National Grid Holdings, Inc. v. Commissioner of Revenue (June 4, 2014)

COMMONWEALTH OF MASSACHUSETTS

APPELLATE TAX BOARD



NATIONAL GRID HOLDINGS, INC.	 v.	COMMISSIONER OF REVENUE
Docket No.: C292287


		   
NATIONAL GRID USA			 v.	COMMISSIONER OF REVENUE
Docket No.: C292288



NATIONAL GRID USA SERVICE      v.  COMMISSIONER OF REVENUE
COMPANY, INC.
Docket No.: C292289	
                                   Promulgated: 		
							June 4, 2014


	These are appeals 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 and penalties assessed against National Grid Holdings, Inc. ("NGHI") and National Grid USA ("NGUSA"), as well as corporate excise assessed against National Grid USA Service Company, Inc. ("NG Service," together with NGHI and NGUSA, are referred to herein as the "appellants") for the tax year ended March 31, 2002 ("tax year at issue")
	

	Chairman Hammond heard the appeals. Commissioners Scharaffa, Rose, Chmielinski and former Commissioner Mulhern joined him in the decision for the appellee.
	These findings of fact and report are made at the requests of the appellants 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 appellants.
	Andrew O'Meara, Esq., Brett M. Goldberg, Esq., Daniel Shapiro, Esq., and Julie Flynn, Esq. for the appellee.



FINDINGS OF FACT AND REPORT
	These appeals were presented over the course of fifteen days through the testimony of nine witnesses and a Statement of Agreed Facts accompanied by one-hundred-and-ninety agreed exhibits. Approximately one-hundred additional exhibits were entered into evidence at the hearing of the appeals. 
The appellants offered three fact and three expert witnesses. The appellants' fact witnesses were John Cochrane, David Bonar and Malcolm Cooper, all of whom were employees of affiliates of the appellants. The appellants' expert witnesses were Alan Feld, Graham Aaronson and Lee Garza. Mr. Feld is an attorney and professor at Boston University Law School. The Board qualified Mr. Feld as an expert in the field of federal income taxation and the U.S. taxation implications of cross-border transactions. Mr. Aaronson is a United Kingdom ("U.K.") barrister and Queen's counsel who specializes in commercial tax. Mr. Aaronson was qualified as an expert in English commercial and U.K. tax law. Mr. Garza is director of EA Markets, a financial advisory firm. He provides counsel to power and utility companies relating to capital structures, financing and market conditions. The Board qualified Mr. Garza as an expert on debt financing for power companies. 
For her part, the Commissioner offered three expert witnesses: H. David Rosenbloom; Malcolm Gammie; and William Easton. Mr. Rosenbloom, an attorney and professor of taxation at New York University Law School, was qualified as an expert in United States cross-border tax issues, tax treaties, and international aspects of U.S. federal tax policy. Mr. Gammie is a U.K. barrister and Queen's Counsel who specializes in commercial tax. The Board qualified Mr. Gammie as an expert in U.K. taxation, English commercial and contract law. Mr. Easton is a partner at Enger, Easton and Associates, a consulting firm that offers risk mitigation and conflict risk solutions. Previously, Mr. Easton worked as a commercial lender. The Board qualified Mr. Easton as an expert in commercial lending. 
	On the basis of the foregoing, the Board made the following findings of fact.

INTRODUCTION
The appellants in these appeals, NGHI, NGUSA and NG Service, were subsidiaries of National Grid plc ("NGPLC"), a British multinational electricity and gas utility company headquartered in London, U.K. NGPLC, either directly or indirectly, owned numerous entities that were organized in the United States, the U.K. and elsewhere (NGPLC, together with its affiliated entities, are referred to herein as "National Grid").  
	Between December, 2001, and February, 2002, National Grid completed two purported financing transactions intended to play off claimed differences between the laws of the U.S. and the U.K. and which involved: forty-seven and forty-four steps, respectively; numerous entities, many of which were newly-created disregarded entities that had no employees or discernable assets; and several jurisdictions including the U.S., the U.K., Ireland and Luxembourg. The transactions, which National Grid's tax advisors designed, relied on the use of highly nuanced deferred subscription arrangements that in form operated solely to reduce National Grid's worldwide tax liability. 
In the first transaction (the "NG8 DSA"), NGHI subscribed for shares of an affiliated entity, National Grid Eight Ltd. ("NG8"), on a deferred payment basis and then sold the shares to another affiliate, National Grid (US) Investments 4 ("NGUSI4"), the same day the shares were issued. The appellants assert that the arrangement, in relevant part, created debt borne by NGHI. Soon thereafter, NGHI entered into a similar arrangement (the "NG11 DSA") with two other affiliated entities, National Grid Eleven Ltd. ("NG11"), whose shares NGHI subscribed for, and National Grid Twelve Ltd. ("NG12"), the entity to which the shares were sold. These deferred subscription arrangements (together, the "DSAs"), which are discussed in detail below, were intended to produce interest deductions for National Grid in the United States but not generate taxable interest income in the U.K. or other jurisdictions. They were also the primary focus of an audit initiated by the Commissioner that gave rise to the assessments at issue in these appeals.

PROCEDURAL HISTORY
For Massachusetts tax purposes, NG Service was the principal reporting corporation for a combined group of affiliated entities that included NGHI and NGUSA. NG Service filed a Combined Massachusetts Corporate Excise Return dated December 10, 2002, for the tax year at issue. Following her audit of this return, the Commissioner issued a Notice of Intent to Assess to NG Service dated December 19, 2006, proposing to assess $1,202,880, inclusive of interest, with respect to the tax year at issue. The Commissioner subsequently issued a Notice of Assessment dated February 17, 2007. NG Service filed an Application for Abatement on April 26, 2007. By a Notice of Abatement Determination dated May 16, 2007, the Commissioner informed NG Service of her intention to deny its abatement application in full. On July 10, 2007, NG Service timely filed a petition with the Board for the tax year at issue. 
NGHI filed a separate corporate excise return for the tax year at issue to report its taxable net worth. Following her audit of the return, the Commissioner issued   a Notice of Intent to Assess to NGHI dated December 19, 2006, proposing to assess corporation excise as well as interest and penalties totaling $307,802.77. The Commissioner subsequently issued a Notice of Assessment dated February 17, 2007. NGHI filed an Application for Abatement on April 26, 2007, and by a Notice of Abatement Determination dated May 16, 2007, the Commissioner informed NGHI of her intention to deny its abatement application in full. On July 10, 2007, NGHI timely filed a petition with the Board for the tax year at issue. 
NGUSA also filed a separate corporate excise return for the tax year at issue to report its taxable net worth. Following her audit of the return, the Commissioner issued a Notice of Intent to Assess to NGUSA dated December 19, 2006, proposing to assess corporation excise as well as interest and penalties totaling $76,739.10. The Commissioner subsequently issued a Notice of Assessment dated February 17, 2007. NGUSA filed an Application for Abatement on April 26, 2007, and by a Notice of Abatement Determination dated May 16, 2007, the Commissioner informed NGUSA of her intention to deny its abatement application in full. On July 10, 2007, NGHI timely filed a petition with the Board for the tax year at issue. 
On the basis of the foregoing, the Board found that it had jurisdiction to hear and decide these appeals.

