Case 1:06-cv-00305-MBH Document 46 Filed 09/21/2007 Page 1 of 15
IN THE UNITED STATES COURT OF FEDERAL CLAIMS
CONSOLIDATED EDISON COMPANY
OF NEW YORK, INC. &
THE UNITED STATES,
No. 06-305 T
Judge Marian Blank Horn
JOINT STATEMENT OF ISSUES OF FACT
The Plaintiff, Consolidated Edison Company of New York and Subsidiaries, and the
Defendant, the United States of America, pursuant to the Court’s Scheduling Order revised
August 31, 2007, submit this Joint Statement of Issues of Fact.
PLAINTIFF’S SEPARATE STATEMENT:
All capitalized terms are as defined in Appendix A to the Participation Agreement and
Appendix A to the Facility Operating Agreement, both dated as of December 15, 1997. Other
defined terms are:
“ABN” refers to ABN AMRO Bank N.V.
“Con Edison NY” refers to Consolidated Edison Company of New York, Inc. and its
“EZH” refers to Electriciteitsbedrijf Zuid-Holland.
“EZH Lease Transaction” refers to the transaction described in paragraphs 64-73 of Con
Edison NY’s Complaint.
“HBU” refers to Hollandsche Bank-Unie N.V.
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As this is a Joint Statement of Issues of Fact, Con Edison NY does not agree that it must
prevail on all issues listed herein in order to obtain its requested refund.
Benefits and Burdens
Whether, as of December 15, 1997, it was reasonably expected that economic or
other factors would compel EZH to exercise its Sublease Purchase Option on January 2, 2018, so
that the exercise of the Option by EZH was virtually certain?
Whether, as of December 15, 1997, ConEdison NY reasonably expected that the
Sublease Purchase Option was not compelled or virtually certain to be exercised?
Whether EZH will possess a significant residual interest in the RoCa3 Facility
after the termination of the Lease to Con Edison NY?
Whether, if EZH does not exercise the Sublease Purchase Option and Con Edison
NY exercises the Retention Option, Con Edison NY expected to have a residual interest in the
RoCa3 Facility from January 2, 2018 to February 24, 2041?
Whether Con Edison NY expected that it would be precluded from exercising the
Retention Option by reason of section 20(c)(ii) of the Sublease (requiring repayment of the Loan
Whether, if EZH does not exercise the Sublease Purchase Option and Con Edison
NY exercises the Sublease Renewal Option, Con Edison NY expected to have a residual interest
in the RoCa3 Facility from June 15, 2034 to February 24, 2041?
Whether Con Edison NY expected its leasehold interest in the RoCa3 Facility to
have significant value after the expiration of the Sublease Renewal Option?
Whether, pursuant to the provisions of the Facility Operating Agreement and
other Operative Documents, Con Edison NY will be entitled to sell its pro rata share of the
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electrical and thermal output of the RoCa3 Facility after the expiration of the Sublease
Agreement (assuming EZH does not exercise its Sublease Purchase Option)?
Whether, pursuant to the provisions of the Facility Operating Agreement and
other Operative Documents, Con Edison NY will be responsible for its pro rata share of the
expenses of the RoCa3 Facility after the expiration of the Sublease Agreement (assuming EZH
does not exercise its Sublease Purchase Option)?
10. Whether pursuant to the provisions of the Operative Documents, ConEdison NY
can expect to have sufficient access rights to use common facilities, and support rights to permit
commercial operation of the RoCa3 Facility and to permit sales of electrical and thermal output
from the RoCa3 Facility to the extent of its interest therein.
11. Whether Con Edison NY and Banc One together have the right to remove EZH as
Operator of the RoCa3 Facility after the expiration of their Subleases to EZH (assuming EZH
has not exercised its Sublease Purchase Options)?
12. Whether, pursuant to the provisions of the Facility Operating Agreement, Con
Edison NY would be required to pay a fee to EZH as the Operator of the Facility following the
expiration of the Sublease to EZH (assuming EZH has not exercised the Sublease Purchase
13. Whether the EZH Lease Transaction, on an objective basis, was likely to produce
a pre-tax profit?
14. Whether the pre-tax profit from the EZH Lease Transaction was consistent with
the pre-tax profit from leveraged lease transactions for assets of similar size?
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15. Whether Con Edison NY’s yield on the EZH Lease Transaction for financial
reporting purposes was expected to be at least 12%?
16. Whether, as a principle of corporate finance and standard business practice,
potential investments should be evaluated on a pre-tax or after-tax basis?
17. Whether Con Edison NY expected to report additional taxable income and pay
additional taxes as a result of entering into the EZH Lease Transaction?
Subjective Business Purpose
18. Whether Con Edison NY’s decision to invest in the EZH Transaction was
encouraged by business or regulatory reality?
