurchase the shares.
The parties' disagreement centers on clause 2.10 of the S&P
agreement. We set forth clause 2.10 in its entirety:
"If for any reason whatsoever any sums due in respect
of the [s]hares under [a]rticle 3 of the [a]rticles remain
unpaid after 19 December[,] 2004, the [b]uyer shall serve a
notice on the [s]eller requiring the [s]eller to repurchase
the [s]hares on 20 December[,] 2004[,] or if this is not a
[b]usiness [d]ay, the next [b]usiness [d]ay thereafter for
a consideration equal to the net asset value of the
8
[c]ompany (as determined in accordance with clauses 2.11 to
2.14) and the aggregate of any sums remaining unpaid in
respect of the [s]hares less the amount of any called up
share capital not paid, and such consideration shall be
paid in cash against delivery of a duly executed transfer
on behalf of the [b]uyer in favour of the [s]eller and the
delivery of the relevant share certificate. If the [b]uyer
exercises its rights under this clause and the [s]eller
fails to complete the repurchase of the [s]hares at the
time specified by the [b]uyer[,] the consideration due
shall bear interest for the period from and including the
date on which the failure to complete the repurchase has
occurred up to the date of the actual payment (after as
well as before judgment) at the rate which is the aggregate
of [four] percent per annum above the base rate from time
to time of Barclays Bank plc. The interest will accrue
from day to day and shall be payable on demand and shall be
compounded monthly in arrears provided that no interest
shall accrue under this clause 2.10 where interest is
accruing under [a]rticle 3 of the [a]rticles."
The parties debate the interpretation of clause 2.10, and
whether it required NGHI4, as the buyer, to serve notice to
repurchase, or whether NGHI4 merely had the right to serve
notice to repurchase. According to National Grid, clause 2.10
establishes that NGHI4 was required to serve notice to
repurchase and, as such, imposed on NGHI an unqualified
obligation to repurchase the shares -- and hence, repay a debt.5
A month after Project Spam's implementation, Project Spa
was carried out, consisting of forty-four steps, through which
National Grid acquired Niagara Mohawk. The DSA components of
5
In reality, all of the calls and call payments were made
prior to the applicable call default dates, and thus no notice
to repurchase the shares was actually issued. Interest paid on
the call payments was disbursed to National Grid entities
outside of the U.S.
9
Project Spa were similar to those for Project Spam, except for
the companies involved, the dates, the number of shares, and the
dollar amounts. Significant here, NGUSA filed a separate
corporate excise return claiming a deduction in computing its
taxable net worth for a liability for costs associated with the
Niagara Mohawk acquisition.
NG Service was the principal reporting corporation for NGHI
and NGUSA for Massachusetts tax purposes. For the tax year
ending March 31, 2002, the taxpayers deducted the interest
payments made under the DSAs, treating the DSAs as indebtedness.
Similarly, NGHI treated the DSAs as deductible for purposes of
calculating taxable net worth. The commissioner made additional
assessments of corporate excise for the year ending March 31,
2002. The taxpayers filed applications for abatement, which the
commissioner denied.
The taxpayers appealed the denial to the board, which held
fifteen days of hearings and issued its findings of fact and
report dated June 4, 2014. The board ruled that clause 2.10 did
not mandate that NGHI4 serve notice to repurchase the NG8
shares, and was at best ambiguous as to whether NGHI4 was
obligated to serve notice to repurchase or whether it merely
possessed the right to serve such notice. The board concluded
that the DSAs did not constitute true indebtedness and that the
taxpayers were not entitled to the claimed interest deductions,
10
nor were they entitled to deduct the DSAs as a liability in
computing taxable net worth. The board also denied the
deductions for certain costs claimed in connection with the
acquisition of Niagara Mohawk. The taxpayers filed this appeal.6
Discussion. 1. Standard of review. The standard of
review is the parties' first point of contention. It is well
established that "[a] decision of the board will not be reversed
or modified if it is based on substantial evidence and on a
correct application of the law." Koch v. Commissioner of Rev.,
416 Mass. 540, 555 (1993). National Grid maintains that the
board's interpretation of the DSAs is a question of law subject
to de novo review. It is true that contract interpretation is
ordinarily a question of law. See Robert Indus., Inc. v.