FACTUAL BACKGROUND  
	National Grid's Entry into the U.S. Market
	National Grid was the successor to a company formed during the restructuring of the electric industry in the U.K., prior to which the industry had been owned by the government. After the restructuring, which occurred in the early 1990s, National Grid owned the electrical transmission system in England and Wales as well as a telecommunications company. During 1998, National Grid began its expansion into the U.S. utility market, having agreed to acquire a New-England based utility company, New England Electrical System ("NEES"), via a merger that was announced on December 11, 1998. On February 1, 1999, Eastern Utilities Association ("EUA") announced that it had executed a merger agreement with NEES pursuant to which EUA would become a wholly owned subsidiary of NEES. National Grid and NEES filed a Form U-1/A with the Securities and Exchange Commission on October 1, 1999, that in part described the corporate structure National Grid intended to employ in its acquisition of NEES. In particular, the Form U-1/A stated that "[t]he purpose of th[e] structure is to permit both reinvestment and repatriation of the profits of NEES in a tax efficient manner."
	Project Mayflower
	Integral to National Grid's plan to achieve tax efficiency was creation of a "domestic reverse hybrid," a U.S. entity taxable as a corporation in the United States but transparent in a foreign country. The domestic reverse hybrid structure created by National Grid formed part of a thirty-three step process named "Project Mayflower" by National Grid, which included the acquisition of NEES and EAU as well as establishment of the structure used for the acquisition. By employing the reverse hybrid structure, National Grid intended to produce deductible interest in the United States without creating taxable interest in the U.K., and to avoid liability for withholding tax in the U.S. under Internal Revenue Code ("I.R.C.") § 881. 
	Briefly, and omitting discussion of the bulk of its complexities, Project Mayflower was implemented as follows. In early 1999, National Grid formed a Delaware C-corporation, National Grid Group Holdings, which acquired NEES and subsequently changed its name to NGUSA. Soon thereafter, several U.K. and U.S. entities were created, two of which formed a Delaware General Partnership, National Grid General Partnership ("NGGP"). NGGP filed Form 8832 with the Internal Revenue Service ("I.R.S.") to elect to be treated as a corporation for U.S. tax purposes. This election, however, had no impact in the U.K., where the entity remained a partnership for U.K. tax purposes. As a result, NGGP was a domestic reverse hybrid entity. 
	In the ensuing months, members of the National Grid group issued various intercompany notes among the newly created entities including two loans to NGGP totaling $2.68 billion that were made on March 22, 2000 ("NGGP notes"), ostensibly to finance the bulk of the purchase price for the acquisition of NEES.  The same day that the NGGP notes were issued, National Grid lent cash from its own operating funds and funds made available through external debt to one of the U.K. companies that had been formed as part of Project Mayflower. After intermediate steps involving payments on certain intercompany notes, the cash was placed in a bank account designated for payment of the NEES acquisition purchase price. 
    Project Mayflower also included the acquisition of EUA by NEES. The funds for this acquisition flowed through two of National Grid's existing affiliates as well as a newly created Delaware C-corporation, Eastern Utilities Association Holdings, Inc. 
Following the NEES and EUA acquisitions, NGGP became the parent of the U.S. federal consolidated group and NGGP's balance sheet reflected NGGP's outstanding indebtedness of $2.68 billion relating to the acquisitions in the form of the NGGP Notes. NGGP made payments on the NGGP Notes until December 20, 2001, the date of the first of the purported refinancings at issue in the present appeals.
	Ultimately, Project Mayflower had the desired worldwide tax effect. NGGP, which was treated as a corporation for federal tax purposes, filed federal consolidated income tax returns as the parent of National Grid's U.S. group. As part of these filings, NGGP claimed income tax deductions for its interest payments made to a U.K. entity outside of the group, which reduced National Grid's U.S. federal income tax liability. Further, there was no corresponding income inclusion for U.K. tax purposes. Finally, by virtue of the application of a U.S.- U.K. tax treaty then in effect, payments of interest to the U.K. parent were not subject to U.S. tax withholding otherwise applicable to payments of U.S.-source interest income under I.R.C. § 881. 	                            
	Threat to the Domestic Reverse Hybrid Arrangement
	The U.S. Treasury proposed regulations under I.R.C. § 894(c) on February 27, 2001, in part to address issues attendant to use of the type of domestic reverse hybrid structure employed by National Grid. See Preamble, 66 Fed. Reg. 12445 (2001). In the preamble to the regulations, the I.R.S. explicitly addressed the use of interest payments by domestic reverse hybrids to their foreign interest holders to lower overall worldwide tax liability through the use of bilateral tax treaties, stating:
[T]he IRS and Treasury believe that it is inappropriate for related parties to use domestic reverse hybrids for the purpose of converting higher taxed U.S. source items of income to lower taxed, or untaxed, U.S. source items of income. To do so defeats the expectation of the United States and its treaty partners that treaties should be used to reduce or eliminate double taxation for legitimate transactions, not to reward the manipulation of inconsistencies in the laws of the treaty partners. (emphasis added) Id.