19. Whether the investment in the EZH Lease Transaction was undertaken as part of
Con Edison NY’s expansion into unregulated investments, including international investments,
as part of the deregulation of its utility business?
20. Whether the EZH Lease Transaction had a business or corporate purpose other
than to reduce taxes?
21. Whether Con Edison NY’s management was motivated solely by tax
considerations in making the decision to enter into the EZH Lease Transaction?
Con Edison NY’s Due Diligence
22. Whether Con Edison NY’s review of the proposed EZH Lease Transaction was
conducted in a prudent, business-like, and reasonable manner, including reasonable due
diligence, such as:
Obtaining an appraisal of the RoCa3 Facility from Deloitte &
Obtaining an engineering review of the RoCa3 Facility form Duke
Engineering and Services;
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Obtaining an environmental review of the RoCa3 Facility from
Conducting a due diligence site visit;
Reviewing technical material;
Obtaining appropriate legal non-US tax opinions.
How was the EZH Lease Transaction introduced to Con Edison NY?
Leveraged Lease Accounting
24. Whether the EZH Lease Transaction qualifies for leveraged lease accounting?
25. Whether the EZH Lease Transaction produces front-loaded earnings for financial
26. Whether the earnings pattern produced by leveraged lease accounting was one of
Con Edison NY’s reasons for entering the EZH Lease Transaction?
Leveraged Leasing Issues
27. Whether it is a common commercial practice for leveraged leases to be structured
so that the investor’s return from the lease, including a scheduled termination value in the event
of default or other termination, will provide the investor with a return of its equity plus its
minimum expected after-tax rate of return?
28. Whether the default provisions and early termination provisions of the EZH Lease
Transaction are similar to those of other leveraged lease transactions?
29. Whether the use of credit support for a lessee’s obligations is a common
commercial practice in financial transactions, including leveraged leasing?
30. Whether the use of credit support had a business purpose in the context of the
EZH Lease Transaction?
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31. Whether the matching of rental payments due on a leveraged lease to the debt
service with respect to the lease, both in timing and amount, is a normal commercial practice in
32. Whether the use of net leases, in which the lessee in possession of the property is
responsible for maintenance, insurance, and taxes with respect to the property, is a normal
commercial practice in leveraged leasing?
33. Whether the use of nonrecourse debt is a normal commercial practice in leveraged
34. Whether leveraged lease transactions generally result in accelerated earnings for
financial reporting purposes?
35. Whether leveraged lease transactions generally result in a deferral of income taxes
which are taken into account by the equity investors in determining their accounting yields?
Substance v. Form Issues
36. Whether Con Edison NY and EZH agreed that the Lease Agreement and the
Sublease Agreement were intended to qualify as leases for federal income tax purposes?
37. Whether Con Edison NY has retained significant and genuine attributes of a
lessor with respect to the RoCa3 Facility, such as:
the right to receive rent;
the right to declare a default if EZH does not comply with its
obligations as lessee;
the right to repossess its interest in the RoCa3 Facility upon a
the right to earn income from the residual value of the RoCa3
Facility after the expiration of the Sublease with EZH?
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38. Whether the terms of the EZH Lease Transaction were subject to negotiation prior
39. Whether the form of the EZH Lease Transaction resulted in the creation of
genuine obligations enforceable by unrelated parties?
40. Whether the form of the EZH Lease Transaction has practical economic effects
aside from any tax benefits?
41. Whether the EZH Lease Transaction was imbued with tax-independent
considerations and was not shaped solely by tax-avoidance features?
42. Whether EZH may experience a financial detriment if the EZH Lease Transaction
is terminated before the Sublease Basic Termination Date and that financial detriment cannot be
calculated as of the Closing Date because it is dependent on variables only knowable in the
43. Whether the Sublease Deposit and IJssel Deposit would be treated as eliminating
EZH’s obligations for financial reporting purposes?
44. Whether ConEdison NY understood that HBU and ABN are financial institutions
which, though affiliated, have separate operations, assets, and management?
H. Miscellaneous Issues
45. Whether it was reasonable for Con Edison NY to expect the value of its undivided
leasehold interest in the RoCa3 Facility to be greater than the amount of its non-recourse
indebtedness owed to HBU throughout the term of the EZH Lease Transaction?
46. Whether Con Edison NY is required to fund the Trustee Treasury Collateral and
Lease Collateral Deposit if the Sublease Purchase Option is not exercised by EZH?
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47. Whether the Facility Operating Agreement contains provisions for resolving
potential conflicts between EZH, Banc One, and Con Edison NY concerning the operation of the
48. Whether EZH remains legally liable for the payment of Sublease rent (including
Sublease Basic Rent or any Sublease Supplemental Rent) regardless of any collateral or other
credit support pledged for such payments?
