National Grid USA Service Company, Inc. v. Commissioner of Revenue (September 19, 2014)

COMMONWEALTH OF MASSACHUSETTS

APPELLATE TAX BOARD



NATIONAL GRID USA SERVICE      v.		COMMISSIONER OF REVENUE
COMPANY, INC.


Docket No. C314926		Promulgated: 		
		September 19, 2014
	
                             		
							
	This is an appeal filed under the formal procedure pursuant to G.L. c. 58A, § 7 and G.L. c. 62C, § 39(c) from the refusal of the appellee, the Commissioner of Revenue ("Commissioner"), to abate corporate excise assessed against National Grid USA Service Company, Inc. ("NG Service" or "appellant") for the tax year ended March 31, 2002 ("tax year at issue" or "2002 tax year").
	Chairman Hammond heard the Commissioner's Motion to Dismiss.  He was joined by Commissioners Scharaffa, Rose, Chmielinski and Mulhern in the decision allowing the motion to dismiss and dismissing the appeal for lack of jurisdiction.
	These findings of fact and report are made at the requests of the appellant and the appellee pursuant to G.L. c. 58A, § 13 and 831 CMR 1.32.

	
John S. Brown, Esq., George P. Mair, Esq., Donald-Bruce Abrams, Esq., and Darcy A. Ryding, Esq. for the appellant.

	Andrew P. O'Meara, Esq., Brett M. Goldberg, Esq., Daniel A. Shapiro, Esq., and Julie A. Flynn, Esq. for the appellee.