Under the proposed as well as the final regulations, which were issued on June 12, 2002, interest payments such as those made by NGGP were treated as non-deductible dividends rather than interest. See Treas. Reg. § 1.894-1. Treaty benefits were also lost as payment of the dividends was thereafter subject to U.S. tax withholding. Id. Anticipating the elimination of its tax benefit, National Grid sought counsel in both the U.S. and the U.K. in an effort to replace the domestic reverse hybrid structure with one that would continue to generate deductible interest payments in the U.S. without corresponding recognition of income in the U.K.        
	Project Spam
	"Project Spam" was National Grid's name for a forty-seven step transaction designed to maintain the tax benefit created under Project Mayflower via a refinancing of the NEES acquisition debt that would not trigger application of the regulations under I.R.C. § 894. Prior to the transactions that comprised Project Spam, as previously noted, NGGP was the parent of National Grid's U.S. federal consolidated group and had $2.68 billion of outstanding indebtedness, which had been incurred in connection with the acquisition of NEES. When Project Spam was complete, NGHI, which had been created as part of the project, had become a subsidiary of NGGP, and as the direct owner of NGUSA, was the indirect owner of the U.S. operating companies. According to the appellants, through several of the project's operative steps, NGHI also assumed the debt formerly held by NGGP. More specifically, the appellants asserted that by entering into the NG8 DSA deferred subscription agreement, the substance of which is discussed below, NGHI effectively borrowed $2.68 billion from NGUSI4, which was used to repay the outstanding acquisition loan.
Of Project Spam's numerous steps, those that relate directly to these appeals involved NGHI, which was initially formed with nominal assets. As described by the appellants, these steps are as follows. On December 19, 2001, one day before the NG8 DSA was completed, National Grid funded NGHI with an additional $224 million of capital in the form of a loan receivable from an affiliated U.K. entity. The next day, ownership of NGHI was contributed to NGGP, which remained the parent of the U.S. federal consolidated group. NGHI entered into the NG8 DSA on the same day its ownership was transferred to NGGP. NGHI, then the owner of NG8, subscribed for an additional ten million shares of NG8 on deferred payment terms, as discussed below, and assigned $15 million of the $224 million loan receivable to NG8 to satisfy the initial subscription payment. NGHI then sold the shares of NG8 to NGUSI4 for $2.695 billion in cash that came from a "daylight loan" issued by Barclay's Bank, plc ("Barclays") to National Grid.
	NGHI used $2.68 billion of the proceeds from the sale of the NG8 shares as well as the remaining $209 million of its loan receivable to NGUSA to make a loan to NGUSA. The loan was capitalized when NGHI became the owner of NGUSA via a merger between NGUSA and a special-purpose subsidiary of NGHI. NGUSA distributed the $2.889 billion it had received from NGHI to NGGP, its parent company, in a redemption of its capital. NGGP used the funds to pay off its outstanding loans of $2.68 billion and to pay a "breakage fee" of $209 million to its parent companies that had been the original lenders in the NEES financing. The funds flowed to the top of the group and were ultimately repaid to Barclays. 
	The NG8 DSA
The NG8 DSA was the centerpiece of Project Spam and consisted of three documents including: the Articles of Association of NG8, a newly created U.K. entity (the "NG8 Articles"); an Offer for subscription of ordinary share capital (the "NG8 Offer Letter"); and an Agreement for the Sale and Purchase of Shares in National Grid Eight Limited ("NG8 S&P Agreement"). Taken together, these documents purported to reflect NGHI's $2.68 billion of outstanding debt for U.S. and Massachusetts tax purposes.
The NG8 Articles
NG8 adopted the NG8 Articles on December 20, 2001. The NG8 Articles set forth terms for the capitalization of NG8 on a deferred subscription basis. The company's share capital consisted of $3,155,000,100, divided into 10,000,000 ordinary shares and 100 non-voting reorganization shares.The deferred subscription arrangement described in the NG8 Articles, which related only to the ordinary shares, provided for an initial payment of $15,000,000, or $1.50 per share, and three additional payments ("Call Payments"), that were dependent on the issuance of discretionary calls ("Calls"). More specifically, the NG8 Articles stated that its directors could make Calls to require payment on partially paid shares, but specified only when the Calls could not be made. In particular, the NG8 articles stated that the directors "may not make calls in respect of a [s]hare . . . save as follows": a payment of $3.50 per share not before March 1, 2002; a payment of $15.00 per share not before March 1, 2003; a payment of $15.50 per share not before March 1, 2004; and a final payment of $280.00 per share not before November 19, 2004. The sum of the Call Payments and the initial payment was $3.155 billion, which the appellants stated included interest at an annual rate of 5.7 percent on $2.68 billion, the principle of the purported loan. The intermediate Call Payments represented interest only and the final payment represented interest and the full principal balance. The precise interest rate, however, depended on the dates of the Calls, which were discretionary, and the Call Payments, which were therefore not predetermined.
The NG8 Articles provided that the original member of the company, which was NGHI, would remain primarily liable for the Call Payments in the event of a transfer of the shares, which in fact occurred pursuant to the NG8 S&P Agreement the same day that NG8 adopted the NG8 Articles. Finally, the NG8 Articles imposed additional interest at a rate of four percent above the Barclays' base rate if a Call Payment was not made by the due date specified in a Call.
The NG8 Offer Letter
The NG8 Offer Letter offered NGHI the "opportunity" to subscribe for 10,000,000 shares of NG8 at "an aggregate consideration of US$2,695,000,000." Like the NG8 Articles, it called for an initial payment of $15,000,000 and Call Payments on or after the same dates and in the same amounts provided for in the NG8 Articles.   
Within the constraints of the NG8 Articles and the NG8 Offer Letter, the directors of NG8 had full discretion regarding whether and when to make Calls for the Call Payments. Once a Call was made, however, NGHI was obligated to make a Call Payment. The Offer Letter was accepted on December 20, 2001, the date of its issuance, and was accepted orally as its terms explicitly required.
The NG8 S&P Agreement
Immediately after accepting the NG8 Offer Letter, NGHI sold the shares of NG8 to NGUSI4 for $2.695 billion pursuant to the NG8 S&P Agreement. The net amount paid by NGUSI4 was $2.68 billion, accounting for the $15 million that NGHI had previously transferred to NG8, which was effectively repaid through the transfer of the NG8 shares to NGUSI4. The net payment of $2.68 billion equaled the loans put in place during Project Mayflower that were purportedly refinanced through Project Spam and the NG8 DSA.
	The NG8 S&P Agreement, like the NG8 Articles, provided that NGHI remain liable for the Call Payments. The agreement also stated that if NG8 failed to make a Call within thirty days "subsequent to the earliest date on which a call [could] be made under . . . [the NG8 Articles]" ("Call Default Date"), NGHI was "entitled to require" that NGUSI4 "procure" that NG8 make the Call. NGHI, however, had no obligation to exercise this right. 
Clause 2.9 of the NG8 S&P Agreement ("Clause 2.9") 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]." Repurchase of the NG8 shares was also contemplated if any sums representing payment for the shares remained outstanding after December 19, 2004, one month after the earliest date for the final Call Payment. In the appellants' view, NGHUSI4 would then have been obligated to serve notice on NGHI requiring repurchase of the NG8 shares. The Commissioner disagreed, advancing the argument that service of the notice, like issuance of the Calls, was discretionary. The significance of this disagreement is discussed below.
Finally, the NG8 S&P Agreement provided for payment of interest in addition to that incorporated in the Call Payments. In particular, if NGUSI4 chose to issue a Call with a due date beyond the Call Default Date, interest would compound annually at the rate of 5.7%. Further, if NGUSI4 failed to make a Call and NGHI did not exercise its right to procure a Call within seven days of the Call Default Date, interest would accrue at 4 percent above the Barclays' base rate, the same rate specified in the NG8 Articles, which accrued if a Call Payment was not made by the due date specified in a Call.
Neither the interest provisions in the NG8 Articles and the NG8 S&P Agreement nor a notice requiring repurchase provided by the NG8 S&P Agreement ever came into effect as all of the Calls and the Call Payments were made prior to the applicable Call Default Dates.
