National Grid USA Service Co., Inc. v. Commissioner of Revenue

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14-P-1861 Appeals Court
NATIONAL GRID USA SERVICE COMPANY, INC. vs. COMMISSIONER OF
REVENUE.
No. 14-P-1861.
Suffolk. December 11, 2015. - June 8, 2016.
Present: Cypher, Carhart, & Blake, JJ.
Taxation, Abatement, Corporate excise. Public Utilities.
Appeal from a decision of the Appellate Tax Board.
John S. Brown (Donald-Bruce Abrams with him) for the
taxpayer.
Brett M. Goldberg for Commissioner of Revenue.
CYPHER, J. National Grid USA Service Company, Inc. (NGUSA)
appeals from a decision of the Appellate Tax Board (board)
denying its motion for summary judgment and allowing a motion to
dismiss brought by the Commissioner of Revenue (commissioner)
concerning the effect of a closing agreement between National
2
Grid Holdings, Inc. (NGHI)1 and the Internal Revenue Service
(IRS) on interest deductions under G. L. c. 63, § 30(4). The
board rejected National Grid's position that the closing
agreement, which allowed a Federal deduction for a portion of
the disputed interest payments, is binding on deductions allowed
for State tax purpose.
Background. For background we refer to our decision in
National Grid Holdings, Inc. v. Commissioner of Rev., 89 Mass.
App. Ct. (2016) (National Grid Holdings, Inc.). Briefly,
that case dealt with the question whether certain deferred
subscription arrangements (DSAs), among various entities related
to National Grid plc, the parent company located in the United
Kingdom, constituted true indebtedness, whereby payments made
pursuant to the DSAs could be deducted as interest in
calculating Massachusetts corporate excise tax. The
commissioner disallowed the deductions for the 2002 tax year and
National Grid appealed to the board. This separate action arose
when the board, in hearing the first appeal, declined to admit
the closing agreement in evidence.
Relevant here, we add the following undisputed facts from
the board's September 19, 2014, findings of fact and report.
1
NGUSA is the principal reporting corporation for a
Massachusetts combined group of affiliated entities. In this
appeal, we refer to NGUSA and/or NGHI as National Grid.
3
National Grid's tax returns for the 2002 tax year were audited
by both the commissioner and the IRS. On May 1, 2007, National
Grid entered into a closing agreement with the IRS, pursuant to
26 U.S.C. § 7121 of the Internal Revenue Code (code), in
connection with National Grid's Federal tax return.2 As part of
that agreement, the IRS allowed a Federal deduction for a
portion of the amount claimed by National Grid as interest on
the DSAs.
As to National Grid's 2002 Massachusetts tax return, the
commissioner determined that the DSAs were not indebtedness and
that payments made in connection therewith were not interest.
The commissioner issued an assessment, and on April 26, 2007,
National Grid filed a CA-6, application for abatement/amended
return (form CA-6), which the commissioner then denied.
National Grid appealed to the board, which ruled in the
commissioner's favor. National Grid appealed to this court, in
National Grid Holdings, Inc., supra.
This case comes before us as a separate appeal because
three months after filing its original form CA-6, National Grid
filed a second form CA-6 on July 27, 2007, to report the Federal
changes that resulted from the closing agreement. The second
2
Section 7121(a) authorizes the IRS "to enter into an
agreement in writing with any person relating to the liability
of such person (or of the person or estate for whom he acts) in
respect of any internal revenue tax for any taxable period."
4
form CA-6 indicated that the corrected amount of tax due, based
on the Federal change, was the same as the original amount of
the tax due on its return, and that the net change to the tax
was zero. National Grid did not indicate at that time that it
was seeking an abatement based on the Federal changes.
The commissioner did not act on the second form CA-6.
Subsequently, at the hearing before the board in the first
appeal, National Grid sought to introduce the closing agreement
in evidence, and was denied. Approximately a month later, on
March 14, 2012, National Grid withdrew its consent to the
commissioner's failure to act on the second form CA-6 and filed
an appeal with the board. The commissioner moved to dismiss and
National Grid moved for summary judgment. The board ruled that
the closing agreement did not entitle National Grid to an
abatement, and National Grid followed with this appeal.
Discussion. We are asked to decide whether the closing
agreement between National Grid and the IRS is binding on the
commissioner as to the deductions permitted for National Grid's
Massachusetts corporate excise. The Massachusetts corporate
excise statute refers to the code in providing for deductions
that may be taken in calculating net income. General laws
c. 63, § 30(4), as amended through St. 2003, c. 143, § 5,
defines net income, in relevant part, as "gross income less the
deductions, but not credits, allowable under the provisions of
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the Federal Internal Revenue Code." The code, in turn, allows a
deduction for "all interest paid or accrued within the taxable
year on indebtedness." 26 U.S.C. § 163(a). National Grid
maintains that the IRS's allowance of a portion of the DSA
payments as deductions in the closing agreement constitutes the
allowance of the deductions as interest under the code for
purposes of § 30(4) such that those payments should be
deductible, as interest on indebtedness, in calculating National
Grid's Massachusetts excise.
The board determined that the IRS's allowance of a portion
of the disputed interest deductions, as part of the closing
agreement, did not dictate the commissioner's treatment of the
interest payments for State tax purposes. Because Massachusetts
deductions are determined by reference to those that are
"allowable under the provisions of the Federal Internal Revenue
Code," the board reasoned that by permitting only some of the
claimed Federal interest deductions for the DSA payments, and
not all, the closing agreement did not establish that the DSA
payments qualified as interest. We agree.
