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Case 1:06-cv-00305-MBH Document 94 Filed 01/03/2008 Page 1 of 41

IN THE UNITED STATES COURT OF FEDERAL CLAIMS

_______________________

No. 06-305 T

(Judge Marian Blank Horn)
_______________________

CONSOLIDATED EDISON COMPANY
OF NEW YORK, INC. & SUBSIDIARIES,

Plaintiff,

v.

UNITED STATES,

Defendant.

CONSOLIDATED EDISON’S MEMORANDUM IN SUPPORT OF ITS RCFC
52(c) MOTION AND IN OPPOSITION TO THE GOVERNMENT’S BRIEF

REGARDING DEFENDANT’S SPOLIATION OF EVIDENCE CLAIM

DAVID F. ABBOTT
MAYER BROWN LLP
1675 Broadway
New York, NY 10019-5820
Tel: (212) 506-2642
Fax: (212) 849-5642

Of Counsel:
JOEL V. WILLIAMSON
MARCIA G. MADSEN
LUKE LEVASSEUR
MAYER BROWN LLP
Counsel For Plaintiff

January 3, 2008

Case 1:06-cv-00305-MBH Document 94 Filed 01/03/2008 Page 2 of 41

TABLE OF CONTENTS

Page

INTRODUCTION ......................................................................................................................... 1
PROPOSED FINDINGS OF FACT RELATED TO THE GOVERNMENT’S
SPOLIATION OF EVIDENCE CLAIM....................................................................................... 3

A.

B.
C.
D.

Relevant Background Of Consolidated Edison Development And The
EZH Transaction.................................................................................................... 3
Mr. Scher’s Limited Role In The EZH Transaction .............................................. 4
The November 2000 Email System Change Effected By CED............................. 5
Consolidated Edison’s Preservation, Collection, And Production Of
Relevant Materials ................................................................................................. 7
ARGUMENT................................................................................................................................. 8
I.

This Court Dismisses Claims Under RCFC 52(c) When A Party Fails To
Establish The Elements Of Its Claim................................................................................. 8
The Evidence Offered By The Government Does Not Satisfy The Basic
Requirements Of A Spoliation Of Evidence Claim........................................................... 9
The Government Misstates The Elements Of A Spoliation Claim........................ 9
A.
B.
The Government’s Attempts To Establish Consolidated Edison’s Duty
To Preserve Evidence At A Time That Would Support The Spoliation
Of Evidence Claim Are Fundamentally Flawed.................................................. 11
1.

II.

2.

3.

4.

The Government’s Legal Position Regarding When A Party
Should Be Deemed To Anticipate Litigation Is Erroneous ..................... 11
The Earliest Point In Time At Which Consolidated Edison Could
Reasonably Have Anticipated Litigation Regarding The EZH
Transaction Was The Completion Of The IRS’ Audit ............................ 12
The Government’s Assertions That Consolidated Edison
Anticipated Litigation In 1997 Are Flawed............................................. 16
a.

Consolidated Edison Understood “Litigation” For Work
Product Purposes To Encompass An IRS Audit.......................... 16
The Government Is Improperly Arguing For Judicial
Estoppel........................................................................................ 19

b.

The Government’s Assertions That Consolidated Edison
Anticipated Litigation As A Result Of IRS Revenue Ruling 99-14
Cannot Be Supported ............................................................................... 20

C.

None Of The Consolidated Edison Actions On Which The
Government’s Spoliation Claim Is Based Occurred With The Requisite
“Culpable State Of Mind”.................................................................................... 23

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Case 1:06-cv-00305-MBH Document 94 Filed 01/03/2008 Page 3 of 41

1.

2.

Before A Spoliation Sanction Can Be Imposed, This Court
Requires A Higher Degree Of Fault Than The Government Has
Alleged, Much Less Proven..................................................................... 23
The Conduct At Issue In This Case Does Not Constitute A
Culpable State Of Mind, Regardless Of The Standard............................ 25

D.

The Government Has Failed To Prove Either That Documents Were
Destroyed Or That It Was Prejudiced By The Purported Destruction................. 27

III.

