Heard: December 11, 2015.
from a decision of the Appellate Tax Board.
S. Brown (Donald-Bruce Abrams with him) for the taxpayers.
M. Goldberg for Commissioner of Revenue.
Present: Cypher, Carhart, & Blake, JJ.
plaintiffs, National Grid Holdings, Inc. (NGHI), National
Grid USA (NGUSA), and National Grid USA Service Company, Inc.
(NG Service) (collectively, taxpayers), appeal from a
decision of the Appellate Tax Board (board) in favor of the
defendant, Commissioner of Revenue (commissioner), on the
taxpayers' claims for an abatement of corporate excise
for the tax year ended March 31, 2002. Primarily at issue is
whether certain financing transactions, referred to as
deferred subscription arrangements (DSAs), among various
subsidiaries of National Grid plc (NGPLC), constituted true
indebtedness so that the interest paid thereon qualified for
the deduction allowed under the Massachusetts taxation of
corporations statute, G. L. c. 63, § 30(4).
is a British electric and gas utility company that owns
numerous entities in the United States (U.S.), the United
Kingdom (U.K.), and beyond (collectively, National Grid). The
DSAs were financing arrangements designed by National Grid to
take advantage of the differences in the U.S. and U.K. tax
codes. National Grid attempted to cast the
transactions as indebtedness under U.S. State and Federal tax
laws, thereby reducing National Grid's tax liability in
the U.S., and as equity, under U.K. law, thereby reducing its
taxable income in the U.K. Of overriding concern was the
avoidance of any appearance of indebtedness in the U.K.,
where a debenture between a U.K. entity and its foreign
subsidiary is strictly prohibited by statute, under threat of
criminal sanctions. To that end, National Grid drafted
the DSAs as agreements among various related entities to sell
and repurchase shares of stock, maintaining in these
proceedings that the mandatory nature of the stock repurchase
constituted debt under Massachusetts corporate tax law.
will not modify or reverse a decision of the board if the
decision is based on both substantial evidence and the
correct application of the law." Boston Professional
Hockey Assn. v. Commissioner of Rev., 443 Mass. 276, 285
(2005). We find no error with the board's determination
that the taxpayers failed to satisfy their burden of proving
that the critical provisions of the DSAs, upon which they
rely, gave rise to an unqualified obligation to repay.
Accordingly, their claimed deductions for interest payments
under the DSAs were properly rejected, as was their claim
that the DSAs constituted a liability in calculating net
summarize the factual and procedural background from the
board's very thorough account, provided in its June 4,
2014, findings of fact and report, which we supplement from
the record where appropriate.
Grid entered the U.S. utility market in 1998, when it
acquired New England Electrical System (NEES) and, shortly
thereafter, Eastern Utilities Association (EUA). Pursuant to
the acquisition, National Grid General Partnership (NGGP)
became the parent of the U.S. group and NEES merged with
NGUSA. In order to achieve tax efficiency in the purchase,
National Grid created a domestic reverse hybrid, a tax
structure whereby the U.S. entity was taxable as a
corporation in the U.S. but was transparent, for tax
purposes, in a foreign country. The domestic reverse hybrid was
part of a thirty-three-step process known as Project
Mayflower, by which National Grid acquired NEES and EAU.
National Grid used existing affiliates, and also created
several U.K. and U.S. entities in the process that issued
various intercompany loans to finance the acquisition of NEES
and EUA and permitted National Grid to claim interest
deductions in the U.S.
February, 2001, the U.S. Treasury proposed regulations to
restrict the use of domestic reverse hybrids. Under the new
regulations, the interest payments made by the National Grid
subsidiary would be treated as payment of dividends and
subject to U.S. tax withholding. In the face of the proposed
changes, National Grid sought to replace the domestic reverse
hybrid with a different structure that would maintain its tax
advantages, that is, the deductibility of interest payments
in the U.S., and avoidance of income recognition in the U.K.
Also to be avoided was running afoul of §§ 765-766
of the United Kingdom Income and Corporation Taxes Act 1988
(§ 765), which prohibits debentures between U.K.
entities and foreign subsidiaries, and which carries criminal
result was known as Project Spam and Project Spa. Project
Spam was a forty-seven-step series of transactions that
refinanced the $2.68 billion indebtedness incurred in the
NEES acquisition. Project Spa was a forty-four-step series of
transactions created soon after the Project Spam financing to
finance National Grid's acquisition of Niagara Mohawk
Holdings, Inc. (Niagara Mohawk), a New York utility company.
The projects utilized the DSAs, which were structured as
stock purchases, to retain the interest deductions and other
tax benefits of the domestic reverse hybrid while avoiding
creation of a debenture, as prohibited under U.K law. The
relevant documents and provisions of the two projects being
similar, we principally focus on Project Spam.