FINDINGS OF FACT AND REPORT
INTRODUCTION
	This appeal concerns the appellant's challenge to the Commissioner's assessment of additional corporate excise for the tax year 2002.  The appellant's challenge to the same assessment for the same tax year was the subject of a full evidentiary hearing at the Appellate Tax Board ("Board") over the course of fifteen days between February 9, 2012 and April 19, 2012, which included the testimony of nine witnesses, a Statement of Agreed Facts accompanied by one-hundred-and-ninety agreed exhibits, and approximately one-hundred additional exhibits entered into evidence at the hearing.   See National Grid Holdings, Inc. v. Commissioner of Revenue, Mass. ATB Findings of Fact and Reports 2014-357 ("National Grid I").  
	The appellant maintained for the first time in the present appeal that the Board and the Commissioner are legally bound by an Internal Revenue Service ("IRS") Closing Agreement which, as the Commissioner and the appellant agreed, allowed a federal deduction for a portion of the interest deductions that the Commissioner had disallowed in making the subject assessment.  The appellant moved for summary judgment, while the Commissioner moved to dismiss the present appeal.  A brief recounting of the procedural histories of National Grid I and the present appeal is necessary to put into context the arguments raised by the parties.
PROCEDURAL HISTORY
MASSACHUSETTS RETURN, ASSESSMENT, AND ORIGINAL CA-6
	The appellant filed a Massachusetts corporate excise return for the tax year 2002 as the principal reporting corporation for a Massachusetts combined group of affiliated entities.   One of the affiliated entities was National Grid Holdings, Inc. ("NGHI").  The corporate excise return filed by NG Service reported that the group's combined net income was zero and reflected a total group excise liability of $88,882, comprised of net worth taxes for NG Service and one of its affiliates and minimum excises of $456 each for ten other affiliates.
The Commissioner audited the combined group's tax year 2002 return and issued a notice of assessment on February 17, 2007, in the amount of $918,542.  The assessment was largely due to the Commissioner's re-characterization of deferred subscription agreements ("DSAs").  The appellant originally characterized the DSAs for U.S. tax purposes as debt owed by NGHI to its United Kingdom ("U.K.") parent, National Grid plc, while simultaneously treating them for U.K. tax purposes as an equity interest held by NGHI.  The Commissioner concluded that the DSAs were not true indebtedness for Massachusetts corporate excise purposes and determined that payments which had been reflected on the appellant's original return as deductible interest payments were non-deductible distributions. 
On April 26, 2007, the appellant timely filed an application for abatement on Form CA-6, Application for Abatement/Amended Return ("Form CA-6"), with the Commissioner ("Original CA-6").  The appellant indicated on the Original CA-6 that it was disputing an audit and seeking a net reduction in Massachusetts tax in the amount of $308,741.
FEDERAL CHANGES FOR TAX YEAR 2002
The IRS also audited the appellant's federal income tax return for the 2002 tax year. On May 1, 2007, five days after filing its Original CA-6 and well prior to the expiration of the period to appeal the February 17, 2007 notice of assessment, NGHI entered into a closing agreement with the IRS under Internal Revenue Code ("Code") Section 7121 ("Closing Agreement").  Both the appellant and the Commissioner agree that, as part of the Closing Agreement, the IRS, while making a number of unrelated adjustments that resulted in a net increase to federal taxable income, allowed a federal deduction for a portion of the interest deductions that the Commissioner had disallowed in making the subject assessment. 
On May 16, 2007, the Commissioner denied appellant's Original CA-6, not having yet been notified of any federal changes by the appellant.  In response to the denial of the Original CA-6, the appellant timely filed its appeal with the Board in National Grid I on July 10, 2007.  
REPORT OF FEDERAL CHANGES
On July 27, 2007, seventeen days after filing its petition with the Board in National Grid I, the appellant reported federal changes to the Commissioner by filing another Form CA-6 for tax year 2002 ("Federal Change CA-6").  On the Federal Change CA-6, appellant did not select, as the reason for filing the form, the options provided on the form to: report an increase in tax; claim a decrease in tax; dispute penalties; or dispute an audit.  Rather, the appellant filled in the oval next to "other" and typed in the words "report federal change."  The appellant also indicated on the Federal Change CA-6 that the "original amount" of tax due on its return was $88,882, the "corrected amount" of tax due based on the federal changes was $88,882, and that the net change to tax was zero.  
The appellant attached workpapers to the Federal Change CA-6 which reported the federal changes.  The appellant did not, however, include an explanatory statement which indicated the impact of these changes on Massachusetts taxable income or that the appellant was seeking an abatement based on these federal changes.  
The Commissioner took no action with respect to the Federal Change CA-6.  On March 14, 2012, the appellant withdrew its consent to the Commissioner's failure to act on the Federal Change CA-6; one day later, it filed the present appeal.  The appellant's withdrawal of consent and filing of this appeal occurred: (1) over four and a half years after filing the Federal Change CA-6 and filing its appeal in National Grid I; and (2) after the hearing in National Grid I had commenced and the Board ruled that the Closing Agreement was inadmissible.
THE PARTIES' DISPOSITIVE MOTIONS
The Commissioner filed a motion to dismiss the present appeal, arguing that the Board lacked jurisdiction because:   (1) the appellant is not "aggrieved" by the Commissioner's failure to act on the Federal Change CA-6 because the appellant, by filing the Federal Change CA-6, did not request an abatement or refund; and (2) to the extent the Federal Change CA-6 could be construed as an application for abatement, the appellant was barred from making a second abatement claim relating to the same item of tax that did not raise any new issues that were relevant to the appeal.  The appellant opposed the motion to dismiss and also filed a motion for summary judgment, contending that it was entitled to an abatement as a matter of law due to the IRS's determination of the amount of interest deductible for federal tax purposes, which it argued should be binding for Massachusetts corporate excise purposes.
BOARD'S RULINGS ON THE DISPOSITIVE MOTIONS
With respect to the Commissioner's motion to dismiss, the Board first found and ruled that the Federal Change CA-6 constituted an application for abatement.  Although appellant could certainly have more clearly articulated on its Federal Change CA-6 that it was requesting an abatement based on the federal change, it did use the form approved by the Commissioner to both report a federal change and request an abatement - "Form CA-6-Application for Abatement/Amended Return."  It would be a curious result for the Board to rule that a form entitled "application for abatement" was not, in fact, an application for abatement.  
The form itself is ill-suited for a situation such as the present one, where a taxpayer both reports a federal change and seeks not to change the amount of tax it originally reported, but to dispute an additional assessment.  By listing on the Federal Change CA-6 the same tax liability both before and after the federal change, and by attaching workpapers showing the federal changes, the clear implication is that the appellant was challenging the Commissioner's assessment.  Although the Commissioner may believe that greater specificity was required, the appellant appropriately filled out the form that the Commissioner had approved for this purpose.  Accordingly, the Board finds and rules that the Federal Change CA-6 constituted an application for abatement.
However, the Board found and ruled that, even though the Federal Change CA-6 constituted an application for abatement, it challenged the same tax for the same period as the Original CA-6 and did not advance new facts or precedent relevant to the issue of whether the DSA arrangements were properly treated as debt under Massachusetts law.  The existence of the Closing Agreement, and its allowance of a federal deduction of a portion of the claimed interest expense at issue in the present appeal, was the subject of lengthy colloquy and argument in National Grid I.  Therefore, the only thing new about this issue which had not already been fully and exhaustively litigated in National Grid I was the argument, advanced after the appellant's attempt to introduce the Closing Agreement was denied in National Grid I, that the Commissioner and the Board were somehow bound by the terms of the Closing Agreement.
As more fully explained in the following Opinion, neither G.L. c. 62C, § 30 nor applicable case law supports a conclusion that the Closing Agreement, which the appellant and the Commissioner agreed called for the deductibility of only some of the appellant's claimed interest expense, required the Board to rule that payments made under the DSAs were deductible interest for Massachusetts tax purposes.  Accordingly, the Board allowed the Commissioner's motion to dismiss, denied the appellant's motion for summary judgment, and issued a decision for the appellee in this appeal. 