There Is No Basis For Any Sanction Against Plaintiff, Much Less The
Overbroad Adverse Inferences The Government Requests............................................. 32
CONCLUSION............................................................................................................................ 34

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Case 1:06-cv-00305-MBH Document 94 Filed 01/03/2008 Page 4 of 41

Cases:

TABLE OF AUTHORITIES

Page(s)

AAB Joint Venture v. United States, 75 Fed. Cl. 432 (2007)................................................... 11-12

Adams v. United States, 42 Fed. Cl. 463 (1998)............................................................................23

Aramburu v. Boeing Co., 112 F.3d 1398 (10th Cir. 1997) ......................................................25, 33

Beatrice Foods Co. v. New England Printing & Lithographing Co.,

899 F.2d 1171 (Fed. Cir. 1990)................................................................................................24

Buckley v. United States, 57 Fed. Cl. 328 (2003) ..........................................................................19

Columbia First Bank, FSB v. United States, 58 Fed. Cl. 54 (2003) ........................................ 23-24

Columbia First Bank, FSB v. United States, 54 Fed. Cl. 693 (2002) ................................ 10, 23-27

Consolidated Aluminum Corp. v. Alcoa, 2006 WL 2583308

(M.D. La. July 19, 2006).............................................................................................. 30, 32-33

Cooper v. United States, 37 Fed. Cl. 28 (1996)...............................................................................9

De Espana v. American Bureau of Shipping, 2007 WL 1686327

(S.D.N.Y. June 6, 2007)...........................................................................................................30

Duy Ngo v. Storlie, 2006 WL 1046933 (D. Minn. Apr. 19, 2006) ................................................10

Eaton Corp. v. Appliance Valves Corp., 790 F.2d 874 (Fed. Cir. 1986).......................................23

EEOC v. Lutheran Social Services, 186 F.3d 959 (D.C. Cir. 1999)..............................................11

Energy Capital Corp. v. United States, 45 Fed. Cl. 481 (2000) ....................................................11

Hardwick Brothers Co. v. United States, 36 Fed. Cl. 347 (1996) .................................................24

Hartford Ins. v. Am. Automatic Sprinkler Sys., 23 F. Supp. 2d 623 (D.

Md. 1998)...........................................................................................................................25, 27

Hodge v. Wal-Mart Stores, Inc., 360 F.3d 446 (4th Cir. 2004) ...............................................25, 33

Hooker v. United States, —Fed. Cl. —, 2007 WL 4238998 (Nov. 28, 2007)................................9

Jandreau v. Nicholson, 492 F.3 (Fed. Cir. 2007) ..........................................................................10

Jinks-Ulmstead v. England, 2005 WL 3312947 (D.D.C. Dec. 7, 2005)........................................33

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Case 1:06-cv-00305-MBH Document 94 Filed 01/03/2008 Page 5 of 41

Kori Corp. v. Wilco Marsh Buggies & Draglines, Inc., 761 F.2d 649

(Fed. Cir. 1985)........................................................................................................................24

New Hampshire v. Maine, 532 U.S. 742 (2001)............................................................................19

Persyn v. United States, 34 Fed. Cl. 187 (1995)..............................................................................9

Residential Funding Corp. v. DeGeorge Financial Corp., 306 F.3d 99

(2d Cir. 2002)...........................................................................................................................10

Sensonics, Inc. v. Aerosonic Corp., 81 F.3d 1566 (Fed. Cir. 1996) ..............................................24

Slattery v. United States, 46 Fed. Cl. 402 (2000) .................................................................... 23-24

In re SmithKline Beecham Corp., 243 F.3d 565 (Fed. Cir. 2000) .................................................11

Tri-County Motors, Inc. v. Am. Suzuki Motor Corp., 494 F. Supp. 2d

161 (E.D.N.Y. 2007)................................................................................................................10

United Medical Supply Co. v. United States, 77 Fed. Cl. 257 (2007) ................................... passim

United States ex rel. Fago v. M&T Mortgage Corp., 235 F.R.D. 11 (D.D.C. 2006) ...................11

United States v. Roxworthy, 457 F.3d 590 (6th Cir. 2006)............................................................11

Vick v. Texas Employment Commission, 514 F.2d 734 (5th Cir. 1975) ...................... 25, 26-27, 33

West v. Goodyear Tire & Rubber Co., 167 F.3d 776 (2d Cir. 1999)...............................................9

Statutes:

26 U.S.C. § 6001..............................................................................................................................7

Miscellaneous:

Fed. R. Civ. P. 50(a) ........................................................................................................................9

Internal Revenue Manual 33.3.6.1.................................................................................................21

IRS Revenue Ruling No. 99-14, 1999-1 C.B. 835, 1999 WL 127035

(Mar. 11, 1999) ............................................................................................................ 14, 20-21

IRS Revenue Ruling No. 2002-69, 2002-2 C.B. 760, 2002 WL 31272941

(Oct. 11, 2002) .........................................................................................................................21

RCFC 37 ....................................................................................................................................9, 34

RCFC 52(c)..............................................................................................................................1, 8, 9

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Case 1:06-cv-00305-MBH Document 94 Filed 01/03/2008 Page 6 of 41

Restatement (Third) of the Law Governing Lawyers § 87 (2000) ..................................................16

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Case 1:06-cv-00305-MBH Document 94 Filed 01/03/2008 Page 7 of 41

IN THE UNITED STATES COURT OF FEDERAL CLAIMS

OF NEW YORK, INC. &
SUBSIDIARIES,

CONSOLIDATED EDISON COMPANY )
)
)
)
)
)
)
)
)
)
)

Defendant.