NGHI borrowed funds from an affiliated entity to make the first Call Payment under the NG8 DSA. The remaining Call Payments, with the exception of the principal component of the final Call Payment, were made from the operating cash flow of the U.S. companies. All of the money for the interest component of the Call Payments went to the National Grid group outside the U.S., where it remained.
	Project Spa
On January 31, 2002, approximately one month after Project Spam was implemented, National Grid put in place a forty-four step transaction it had named "Project Spa," through which National Grid established the structure for acquisition of Niagara Mohawk Holdings, Inc. ("Niagara Mohawk"), a utility company based in New York. The acquisition was effected via a merger in which the shareholders of Niagara Mohawk received a combination of cash and newly issued stock of National Grid. The cash portion of the purchase price, slightly in excess of $1.23 billion, came from third-party banks and was loaned to NGG Finance plc ("NGGF"), a U.K. affiliate of National Grid. NGGF issued a temporary loan of $1.03 billion to its sister company National Grid Ten Ltd. ("NG10"), a newly formed U.K. company. NG10 then reloaned the $1.03 billion to New National Grid Limited ("NNG"), another newly formed U.K. entity and the common parent of NG10 and NGGF. NNG used these funds, as well as the balance of the bank loans which NGGF reloaned to NNG, to pay the shareholders of Niagara Mohawk. 
Via several additional steps, all of which occurred on the date of the merger, NG10 became the owner of Niagara Mohawk, which became part of the U.S. federal consolidated group through a transfer of NG10 to NGHI. NGHI entered into the NG11 DSA the next day, purportedly to create a debt obligation to replace the $1.03 billion loan from NGGF to NG10.
The NG11 DSA
Like the NG8 DSA, the NG11 DSA consisted of three documents including: the Articles of Association of NG11, a newly created U.K. entity (the "NG11 Articles"); an Offer for subscription of ordinary share capital (the "NG11 Offer Letter"); and an Agreement for the Sale and Purchase of Shares in NG11 ("NG11 S&P Agreement"). Although the companies involved, as well as the dates, numbers of shares and sums for the initial payment and the Call Payments were different than those in the NG8 DSA, the documents were otherwise the same as those that comprised the NG8 DSA.  
On February 1, 2002, NG11 adopted the NG11 Articles and issued the NG11 Offer Letter, which NHGI accepted the same day. Having made the required initial payment of $10 million to NG11, NGHI immediately sold the shares of NG11 to NG12 for $1.04 billion, which yielded net proceeds of $1.03 billion after subtracting the $10 million NGHI had contributed to NG11. NGHI then contributed the $1.03 billion to NG10, which used the funds to repay the loan from NGGP.  As part of the overall transaction, National Grid also took steps to make Niagara Mohawk a subsidiary of NGUSA and to transfer the NG8 DSA from NGUSI4 to NG12. 
  	The companies in the NG11 DSA had different names and places in the National Grid corporate structure than those in the NG8 DSA, but had the same tax status as the corresponding companies in the NG8 DSA. Like NG8, NG11 elected to be disregarded for U.S. tax purposes and like NGUSI4, NG12 was disregarded for U.S. tax purposes.
As with the NG8 DSA, neither the interest provisions in the NG11 Articles and the NG11 S&P Agreement nor a notice requiring repurchase provided by the NG11 S&P Agreement ever came into effect because all of the Calls and the Call Payments were made prior to the applicable Call Default Dates. 
Also like the NG8DSA, NGHI borrowed funds from an affiliated entity to make the first Call Payment under the NG11 DSA. The remaining Call Payments, with the exception of the principal component of the final Call Payment, were made from the operating cash flow of the U.S. companies. All of the money for the interest component of the Call Payments went to the National Grid group outside the U.S., where it remained.
§ 765 of the U.K. Income and Corporation Taxes Act 1988
	Under § 765 of the U.K. Income and Corporation Taxes Act 1988 ("§ 765"), it was unlawful for a foreign subsidiary of a U.K. parent to issue a "debenture" without consent of the U.K. government, a process National Grid took meticulous care to avoid. As described by Mr. Aaronson and Mr. Gammie, a "debenture" within the meaning of § 765 was a document that created or evidenced a debt under English law. 
	Mr. Aaronson testified that U.K. counsel was "highly concerned" that § 765 might apply to the NG8 DSA. He stated that in structuring the transaction, "the essence of the tax planning . . . [was] to prevent § 765 applying."  In this regard, Mr. Aaronson noted the introduction of "cumbersome mechanisms" designed to "structure [the transaction] in such a way that Inland Revenue would not be able to identify any document or any combination of documents as giving rise to indebtedness created or evidenced by th[e] document[s]." The cumbersome mechanisms included incorporation of alternate means of payment, which took the form of Call Payments, the dates of which were not predetermined because they resulted from discretionary calls, or consideration potentially paid through the repurchase of shares. Similarly, National Grid drafted the Offer Letters to require oral acceptance, which was intended to avoid a written acceptance that might be construed as a document evidencing debt.
	In reaching his conclusion that the DSAs would not be subject to § 765, Mr. Aaronson noted "[y]ou would look at this [arrangement] and say not only is the date indeterminate, not only is the method of payment indeterminate" but "instead of something becoming due, it only becomes due if a notice is given."   
	The Board found that while Mr. Aaronson's testimony reflected his perspective as a U.K. tax and English Law expert, his interpretation of the DSAs' documents also informed the Board's interpretation of the documents as they would be treated under Massachusetts law.
Clause 2.10
The parties agreed that the Calls for the Call Payments reflected in the DSAs were discretionary. As previously noted, however, they disagreed as to whether the enforcement mechanism connected with the final Call Payments was mandatory or optional.
Clause 2.10 of the NGUSI4 and the NG11 S&P Agreements ("Clause 2.10") imposed an obligation on NGHI to repurchase the shares of NG8 and NG11 that was contingent on service of a notice to repurchase on a specified date. The parties did not dispute that NGHI's obligation to repurchase the shares was mandatory if the notice was served. They disagreed, however, as to whether service of the notice was mandatory or optional as well as the effect of a determination that such service was optional.
The first sentence of Clause 2.10 provides:
If for any reason whatsoever any sums due in respect of the Shares under Article 3 of the Articles remain unpaid after 19 December, 2004, the Buyer shall serve a notice on the Seller requiring the Seller to repurchase the Shares on 20 December or if this is not a Business Day, the next Business Day thereafter for consideration equal to the net asset value of the Company. . .
(emphasis added)
As testified to by Mr. Aaronson, the appellants construed this sentence as establishing the "drop-dead" date, i.e., the maturity date of the purported loan arrangement on which NGUSI4 "gets its money back plus what you can regard as the interest that has accrued up to then." Mr. Feld reached a similar conclusion. The appellants also argued that the operation of Clause 2.10 provided unequivocal support for the assertion that NGHI had an unqualified obligation to repay the purported loans.
The appellants' assertions regarding the effects of Clause 2.10 were premised on the conclusion that service of the notice was mandatory. In support of this conclusion, the appellants primarily pointed to the use of the word "shall" with respect to service of the notice to repurchase. According to the appellants, this stood in stark contrast to the optional right to require a repurchase under Clause 2.9., which allowed service of a notice to repurchase, but provided that NGUSI4 "shall be entitled to serve a notice on the Seller requiring the Seller to repurchase the Shares." (emphasis added) According to the appellants, the use of "shall" in Clause 2.10 versus "shall be entitled to" in Clause 2.9 are the primary evidence that Clause 2.10 was intended to compel service of the notice, whereas Clause 2.9 was not. 
Mr. Bonar, who worked in National Grid's tax department from 2000 to 2004 and was responsible for tax compliance for U.K. companies and tax planning, testified that he had understood that Clause 2.10 was intended to be mandatory. An analysis of the NG8 DSA submitted by PricewaterhouseCoopers on December 12, 2001, reflected the same view.
The Commissioner's witnesses disagreed. In particular, Mr. Gammie opined that the notice provision in Clause 2.10 was "a right that belong[ed] to [NGUS]I4 to require the repurchase. It's not an obligation in all circumstances to serve that notice." In Mr. Gammie's view, the buyer, NGUSI4, had full discretion to serve a notice or not, but:

If it wants to exercise its right to require [a] repurchase [of] the shares it has to serve the notice at a specific time. That's why it says it shall serve a notice on the 20th of December. That's what the mandatory obligation extends to. 
(emphasis added)   

Focusing on the notion that service of the notice was simply a right, Mr. Gammie noted the second sentence of Clause 2.10, which in pertinent part provided "[i]f the Buyer exercises its rights under this clause and the Seller fails to complete the repurchase of the shares. . ." Mr. Gammie viewed this language as explicit recognition that service of the notice was a discretionary right belonging to NGUSI4 and not an obligation.     
Mr. Gammie also considered the difference in language between Clause 2.9 and Clause 2.10. He observed that Clause 2.9, which provided that NGUSI4 "shall be entitled to" serve a notice to repurchase, did not specify a date for service of the notice, as there was an ongoing ability to exercise the right, which existed to the time at which the final Call Payment became due. Thus, entitlement to serve notice afforded discretion to do so throughout the period during which the option was available. In contrast, notice under Clause 2.10 was to be given on a specific date, a temporal constraint that rendered use of only the word "shall" appropriate.  
Mindful that the documents comprising the DSAs could not evidence or create a debt in violation of § 765, Mr. Gammie testified that "the whole structure of the agreements is consistent with the idea that when the documents are entered into, there's no immediate obligation on NGHI to do anything in terms of paying the sums of money." He further reasoned that "if it were the case that Clause 2.10 imposed an obligation on [NGUS]I4 to serve the notice . . . there would at least on one basis be an immediate obligation," which could be construed as evidencing a debt within the meaning of § 765.
The appellants argued that even if Clause 2.10 was construed as optional and no notice was served under its provisions, the DSAs could properly be viewed as demand loans with maturity dates because there would be an ongoing right to demand payment. Mr. Gammie disagreed with this view and testified that the DSAs could not be construed as an unqualified promise to pay "on demand," because:
Under a demand loan, there is an immediate debt obligation, which will have to be satisfied if a demand is made. As I've explained, where there is a call obligation on shares, there is no debt that exists until the call is made. Similarly, I don't regard there being any obligation to pay the consideration on repurchasing the shares until the notice is served.  
 
	The Board recognized that Mr. Gammie's testimony, like that of Mr. Aaronson, reflected Mr. Gammie's perspective as a U.K. tax and English Law expert. Regardless, the Board found that Mr. Gammie's construction of Clause 2.10 and his opinion as to whether the DSAs could be construed as demand loans were probative under Massachusetts law.
Based on the foregoing, and even affording some weight to the appellants' view of Clause 2.10, the Board found that the phrase "shall serve a notice" was at best ambiguous as it related to the question of whether NGUSI4 or NG12 was obligated or merely possessed the right to serve a notice of repurchase. Thus, the Board found that invocation of Clause 2.10 was not mandatory and it did not establish a maturity date for the purported loans or implicate an unconditional obligation on the part of NGHI to repay the loans. Further, the Board found nothing in the record to undermine the conclusion that the DSAs could not be viewed as demand notes, under which NGHI would have had an existing obligation to repay the purported loans.  
Refinancings of the DSAs 
When the DSAs were put in place, the appellants knew that the principal component of each final Call Payment would be refinanced. According to the appellants, while there was an expectation that the arrangements would be refinanced a number of times and would ultimately be refinanced externally, there was no specific expectation at the time the DSAs were established as to whether the loans would be refinanced through intercompany loans or externally. The arrangements were each refinanced as follows.
The NG8 DSA
On December 7, 2004, slightly more than two weeks after the first day on which the final Call for the NG8 DSA could be made, National Grid refinanced the $2.68 billion of principal from the NEES acquisition with a new intercompany loan structured as a deferred consideration agreement. The arrangement extended to March 20, 2009.
As discussed in the testimony of Mr. Feld and Mr. Bonar, U.K. law was amended prospectively in 2005, in part to address international tax arbitrage and to alter treatment of shares that had debt-like features. Under the legislation, certain interest-like payments made in respect of shares, including those made by NGHI in these appeals, were to be treated as interest payments for tax purposes, negating the U.K. tax benefit previously received by National Grid under Projects Spam and Spa. 
The appellants stated that in response to the 2005 legislation, on August 10, 2005, National Grid refinanced the first deferred consideration agreement with a second intercompany deferred consideration agreement that extended to August 12, 2008. The principal sum was again refinanced on August 12, 2008, via a loan from National Grid to NGHI. That loan was structured as an amortizing ten-year loan calling for payments in tranches with associated interest at claimed market rates. The interest and principal payments have all been made, interest having been paid from U.S. operations, and principal generally through external borrowings.   
The NG11 DSA
On January 31, 2007, National Grid refinanced $1.03 billion, the outstanding principal from the Niagara Mohawk acquisition, with a new intercompany loan that had a term of twelve months. The term of the loan was short in anticipation of National Grid combining the loan's principal with the financing of National Grid's 2007 acquisition of Keyspan. Regardless, $230 million of the loan was externally refinanced in April of 2007, approximately three months after the loan was executed, leaving a principal balance of $800 million. The balance was refinanced through a new intercompany loan on January 30, 2008. That loan was incorporated in the Keyspan acquisition financing, increasing its principal by $800 million. An amendment to the Keyspan financing, through which the new loan was documented, called for payments of principal totaling $800 million, which had not previously been part of the financing.
The interest and principal payments have all been made, resulting in reduction of the initial principal of $1.03 billion to $350 million by August 24, 2010. Funds for the payments came from U.S. operations and new intercompany financings.   
    In August of 2011, NGHI received three loans totaling $1 billion from unrelated Japanese banks. The majority of the loan proceeds were used to pay $750 million of the principal of the Keyspan acquisition financing. The appellants stated that NGHI intended to make interest payments on the loans from U.S. operations and to refinance the principal on unspecified terms. 
	Mr. Garza's and Mr. Easton's Testimony 
Mr. Garza's testimony focused on the viability of the DSAs as loan documents in the marketplace. In particular, Mr. Garza testified that third-party lenders would have made loans to NGHI using the same documents that comprised the DSAs. Acknowledging that the documents were idiosyncratic to the transactions at issue in these appeals, Mr. Garza opined that the documents contained the same commercial terms and conditions that a lender would expect in other types of lending documents. According to Mr. Garza, the DSAs could have been marketed to mutual funds, banks and insurance companies.  
In support of his conclusion that the DSAs were marketable instruments on their specific terms, Mr. Garza testified that the operating companies that were to be the source of repayment of the purported debt (NEES, EUA and Niagara Mohawk) each had "investment grade profiles." Mr. Garza presented slides illustrating the "business position," or strength of the entities, with four financial ratios to demonstrate their creditworthiness. In several instances, however, the slides were distortive. For example, Mr. Garza's slide relating to Niagara Mohawk for the years 1998-2000 indicated each of the ratios fell within the investment grade range. Cross-examination of Mr. Garza, however, revealed that they were not. The errors were particularly important given that Niagara Mohawk accounted for approximately 70% of the capital of the three operating companies, which were to be the source of repayment of the debt. 
The Board found that the errors in Mr. Garza's analysis, which he did not correct or explain, undermined his credibility and substantially diminished the probative value of his testimony. Further, the Board found it curious that despite his experience with capital structures and financing of utility companies, Mr. Garza offered not a single instance in which documents similar to the DSAs had been used as loan documents in the marketplace. On balance, the Board afforded Mr. Garza's opinions little if any weight and found insufficient evidence in the record to indicate that lenders in the marketplace would have issued loans to NGHI totaling $3.71 billion using documents that were substantially similar to the DSAs.
Mr. Easton, who was qualified as an expert in commercial lending, testified that he believed a bank would not have made a loan on terms similar to those set forth in the DSAs. He acknowledged, however, that financing may have been available to NGHI on substantially different terms, likely from long-term lenders. 
Although Mr. Easton had experience in commercial lending, his experience with the utility industry was quite limited. Further, he was not qualified to address the availability of financing in the marketplace as a whole, which encompassed a variety of lenders other than commercial banks. Indeed, Mr. Easton's analysis of the DSAs was effectively limited to the context of the bank loan market, having testified that his assignment in this case was determining whether the DSAs "resembled . . . a debt transaction that a bank would have made." Given the limitations of Mr. Easton's experience, the Board found that his testimony had limited probative value.  
Treatment of the DSAs for Tax and Other Purposes
NGHI treated the DSAs as debt for U.S. tax purposes, including in its U.S. federal and Massachusetts Tax returns. NGHI's U.S. financial statements also reflected treatment of the DSAs as promissory notes. The U.K. tax returns and financial statements for NG8, NG11, NG12 and NGUSI4 reported the DSAs as issuances and purchases of stock and capital calls with respect to stock. 
Board's Ultimate Findings of Fact with Respect to the DSAs