Spence, 362 Mass. 751, 755 (1973). But it has also been
observed that the question whether the taxpayers intended that a
contractual arrangement obligate them to repay a debt is an
issue of fact, see New York Times Sales, Inc. v. Commissioner of
Rev., 40 Mass. App. Ct. 749, 752 (1996), and that the board's
findings of fact are final. See Kennametal, Inc. v.
Commissioner of Rev., 426 Mass. 39, 43 (1997). We may look at
6
The taxpayers also filed a related appeal, National Grid
USA Serv. Co. v. Commissioner of Rev., 89 Mass. App.
Ct. (2016), which concerns the effect of a closing
agreement entered into between the taxpayers and the Internal
Revenue Service.
11
whether the evidence is sufficient to support the board's
conclusions of law, but our review in that regard "is limited to
'whether a contrary conclusion is not merely a possible but a
necessary inference from the findings.'" Ibid., quoting from
Commissioner of Rev. v. Houghton Mifflin Co., 423 Mass. 42, 43
(1996).
We therefore consider whether the board applied the correct
legal standard in interpreting the relevant documents and
whether its conclusion that the DSAs did not constitute
indebtedness was supported by substantial evidence.
2. Unqualified obligation to repay. The board applied the
correct legal standard in defining debt as "an unqualified
obligation to pay a sum certain at a reasonably close fixed
maturity date along with a fixed percentage in interest payable
regardless of the debtor's income or lack thereof." Overnite
Transp. Co. v. Commissioner of Rev. 54 Mass. App. Ct. 180, 186
(2002), quoting from Gilbert v. Commissioner of Int. Rev. 248
F.2d 399, 402 (2d Cir. 1957). In considering whether the DSAs
qualified as debt, the board appropriately looked to the
language of the DSAs as well as the circumstances of their
creation and performance. See New York Times Sales, Inc., supra
at 752-753; Overnite Transp. Co., supra. See also Shea v. Bay
State Gas. Co., 383 Mass. 218, 222-223 (1981), quoting from
United States v. Seckinger, 397 U.S. 203, 213 n.17 (1970)
12
("[c]ontract interpretation is largely an individualized
process, with the conclusion in a particular case turning on the
particular language used against the background of other indicia
of the parties' intention").7
We begin with the text. As noted, the central issue is
whether the service of the repurchase notice under clause 2.10
was mandatory or merely a right and, therefore, whether NGHI's
obligation to repurchase shares under the DSA, and thereby repay
the funds, was an unqualified one. The board ruled that the
DSAs did not mandate service of notice to repurchase the shares
and so did not reflect an unqualified obligation to repay on the
part of NGHI.
National Grid maintains that the board misconstrued clause
2.10 as not imposing a mandatory requirement that NGHI4 serve a
repurchase notice if the DSAs were not repaid by the final call
default dates. National Grid points to use of the word "shall"
in the first sentence of clause 2.10 in regard to serving the
repurchase notice as plainly setting forth a requirement that
NGHI4 serve the notice to repurchase if amounts remained
outstanding as of the date specified, and triggering NGHI's
7
The board also referenced the list of factors set out in
Fin Hay Realty Co. v. United States, 398 F.2d 694, 696 (3d Cir.
1968), but noted that, under that analysis, certain facts
supported the taxpayers' argument while others cut against it.
The board instead rested its decision on the lack of an
unqualified obligation to repay, to be discussed, infra.
13
obligation to repay upon receipt of that notice. The board
pointed to the second sentence of clause 2.10, which speaks in
terms of exercising a right, suggesting that NGHI4 was not
required to serve notice, but instead had the right to serve
notice, at its discretion. The board concluded that, at best,
clause 2.10 was ambiguous on the issue and rejected National
Grid's argument largely on that basis.
National Grid challenges the board's ruling that the
meaning of clause 2.10 was ambiguous as to the mandatory
character of the notice. A contract is ambiguous "where the
phraseology can support reasonable difference of opinion as to
the meaning of the words employed and the obligations
undertaken." President & Fellows of Harvard College v. PECO
Energy Co., 57 Mass. App. Ct. 888, 896 (2003), quoting from
Suffolk Constr. Co. v. Lanco Scaffolding Co., 47 Mass. App. Ct.
726, 729 (1999). Contrary to National Grid's assertion, the
board did not rest its conclusion of an ambiguity solely on the
use of the word "shall" in clause 2.10 and whether it referred
to the mandatory nature of the notice or to the date on which
notice, if given, had to be served. The board specifically
pointed to the second sentence of 2.10, and the discretionary
nature of a right to give notice.