OPINION
INTRODUCTION
G.L. c. 62C, § 30 provides, in pertinent part, that:
If the federal government finally determines that there is a difference from the amount previously reported in . . . the taxable income of a person subject to taxation under chapter 63 . . . the final determination shall be reported, accompanied by payment of any additional tax due . . . to the commissioner within 3 months of receipt of notice of the final determination.

Accordingly, because the appellant was taxable under Chapter 63 for the tax year at issue, it was required to report the federal changes resulting from the Settlement Agreement to the Commissioner within 3 months of the final determination.  The appellant complied with this requirement by filing the Federal Change CA-6 on July 27, 2007, less than 3 months after the May 1, 2007 Closing Agreement.  
Section 30 goes on to provide that:
If, as a result of the change by the federal government in a person's federal taxable income       . . . the person . . . believes that a lesser tax was due the commonwealth than was assessed, the person . . . may apply in writing to the commissioner for an abatement thereof under section 37 within 1 year of the date of notice of the final determination by the federal government.

FEDERAL CHANGE CA-6 WAS AN APPLICATION FOR ABATEMENT
The parties disagreed over whether the Federal Change CA-6 constituted an application for abatement.  The Commissioner argued that the Federal Change CA-6 merely reported the federal changes, as required by § 30, but did not notify the Commissioner that the appellant sought an abatement based on those changes.  For its part, the appellant maintained that the Commissioner should have known that the appellant was applying for an abatement because the Federal Change CA-6: (1) was on the only form approved for reporting a federal change, which was also the only form approved for applying for an abatement based on a federal change; and (2) reported the same tax amount due after the federal changes as reported on its return and included an attachment showing the federal changes, from which the Commissioner should have concluded that the appellant was claiming that the disputed assessment should be abated.  
The Board agreed with the appellant that the Federal Change CA-6 put the Commissioner on notice that the appellant sought an abatement as a result of the federal changes.  An application for abatement is a "notice of the taxpayer's assertion that he objects to" the assessment of a tax.  MacDonald v. Assessors of Mashpee, 381 Mass. 724, 726 (1980); see also Commissioner of Revenue v. Exxon Corporation, 407 Mass. 17, 19-20 (recognizing similarity between applications for abatement under G.L. c. 59, § 59 and G.L. c. 62C, § 37 and citing MacDonald in determining the necessary contents of a § 37 application for abatement).  At a minimum, an application for abatement is a "notice or request" that is "in the nature of a claim for reduction of the tax to which it relates."  Assessors of Brookline v. Prudential Insurance Company of America, 310 Mass. 300, 308-09 (1941).  An application for abatement is not, however, "in its nature the presentation of evidence" but serves as "notice of the taxpayer's assertion that he objects to the assessors' action." Id. at 268 (quoting Prudential Insurance Co., 310 Mass. at 312 and MacDonald, 381 Mass. at 726).
In the present appeal, the appellant used the only form approved by the Commissioner for filing an application for abatement, including an application for abatement based on a federal change. See AP 619.6; 830 C.M.R. 62C.30.1(6)(a); 830 C.M.R. 62C.37.1(5)(c) and (e).  Assuming that something more than the filing of the proper form were required, the appellant's attachment of the federal change workpapers to the Federal Change CA-6, and its indication on the Federal Change CA-6 that the tax due as a result of the federal changes was the same as the tax it originally reported, put the Commissioner on notice that the appellant sought an abatement of the Commissioner's deficiency assessment.  
Although the Commissioner argued that she cannot be expected to determine whether there were inconsistencies between the Federal Change CA-6 and a prior assessment, "a matter of administrative convenience cannot rise to the level of a jurisdictional prerequisite."  Children's Hospital Medical Center v. Assessors of Boston, 393 Mass. 266, 269 (1984).  Further, the Commissioner "may not under the guise of approving a form for an application impose upon the taxpayer an obligation to furnish information not required by the statute expressly or by implication." Exxon Corp., 407 Mass. at 20.  The statute requires notice of an objection to an assessment, not a detailed description of the basis of the objection.
The Board ruled that the appellant provided the Commissioner with sufficient information in the Federal Change CA-6 to constitute an application for abatement.  By using the only form approved by the Commissioner for applying for an abatement, including an abatement based on federal changes, and by indicating on the Federal Change CA-6 that the appellant was claiming that its Massachusetts tax due after the federal changes shown on the attached workpapers was the same as the tax that it originally reported, the appellant put the Commissioner on notice that it was disputing the Commissioner's deficiency assessment.  Accordingly, the Board ruled that the Federal Change CA-6 constituted an application for abatement.  
FEDERAL CHANGE CA-6 IS DUPLICATIVE OF ORIGINAL CA-6
However, the Board found and ruled that, even though the Federal Change CA-6 constituted an application for abatement, it was duplicative of the Original CA-6 and did not create a new avenue to appeal the disputed assessment.  It is well established that a taxpayer may not file a second application for abatement which puts an identical item of tax at issue that has been the subject of a previous application, unless there are newly discovered facts, the first application is a return which shows an overpayment, there is a second assessment, or there is a subsequent change in decisional law. Liberty Life Assurance Co. of Boston v. State Tax Commission, 374 Mass. 25, 30 (1977); Focaccia, Inc. v. Commissioner of Revenue, Mass. ATB Findings of Fact and Reports 2013-665, 668; 830 CMR 62C.37.1(5)(g). 
