Massachusetts ~ Corporate Income Tax: Interest and Liability Deductions Based on Deferred Stock Subscription Arrangements Rejected

The Massachusetts Appeals Court has affirmed the Appellate Tax Board (Board) and rejected a claim for an abatement of corporate excise tax liability by a British multinational utility company and its U.S. subsidiaries because a series of complex deferred stock subscription arrangements between the taxpayers did not reflect true debt that qualified for an interest expense deduction from taxable income or a liability deduction from taxable net worth. The taxpayers argued that the Deferred Subscription Arrangements (DSAs) were agreements to sell and repurchase shares of stock and that the repurchase clause of the agreement was drafted to mandate repurchase if the DSAs were not repaid. According to the taxpayers, the mandatory nature of the clause created an unqualified obligation to repay the debt and amounted to true debt under Massachusetts corporate tax law. The taxpayers maintained on appeal that the Board did not apply the correct legal standard in interpreting the repurchase clause or in the weight given to evidence from the taxpayers’ employees and tax advisers about the meaning of the clause. The court rejected this argument and agreed with the Board’s finding that the clause was ambiguous. In ruling the clause was ambiguous, the Board was entitled to rule against the taxpayers, based on its findings concerning the circumstances surrounding the DSAs, the taxpayers’ intentions, and the Board’s assessment of the witnesses’ credibility. It was the taxpayers’ burden to prove that the DSAs created an unqualified obligation to repay, and the Board could find that the taxpayers’ burden was not met with documents, drafted by them, that were ambiguous on that very point. An ambiguous contract is construed against its author because the drafter had the capacity and opportunity for clear expression and should bear the detriment of unclear expression. The court also rejected the taxpayers’ alternative argument that, even if not mandatory, the right to repurchase the shares on a fixed date was sufficient, in itself, to establish an unconditional obligation to repay. Since the DSAs were not true debt, the taxpayers were not entitled to the claimed interest expense deduction in computing the taxable income portion of the excise tax. They also were not entitled to deduct the DSAs as a liability in computing the taxable net worth portion of the tax. Finally, the taxpayers were not allowed to claim a deduction in computing taxable net worth for U.K. stamp tax paid on the acquisition of a subsidiary because the taxpayers failed to prove that the tax was paid by the taxpayers or was the taxpayers’ liability.

National Grid Holdings, Inc. v. Massachusetts Commissioner of Revenue, Massachusetts Appeals Court, No. 14-P-1662, June 8, 2016, ¶401-583

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