The Board found and ruled that the DSAs, which the appellants and the Commissioner agreed fully represented the rights and obligations of the parties thereto, did not reflect bona-fide debt. The Board noted, as discussed in the Opinion below, that certain facts supported characterization of the DSAs as debt and numerous others undermined that characterization. More importantly, the Board found and ruled that the DSAs did not reflect an unqualified obligation to pay on the part of NGHI. In reaching this conclusion, the Board focused on several facts, including but not limited to: the absence of any document explicitly referencing such an obligation; the discretionary nature of the Calls; the lack of an obligation on the part of NGHI to pay prior to issuance of a Call; and the absence of a mandatory enforcement mechanism to compel payment through repurchase of shares if the Calls were not made. These facts also established that there was no maturity date associated with the DSAs.
	NGUSA's Claimed Liability for Net Worth Tax Purposes 
	For the tax year at issue, NGUSA claimed a deduction in computing its taxable net worth for a liability in the amount of $43,802,111, representing costs the appellants asserted were associated with the Niagara Mohawk acquisition. According to the appellants, NGUSA assumed the costs as a liability at the time it became the direct owner of Niagara Mohawk as part of its acquisition. NGUSA then reported the costs on its books and records, which some years later the appellants state NGUSA repaid to an English subsidiary of National Grid.  
	The claimed expenses are reflected in a document submitted into evidence, which on each page bore the heading "National Grid USA, NIMO Merger Costs, 3/31/02." Mr. Cochrane, who was a first Vice-President and treasurer of NEES From 1998 to 2002 and subsequently Chief Financial Officer for National Grid's U.S. operations, reviewed the document and testified that it was "a listing of all the costs related to executing the transaction on Niagara Mohawk." Mr. Cochrane also testified that the document was prepared "under my supervision. . .we would have kept track of all these [costs] and worked with the U.K. accounting group to make sure there was a record." 
	Notwithstanding Mr. Cochrane's testimony, several of the items identified in the document appeared not to be associated with the Niagara Mohawk acquisition in any way, including those identified as "Project Spam" expenses. Further, many of the expenses were incurred by U.K. entities, for which Mr. Cochrane, by his own admission, was not responsible. Further, Mr. Cochrane did not explain why the expenses were properly allocated to NGUSA. Neither did the appellants submit ledgers or other documentary evidence establishing the propriety of this allocation. Finally, Mr. Cochrane did not explain why NEES and not NGUSA was shown as the source of the liability's payment in bank records.
	Based on the foregoing, the Board found that neither Mr. Cochrane's testimony nor the record as a whole provided credible substantiation of the allocation of the claimed expenses to or payment of the expenses by NGUSA. Consequently, the Board found that the appellants failed to sustain their burden of demonstrating NGUSA's entitlement to an abatement with respect to its claimed expenses. 
Conclusion
For the foregoing reasons, the Board found and ruled that the DSA arrangements did not qualify as bona-fide debt for Massachusetts tax purposes. Moreover, the Board found it particularly troubling that the appellants' numerous contemporaneously created documents were drafted with meticulous care to avoid any terminology or provision that could possibly be construed as debt by the U.K. authorities, but which were argued by the appellants to typify debt for U.S. and Massachusetts purposes. Moreover, both Project Mayflower and Projects Spam and Spa were in form tax-driven transactions and no evidence was presented that demonstrated some purpose underlying the transactions' form other than tax avoidance.
Having concluded that the DSA arrangements did not constitute debt, the Board also found and ruled that NGHI was not entitled to a deduction for a liability created by the DSAs in computing its taxable net worth. Finally, the Board found and ruled that the appellants failed to sustain their burden of demonstrating that NGUSA was entitled to a deduction in computing its taxable net worth for expenses the appellants claimed were incurred in connection with the acquisition of Niagara Mohawk.
Based on the foregoing, the Board issued a decision for the appellee in these appeals.
OPINION
	General Laws c. 63, § 30(4) provides, generally, that a corporation's net income consists of gross income less the deductions, but not credits, allowed under the I.R.C. Pursuant to I.R.C. § 163(a), a corporation may deduct "all  interest paid or accrued within the taxable year on indebtedness." 
	As stated by the Board in Sysco Corporation v. Commissioner of Revenue, for a transaction to give rise to a valid interest deduction, the transaction must constitute true indebtedness. See Sysco Corporation v. Commissioner of Revenue, Mass. ATB Findings of Fact and Reports 2011-918 (citing Knetsch v. United States, 364 U.S. 361, 364-65 (1960)). True indebtedness requires, at the time funds are transferred, both "'an unconditional obligation on the part of the transferee to repay the money, and an unconditional intention on the part of the transferor to secure repayment.'" Schering-Plough Corporation v. United States, 651 F.Supp.2d 219, 244 (D.N.J. 2009)(quoting Geftman v. Commissioner of Internal Revenue, 154 F.3d 61, 68 (3rd Cir. 1998)).
	The primary question presented for consideration in these appeals is whether the DSA arrangements constituted true indebtedness, thereby giving rise to interest payments made by NGHI, which would be deductible for tax purposes. As previously noted, the parties agreed that the rights and obligations of NGHI and its counterparties with respect to NGHI's purported debt were reflected in the documents that comprised the DSAs. The parties disagreed, however, about what these rights and obligations were, and reached opposite conclusions as to whether the DSAs, when viewed as a whole, established true indebtedness. 
	The Commissioner and the appellants agreed on the "paradigmatic" or "core definition" of debt as "'an unqualified obligation to pay a sum certain at a reasonably close fixed maturity date along with a fixed percentage of interest payable regardless of the debtor's income or lack thereof.'" Overnite Transportation Company v. Commissioner of Revenue, 54 Mass. App. Ct. 180, 186 (2002)(quoting Gilbert v. Commissioner of Internal Revenue, 248 F.2d 399, 402 (2d Cir. 1957)). The appellants claimed that the DSA arrangements qualified as debt under this definition. The Commissioner disagreed, viewing the DSAs as failing to meet this or any comparable definition of debt on virtually every count. While agreeing with the Commissioner's analysis only in part, the Board agreed with her conclusion that the DSA arrangements did not constitute debt.
	In The TJX Companies, Inc. v. Commissioner of Revenue, the Board restated the well-settled principle that determination of whether intercompany transfers constitute debt requires a "case-by-case analysis based on the specific facts and circumstances of a particular case." The TJX Companies, Inc. v. Commissioner of Revenue, Mass. ATB Findings of Fact and Reports 2007-790, 881, aff'd in part, remanded in part on other grounds, Mass. App. Ct., No. 07-P-1570, Memorandum and Order under Rule 1:28 (April 3, 2009), aff'd, Mass. App. Ct., No. 09-P-1841, Memorandum and Order under Rule 1:28 (July 23, 2010). Thus, "[t]he Board must review the facts and circumstances surrounding a purported inter-company loan to determine whether a true debt obligation exists." Id. at 882. 
	The Board has also repeatedly held that "[r]elated but separate corporations can freely enter into contracts including debt transactions, like any corporations or individuals." Overnite Transportation Company v. Commissioner of Revenue, Mass. ATB Findings of Fact and Reports 1999-353, 370, aff'd, 54 Mass. App. Ct. 180 (2002)(citing Bordo Products Co. v. United States, 476 F.2d 1312, 1323 (Ct. Cl. 1973)). However, courts examine transactions among related entities with greater scrutiny because the transactions "do not result from arm's length bargaining."  Overnite Transportation Company, Mass. ATB Findings of Fact and Reports at 1999-370 (citing Kraft Foods Co. v. Commissioner, 232 F.2d 118, 123-24 (2nd Cir. 1956)); see also, Overnite Transportation Company, 54 Mass. App. Ct. at 186 ("When 'the same persons occupy both sides of the bargaining table, form does not necessarily correspond to the intrinsic economic nature of the transaction, for the parties may mold it at their will with no countervailing pull'")(quoting Fin Hay Realty Co. v. United States, 398 F.2d 694, 697 (3d Cir. 1968)). 
	The present appeals involve complex transactions through which National Grid sought to achieve a successful international tax arbitrage, a transaction entered into by a multi-national taxpayer to take advantage of differences in the laws of two different sovereign countries to derive tax benefits in both. The sole motivation for the form of the transactions at issue, as evidenced by the record, was the regulatory changes under I.R.C. § 894 that imperiled the utility of a domestic reverse hybrid entity, which had been used to effect a tax arbitrage, the legality of which is not in dispute. In its stead, and to achieve the prior result of creating interest deductions in the U.S. without corresponding recognition of income in the U.K., National Grid crafted multistep transactions involving significant changes to its corporate structure. Success of the transactions was dependent on the DSAs, operatively intricate sets of documents designed to fulfill two requirements: not create or evidence a debt in the U.K., thereby avoiding potential sanctions under § 765; and qualify as debt for U.S. tax purposes.
	The Form Disavowal Doctrine
The Commissioner argued that in seeking to achieve their desired tax results, the appellants created documents that clearly did not constitute debt in the U.S. or the U.K. and acted in a duplicitous manner, telling two fundamentally different factual stories to the two jurisdictions. In support of this argument, the Commissioner asserted that the facts necessary to receive interest deductions in the U.S. contradicted those required to avoid creating a debenture within the meaning of § 765 in the U.K. Implicit in this assertion was an assumption that the relevant laws of each jurisdiction dictating treatment of the transactions were the same. In light of these intentionally distinct characterizations, the Commissioner urged application of the form disavowal doctrine, which generally bars a taxpayer from repudiating a freely chosen transactional form. See, e.g., National Alfalfa v. Commissioner of Internal Revenue, 417 U.S. 134, 149 (1974)(citations omitted)(recognizing that a taxpayer may structure a transaction as he chooses, but "once having done so, he must accept the tax consequences of his choice."). 
	As a threshold matter, the Board did not find that the appellants intentionally told two different stories to the U.S. and the U.K. The record reflects that the appellants did indeed treat the DSAs differently in the U.S. and the U.K. for tax and financial reporting purposes, but it did not establish that National Grid told two different stories. In fact, the only story told was of stock subscription and sale agreements, the implications of which the appellants claimed were different under the laws of the two jurisdictions.
Further, the appellants' stated reliance on distinctions between U.S. and U.K. law were largely unrebutted. Experts testified about various relevant aspects of U.S. and U.K. tax law, from which the Board could discern substantial similarities between the jurisdictions. No witness, however, testified that for all relevant purposes, the laws of the jurisdictions were the same. Absent credible testimony to this effect, and lacking expertise in U.K. tax law, the Board could not make a finding that the appellants' assertion of operative differences was unfounded. Moreover, the 2005 change in U.K. tax law supports the assertion that relevant differences did exist. More specifically, under the legislation, certain interest-like payments made in respect of shares, which included the payments made by NGHI at issue in these appeals, were to be treated as interest payments for tax purposes, a change that created greater symmetry between the tax treatment of the DSAs in the U.K. and that claimed by the appellants in the U.S. Thus, the change undermined an assertion that U.S. and U.K. tax laws required different treatment of the DSAs. 
	The Board also found unpersuasive the Commissioner's assertion that case law supported application of the form disavowal doctrine in the present appeals. While the Board agrees with the Commissioner's assertion that the doctrine applies to a variety of fact patterns, none is substantially similar to the facts of these appeals. The numerous cases cited by the Commissioner generally contemplate two situations. The first involves a taxpayer that seeks in hindsight to disavow the manner in which it treated a transaction on its U.S. tax returns. See, e.g., Nestle Holdings v. Commissioner of Internal Revenue, 152 F.3d 83 (2nd Cir. 1998)(sale and consequent capital gain could not be recast as a capital contribution); FMNA v. Commissioner of Internal Revenue, 896 F.2d 580 (D.C. Cir. 1990)(payoff of old loans and repurchase of loans could not be recast as exchange of loans); Halstead v. Commissioner of Internal Revenue, 296 F.2d 61 (2nd Cir. 1961)(taxpayer that represented chosen form of business as a partnership may not disclaim its validity); and Sterno Sales Corp v. U.S., 345 F.2d 552 (Ct. Cl. 1965)(taxpayer may not recast sales commission as a dividend). Similarly, two Massachusetts cases cited by the Commissioner, Bayer Corporation v. Commissioner of Revenue, Mass. ATB Findings of Fact and Reports 2000-543, and Estate of Nielsen v. Commissioner of Revenue, Mass. ATB Findings of Fact and Reports 2001-171, each involve taxpayers who sought to disavow their own prior tax reporting. 
In the second situation, a taxpayer seeks to disavow a U.S tax result that arose from a transaction, the terms of which had been explicitly agreed to by the parties. See, e.g., Spector v. Commissioner of Internal Revenue, 641 F.2d 376, (5th Cir. 1981)(declining request by the taxpayer to set aside agreement of the parties regarding merger followed by liquidation of partnership interest); Sullivan v. U.S., 618 F.2d 1001 (3rd Cir. 1980)(having agreed to assignment of a lease package and conveyance of real estate as sales of separate assets and treated them as such, taxpayer could not treat them as a sale of a single capital asset); Glacier State Electrical Supply Co. v. Commissioner of Internal Revenue, 80 T.C. 1047 (1983)(disavowal of stock ownership as previously agreed to was not permitted).
The Board found that neither the cited cases, nor any other in which the form disavowal doctrine has been applied successfully, is dispositive in these appeals. Given this conclusion and the discussion above relating to the appellants' reporting for U.S. and U.K. purposes, the Board found that the form disavowal doctrine was not applicable to the appeals.  
	The DSAs as Debt	
The issue of whether intercompany transfers constitute debt has been extensively litigated. See, e.g., The TJX Companies, Inc. v. Commissioner of Revenue, Mass. ATB Findings of Fact and Reports at 2007-881. (additional citations omitted). The litigation was borne of the wide array of fact patterns to which the issue applies, and courts have developed tests that incorporate a variety of criteria which, when taken together, are designed to assist in evaluating whether a given transaction qualifies as debt. The cases have most often involved application of a multifactor analysis in the context of a debt versus equity determination, though courts have distinguished debt from other types of transactions as well. See, e.g., Merck & Co., Inc., v. U.S., 652 F.3d 475 (3rd Cir. 2011)(considering the distinction between debt and an element of an interest rate swap scheme). 
 There are numerous cases in Massachusetts that address the debt/equity dichotomy. For example, the Board and the Appeals Court have considered whether intercompany transactions associated with cash-management systems gave rise to bona-fide debt and consequent interest expenses. See Sysco Corp. v. Commissioner of Revenue, Mass. ATB Findings of Fact and Reports 2011-918, aff'd , Mass. App. Ct., No. 11-P-2108, Memorandum and Order under Rule 1:28 (April 30, 2013); Kimberly-Clark Corporation & Kimberly-Clark Global Sales, Inc. v. Commissioner of Revenue, Mass.  ATB Findings of Fact and Reports 2011-1, aff'd 83 Mass. App. Ct. 65 (2013); The New York Times Sales, Inc. v. Commissioner of Revenue, Mass. ATB Findings of Fact and Reports 1995-137, aff'd, 40 Mass. App. Ct. 749 (1996).
In Overnite Transportation Company, the Board considered whether a promissory note declared by the taxpayer as a dividend to its parent corporation qualified as true indebtedness and employed a multifactor test  derived from the "non-exhaustive list" of 16 factors identified in Fin Hay Realty, which included: 
 