The appellant argued that the determination of deductible interest by the IRS provided sufficient grounds for a second application for abatement.  This argument is premised on the notion that the Closing Agreement, which the appellant and the Commissioner agreed allowed some but not all of the disputed interest deductions, is binding on the question of whether the DSAs constituted debt for Massachusetts tax purposes.  The Board ruled, however, that the amount of interest deduction provided for in the Closing Agreement did not constitute a binding determination of the interest deduction allowable for Massachusetts corporate excise purposes.
"Net income" is defined for Massachusetts corporate excise purposes in G.L. c. 63, § 30(4) as "gross income less the deductions, but not credits, allowable under the provisions of the Federal Internal Revenue Code."  The statutory reference is to deductions "allowable" under the Code, not simply the dollar amount of the federal deductions.  In construing a similar definition of gross income for Massachusetts corporate excise purposes, the Board observed that the "Supreme Judicial Court has rejected the . . . argument that gross income for Massachusetts purposes is the number reported on the taxpayer's federal return; the reference to the Code is to its provisions rather than the amounts reported."  Weston Marketing v. Commissioner of Revenue, Mass. ATB Findings of Fact and Reports 1994-34, 46 (citing Rohrbaugh, Inc. v. Commissioner of Revenue, 385 Mass. 830, 832 (1982).  Further, in determining whether deductions are allowable, the Board has stated that "Federal tax concepts are not always dispositive of the interpretation of Massachusetts corporate excise statutes . . . In particular, courts and the Board are cautious when applying federal tax concepts to deductions available under Massachusetts statutes."  BankBoston Corporation v. Commissioner of Revenue, Mass. ATB Findings of Fact and Reports 2005-450, 466-67 (citing Rohrbaugh, supra, and FMR Corp. v. Commissioner of Revenue, 441 Mass. 810 (2004)).
Section 163(a) of the Code allows a deduction for "all interest paid or accrued within the taxable year on indebtedness."  As a threshold matter, the appellant and the Commissioner agreed that the Closing Agreement provided for the federal deduction of only a portion of the interest deductions that the Commissioner had disallowed in total.  At no time has the appellant claimed, either in the present appeal or National Grid I, that there is any legal basis to distinguish between and among the payments made under the DSAs; either all of the payments are interest or none is.  Accordingly, it cannot be the case that a portion of the interest expense was "allowable under the provisions" of the Code.  For that reason alone, the Board is not bound by the Closing Agreement's allowance of a portion of the disputed interest expense as a federal deduction.
Moreover, the issue of whether the DSA arrangements constituted debt is not one that is controlled by the Code, but is a matter of common law that has been taken up by Massachusetts courts on numerous occasions.  See e.g., Kimberly-Clark Corp. v. Commissioner of Revenue, 83 Mass. App. Ct. 65 (2013); Overnite Transportation Co. v. Commissioner of Revenue, 54 Mass. App. Ct. 180 (2002); New York Times Sales, Inc. v. Commissioner of Revenue, 40 Mass. App. Ct. 749, 753 (1996); Sysco Corp. v. Commissioner of Revenue, Mass. ATB Findings of Fact and Reports 2011-918; The TJX Companies, Inc. v. Commissioner of Revenue, Mass. ATB Findings of Fact and Reports 2007-790.  As the Board ruled in National Grid I, the question of whether the DSA arrangements were properly treated for Massachusetts corporate excise purposes as debt is one which must be decided by weighing the appellants' facts and circumstances according to various principles regarding the presence or absence of indebtedness drawn from the voluminous body of Massachusetts and federal case law. See National Grid I, Mass. ATB Findings of Fact and Reports 2014 at 398-400.  
Finally, the cases cited by the appellant do not support a conclusion that the Board is bound by the Closing Agreement.  Both Simms v. Commissioner of Revenue, Mass. ATB Findings of Fact and Reports 2001-661 and Smolak v. Commissioner of Revenue, Mass. ATB Findings of Fact and Reports 1995-93 involved reports of federal changes.  In each case, the Board first addressed the procedural issue of whether the Board had jurisdiction based on the federal change reports.  After determining that it had jurisdiction, the Board proceeded to determine "whether the appellant is entitled to the same adjustment in taxable income for Massachusetts purposes as he received for federal purposes." Smolak, at 195-102; see also Simms at 2001-672.  Had the Board been bound by the federal determinations, there would have been no need to engage in such an analysis.  Although in both cases the Board came to the same conclusion as the IRS, the fact that the Board undertook the analysis indicates that it was not bound by the federal determinations.
Similarly, in PMAG, Inc. v. Commissioner of Revenue, Mass. ATB Findings of Fact and Reports 1998-1, aff'd 429 Mass. 35     (1999), the Board first determined a procedural issue: whether the assessment was valid under both § 30 and G.L. c. 62C, § 26.  After determining that the assessment was valid, the Board explicitly held that:
Section 30 does not provide, however, that a taxpayer's federal taxable income then becomes its Massachusetts taxable income.  Rather, § 30 provides that the taxpayer, as the Appellant has done here, must report the final determination to the Commissioner and if, on the basis of that report or upon the Commissioner's investigation, it appears that the tax under chapter 63 has not been fully assessed, the Commissioner may assess the additional tax. 