Plaintiff,

v.

UNITED STATES,

No. 06-305 T
(Judge Marian Blank Horn)

CONSOLIDATED EDISON’S MEMORANDUM IN SUPPORT OF ITS RCFC
52(c) MOTION AND IN OPPOSITION TO THE GOVERNMENT’S BRIEF

REGARDING DEFENDANT’S SPOLIATION OF EVIDENCE CLAIM

Following the close of the Government’s evidence regarding its spoliation claim,

plaintiffs, Consolidated Edison Company of New York, Inc. & Subsidiaries (“Consolidated

Edison” or “plaintiff”),1 made a motion for judgment on partial findings under RCFC 52(c). Tr.

4404-05; see id. at 4405-23. Pursuant to the Court’s instructions during trial, and its December

5, 2007 order, plaintiff respectfully submits this memorandum in support of its motion for

judgment on partial findings and for dismissal of the Government’s spoliation claim, and in

opposition to the Government’s December 13, 2007 brief (“Gov’t Br.”).

INTRODUCTION

The Government led off its case with dramatic assertions of spoliation, but its

presentation of evidence did not measure up to the advance billing. When pressed by the Court

and the plaintiff to specify its claim and “muster up the proof and lay it out on this issue,” the

1 When necessary for clarity, we refer to the holding company, Consolidated Edison

Company of New York, Inc., as “CECONY.” We refer to Consolidated Edison Development as
“CED.” For the convenience of the Court, when the witness is not clear from context, we
provide the witness’ name in a parenthetical following the citation to the trial transcript (“Tr.”).

Case 1:06-cv-00305-MBH Document 94 Filed 01/03/2008 Page 8 of 41

Government failed to satisfy the basic requirements of a spoliation of evidence claim. Tr. 4412-

13, 4433.

In its brief, the Government limits its spoliation of evidence claim to a single event: the

purported loss of electronic communications and attachments (collectively, “email”) in late 2000

when CED changed from a Linux-based, off-site contracted email provider to an Outlook email

system with an on-site server. However, at trial, the Government failed to establish the basic

elements of spoliation—even with respect to this limited claim.

? The Government failed to prove that Consolidated Edison had a duty to preserve

evidence at any time relevant to the defendant’s spoliation claim. The Government bases
its assertion of a duty to preserve evidence on statements plaintiff made in April and May
2007 regarding three 1997 documents—two Shearman & Sterling opinions and an In-
House Memorandum—which plaintiff had argued were protected by the work product
doctrine. Plaintiff’s argument was expressly based on the understanding that anticipation
of an audit and administrative appeal before the Internal Revenue Service (“IRS”) is
sufficient to satisfy the anticipation of litigation test necessary for work product
protection. The Court rejected that argument and held that Consolidated Edison’s
anticipation of an audit, as reflected in the three documents, did not satisfy the
“anticipation of litigation” standard. The Government has offered no other
contemporaneous evidence.

? The submissions made to the Court by plaintiff in April and May 2007 do not establish
“anticipation of litigation” for preservation of evidence purposes. Moreover, at trial and
in its brief, the Government has misquoted plaintiff’s submissions, both of which plainly
defined “anticipation of litigation” to include anticipation of an audit by the IRS. That
mischaracterization does not aid the Government’s position.

? The Government ignores the requirement of this Court and of the Federal Circuit that a
party claiming spoliation of evidence demonstrate a culpable state of mind before any
spoliation sanction may be imposed. In its brief, the Government references this Court’s
decision in United Medical Supply Co. v. United States, 77 Fed. Cl. 257 (2007), and
asserts that proof of “bad faith” is no longer required. Not only has the Department of
Justice taken unacceptably inconsistent positions before this Court with respect to the
“culpable state of mind” requirement and the interpretation of controlling precedent, but
the conduct of the Government in United Medical that merited sanctions—though not an
adverse inference—was vastly more egregious than anything alleged (much less proven)
in this case. The Government has failed to satisfy its burden of a culpable state of mind.

? Critically, the Government failed to demonstrate that email was actually lost as a result of
the CED email system change or that such purported loss was prejudicial to its case. For
instance, the Government erroneously asserts that the CED email system change affected

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Case 1:06-cv-00305-MBH Document 94 Filed 01/03/2008 Page 9 of 41

numerous people who were not employees of CED, were never on the CED email
system, and were thus unaffected by the change. With respect to the two individuals who
were on the CED system and whose emails could have been affected (Messrs. DePlautt
and Muoio), the Government did not prove that their relevant emails from 1997 through
November 2000 (when the spoliation claim ends) were not collected and produced in this
litigation. The Government’s assertions of lost emails are all speculative. What is more,
even if emails were lost, the Government did not prove that any such emails contained
relevant information, and thus that defendant was prejudiced by the purported loss.