The board's ruling, that clause 2.10 is ambiguous, is a
correct application of law and is supported by substantial
14
evidence. We therefore concur with the board's finding. See
Browning-Ferris Indus., Inc. v. Casella Waste Mgmt. of Mass.,
Inc., 79 Mass. App. Ct. 300, 307 (2009). The curious
inconsistency between the language employed in the first
sentence -- indicating "the [b]uyer shall serve" -- and the
second sentence -- which speaks of a right in the phrase "if the
[b]uyer exercises its rights," undercuts the taxpayers'
interpretation of 2.10 as setting forth a mandatory obligation.
The plain and ordinary meaning of a right, particularly in the
context of "if" a right is exercised, in no way connotes a
requirement or obligation to do anything.8 See Bailey v. Astra
Tech, Inc., 84 Mass. App. Ct. 590, 594 (2013) (words of contract
are interpreted according to their "plain meaning"). The
incongruity between the first sentence and the second sentence
in clause 2.10 renders the clause ambiguous on its face, because
under the second sentence, the obligation to repurchase the
shares was not an unqualified one; it depended on whether the
right to serve the final repurchase notice was exercised. See,
e.g., Post v. Belmont Country Club, Inc., 60 Mass. App. Ct. 645,
652 (2004), quoting from Fashion House, Inc. v. K Mart Corp.,
8
Various definitions of a "right" include "something to
which one has a just claim," such as "a power or privilege
vested in a person by the law," or "a legally enforceable claim
against another," or "a capacity or privilege the enjoyment of
which is secured to a person by law." Webster's Third New
International Dictionary (1993).
15
892 F.2d 1076, 1083 (1st Cir. 1989) ("Contract language is
ambiguous where 'an agreement's terms are inconsistent on their
face or where the phraseology can support reasonable difference
of opinion as to the meaning of the words employed and
obligations undertaken'").
National Grid argues that, upon concluding that clause 2.10
was at best ambiguous, the board should have resolved the
ambiguity by reference to extrinsic evidence, in particular the
"preliminary negotiations, the conduct of the parties, and
interviews between them after the contract is executed," citing
Rizzo v. Cunningham, 303 Mass. 16, 21 (1939). In resolving an
ambiguity, however, the board was entitled to evaluate the
parties' circumstances as well as intentions at the time of
formation. See Castricone v. Mical, 74 Mass. App. Ct. 591, 599
(2009). In essence, National Grid is arguing that the board
should have given more weight to evidence that favored National
Grid's interpretation, in particular the testimony of a National
Grid employee and a memorandum from its tax advisers, that
clause 2.10 was drafted to require mandatory service of the
repurchase notice.
Contrary to National Grid's assertion, the board did not
apply an improper legal standard in according little weight to
evidence of the subjective intent of National Grid employees and
tax advisors. First, the weight of the evidence, the inferences
16
to be drawn therefrom, and the credibility of the witnesses are
all matters for the board. See Kennametal, Inc., 426 Mass. at
43 n.6. And particularly in this instance, where related
entities were on both sides of the transactions, the board was
not required to credit evidence of the taxpayers' subjective
intent. "[M]ere declarations by the parties that they intend a
certain transaction to constitute a loan is insufficient if it
fails to meet more reliable indicia of debt which indicate the
'intrinsic economic nature of the transaction.'" Alterman
Foods, Inc. v. United States, 505 F.2d 873, 877 (5th Cir. 1974),
quoting from Fin Hay Realty Co. v. United States, 398 F.2d 694,
697 (3d Cir. 1968). In cases like this, "courts look with great
care to the surrounding facts and view with some suspicion
declarations of intent which have the effect of maximizing the
tax benefit." Ibid. Where the entities involved are under
common control, the fact that "all the formal indicia of an
obligation were meticulously made to appear," may be entitled to
less weight, as the drafters "had the power to create whatever
appearance would be of tax benefit to them despite the economic
reality of the transaction." Fin Hay Realty Co., supra.