PMAG at 1998-10.  Nothing in PMAG suggests that the Commissioner or the Board were bound by the IRS's federal changes; rather, PMAG simply ruled that the Commissioner had the authority under § 30 to assess additional Massachusetts corporation excise based on a federal change. 
	Accordingly, the Board ruled that the IRS's allowance of some but not all of the disputed interest deductions in the Closing Agreement was not binding on the question of whether the DSA arrangements constituted debt for Massachusetts tax purposes.  The Federal Change CA-6 therefore raised no new facts warranting a second application for abatement concerning the same assessment challenged in National Grid I.  The appellant could, and did, raise the IRS's allowance of a portion of the claimed interest expense in National Grid I.  Because the IRS's treatment of the claimed interest expense in the Closing Agreement was not binding for Massachusetts tax purposes, the Closing Agreement was neither relevant in National Grid I nor the source of an independent avenue to challenge the disputed assessment in the present appeal. 
CONCLUSION
On the basis of the foregoing, the Board ruled that the Federal Change CA-6 raised no new facts warranting a second application for abatement concerning the same assessment that was challenged in the Original CA-6 and National Grid I.  Accordingly, the Board allowed the Commissioner's motion to dismiss, denied the appellant's motion for summary judgment, and entered a decision for the appellee in this appeal. 