Grid Eight Limited (NG8), was a U.K. entity created as part
of Project Spam. The NG8 DSA was designed to reflect
NGHI's $2.68 billion of outstanding debt for U.S. tax
purposes. We are directed to three documents critical to the
dispute: the articles of association of NG8 (articles); a
December 20, 2001, offer for subscription of ordinary share
capital; and an agreement for the sale and purchase of shares
in NG8 (S&P agreement). The offer letter extended to NGHI
the opportunity to subscribe for 10 million shares of NG8,
for $2.695 billion, with an initial payment of $15 million
and three additional payments, referred to as call payments,
on or after the dates and in the amounts specified in the NG8
article. NG8 could make those calls only in the amounts and
on dates specified in the documents. The offer letter
required that any acceptance be oral, thereby avoiding a
document that might be construed as a debenture under §
NGHI's oral acceptance of the offer, NGHI paid $15
million to NG8 for 10 million NG8 shares, and then sold the
shares for $2.695 billion to National Grid (US) Investments 4
(NGUSI4). NGHI used the proceeds, totaling $2.68 billion
($2.695 billion minus the $15 million it paid to NG8), to
repay the loans for Project Mayflower, now refinanced.
noted, the articles provided that NG8 could make calls on
NGHI for four call payments on or after specified dates. The
first three payments represented interest, and the final
payment was principal and interest. The S&P agreement
provided that NGHI remain liable for the call payments, and
that if NG8 failed to make a call according to the schedule
in the articles, NGHI was entitled to procure, through
NGUSI4, that NG8 make the call (thereby avoiding interest at
a higher rate). However, NGHI was under no obligation to
exercise that right.
heart of this dispute is the nature of NGHI's obligation
to repurchase the NG8 shares, and whether that obligation
constituted the repayment of a debt, as determined by whether
NGHI4's service of the notice to repurchase was
discretionary or mandatory. Clause 2.9 of the S&P
agreement provided that if NGHI failed to make a call payment
within seven days of the call, or if NG8 made no call and
NGHI failed to exercise its right to procure a call, NGUSI4
was "entitled to serve a notice" on NGHI requiring
NGHI to repurchase the [NG8] shares. The parties agree that,
under clause 2.9, NGUSI4's right to serve notice
requiring NGHI to repurchase the shares was discretionary, as
per the "shall be entitled to serve" language.
Hence, clause 2.9 did not impose an unqualified obligation on
NGHI to repurchase the shares.
parties' disagreement centers on clause 2.10 of the
S&P agreement. We set forth clause 2.10 in its entirety:
"If for any reason whatsoever any sums due in respect of
the [s]hares under [a]rticle 3 of the [a]rticles remain
unpaid after 19 December[, ] 2004, the [b]uyer shall serve a
notice on the [s]eller requiring the [s]eller to repurchase
the [s]hares on 20 December[, ] 2004[, ] or if this is not a
[b]usiness [d]ay, the next [b]usiness [d]ay thereafter for a
consideration equal to the net asset value of the [c]ompany
(as determined in accordance with clauses 2.11 to 2.14) and
the aggregate of any sums remaining unpaid in respect of the
[s]hares less the amount of any called up share capital not
paid, and such consideration shall be paid in cash against
delivery of a duly executed transfer on behalf of the [b]uyer
in favour of the [s]eller and the delivery of the relevant
share certificate. If the [b]uyer exercises its rights under
this clause and the [s]eller fails to complete the repurchase
of the [s]hares at the time specified by the [b]uyer[, ] the
consideration due shall bear interest for the period from and
including the date on which the failure to complete the
repurchase has occurred up to the date of the actual payment
(after as well as before judgment) at the rate which is the
aggregate of [four] percent per annum above the base rate
from time to time of Barclays Bank plc. The interest will
accrue from day to day and shall be payable on demand and
shall be compounded monthly in arrears provided that no
interest shall accrue under this clause 2.10 where interest
is accruing under [a]rticle 3 of the [a]rticles."
parties debate the interpretation of clause 2.10, and whether
it required NGHI4, as the buyer, to serve notice to
repurchase, or whether NGHI4 merely had the right to serve
notice to repurchase. According to National Grid, clause 2.10
establishes that NGHI4 was required to serve notice to
repurchase and, as such, imposed on NGHI an unqualified
obligation to repurchase the shares -- and hence, repay a
after Project Spam's implementation, Project Spa was
carried out, consisting of forty-four steps, through which
National Grid acquired Niagara Mohawk. The DSA components of
Project Spa were similar to those for Project Spam, except
for the companies involved, the dates, the number of shares,
and the dollar amounts. Significant here, NGUSA filed a
separate corporate excise return claiming a deduction in
computing its taxable net worth for a liability for costs
associated with the Niagara Mohawk acquisition.
Service was the principal reporting corporation for NGHI and
NGUSA for Massachusetts tax purposes. For the tax year ending
March 31, 2002, the taxpayers deducted the interest payments
made under the DSAs, treating the DSAs as indebtedness.
Similarly, NGHI treated the DSAs as deductible for purposes
of calculating taxable net worth. The commissioner made
additional assessments of corporate excise for ...