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Case 1:06-cv-00305-MBH Document 23 Filed 04/05/2007 Page 1 of 8

No. 06-305 T

(Judge Marian Blank Horn)








Pursuant to Rule 28(b) of the Rules of the United States Court of Federal Claims Court

(RCFC), the defendant, the United States, hereby moves for the issuance of Letters of Request. This

motion is made in accordance with the Hague Convention of 18 March 1970 on the Taking of

Evidence Abroad in Civil or Commercial Matters. Three proposed Letters of Request, each directed

to competent authorities in the Netherlands, England and Germany, are annexed hereto as Exhibits

1, 2, and 3, respectively.

In support of its Motion for Issuance of Letters of Request, the United States states as


Case 1:06-cv-00305-MBH Document 23 Filed 04/05/2007 Page 2 of 8


In this case, Consolidated Edison Company of New York, Inc. & Subsidiaries’ (“Con Ed”)

participated in a lease-in/lease-out (“LILO”) shelter transaction involving a power station (the

“RoCa3” facility owned by South Holland Electric (N.V. Electriciteitsbedrifj Zuid-Holland)

(hereinafter “EZH”)) located in the Netherlands. Con Ed, a United States taxpayer, through a

subsidiary, purported to lease property from its owner, EZH, under a head lease and simultaneously

purported to lease the property back to EZH under a sublease. This case involves the proper tax

treatment to be accorded Con Ed’s LILO shelter transaction. The specific substantive issue raised

in this refund suit is whether Con Ed is entitled to deductions for rent, interest, and transaction costs

its asserts were incurred in 1997 in connection with this transaction.

Because the counter-party to the LILO shelter, as well as third party consultants and banks

involved are located in foreign countries, the United States has requested the assistance of this Court

to obtain discovery from foreign entities.

The Transaction

Con Ed, a United States taxpayer, through a subsidiary, purported to lease property from its

owner, EZH, under a head lease and simultaneously purported to lease the property back to EZH

under a sublease. As is typical in a LILO transaction, the counter-party, EZH, is a foreign entity that

pays no taxes in the United States. EZH is unable to claim federal income tax benefits, like

depreciation, associated with its ownership of the RoCa3 facility. Immediately after the transaction

was entered into, and continuing to date, EZH or its successors (including E.On Benelux Generation

N.V., a subsidiary of E.On Energie A.G.) have continued to operate the facility and have retained


Case 1:06-cv-00305-MBH Document 23 Filed 04/05/2007 Page 3 of 8

all of the benefits and burdens associated with its use and ownership. For its part, Con Ed claimed

rent and interest deductions associated with the purported head lease.

According to the LILO documents provided by Con Ed, (1) a foreign bank, Hollandsche

Bank-Unie N.V. (“HBU”) purported to make a non-recourse loan to Con Ed to finance the head

lease payments, (2) EZH’s sublease rent payments are essentially identical in timing and amount to

Con Ed’s loan payments, (3) the loan proceeds were not paid to EZH but rather were held by ABN

AMRO Bank N.V. (“ABN AMRO”), the parent bank of HBU, and used to satisfy the identical

owner rent payments from EZH and Con Ed’s purported loan repayments to HBU. Further, other

financial entities, such as Credit Suisse Financial Products, Credit Suisse First Boston (collectively

“Credit Suisse”) and Bayerische Landesbank A.G., were also involved in the financing aspects of

the LILO shelter. The circular financing arrangement among Con Ed, EZH and the foreign banks

virtually ensured that (1) neither Con Ed nor EZH will need to use their own funds to satisfy their

respective obligations under the operative documents (save for the fees and other costs paid by the

taxpayer in connection with the transaction); and (2) EZH will retain dominion and control over the

subject property.