By the same token, the board was entitled to reject
National Grid's explanation of its use of the phrase "if the
[b]uyer exercises its rights." National Grid's expert, Graham
Aaronson, who was qualified as an expert in English commercial
17
law and U.K. tax law, explained the second sentence of clause
2.10, "if the [b]uyer exercises its rights," as simply meaning
"if this clause applies." But if that is all that was meant,
the drafters could have said so, in far simpler language. See,
e.g., Jefferson Ins. Co. of N.Y. v. Holyoke, 23 Mass. App. Ct.
472, 476 (1987) (contract's plain language will not be distorted
where parties could have used appropriate language to indicate
different intent).9 The board could consider that these were
sophisticated taxpayers whose tax advisors carefully drafted the
transactions so as to yield the most beneficial tax
consequences. See, e.g., Estate of Leavitt v. Commissioner of
Internal Rev., 875 F.2d 420, 424 (4th Cir. 1989) ("It must be
borne in mind that we do not merely encounter naive taxpayers
caught in a complex trap for the unwary"). Giving the phrase
"if the [b]uyer exercises its rights" its plain and ordinary
meaning, the phrase does not harmonize with the "shall serve"
language of the first sentence of clause 2.10 if the service of
notice was intended to be mandatory.
Rather than relying on the taxpayers' declarations of
intent, the board appropriately looked to "the more reliable
criteria of the circumstances surrounding the transaction."
Alterman Foods, Inc., supra. Principal among these, according
9
National Grid's attempt to ignore the clause's second
sentence, and relegate it to a footnote in its brief, does not
strengthen its cause.
18
to testimony of the experts for both sides, was the legal
context in which the DSAs arose. The record establishes that
the DSAs were designed to take advantage of the deduction
allowed for interest on indebtedness under U.S. tax laws, while
avoiding taxable income on the interest payments to the U.K.
recipient.
Even more significant, according to the testimony of the
parties' respective U.K tax law experts, Malcolm Gammie and
Graham Aaronson, the overriding concern in drafting the DSAs was
to avoid the appearance of debt under U.K. law. Both experts
testified that avoidance of any writing evincing debt was
paramount for purposes of § 765, because the statute imposes
criminal sanctions on the directors of a U.K. corporation for a
debenture issued by a nonresident subsidiary. The primacy of
the taxpayers' concern to avoid a document evincing a debt was
repeatedly emphasized by the expert witnesses.
In particular, Aaronson testified that, for that reason, "a
rather cumbersome process" was utilized to make it impossible
for the U.K. tax authority to argue there was a debenture. The
transactions were deliberately designed with indeterminate dates
and methods of payment, and with amounts due only upon notice
given, and in the form of an asset repurchase rather than
repayment. According to Aaronson, it would be impossible for
the U.K. authorities to view this contingency as a debt.
19
Aaronson further testified that § 765 carried sanctions and was
taken very seriously, that taxpayers in general, and National
Grid in particular, were highly concerned about the possibility
of issuing a debenture subject to § 765, and that a taxpayer
would go to great lengths to avoid it.
The board specifically referenced Aaronson's testimony in
describing avoidance of § 765 as "the essence of the tax
planning" in these projects, and that "cumbersome mechanisms"
were put in place so that the U.K. tax authority "would not be
able to identify any document or combination of documents as
giving rise to indebtedness created or evidenced" by the
documents.
Malcolm Gammie, the commissioner's expert on U.K. law,
similarly testified that the taxpayer would want absolute
assurance that the transaction would not breach § 765. Gammie
also testified that it was the essence of the transaction to
avoid problems with § 765, noting, for example, that the
subscription letter required oral acceptance.
In the end, the board rejected National Grid's argument
that the repurchase notice under clause 2.10 should be
interpreted as mandatory. The board specifically found that
"clause 2.10 could not be construed as compelling service of a
notice to repurchase or, in turn, payments by NGHI." To the
extent the board ruled the clause ambiguous, the board was
20
entitled to rule against the taxpayers, based on its findings
concerning the circumstances surrounding the DSAs, the
taxpayers' intentions in the context of an international tax
arbitrage, and the board's assessment of the witnesses'
credibility. See Castricone, 74 Mass. App. Ct. at 600, quoting
from Edinburg v. Edinburg, 22 Mass. App. Ct. 199, 203 (1986)
("Where there are two permissible views of the evidence, the
factfinder's choice between them cannot be clearly erroneous").