49. Whether EZH has interest rate risk (or opportunity) on the funds in the Ijssel
50. Whether EZH has default risk on funds in the Sublease Deposit?
51. Whether Con Edison NY has interest rate risk (or opportunity) on the Lease
Collateral Deposit or Trustee Treasury Collateral?
52. Whether the existence of the Letter of Credit, Sublease Deposit and Ijssel Deposit
changed the payment expectation under the Sublease from speculative to non-speculative?
DEFENDANT’S SEPARATE STATEMENT:
Substance over Form
The following facts are relevant to the Court=s determination of whether Plaintiff obtained
a current leasehold interest in the RoCa3 Facility ([email protected]
) in 1997 that entitles Plaintiff to
claim a deduction for rent expense, interest expense, and other fees for that taxable year:
Does the substance of the EZH LILO transaction (the [email protected]
with the form of a genuine leasing transaction that should be respected for federal income tax
By entering into this transaction, did Plaintiff obtain a current lease interest, or
merely a future contingent interest?
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Whether EZH ever relinquished to Plaintiff any of the benefits (rewards) or
burdens (risks) of ownership of the undivided leasehold interest in the Facility.
Whether Plaintiff enjoyed the benefits, and shouldered the burdens, of owning an
interest in the Facility during the initial sublease term?
Whether Plaintiff bore any substantial, genuine risk of incurring an economic loss
on its investment in the Lease.
Whether the Transaction allows Plaintiff to use or benefit from the Facility, or
provides Plaintiff with an unconditional right to use or enjoy the Facility at any time during the
initial sublease term?
Whether Plaintiff has the right to operate or profit from the use of the Facility?
Before the purchase option date, did Plaintiff have any capital at risk in the
Transaction, or was Plaintiff assured a risk-free return of its investment?
Whether Plaintiff’s recovery of its purported equity investment depends to any
extent on the residual value of its claimed leasehold interest (the market value of that interest at
the end of the sublease term)?
10. Whether any return on Plaintiff’s proposed equity investment is “collared” by a
purchase option, and a sublease renewal option, that place a ceiling and a floor, respectively, on
11. Whether any potential profit to Plaintiff is derived from leasing the Facility, and
not the investments that were purchased at the outset of the Transaction?
To what extent will any return to Plaintiff vary depending upon which end-of-
sublease option is exercised?
13. What benefit did Plaintiff receive for its participation in this transaction?
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14. Whether EZH retained the rights and responsibilities with respect to the
Equipment it possessed at the outset of the Transaction?
15. What risks, if any, did Plaintiff assume in entering into the transaction?
16. What steps did Plaintiff take to mitigate or eliminate risks associated with the
17. What is the substantive effect of the equity defeasance and debt defeasance in the
18. What is the purpose of the Rotte agreement in the transaction?
19. What is the purpose of the RoCa Foundation in the Transaction?
20. What is purpose of the IJssel Agreement and IJssel deposit in the Transaction?
21. What is the purpose of the Debt Defeasance in the Transaction?
22. What is the purpose of the Equity Defeasance in the Transaction?
23. What is the purpose of the Letter of Credit requirement in the Transaction?
24. What is the purpose of the sublessee loan in this Transaction?
25. What are the substantive effects of the circular cash flows in this transaction?
26. Whether, despite having the right to inspect the facility each year, Plaintiff’s
failure to visit the RoCa3 facility until 2005, after the tax audit related to this transaction had
begun, supports the argument that Plaintiff did not have the benefits or burdens of ownership in
the Facility and that the transaction was motivated by tax avoidance.
27. Whether the existence of a pre-funded purchase option means dominion and
control over the property remains with EZH.
In addition to those listed above, the following additional facts would be relevant to the
Court=s determination of whether the loan from Hollandsche Bank-Unie N.V.("HBU") to
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Plaintiff constitutes a bona fide debt for tax purposes that entitles Plaintiff to claim an interest
28. Whether the HBU loan was genuine.
29. Whether the HBU loan did not finance meaningful business activity.
30. Whether the HBU loan was incurred solely to obtain a tax deduction.
31. Whether the circular flows of funds in the transaction eliminated the possibility of
any use or forbearance of money by Plaintiff or by EZH.
32. Whether HBU faced any risk of non-repayment of the loan.
33. Whether Plaintiff negotiated or participated in the process of obtaining the HBU
In addition to the above facts, the following facts would be relevant to a determination of
whether the Transaction should be disregarded under the economic substance doctrine:
34. Whether Plaintiff had a reasonable possibility of realizing a net economic profit,
apart from claimed tax benefits.
35. Whether, objectively, a reasonable possibility of profit from the Transaction
existed absent claimed tax benefits.