It is the Government’s position that the tax deductions and losses claimed by Con Ed in

connection with the LILO shelter transaction are improper and that Con Ed will not be able to prove

it is entitled to a refund because:

Con Ed did not acquire a genuine leasehold interest in property in 1997 when it
participated in the LILO;

Con Ed did not incur a genuine debt obligation in connection with the LILO;

The LILO tax shelter transaction and components thereof lacked economic substance
and/or constitute a sham;


Case 1:06-cv-00305-MBH Document 23 Filed 04/05/2007 Page 4 of 8

The tax deductions fail when the step transaction doctrine is applied and the steps
which comprise the tax shelter are collapsed and then viewed as a single transaction;

Con Ed is not entitled to an interest expense deduction with respect to its
“non-recourse loan,” because such loan does not result in a use of the loan proceeds
by Con Ed nor does it constitute a true forbearance by the lender; and

The LILO shelter here at issue creates, at most, a contingent future leasehold interest
not entitling Con Ed to any present deductions on account thereof.

In short, other than the execution of paper and the payment of fees, nothing happens.

The Letters of Request

Given the structure of the transaction described herein, much discoverable information is

held by entities found outside the United States. The Letters of Request (Exhibits 1-3) each request

that certain foreign entities involved in Con Ed’s LILO transaction, or their respective successors

and assigns, appear for oral examination and produce documents for inspection and copying, in the

country where they are located.

The Letter of Request addressed to the competent authority in the Netherlands (Exhibit 1)

requests the authority in the Netherlands to summon representatives of E.On Benelux Generation

N.V. (formerly EZH) (hereinafter “EZH”); Tauw N.V. (formerly Tauw Milieu B.V.) (hereinafter

“Tauw”); HBU; ABN AMRO; Credit Suisse First Boston (Nederland) N.V. and Ernst & Young

(formerly Moret, Ernst & Young). EZH is a counter-party to the Plaintiff’s LILO transaction. Tauw

is an environmental consultant retained by the Plaintiff to effectuate the LILO transaction. HBU and

ABN AMRO are commercial banks who purportedly provided the financing for the transaction and

hold the funds for making the purported payments under the transaction. Moret Ernst & Young was

the accountant for EZH at the time of the LILO transaction.


Case 1:06-cv-00305-MBH Document 23 Filed 04/05/2007 Page 5 of 8

The Letter of Request addressed to the competent authority in England (Exhibit 2) requests

the English authority to request documents from Credit Suisse and Standard & Poor’s. Credit Suisse

is a financial company that provided advice on interest rates and secured credit strips in conjunction

with the transaction. Standard & Poor’s is an entity retained by or on behalf of Con Ed to provide

credit information on EZH.

The Letter of Request addressed to the competent authority in Munich, Germany (Exhibit

3)1 requests the German authority to request documents from representatives of Bayerische

Landesbank A.G. (“BL”) and E.ON Energie A.G. (“E.ON”). BL is a financial institution

headquartered in Germany that issued a Letter of Credit in connection with the transaction. E.ON

is a German energy company that acquired EZH as a subsidiary subsequent to the instant LILO


The Need for Foreign Discovery

One of the issues in this case is whether Con Ed can meet its burden to establish that its

LILO shelter transaction has economic substance. Under the economic substance doctrine,

transactions that are invented solely to create tax deductions and otherwise have no economic

substance, even though formally complying with the letter of the Internal Revenue Code, will not

be recognized. Knetsch v. United States, 364 U.S. 361 (1960); see also BB&T Corporation v.

United States, No. 1:04-cv-00941, 2007 WL 37798, at *11-*12 (M.D.N.C. Jan. 1, 2007) (slip

opinion) (a copy of which is attached hereto as Exhibit 1). That is “whether the transaction had any

practicable economic effect other than the creation of income tax losses.” Rose v. Commissioner,


Pursuant to the German reservations to the Hague Convention of 18 March 1970
on the Taking of Evidence Abroad in Civil or Commercial Matters, the United States has had the
version of the Letter of Request addressed to the competent authority in Germany translated into
German, and has submitted it in conjunction with the version written in English.


Case 1:06-cv-00305-MBH Document 23 Filed 04/05/2007 Page 6 of 8

868 F.2d 851, 853 (6th Cir. 1989). The first prong of this test requires an analysis as to whether the

transaction had economic substance beyond the generation of tax benefits. Coltec Industries, Inc.

v. United States, 454 F.3d 1340, 1356 (Fed. Cir. 2006). This determination is exclusively an

objective analysis. Id. The second prong looks to whether the taxpayer possessed a non-tax

business purpose in entering the transaction, which is a subjective analysis. Sochin v.