We observe, as well, that it was the taxpayers who had the
burden of proof on every material fact regarding their right to
an abatement. See IDC Research, Inc. v. Commissioner of Rev.,
78 Mass. App. Ct. 352, 358 (2010). It was therefore the
taxpayers' burden to prove that the DSAs constituted an
unqualified obligation to repay, and the board properly could
find that the taxpayers' burden was not met with documents,
drafted by them, that were ambiguous on that very point. See
Estate of Leavitt, 875 F.2d at 424 (taxpayer's burden to prove
debt is especially difficult to meet where "transaction is cast
in sufficiently ambiguous terms to permit argument either way
depending on which is subsequently advantageous from tax point
of view"). This is in keeping with the general rule that an
ambiguous contract is construed against its author, which "rests
upon the practical and fair premise that the drafter had the
capacity and opportunity for clear expression and that he should
21
bear the detriment of unclear expression." Air Plum Island,
Inc. v. Society for the Preservation of New England Antiquities,
70 Mass. App. Ct. 246, 253 (2007).
We reject National Grid's alternative argument that, even
if not mandatory, NGHI's right to serve a notice to repurchase
the shares on a fixed date was sufficient, in itself, to
establish an unconditional obligation to repay. The Federal
cases on which National Grid relies do not bear that out. See,
e.g., Jewel Tea Co. v. United States, 90 F.2d 451, 453 (2d Cir.
1937) (while there cannot be debt in the absence of an
unconditional right to demand payment at a fixed time, the
presence of such a right does not, in all circumstances, mean
shares are debts); Merck & Co. v. United States, 652 F.3d 475,
483 (3d Cir. 2011) (formal, explicit unconditional obligation to
repay was not an absolute prerequisite where an interest rate
"swap" was structured "to ensure repayment of funds as a
practical matter"). National Grid fails to persuade us that the
DSAs were structured so as to ensure that the shares were
repurchased or that the mere right to give notice to repurchase
rendered the obligation to repay an unqualified one.
3. DSAs as liabilities for computing taxable net worth.
NGHI was subject to tax on its taxable net worth pursuant to
c. 63, § 30(11). NGHI argues that it was entitled to treat the
DSAs as debt and, accordingly, as liabilities deductible from
22
its total assets in computing its taxable net worth. The board
deemed the argument moot, based on its ruling that the DSAs were
not debt and, as such, could not be considered liabilities in
determining net worth. See, e.g., Overnite Transp. Co., 54
Mass. App. Ct. at 180.
National Grid presses the significance of the fact that
NGHI treated the DSAs as liabilities on NGHI's financial
statements. Relying on Xtra, Inc., 380 Mass. 277, 280-281
(1980), National Grid maintains that the net worth assessment
should be consistent with the manner in which the taxpayer
actually accounted for the liability on its own books. The
reference in that case, however, was to a generally accepted
accounting principle, and not to an individual taxpayer's
particular method of accounting for a given expense, however
erroneous.
In Xtra, Inc., for example, the Court recognized the
accounting practice of accelerating depreciation on personal
property in computing income tax liability, and affirmed the
taxpayer's inclusion of its future obligation to pay the income
tax it deferred, through accelerating the depreciation
deductions, as a liability. The holding was a narrow one: "[A]
corporation which takes accelerated depreciation may treat the
income taxes deferred thereby as a liability." Id. at 278. We
will not extend the outcome in that case to the present
23
situation to allow the taxpayer's characterization of the DSAs
as a debt to dictate the central issue of their tax treatment
for purposes of calculating taxable net worth. And as the board
recognized in Xtra, Inc., even "a generally accepted accounting
principle, 'of itself and standing alone, cannot necessarily
dictate the result in tax cases.'" Id. at 281, quoting from
First Fed. Sav. & Loan Assn. v. State Tax Commn., 372 Mass. 478,
483 (1977), aff'd, 437 U.S. 255 (1978).
Indeed, First Fed. Sav. & Loan Assn., is more to the point.
In deciding whether dividend and interest payments made to
members of a savings and loan association were deductible as
operating expenses, the Supreme Judicial Court reasoned that
there was no basis "for assuming that the Legislature intended
to import accounting practice into its statutory language and
thus to permit accounting principles to be the guide to the
meaning of the words 'operating expenses.'" Id. at 483.
Determining that the taxpayer's members were more akin to
investors than creditors, the court concluded that payments to
them represented dividends rather than debt. Id. at 484-485.
