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14-P-1861                                                Appeals Court

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


                               No. 14-P-1861.

            Suffolk.       December 11, 2015. - June 8, 2016.

                Present:    Cypher, Carhart, & Blake, JJ.


   Taxation, Abatement, Corporate excise.         Public Utilities.



    Appeal from a decision of the Appellate Tax Board.


     John S. Brown (Donald-Bruce Abrams with him) for the
taxpayer.
     Brett M. Goldberg for Commissioner of Revenue.


    CYPHER, J.         National Grid USA Service Company, Inc. (NGUSA)

appeals from a decision of the Appellate Tax Board (board)

denying its motion for summary judgment and allowing a motion to

dismiss brought by the Commissioner of Revenue (commissioner)

concerning the effect of a closing agreement between National
                                                                   2


Grid Holdings, Inc. (NGHI)1 and the Internal Revenue Service

(IRS) on interest deductions under G. L. c. 63, § 30(4).     The

board rejected National Grid's position that the closing

agreement, which allowed a Federal deduction for a portion of

the disputed interest payments, is binding on deductions allowed

for State tax purpose.

     Background.   For background we refer to our decision in

National Grid Holdings, Inc. v. Commissioner of Rev., 89 Mass.

App. Ct.       (2016) (National Grid Holdings, Inc.).   Briefly,

that case dealt with the question whether certain deferred

subscription arrangements (DSAs), among various entities related

to National Grid plc, the parent company located in the United

Kingdom, constituted true indebtedness, whereby payments made

pursuant to the DSAs could be deducted as interest in

calculating Massachusetts corporate excise tax.   The

commissioner disallowed the deductions for the 2002 tax year and

National Grid appealed to the board.   This separate action arose

when the board, in hearing the first appeal, declined to admit

the closing agreement in evidence.

     Relevant here, we add the following undisputed facts from

the board's September 19, 2014, findings of fact and report.


     1
       NGUSA is the principal reporting corporation for a
Massachusetts combined group of affiliated entities. In this
appeal, we refer to NGUSA and/or NGHI as National Grid.
                                                                    3


National Grid's tax returns for the 2002 tax year were audited

by both the commissioner and the IRS.   On May 1, 2007, National

Grid entered into a closing agreement with the IRS, pursuant to

26 U.S.C. § 7121 of the Internal Revenue Code (code), in

connection with National Grid's Federal tax return.2   As part of

that agreement, the IRS allowed a Federal deduction for a

portion of the amount claimed by National Grid as interest on

the DSAs.

     As to National Grid's 2002 Massachusetts tax return, the

commissioner determined that the DSAs were not indebtedness and

that payments made in connection therewith were not interest.

The commissioner issued an assessment, and on April 26, 2007,

National Grid filed a CA-6, application for abatement/amended

return (form CA-6), which the commissioner then denied.

National Grid appealed to the board, which ruled in the

commissioner's favor.   National Grid appealed to this court, in

National Grid Holdings, Inc., supra.

     This case comes before us as a separate appeal because

three months after filing its original form CA-6, National Grid

filed a second form CA-6 on July 27, 2007, to report the Federal

changes that resulted from the closing agreement.   The second


     2
       Section 7121(a) authorizes the IRS "to enter into an
agreement in writing with any person relating to the liability
of such person (or of the person or estate for whom he acts) in
respect of any internal revenue tax for any taxable period."
                                                                    4


form CA-6 indicated that the corrected amount of tax due, based

on the Federal change, was the same as the original amount of

the tax due on its return, and that the net change to the tax

was zero.   National Grid did not indicate at that time that it

was seeking an abatement based on the Federal changes.

    The commissioner did not act on the second form CA-6.

Subsequently, at the hearing before the board in the first

appeal, National Grid sought to introduce the closing agreement

in evidence, and was denied.   Approximately a month later, on

March 14, 2012, National Grid withdrew its consent to the

commissioner's failure to act on the second form CA-6 and filed

an appeal with the board.   The commissioner moved to dismiss and

National Grid moved for summary judgment.   The board ruled that

the closing agreement did not entitle National Grid to an

abatement, and National Grid followed with this appeal.

    Discussion.    We are asked to decide whether the closing

agreement between National Grid and the IRS is binding on the

commissioner as to the deductions permitted for National Grid's

Massachusetts corporate excise.   The Massachusetts corporate

excise statute refers to the code in providing for deductions

that may be taken in calculating net income.   General laws

c. 63, § 30(4), as amended through St. 2003, c. 143, § 5,

defines net income, in relevant part, as "gross income less the

deductions, but not credits, allowable under the provisions of
                                                                      5


the Federal Internal Revenue Code."   The code, in turn, allows a

deduction for "all interest paid or accrued within the taxable

year on indebtedness."   26 U.S.C. § 163(a).    National Grid

maintains that the IRS's allowance of a portion of the DSA

payments as deductions in the closing agreement constitutes the

allowance of the deductions as interest under the code for

purposes of § 30(4) such that those payments should be

deductible, as interest on indebtedness, in calculating National

Grid's Massachusetts excise.

    The board determined that the IRS's allowance of a portion

of the disputed interest deductions, as part of the closing

agreement, did not dictate the commissioner's treatment of the

interest payments for State tax purposes.     Because Massachusetts

deductions are determined by reference to those that are

"allowable under the provisions of the Federal Internal Revenue

Code," the board reasoned that by permitting only some of the

claimed Federal interest deductions for the DSA payments, and

not all, the closing agreement did not establish that the DSA

payments qualified as interest.   We agree.

