Yesterday, June 8, the Massachusetts Appeals Court once again denied a taxpayer’s claimed deductions from the income and net worth tax base of the corporate excise tax.
In a decision that will be a disappointment for taxpayers with pending appeals on the issue, the Massachusetts Appeals Court has upheld the Appellate Tax Board’s determination in National Grid, Inc. & others v. Commissioner1—denying the taxpayer a deduction from its net worth tax base for intercompany obligations classified as debt, as well as denying an interest deduction for amounts paid under those intercompany obligations.
The court’s decision impacts any taxpayer that is facing a Department “true debt” audit, where the Department refuses to treat an intercompany obligation as debt that can be deducted from the tax base of the net worth portion of the corporate excise tax.
Taxpayers have been arguing that the Department’s authority to attack a taxpayer’s classification of an intercompany obligation as debt is more limited in the context of the net worth portion of the corporate excise tax, because the Department is required to follow the taxpayer’s treatment of the obligation for financial reporting and GAAP purposes. The National Grid court rejected this argument, stating that the court “see[s] no reason…that the determination of indebtedness for purposes of interest deductions resolved the issue for calculating net worth as well.”
Another striking aspect of this case is that it involved cross-border obligations. As a consequence, the characterization of the intercompany obligation as “true debt” was also an important issue in determining National Grid’s taxable income for federal income tax purposes. The obligations that were the subject of National Grid’s Massachusetts appeal were also reviewed by the IRS as part of a federal income tax audit. Although National Grid reached a negotiated settlement with the IRS that allowed National Grid to deduct its payments to its affiliates, the Department nonetheless undertook its own independent “true debt” analysis of the intercompany obligation. This is just another notice to taxpayers that the Massachusetts Department of Revenue does not consider itself bound by the result of federal audits, and feels that it has its own independent authority to determine federal taxable income.
For more information on the National Grid case and how to bolster your company’s case for “true debt” treatment for its intercompany obligations, contact the authors of this alert or another member of the Reed Smith State Tax Group.
- NATIONAL GRID HOLDINGS, INC. & others v. COMMISSIONER OF REVENUE, No. 14-P-1662 (Massachusetts Appeals Court June 8, 2016).
Client Alert 2016-147