We agree with the board that the DSAs could not properly be
treated as debt and, hence, as liabilities, and we see no reason
to revisit the outcome implicit in Overnite Transp. Co., supra,
that the determination of indebtedness for purposes of interest
deductions resolved the issue for calculating net worth as well.
24
4. The U.K. stamp duty. NGUSA claimed a deduction in
computing its taxable net worth for costs associated with the
acquisition of Niagara Mohawk. The board rejected certain of
those expenses for lack of proof that they were incurred in
connection with the acquisition. The board further reasoned
that the taxpayers did not show that NGUSA itself paid the
costs, that according to the evidence, some were paid by U.K.
entities while others were paid by NEES.
On appeal, National Grid claims that it offered sufficient
proof that NGUSA paid a $26.5 million liability for U.K. stamp
tax duty in connection with the Niagara Mohawk acquisition, that
the amount was recorded on NGUSA's books, and that it was
properly allocated to NGUSA. National Grid's witness, John
Cochrane, who served as the chief financial officer for National
Grid's U.S. businesses at the time of the acquisition, testified
that the stamp tax was paid by NGPLC, and that NGUSA repaid
NGPLC for that amount five years later. While the testimony
confirms that NGUSA paid the U.K. entity the stamp tax amount
some five years after the transaction, it was unclear from the
evidence why the expense was NGUSA's liability.
The board emphasized that it was the taxpayers' burden to
demonstrate that the expenses claimed as liabilities in
calculating NGUSA's net worth were properly allocated to NGUSA
and were actually paid by NGUSA. The board found that "neither
25
Mr. Cochrane's testimony nor the record as a whole provided
sufficient credible evidence to establish either fact," and,
based on our review of the record, and our deference to the
board's role in weighing the evidence and assessing witness
credibility, we find no error.
National Grid further argues that there was proof in the
record that NEES had merged into NGUSA after being acquired by
National Grid, so that NEES and NGUSA were the same legal entity
and that expenses paid by NEES were liabilities of NGUSA for net
worth purposes. According to the board, however, Cochrane did
not explain why NEES was the source of the payments for which
NGUSA claimed liability, and it was the taxpayer's burden to
establish each fact necessary to its claim for an abatement.
See, IDC Research, Inc., 78 Mass. App. Ct. at 358.
5. Closing agreement. National Grid sought to introduce a
document entitled "Department of the Treasury Internal Revenue
Service Closing Agreement on Final Determination Covering
Specific Matters," (closing agreement), between the Internal
Revenue Service (IRS) and NGHI that, according to National Grid,
included a final determination of NGHI's interest deductions for
the tax year at issue. The question whether the closing
agreement between the taxpayers and the IRS was binding as to
the interest deductions allowable under Massachusetts law is the
subject of a separate appeal. Here, National Grid argues that,
26
even if not binding, the closing agreement still should have
been admitted. National Grid claims that the adjustments made
by the IRS in interest deductions pursuant to the closing
agreement are relevant to determining the taxpayers'
Massachusetts tax liability.
We agree with the board's ruling that, for evidentiary
purposes, the closing agreement constituted the settlement of a
claim, and the board did not abuse its discretion in excluding
it. See Morea v. Cosco, Inc., 422 Mass. 601, 603-604 (1996) (no
evidence of settlement is admissible to prove liability or the
amount of a claim). See generally Zucco v. Kane, 439 Mass. 503,
507 (2003) (absent abuse of discretion or other legal error,
judge's ruling on evidence will not be disturbed). Moreover, as
the commissioner points out, in PMAG, Inc. v. Commissioner of
Rev., 429 Mass. 35, 40-41 (1999), upon which National Grid
relies, the admissibility of a closing agreement between the
taxpayer and the IRS was not at issue.
National Grid also complains that the board allowed the
commissioner's posttrial motion to treat the closing agreement
as impounded material in the record appendix. However, it
appears that National Grid failed to object when making its
offer of proof to the procedure utilized by the board in
accepting the closing agreement for identification and including
it with the record in a sealed envelope. The hearing transcript
27
suggests, rather, that National Grid concurred at that point.
National Grid does not indicate why inclusion of the closing
agreement in the record appendix in the same manner constitutes
error.
Conclusion. Based on the foregoing, we conclude that the
taxpayers failed to establish their right to abatements for the
tax year in question. The decision of the Appellate Tax Board
is affirmed.
So ordered.