    The undisputed fact that only a portion of the interest

deductions was allowed by the IRS cuts against National Grid's

position.   National Grid provided no proof that the claimed

interest payments under the DSAs were anything but homogenous or

that there was a factual basis to distinguish among them for
                                                                    6


Federal tax purposes.    A deduction for the DSA payments cannot

be deemed allowable under the code if some of those payments

actually were allowed as deductions by the IRS while others were

not.   As the board aptly observed, "either all of the payments

are interest or none is."

       Section 30(4) specifically identifies those deductions that

are allowable under the provisions of the code, and not what

actually is allowed by the IRS pursuant to an agreement with an

individual taxpayer.    The distinction between allowable and

allowed is not a minor one, as National Grid insists.     The

commissioner directs us to authority from other jurisdictions on

this point, which we find persuasive.

       In Flood v. United States, 33 F.3d 1174, 1177 (9th Cir.

1994), the term "allowable as a deduction" was described as a

"term of art" in the tax field, citing Lenz v. Commissioner of

Rev., 101 T.C. 260, 265 (U.S.T.C. 1993).    In Lenz, supra, the

United States Tax Court stated that an "'[a]llowable deduction'

generally refers to a deduction which qualifies under a specific

[c]ode provision whereas 'allowed deduction,' on the other hand,

refers to a deduction granted by the Internal Revenue Service."

"A deduction is 'allowable' if it is permitted and not otherwise

forbidden or limited by the [code], whether or not [the

deduction is] actually used."    Flood, supra, quoting from Sharp

v. United States, 14 F.3d 583, 588 (1993).    Similarly, in Force
                                                                     7


v. Department of Rev., 350 Or. 179, 184 (2011), the Oregon

Supreme Court highlighted the significance of the State death

tax credit that was "allowable" under the [code], and "not any

credit that was actually allowed."     See Day v. Heckler, 735 F.2d

779, 784 (4th Cir. 1984) ("The distinction between an

'allowable' deduction and an 'allowed' deduction is not

insignificant"); Sharp, supra (distinguishing between deductions

that are "allowable" under the Code and those that actually are

taken).

    National Grid relies on two out-of-State cases as well, but

both deal with State statutes providing for State taxes "as

determined" or "to be determined" under the code.      We note at

the outset that the plain meaning of "determined" is not

synonymous with "allowable."   While "allowable" is defined as

permissible, "determined" means to settle a question or

controversy, or to come to a decision concerning, as the result

of investigation or reasoning.   Webster's Third New

International Dictionary (1993).     Indeed, in Comptroller of the

Treasury v. Colonial Farm Credit, ACA, 918 A.2d 514, 518-519

(Md. Ct. Spec. App. 2007), upon which National Grid relies, a

closing agreement between a farm credit association and the IRS

reflected a judicial determination, in a similar case, that a

portion of the taxpayer's lending activities should maintain the

same tax exempt status enjoyed prior to its merger with an
                                                                   8


entity that was not tax-exempt.   Thus the closing agreement was

held binding for State tax purposes because it determined how

the association's taxable income would be treated under the

code, consistent with the State statute providing for State

taxes "as determined" under the code.

    A second case, American Tel. & Tel. Co. v. State Tax Appeal

Bd., 241 Mont. 440, (Mont. 1990), involved a depreciation

deduction allowed under a closing agreement that was less than

the deductions allowable under the code.   The taxpayer argued

that, for State tax purposes, it was entitled to the full extent

of deductions allowable under the code, as the State statute

provided that the allowance for wear and tear was "to be

determined" according to the code.    Id. at 450-451.   However,

the court held that the amounts claimed for State tax purposes

should be the same as those claimed on the taxpayer's Federal

tax return, which were determined by the closing agreement with

the IRS.   Significantly, however, the court relied on additional

statutory language that "[a]ll elections for depreciation shall

be the same as the elections made for [F]ederal income tax

purposes."   Id. at 451.   The relevant statutory language in that

case is markedly different from G. L. c. 63, § 30(4), and does

not bear on the effect of the closing agreement here.     See

Rohrbough, Inc. v. Commissioner of Rev., 385 Mass. 830, 832

(1982) ("The reference is to the provisions of the Internal
                                                                   9


Revenue Code and not simply to the amount of gross income shown

on a taxpayer's Federal income tax return for the same year").

    National Grid also relies on the board's findings of fact

and report in PMAG, Inc. v. Commissioner of Rev., 23 Mass. App.

Tax Bd. Rep. 163, 164-165 (1998), as support for its position

that the board should give effect to the deductions allowed in

the closing agreement.   But in that case, the commissioner

specifically stipulated that, for Federal tax purposes, PMAG's

closing agreement with the IRS resulted in an increase in its

Federal taxable income pursuant to the provisions of the code.

Here, by contrast, the commissioner never stipulated to the

effect of the closing agreement between National Grid and the

IRS, and the commissioner specifically disputes that the closing

agreement constitutes a resolution of National Grid's allowable

deductions under the provisions of the code.   Moreover, as the

Supreme Judicial Court observed in reviewing the case, "[a]

change in Federal taxable income does not automatically result

in a change in Massachusetts net income," and that the

commissioner engages in an independent review when there is a

Federal change.   PMAG, Inc. v. Commissioner of Rev., 429 Mass.

35, 39 (1999).

    Conclusion.    We conclude that the interest deduction

provided in the closing agreement between National Grid and the

IRS did not constitute a binding determination of the interest
                                                                 10


deductions allowable for Massachusetts corporate excise

purposes.   The board correctly ruled that the issue raised by

National Grid's second application for an abatement regarding

the interest payments under the DSAs was resolved by the board's

decision in the original abatement proceedings.   Accordingly, we

affirm the board's decision in dismissing the appeal.

                                    So ordered.
