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Case 1:06-cv-00305-MBH Document 84 Filed 11/15/2007 Page 1 of 3

IN THE UNITED STATES COURT OF FEDERAL CLAIMS

OF NEW YORK, INC &
SUBSIDIARIES,

CONSOLIDATED EDISON COMPANY )
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Defendant,

Plaintiff,

v.

UNITED STATES,

No. 06-305 T
Judge Marian Blank Horn

PLAINTIFF’S MEMORANDUM REGARDING POTENTIAL TESTIMONY

FROM LUIS E. ARRITOLA FOR PLAINTIFF’S REBUTTAL CASE

Plaintiffs, Consolidated Edison Company of New York, Inc. & Subsidiaries

(“Con Edison”), respectfully submit this memorandum regarding testimony from Luis E.

Arritola, of the Internal Revenue Service (“IRS), during any presentation of rebuttal evidence by

Con Edison, if required. As Con Edison explained during trial on November 14, 2007, Plaintiff

requests the opportunity to present a rebuttal case with respect to the Government’s spoliation

claim. Plaintiff’s need to present a rebuttal case will arise only in the event the Court denies

Plaintiff’s RCFC 52(c) motion (motion Second) which seeks dismissal of the Government’s

spoliation claim. In that event, Con Edison should have the opportunity to present rebuttal

testimony that will confirm Plaintiffs’ position regarding when it could have reasonably

anticipated litigation with respect to the EZH transaction.

1.

As the evidence presented thus far makes clear—and as cannot be reasonably

disputed—the overwhelming majority of disputes with the IRS are resolved in the audit and

appeals process. Not surprisingly, long after the audit of its 1997 tax return had begun, Con

Edison continued to believe that its tax dispute regarding the EZH transaction would be resolved

Case 1:06-cv-00305-MBH Document 84 Filed 11/15/2007 Page 2 of 3

in these manners. The audit ended with a Notice of Proposed Adjustment in December of 2002.

The matter then went to the Appeals division of the IRS.

Mr. Scher’s uncontradicted testimony establishes that, during the later part of the IRS

appeals process, it became clear to Con Edison that the Company would not be able to bridge the

gap between the IRS’s proposed resolution of the dispute and the tax treatment that Con Edison

was willing to accept. Nov. 14 Tr. (Rough) at 45: 20-25, 46: 1-17. At some time after the third

meeting between IRS and Con Edison officials, in late 2005, Con Edison formally decided to

initiate this lawsuit, which was filed in March 2006. Con Edison has always recognized that a

reasonable person would have anticipated litigation sometime before the lawsuit was filed. In

this case, the evidence demonstrates that the most reasonable timing for such a determination

was when it became clear that, unlike most disputes in IRS appeals, Con Edison’s dispute

regarding the EZH tax treatment was unlikely to be resolved. Mr. Scher’s testimony establishes

that this occurred in the summer of 2005. Id. at 43: 25, 45: 20-25, 46: 1-17.

2.

In contrast, the Government contends that a party like Con Edison would have

anticipated litigation in 1997, before the EZH transaction was completed, when the Sherman &

Sterling memos and the In-House memo were created. As a fallback position, the Government

appears to contend that Con Edison should have anticipated litigation when Revenue Ruling 99-

14 was issued, in March of 1999. Tr. at 3347: 24-25, 3348: 1-22.. Con Edison disagrees with

the Government’s positions. This Court has ruled that the three documents in question were not

written with litigation in mind.

3.

Plaintiff identified Mr. Arritola as a potential rebuttal witness when it made its

Rule 52(c) motion. Plaintiff believes Mr. Arritola’s rebuttal testimony would confirm that it was

reasonable for Con Edison to believe that resolution of the EZH dispute was likely during the

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Case 1:06-cv-00305-MBH Document 84 Filed 11/15/2007 Page 3 of 3

IRS appeals process. Mr. Arritola was the senior IRS official who was responsible for the

“Appeals Coordinated Issue Program Appeals Settlement Guidelines” for LILO transactions. As

the coordinator responsible for this issue, he negotiated in good faith with Con Edison with

respect to the EZH tax treatment during the appeals process. In fact, Mr. Arritola issued

guidelines for the purpose of setting parameters for settlements to occur, and he actually settled

Lease/Leaseback disputes. In short, Con Edison believes that his testimony will support the

assertion that a reasonable taxpayer would not have concluded that litigation was necessary (or

could be anticipated) at the beginning and during much of that IRS appeals process. However,

for the reasons set forth below, Plaintiff now withdraws the specific request for leave to depose

and add Mr. Arritola as a rebuttal witness at this time.

4.

During trial on November 14, 2007, the Court set a briefing schedule with respect

Plaintiff’s RCFC 52(c) motion. The Court made clear that the record will be left open until after

that briefing and decision process with regard to Plaintiff’s RCFC 52(c) motion is completed.

Consistent with judicial economy, as well as the time and expense of the parties, Con Edison

understands and agrees the question whether any potential rebuttal witnesses must be elicited

will be deferred until after that briefing and decision process.

Respectfully submitted,

s/ David F. Abbott
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DAVID F. ABBOTT
MAYER BROWN LLP
1675 Broadway
New York, NY 10019-5820
Tel (during trial): (202) 280-2421
Fax (during trial): (202) 347-0404

November 15, 2007

Counsel for Plaintiff

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