36. Whether Plaintiff lacked a reasonable expectation to earn a non-tax profit from
37. Whether Plaintiff could have earned a profit from its investment in the
Transaction through simpler or more direct methods.
38. Whether the Transaction had any meaningful effect on Plaintiff=s economic
position, other than the payment of transaction costs, an Accommodation Fee to EZH and the
Case 1:06-cv-00305-MBH Document 46 Filed 09/21/2007 Page 12 of 15
investment in fixed-rate securities, or whether the Transaction was simply a sale of tax benefits
39. Whether, when taking into account the time value of money, the transaction fails
to generate a meaningful economic profit absent the claimed tax benefits.
40. Whether or not the present value of the projected after-tax cash flows exceeded
the present-value of the projected pre-tax cash flows, and, if so, by what relative amount.
41. Whether the purpose of Plaintiff's tax-advantaged LILO investments was to
reduce income taxes.
42. Whether Plaintiff=s incentive for engaging in the RaCAa LILO Transaction
("Transaction") was to substantially reduce its U.S. taxes.
43. Whether the Transaction significantly supports Plaintiff's stated non-tax business
reason of gaining entry into the Netherlands?
44. Whether the primary purpose of the Transaction was Plaintiff's stated non-tax
45. Whether Plaintiff’s participation in the Transaction and consideration of and
participation in other LILO transactions was inconsistent with the other investments considered
and engaged in by Plaintiff.
46. Whether Plaintiff considered or invested in transactions outside of its stated area
of expertise, other than tax advantaged transactions.
47. Whether the fact that a financial institution entered into a substantially similar
LILO Transaction with EZH for the remaining interest in the Facility in connection with
Plaintiff’s entry into the Transaction undermines Plaintiff’s stated non-tax business reasons for
entering into the transaction.
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48. Whether Plaintiff intended to enter into the Netherlands power market for any
other purpose than tax advantaged leasing transactions.
49. Whether Plaintiff considered or entered into any transactions in the Netherlands
other than LILO transactions or other tax advantaged leasing transaction.
50. Whether the New York Public Service Commission encouraged Plaintiff to enter
into the transaction?
51. Whether Plaintiff structured this Transaction, without a valid non-tax business
purpose, in order to create a tax benefit.
52. Whether Plaintiff entered into the Transaction to reduce its tax liability.
53. Whether Plaintiff=s actions since it closed the Transaction show that Plaintiff=s
participation was motivated by tax avoidance.
54. Whether the fact that Plaintiff has not received or reviewed financial
documentation related to the payments or receipts in connection with the Transaction indicates
the transaction was motivated by tax avoidance.
55. Whether the accounting benefits, if any, associated with the Transaction are
largely dependent upon the tax benefits generated by the transaction.
56. Whether there is a reasonable chance Plaintiff will be able to sublease the Facility
to a company other than EZH?
57. Whether Plaintiff attached importance to the conditions precedent to entering into
58. Whether the reports from Deloitte & Touche and Duke Engineering Services
correctly determined the remaining useful life of the Facility.
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59. Whether the report from Deloitte & Touche properly estimated the value of the
60. Whether Plaintiff received the final report, if any, from Duke Engineering
61. Whether, and the extent to which, provisions of the Operative Documents were
the product of arms length negotiations.
62. Whether it was Plaintiff's intention, at the outset, to be a passive investor in tax
advantaged LILO leasing transactions in order to gain expertise to help it locate, package and
market those types of transactions to investors (acting like an investment banker).
63. What is the purpose of the tax indemnity agreement in this transaction, and why
did Plaintiff find it necessary to be indemnified if EZH represented in writing that the sublease
was not a true lease, or took a position inconsistent with other tax assumptions stated in the Tax
64. Whether Plaintiff improperly destroyed responsive emails related to its evaluation
of the transaction.
65. Whether Plaintiff improperly withheld responsive documents in the possession of
their trustee, Wilmington Trust Company.
Dated: September 21, 2007
Case 1:06-cv-00305-MBH Document 46 Filed 09/21/2007 Page 15 of 15
/s/ David F. Abbott
David F. Abbott
Attorney of Record
MAYER BROWN LLP
New York, NY 10019-5820
Tel: (212) 506-2642
Fax: (212) 849-5642
Attorney for Plaintiff
/s/ David N. Geier
David N. Geier
Attorney of Record
Joseph A. Sergi
Trial Attorneys, Tax Division
U.S. DEPARTMENT OF JUSTICE
Post Office Box 26, Ben Franklin Station
Washington, D.C. 20044
Tel. (202) 616-3448
Fax: (202) 307-0054
Richard T. Morrison
Assistant Attorney General
Chief, Court of Federal Claims Section
Steven I. Frahm
Assistant Chief, Court of Federal Claim Section