Massachusetts – Obligations without an unconditional requirement to pay do not qualify as bona fide debt

June 2014


On June 4, 2014, the Massachusetts Appellate Tax Board (Board) ruled that deferred subscription arrangements (DSAs) did not qualify as bona fide debt because the DSAs did not require payments to satisfy the obligations. Accordingly, the entity subscribing for shares could neither deduct the interest expense component of its payments pursuant to the DSAs in determining its taxable net income nor deduct as liabilities the book value of the DSAs in determining its taxable net worth.
Massachusetts taxpayers should be aware that the state is continuing to recharacterize debt as equity, which results in the disallowance of both interest and balance sheet deductions. Taxpayers should take care that their debt instruments satisfy state requirements for bona fide debt.

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