The undisputed fact that only a portion of the interest
deductions was allowed by the IRS cuts against National Grid's
position. National Grid provided no proof that the claimed
interest payments under the DSAs were anything but homogenous or
that there was a factual basis to distinguish among them for
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Federal tax purposes. A deduction for the DSA payments cannot
be deemed allowable under the code if some of those payments
actually were allowed as deductions by the IRS while others were
not. As the board aptly observed, "either all of the payments
are interest or none is."
Section 30(4) specifically identifies those deductions that
are allowable under the provisions of the code, and not what
actually is allowed by the IRS pursuant to an agreement with an
individual taxpayer. The distinction between allowable and
allowed is not a minor one, as National Grid insists. The
commissioner directs us to authority from other jurisdictions on
this point, which we find persuasive.
In Flood v. United States, 33 F.3d 1174, 1177 (9th Cir.
1994), the term "allowable as a deduction" was described as a
"term of art" in the tax field, citing Lenz v. Commissioner of
Rev., 101 T.C. 260, 265 (U.S.T.C. 1993). In Lenz, supra, the
United States Tax Court stated that an "'[a]llowable deduction'
generally refers to a deduction which qualifies under a specific
[c]ode provision whereas 'allowed deduction,' on the other hand,
refers to a deduction granted by the Internal Revenue Service."
"A deduction is 'allowable' if it is permitted and not otherwise
forbidden or limited by the [code], whether or not [the
deduction is] actually used." Flood, supra, quoting from Sharp
v. United States, 14 F.3d 583, 588 (1993). Similarly, in Force
7
v. Department of Rev., 350 Or. 179, 184 (2011), the Oregon
Supreme Court highlighted the significance of the State death
tax credit that was "allowable" under the [code], and "not any
credit that was actually allowed." See Day v. Heckler, 735 F.2d
779, 784 (4th Cir. 1984) ("The distinction between an
'allowable' deduction and an 'allowed' deduction is not
insignificant"); Sharp, supra (distinguishing between deductions
that are "allowable" under the Code and those that actually are
taken).
National Grid relies on two out-of-State cases as well, but
both deal with State statutes providing for State taxes "as
determined" or "to be determined" under the code. We note at
the outset that the plain meaning of "determined" is not
synonymous with "allowable." While "allowable" is defined as
permissible, "determined" means to settle a question or
controversy, or to come to a decision concerning, as the result
of investigation or reasoning. Webster's Third New
International Dictionary (1993). Indeed, in Comptroller of the
Treasury v. Colonial Farm Credit, ACA, 918 A.2d 514, 518-519
(Md. Ct. Spec. App. 2007), upon which National Grid relies, a
closing agreement between a farm credit association and the IRS
reflected a judicial determination, in a similar case, that a
portion of the taxpayer's lending activities should maintain the
same tax exempt status enjoyed prior to its merger with an
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entity that was not tax-exempt. Thus the closing agreement was
held binding for State tax purposes because it determined how
the association's taxable income would be treated under the
code, consistent with the State statute providing for State
taxes "as determined" under the code.
A second case, American Tel. & Tel. Co. v. State Tax Appeal
Bd., 241 Mont. 440, (Mont. 1990), involved a depreciation
deduction allowed under a closing agreement that was less than
the deductions allowable under the code. The taxpayer argued
that, for State tax purposes, it was entitled to the full extent
of deductions allowable under the code, as the State statute
provided that the allowance for wear and tear was "to be
determined" according to the code. Id. at 450-451. However,
the court held that the amounts claimed for State tax purposes
should be the same as those claimed on the taxpayer's Federal
tax return, which were determined by the closing agreement with
the IRS. Significantly, however, the court relied on additional
statutory language that "[a]ll elections for depreciation shall
be the same as the elections made for [F]ederal income tax
purposes." Id. at 451. The relevant statutory language in that
case is markedly different from G. L. c. 63, § 30(4), and does
not bear on the effect of the closing agreement here. See
Rohrbough, Inc. v. Commissioner of Rev., 385 Mass. 830, 832
(1982) ("The reference is to the provisions of the Internal
9
Revenue Code and not simply to the amount of gross income shown
on a taxpayer's Federal income tax return for the same year").
National Grid also relies on the board's findings of fact
and report in PMAG, Inc. v. Commissioner of Rev., 23 Mass. App.
Tax Bd. Rep. 163, 164-165 (1998), as support for its position
that the board should give effect to the deductions allowed in
the closing agreement. But in that case, the commissioner
specifically stipulated that, for Federal tax purposes, PMAG's
closing agreement with the IRS resulted in an increase in its
Federal taxable income pursuant to the provisions of the code.
Here, by contrast, the commissioner never stipulated to the
effect of the closing agreement between National Grid and the
IRS, and the commissioner specifically disputes that the closing
agreement constitutes a resolution of National Grid's allowable
deductions under the provisions of the code. Moreover, as the
Supreme Judicial Court observed in reviewing the case, "[a]
change in Federal taxable income does not automatically result
in a change in Massachusetts net income," and that the
commissioner engages in an independent review when there is a
Federal change. PMAG, Inc. v. Commissioner of Rev., 429 Mass.
35, 39 (1999).
Conclusion. We conclude that the interest deduction
provided in the closing agreement between National Grid and the
IRS did not constitute a binding determination of the interest
10
deductions allowable for Massachusetts corporate excise
purposes. The board correctly ruled that the issue raised by
National Grid's second application for an abatement regarding
the interest payments under the DSAs was resolved by the board's
decision in the original abatement proceedings. Accordingly, we
affirm the board's decision in dismissing the appeal.
So ordered.