  					  THE APPELLATE TAX BOARD




   By: ________________________________			  	  Thomas W. Hammond, Jr., Chairman

A true copy,

Attest: _________________________
  	      Clerk of the Board

 National Grid I also involved related appeals for the tax year ended March 31, 2000 and March 31, 2001.
 See, e.g., Appellant's Motion for Summary Judgment, ¶ 3(i); Appellant's Memorandum in Support of Appellant's Motion for Summary Judgment at 4; Commissioner of Revenue's Opposition to Appellant's Motion for Summary Judgment at 2-3; Commissioner of Revenue's Memorandum of Law in Support of Her Motion to Dismiss at 7.
 The Board's review of the workpapers showed that the federal changes, including the partial interest deduction which the IRS allowed in the Closing Agreement, served only to reduce the appellant's federal net operating losses as the consolidated group was in an overall current year loss both before and after the adjustments. Accordingly, the total income measure of the corporate excise of the NG Service Massachusetts combined group was zero, as it was on the original return, even after consideration of the federal changes.

 The hearing officer ruled that the Settlement Agreement was inadmissible on February 9, 2012.  See National Grid I, Transcript, Vol. 1, page 62.  A sealed envelope containing the Settlement Agreement was marked in National Grid I as Exhibit 8 for Identification.  National Grid I, Transcript, Vol. 15, page 101-102.
 Because the federal changes did not result in any additional Massachusetts tax due, the appellant did not need to comply with the payment requirement of § 30. 
 The appellant has consistently argued that the payments made under the DSAs should be treated as interest and has not argued that they are deductible under any other theory. 



 The only operative Code section addressing the determination of whether an instrument constitutes bona fide indebtedness is § 385(a) of the Code, which states that the IRS may make regulations regarding the determination of an instrument as debt or equity. However, none are currently promulgated "thus leaving only case law to guide [a court's] inquiry into the debt-equity issue." Segel v. Commissioner of Revenue, 89 T.C. 816, 827 (1987). Section 385(b) offers a number of potential factors which may be considered as part of the analysis largely derived from case law, none of which are determinative, and which do not comprise an exclusive list. Id. at 826.

ATB 2014-630