Commissioner, 843 F.2d 351, 354 (9th Cir.), cert. denied, 488 U.S. 824 (1988); accord, ACM

Partnership v. Commissioner, 157 F.3d 231, 248 (3d Cir. 1998), cert. denied, 526 U.S. 1017 (1999);

Muhich v. Commissioner, 238 F.3d 860, 864 (7th Cir. 2001); Transpac Drilling Venture, 1983-2

by Dobbins v. United States, 32 Fed. Cl. 810, 820 (1995); American Elec. Power. Co., Inc. v. United

States, 326 F.3d 737, 741 (6th Cir. 2003).

The information sought by the United States through the issuance of Letters of Request is

needed to make the determinations discussed above. Specifically, the United States seeks (1)

documents and information held by EZH and its successors in interest, the foreign owner of the

RoCa3 facility, pertaining to the LILO transaction and its actual structure; (2) documents and

information held by advisors and accountants for EZH; (3) pre-closing due diligence purportedly

performed by foreign entities for the purpose of the LILO transaction; and (4) the information held

by the foreign financial entities involved in the LILO transaction as it relates to the financial

arrangement incorporated into the present LILO. Such information is necessary to properly prepare

a defense to the claims asserted by plaintiff.

The United States has attempted to obtain information sought in the Letters of Request from

plaintiff, through the issuance of document requests and interrogatories. However, plaintiff has

taken the position that (1) it cannot produce information held by unrelated third parties to the LILO


Case 1:06-cv-00305-MBH Document 23 Filed 04/05/2007 Page 7 of 8

transaction such as those identified in the Letters of Request, (2) that plaintiff cannot know what

responsive information or knowledge concerning the transaction other parties to the LILO

transaction may possess, and (3) that these third parties may have discoverable information

pertaining to the claims asserted in the instant matter. (See, e.g., Plaintiff’s Inter. Resp. Nos. 1 and

2, and supplemental Inter. Resp. Nos 1 and 2, attached hereto as Exhibits 5 and 6 respectively.)

Further, these third parties may have retained information or generated relevant information that is

or was unavailable to Con Ed. Therefore, it is necessary for the United States to seek such

information directly from those parties.

Further, there is a substantial risk that the foreign documents will not otherwise be available

at the trial of this case absent the letters of request sought in this motion. Because the documents

of the foreign entities that are the subject of this motion are located in the Netherlands, Germany,

and the United Kingdom, the foreign entities may contend that the documents are not subject to a

subpoena issued by this Court under RCFC 45. Indeed, Defendant has issued subpoenas to the

United States branches of several of the entities from whom information is sought, and the entities

have taken the position that the United States must seek a letter of request to obtain the information

from their foreign counterparts. Thus, to ensure that the United States can obtain the documents

from the entities identified in the Letters of Request, the United States is following the procedure

authorized under RCFC Rule 28(b)(1), in accordance with the Hague Evidence Convention, and

respectfully requests that the Court issue the attached Letters of Request.

The Netherlands, Germany, the United Kingdom and the United States are signatories to the

Hague Evidence Convention. The submission of Letters of Request would minimize intrusion into

the laws of the respective countries, while promoting comity and the search for facts.


Case 1:06-cv-00305-MBH Document 23 Filed 04/05/2007 Page 8 of 8

Under the Hague Evidence Convention, this Court may submit a letter of request to the

respective authorities of the Netherlands, Germany, and the United Kingdom. Defendant requests

that after this Court has executed the respective Letters of Request, the Letters of Request be

transmitted to defendant’s trial attorney who will make application directly to the appropriate

authority in the respective countries. The United States believes that using this procedure will

reduce the time required to obtain the foreign documents.

The United States will be responsible for all fees and costs associated with execution of the

attached Letters of Request and production of the requested documents.

Respectfully submitted,

s/ David N. Geier

Attorney of Record
U.S. Department of Justice, Tax Division
Post Office Box 26
Ben Franklin Station
Washington, D.C. 20044
Telephone: (202) 616-3448
Facsimile: (202) 307-0054

Chief, Court of Federal Claims Section

Assistant Chief, Court of Federal Claims Section


Assistant Attorney General




Trial Attorneys

April 6, 2007

s/ Steven I. Frahm
Of Counsel