1. The intent of the parties; 2. The identity between creditors and shareholders; 3. The extent of participation in management by the holder of the instrument; 4. The ability of the corporation to obtain funds from outside sources; 5. The "thinness" of the capital structure in relation to debt; 6. The risk involved; 7. The formal indicia of the arrangement; 8. The relative position of the obligees as to other creditors regarding the payment of interest and principal; 9. The voting power of the holder of the instrument.; 10. The provision of a fixed rate of interest; 11. A contingency on the obligation to repay; 12. The source of the interest payments; 13. The presence or absence of a fixed maturity date; 14. A provision for redemption by the corporation; 15. A provision for redemption at the option of the holder; and 16. The timing of the advance with reference to the organization of the corporation. 
 
Overnite Transportation Company, Mass. ATB Findings of Fact and Reports at 1999-372 (quoting Fin Hay Realty, 398 F.2d at 696).
 	The U.S. Tax Court has also applied a number of multifactor tests, which are substantially similar to each other. For example, in NA General Partnership & Subsidiaries v. Commissioner of Internal Revenue, T.C. Memo 2012 - 172, the Tax Court followed an eleven-factor test applied by the Court of Appeals for the Ninth Circuit, which considered:  
(1) the name given to the documents evidencing the indebtedness; (2) the presence of a fixed maturity date; (3) the source of the payments; (4) the right to enforce payments of principal and interest; (5) participation in management; (6) a status equal to or inferior to that of regular corporate creditors; (7) the intent of the parties; (8) "thin" or adequate capitalization; (9) identity of interest between creditor and stockholder; (10) payment of interest only out of "dividend" money and (11) the corporation's ability to obtain loans from outside lending institutions. 
NA General Partnership, T.C. Memo 2012 - 172, 2012 Tax Ct. Memo Lexis 172 at *17-18, citing Hardman v. U.S., 827 F.2d 1409, 1412 (9th Cir. 1987). Before applying the factors, the court stated "[o]ur objective is not to count the factors, but rather to evaluate them." Id.; see also  Overnite Transportation Company, Mass. ATB Findings of Fact and Reports at 1999-373.  Further, "'courts have uniformly emphasized that 'no one factor is decisive. . . . The court must examine the particular circumstances of each case.'" The Talbots, Inc. v. Commissioner of Revenue, Mass. ATB Findings of Fact and Reports 2009-786, 829-30, aff'd 79 Mass. App. Ct. 159 (2011) (quoting Overnite Transportation Company, Mass. ATB Findings of Fact and Reports at 1999-373 (quoting Hardman 827 F.2d at 1412); see also New York Times Sales, 40 Mass. App. Ct. at 752 ("No single factor is determinative; rather, all the factors must be considered.").	
The present appeals reflect facts that, in the context of various factors, both favor and undermine the appellants' assertion that the DSAs established debt. Those favoring debt include: service of repurchase notice provisions in the DSAs that gave the right to enforce payment of principal and interest; the incorporation of a fixed rate of interest in the sums due in the Call Payments, though the precise rate was affected by the dates of the payments; and cash flow generated by the U.S. operating companies was concededly a sufficient source of payment of the interest component of the DSAs. Facts undermining characterization as debt include: those indicating that the DSAs had no fixed maturity date, which are discussed elsewhere in these findings; the lack of evidence presented establishing that NGHI could have obtained financing from outside sources on terms that were the same as or similar to those provided by the DSAs; and the names given to the operative documents made reference only to sale and purchase of shares and subscription for share capital.   
	As stated above, applicable factors must be evaluated, not counted. See NA General Partnership, 2012 Tax Ct. Memo Lexis 172 at *17-18. The purpose of this evaluation, though, is to discern a transaction's "essential nature." Overnite Transportation Company, 54 Mass. App. Ct. at 186. The appellants and the Commissioner agreed that the essential nature of debt requires a legal obligation to pay the amount of the debt, and that the obligation must be unqualified or unconditional. Id. The Board found and ruled that in these crucial regards, the DSA arrangements failed to evidence debt and therefore did not qualify as such.   
	As Mr. Aaronson testified, cumbersome mechanisms were included in the DSAs to ensure that payment dates as well as the method of payment were indeterminate. NGHI only became obligated to make a Call Payment if a Call was made. Similarly, payment in the form of repurchase of shares would only be obligatory if a notice to repurchase was served. As Mr. Aaronson observed, "instead of something becoming due, it only becomes due if a notice is given." In other words, there was no obligation on the part of NGHI to pay anything at any time unless and until a Call was made or a notice requiring repurchase was served. 
	There is no dispute that the Calls were discretionary as were notices to repurchase under Clause 2.9. The appellants argued, however, that under Clause 2.10, NGUSI4 and NG12 were obligated to serve a notice to repurchase to NGHI on specified dates, thereby establishing maturity dates for the purported loans and evidencing unqualified obligations on the part of NGHI to repay the loans. As discussed above, however, the Board found that Clause 2.10 could not be construed as compelling service of a notice to repurchase or, in turn, payments by NGHI. This finding, coupled with the concededly discretionary nature of the Calls and service of notice to repurchase under Clause 2.9 inevitably lead to the conclusion that there was no unconditional obligation on the part of NGHI to repay. This conclusion precludes a determination that the essential nature of the DSA arrangements was debt.    
The appellants made several arguments in support of the assertion that the DSAs qualified as debt regardless of whether Clause 2.10 was mandatory. In particular, the appellants emphasized that if Calls were not made and notice to repurchase was not served, NGUSI4 and NG12 would have had an ongoing right to demand repayment, which absent other penalty provisions need never have been made. In turn, the DSAs should be viewed as demand obligations with due dates consistent with the holding in Litton Business Systems, Inc. v. Commissioner of Internal Revenue, 61 T.C. 367; 1973 U.S. Tax Ct. LEXIS 3. The Board found this argument unavailing. Whether a demand obligation exists depends on the presence of an underlying debt obligation, the existence of which the Tax Court explicitly acknowledged in Litton Business Systems. Id. at 1973 U.S. Tax Ct. LEXIS *13. The DSAs, to avoid sanctions under § 765, provided for no such obligation. Rather, an obligation arose only when a Call was made or a repurchase notice was served, i.e, after a demand was made. The appellants have offered no authority to support the proposition that absent an existing debt obligation, an arrangement may qualify as a demand note.   
The appellants also cited NA General Partnership for the proposition that the right to enforce payment is equivalent to an unconditional obligation to pay. The Board disagrees. In its discussion of the factor involving "the right to enforce payment of principal and interest," the Tax Court in NA General Partnership separately stated that "a definite obligation to repay is evidence of debt" and "[a] lack of security for repayment of purported debt generally supports an equity characterization." NA General Partnership, 2012 Tax Ct. Memo Lexis 172 at *22. Applying these principles to the facts of the case, the Tax Court observed both that the borrower "was contractually obligated to pay principal and interest on the intercompany debt by specified dates" and that the lender could require payment of the intercompany debt, which was secured by a stock pledge. Id. Taken together, the Tax Court's statements explicitly delineated the distinction between the obligation to pay, which gave right to enforcement of the debt, and the means by which that obligation could be enforced. Thus, an assertion that the two are equivalent is untenable.
The appellants made a similar argument with respect to Pepsico Puerto Rico, Inc. v. Commissioner of Internal Revenue, T.C. Memo 2012 -269, 2012 Tax Ct. Memo Lexis 270. However, the Tax Court, as it did in NA General Partnership, differentiated between a "definite obligation to repay" and "[t]he right to enforce payment." Pepsico Puerto Rico, 2012 Tax Ct. Memo Lexis 270 at *92, 93. Consequently, the Board found the appellants' argument unpersuasive.
 	Finally, the appellants argued, primarily through the testimony of Mr. Feld, that the DSAs were similar to "repos," thereby supporting their characterization as debt, because repos, like the DSAs, are arrangements that are treated as debt for U.S. tax purposes but do not take the classic form of debt. The Board found this comparison unpersuasive. A "repo," or "repurchase agreement," is a transaction typically structured as a sale of securities in exchange for a specified amount of cash accompanied by a contract that requires the buyer to sell and the seller to buy back the securities at a future date. See, e.g., Nebraska Department of Revenue v. Lowenstein, 513 U.S. 123 (1994). The repurchase price ordinarily includes a premium to account for the time value of money, i.e., interest. See, e.g., Union Planters National Bank v. U.S., 426 F.2d 115 (6th Cir 1970). Thus, the transaction is reasonably viewed as a secured loan because the seller, in substance, does not relinquish ownership of the collateral. See National Bank of Austin v. U.S., 421 F.2d 442, 452 (5th Cir. 1970).
The DSAs were clearly not analogous to "repos." More specifically, NGHI would have been obligated to repurchase the shares of NG8 and NG11 in some circumstances but, unlike the seller in a "repo," had no right to repurchase the shares. The absence of this right substantially undermines characterization of the DSAs as secured loans rather than sales. Indeed, in Citizens Bank of Waco v. U.S., 551 F.2d 832, 843 (Ct. Cl. 1977), where there was no right to repurchase the transferred assets, the court concluded that the transaction was a sale and not a secured loan.  
	Taxable Net Worth of NGHI and NGUSA
For the tax year at issue, both NGHI and NGUSA were foreign corporations subject to the separate corporate excise imposed by G.L. c. 63, § 39 ("Section 39"). Section 39 imposed a tax on net income and a tax measured by a corporation's tangible assets or net worth. Both NGHI and NGUSA were "intangible property corporations" as defined by G.L. c. 63, § 30(11), and were therefore subject to tax on their taxable net worth. As intangible property corporations, NHGI and NGUSA were entitled to deduct "liabilities" from the book value of their total assets in calculating their taxable net worth. See, G.L. c. 63, § 30.  Liabilities, for net worth purposes, include debts. See Xtra, Inc. v. Commissioner of Revenue, Mass. ATB Findings of Fact and Reports 1979-1, aff'd, 380 Mass 277, 280-281 (1980).
NHGI
The appellants' primary contention was that that the DSAs were properly treated as debt and therefore NGHI's liabilities under the DSAs were deductible in computing its taxable net worth. Given that the Board found that the DSA arrangements did not qualify as debt, this argument was moot.
The appellants alternatively argued that the claimed liabilities under the DSAs were deductible as liabilities because they were treated as such on NGHI's financial statements. In support of their argument, the appellants first cited Xtra, in which the Supreme Judicial Court held that the Board had properly taken into account statutory history to discern the meaning of the term "liabilities." Xtra, 380 Mass. at 280-281. The Court observed, as had the Board, that the net worth tax had evolved "as a result of dissatisfaction with problems of valuation in the prior tax structure" and was enacted to put in place a tax that was "more simple, equitable, and speedily computed." Id. To do so, "the Legislature generally chose the 'liberal use' of 'accounting or book-keeping concepts,' concepts which corporations themselves use to measure their value on books or in paying their income taxes." Id.
The appellants next cited National Amusements, Inc. v Commissioner of Revenue, Mass. ATB Findings of Fact and Reports 2001-594, in which the Board upheld the taxpayer's use of the cost method of accounting in computing its taxable net worth, which the taxpayer had consistently used on its books and records for purposes of making its financial statements. Id. at 598-9. The Board further found that interpretation of the statute "requires that the Commissioner's assessments be consistent with principles that are actually employed by taxpayers." Id. at 608. Noting that NGHI treated the DSAs as liabilities on its books and records, the appellants assert that under the principles established in Xtra and National Amusements, the liabilities created by the DSAs were properly deductible as liabilities in computing NGHI's taxable net worth regardless of their treatment for purposes of the net income measure of the excise. 
The Board found the appellants' argument unpersuasive. Nothing in either Xtra or National Amusements supports the proposition that incorrect characterization of the DSAs in the appellants' books and records should yield the net worth tax treatment sought by the appellants. To conclude otherwise would allow a taxpayer to achieve desired tax results simply by presenting financial statements crafted to support those results. "A statute or ordinance should not be construed in a way that produces absurd or unreasonable results when a sensible construction is readily available." Manning v. Boston Redevelopment Authority, 400 Mass. 444, 453 (1987). To adopt the appellants' view would produce just such a result.
Moreover, in Overnite Transportation Company, the Appeals Court affirmed the Board's holding that claimed interest expenses not properly treated as deductions from gross income under the net income measure of the excise could not "figure as a liability in calculating the net worth measure." Overnite Transportation Company, 54 Mass. App. Ct. at 180.
In sum, having concluded that the DSAs did not constitute debt for purposes of calculating its net income, the Board also found and ruled that claimed liabilities associated with the DSAs were not "liabilities" deductible in computing its taxable net worth. 
	NGUSA
	As previously discussed, for the tax year at issue, NGUSA claimed a deduction in computing its taxable net worth for a purported liability representing costs associated with the Niagara Mohawk acquisition that were assumed at the time NGUSA became the direct owner of Niagara Mohawk as part of the acquisition. The appellants offered Mr. Cochrane's testimony as the primary support that the claimed deduction was appropriate.
	Mr. Cochrane's testimony, however, did not adequately support the appellants' claim. More specifically, several of the items on the document that Mr. Cochrane testified was a compilation of the Niagara Mohawk acquisition costs appeared not to have been associated with the acquisition, including those identified as "Project Spam" expenses. Similarly, many of the expenses were incurred by U.K. entities, for which Mr. Cochrane was not responsible. Moreover, Mr. Cochrane did not explain why the expenses should have been allocated to NGUSA, and the appellants submitted no ledgers or other documentary evidence establishing the propriety of the allocation. Finally, Mr. Cochrane did not explain why NEES and not NGUSA was shown in bank records as the source of the claimed liability's payment.
	The burden of proof is upon the appellant to demonstrate his right as a matter of law to abatement of the tax. M & T Charters, Inc. v. Commissioner of Revenue, 404 Mass. 137, 140 (1989); Stone v. State Tax Commission, 363 Mass. 64, 65-66 (1973); Staples v. Commissioner of Corps. and Taxation, 305 Mass. 20, 26 (1940). "The venerable and 'fundamental rule as to burden of proof is, that whenever the existence of any fact is necessary in order that a party may make out [its] case . . . the burden is on such party to show the existence of such fact.'"  Barrett v. Commissioner of Revenue, Mass. ATB Findings of Fact and Reports 1997-875, 880 (quoting Willet v. Rich, 142 Mass. 356, 357 (1886)).
 	There is no dispute that the expenses claimed by NGUSA would have been eligible to be treated as liabilities for purposes of its net worth calculation had they been properly allocated to and ultimately paid by NGUSA. Based on the evidence presented, however, the Board found that neither Mr. Cochrane's testimony nor the record as a whole provided sufficient credible evidence to establish either fact. Consequently, the Board found and ruled that the appellants failed to sustain their burden of demonstrating NGUSA's entitlement to an abatement with respect to NGUSA's claimed liability. 
Conclusion
Having considered the specific facts and circumstances 
of the transactions giving rise to these appeals, and recognizing that related entities may enter into debt transactions, the Board found and ruled that that the DSA arrangements did not constitute true indebtedness for Massachusetts tax purposes. The Board reached its conclusion with particular focus on facts indicating that that the DSAs did not reflect an unconditional obligation on the part of NGHI to repay the purported debt. In turn, NGHI was not entitled to the contested interest deductions. Having concluded that the DSA arrangements did not qualify as debt, the Board also found and ruled that NGHI was not entitled to a deduction for a liability created by the DSAs in computing its taxable net worth, regardless of having treated the DSAs as liabilities on its books and records.  Finally, the Board found and ruled that the appellants failed to sustain their burden of demonstrating that NGUSA was entitled to a deduction in computing its taxable net worth for costs purportedly incurred in connection with the acquisition of Niagara Mohawk.
	Accordingly, the Board decided these appeals for the appellee.   				
					  THE APPELLATE TAX BOARD


   By: ________________________________			  Thomas W. Hammond, Jr., Chairman
A true copy,

Attest: _____________________
  	    Clerk of the Board

 The decision excludes a previously contested adjustment relating to a $142 million loan from National Grid US LLC, an affiliate of the appellants, that was claimed as a liability by NGHI with respect to its net worth measure of the corporate excise and which the Commissioner conceded in her post-trial brief. The record indicates that the contested assessments may also have included an adjustment for an interest deduction taken by NGHI relating to the loan, but the Commissioner made no argument during the course of the appeals concerning such an adjustment. Given the Commissioner's concession that the claimed loan arrangement qualified as debt and absent any assertion that interest payments associated with that debt should not be treated as such, the Appellate Tax Board ("Board") inferred that the Commissioner also conceded any related adjustment for an interest deduction and therefore did not otherwise address it in these findings.
  National Grid plc was formerly known as National Grid Group plc. 
  The Notice also proposed assessments relating to prior tax years, which are not at issue in these appeals.
 In their Statement of Agreed Facts relating to the appeals, the parties agreed that penalties assessed against NGHI should be abated, regardless of the outcome of the appeals.
 As with the penalties assessed against NGHI, the parties agreed that penalties assessed against NGUSA should be abated.
 For U.S. tax purposes, creation of the reverse hybrid structure depended on the entity classification rules of Treas. Reg. §§ 301.7701-1 through -3, which allow specified business entities to elect to be treated either as a corporation or as an entity that is disregarded as a separate entity from its owner. All references in these findings to an entity as "transparent" are intended to refer to an entity that is disregarded as a separate entity from its owner. "Nontransparent" entities, in contrast, are taxable as corporations. 
 As part of the transactions giving rise to the issues at dispute in these appeals, NGGP became the parent of NGHI.
 All transactions in Project Mayflower that were characterized by the appellants as loans or indebtedness are referred to as such in these findings for the sake of simplicity. The Board did not examine the transactions purporting to constitute debt and made no findings or rulings as to whether they so qualified. 
 The entities that loaned funds to NGGP as well as the balance of the intermediate holding companies above NGGP were disregarded entities. Thus, for U.S. tax purposes, the loans were treated as if they had been made to NGGP by a branch or division of National Grid. See Treas. Reg. § 301.7701-2(a).
 See Convention Between the Government of the United States and the Government of the United Kingdom of Great Britain and Northern Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital Gains, 31 U.S.T. 5668, T.A.I.S. No. 9682 (Dec. 31, 1975). 
 There were transactions relating to Projects Spam and Spa that were not part of the DSAs, which were characterized by the appellants as debt. Those transactions are referred to herein as debt although the Board did not examine the transactions and made no findings or rulings as to whether they so qualified because their status was not dispositive in these appeals. 
 Both NG8 and NGUSI4 elected to be disregarded, or transparent, for U.S. tax purposes, but were nontransparent for U.K. tax purposes.
 "Daylight loan" is a term used in the U.K. for an agreement whereby a bank allows a customer to overdraw money from its account, move the money among other accounts at the bank, and repay the bank by the end of the day. A daylight loan essentially allows for a circular flow of electronic transfers, as funds never physically leave the bank. 
 The non-voting shares, which were used for organizational purposes, had a nominal value of $1 each.
Given these similarities, the NG8 DSA and the NG11 DSA were effectively identical for purposes of the analysis relating to the issues contested in these appeals. Therefore, within the context of the Board's analysis as it relates to these issues, any reference to one set of documents is intended to apply in equal measure to the other. 
 National Grid used a daylight loan similar to the loan used in the NG8 transaction to facilitate implementation of the NG11 DSA.
 During the tax year at issue, Inland Revenue had responsibilities in the U.K. that were similar to those of the I.R.S.
 A bank record submitted into evidence indicates a payment in the amount of the contested expenses made on March 20, 2007, from NEES to an entity named National Grid Holdings One. 
 During the course of these appeals, the parties advanced differing opinions as to the nature of the relationship created by the DSAs. For example, the appellants advocated a debt versus equity view, while the Commissioner believed that the DSAs constituted sales of stock with an associated future income stream. In further contrast, Mr. Rosenbloom opined that the DSAs were "option contract[s] followed by the sale of [the] contracts." The Board need not and did not make a finding regarding the nature of the DSAs, except that they did not constitute debt. 
 G.L. c. 63, § 30, as then in effect, provided different formulas for calculating the taxable net worth of domestic and foreign corporations. See G.L. c. 63, § 30, §§ (8) and (9). As a result of the decision in Perini Corp. v. Commissioner of Revenue, 419 Mass. 763 (1995), corporations were allowed to decide which formula to apply, both of which allowed a deduction for a corporation's "liabilities." 

ATB 2014-357