? Finally, there is no basis for the Court to impose spoliation-based sanctions, much less

the overly broad sanctions the Government seeks. The Government asks for two
alternative adverse inferences, both of which are extremely broad. But the precedent on
which defendant relies makes clear that any sanction must be tailored to the
circumstances, and just and appropriate to the failure to preserve evidence. The facts in
United Medical were extreme—preservation issues arose after the case was filed;
Government personnel were not informed of their document preservation obligations for
five years after the complaint and did not comply when informed; documents destroyed
in circumstances amounting to malfeasance; and false statements made by the
Department of Justice to the Court. Yet, the Court refused to make an adverse inference
and imposed a lesser sanction. In this case, even if negligent spoliation had been
proven—and it was not—the alternative inferences requested by the Department of
Justice are wildly inappropriate.

In sum, the defendant’s spoliation of evidence claim should be dismissed, and post-trial

briefing of the merits of Consolidated Edison’s tax claims should proceed at this time.

PROPOSED FINDINGS OF FACT RELATED TO THE
GOVERNMENT’S SPOLIATION OF EVIDENCE CLAIM

A.

Relevant Background Of Consolidated Edison Development And The
EZH Transaction

In August 1997, CED began to consider the EZH lease-in lease-out (“LILO”) transaction

that is the subject of this lawsuit.2 Oct. 3, 2007 Stipulation of Fact (“Stipulation”) ¶ 57; Gov’t

Br. 1-2. CED submitted its initial proposal on September 26, 1997 and, after negotiation, the

LILO transaction closed on December 15, 1997. Stipulation ¶¶ 75, 96-101, 104; Tr. 3991-92.

2 To demonstrate the flaws related to the Government’s spoliation of evidence claim, we

address only the parts of the EZH transaction history that are relevant to that claim.

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Case 1:06-cv-00305-MBH Document 94 Filed 01/03/2008 Page 10 of 41

Mr. Brian DePlautt, CED’s CFO and Vice President responsible for leasing transactions

(among other things), was the principal CED employee assigned responsibility for the “day-to-

day business decisions” regarding the EZH transaction. Tr. 4271 (Scher); see Tr. 4133-34

(same); Tr. 1970, 1973 (Muoio). Mr. DePlautt was one of five initial employees of CED and left

the Company in 2005. Tr. 1906-07 (Muoio). CED’s President and Chief Executive Officer, Mr.

Charles Muoio, was responsible for all of CED’s operations and was not responsible for the day-

to-day activities related to EZH. See Tr. 1905 (Muoio).

At the time of this transaction, CED’s Board of Directors consisted of three individuals.

Tr. 670 (Freilich); Tr. 736, 742 (McCartney). Two of those directors were substantially involved

with the analysis and approval of the EZH transaction. Ms. Joan Freilich was the Chief Financial

Officer of Consolidated Edison, and Ms. Mary Jane McCartney was, and is, Consolidated

Edison’s Senior Vice President in charge of gas operations. Tr. 671 (Freilich); Tr. 737-38

(McCartney). CED’s third director, Mr. Paul Kinkle, was not involved with the EZH

transaction. Tr. 4270, 4329 (Scher).

B.

Mr. Scher’s Limited Role In The EZH Transaction

Mr. Andrew Scher began working as a tax attorney in Consolidated Edison’s law

department on September 2, 1997. Tr. 3985, 4002 (Scher). As part of a marketing effort by

which Consolidated Edison wanted its in-house lawyers to become involved with CED activities,

Mr. Scher met with Mr. Muoio on October 6, 1997. Tr. 4135, 4137-38, 4399 (Scher). After that

one-hour meeting, during which EZH was discussed for 15 minutes, Mr. Scher was asked to

“just memorialize the meeting,” which he did. Tr. 4269 (Scher); see Tr. 4148, 4151; see JX 1231

(describing “foreign leasing transactions”).

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Case 1:06-cv-00305-MBH Document 94 Filed 01/03/2008 Page 11 of 41

Two-and-one-half weeks later, CECONY’s then-General Counsel, Mr. Peter O’Shea,

learned about CED’s consideration of the EZH transaction and wanted “some sort of down and

dirty memo” to provide “detail about it.” Tr. 4272. Mr. Scher spoke to Mr. DePlautt, for “half

an hour, maybe an hour” (Tr. 4166) and, without reviewing documents or conducting further

research, provided Mr. O’Shea a high-level description of the complex transaction on October

23, 1997. JX 390; Tr. 4166, 4197, 4271-73 (Scher).

Mr. Scher was assigned to work on the EZH transaction in November 1997. Tr. 4279-80

(Scher); JX 1150. The transaction, for which a bid had been made earlier, had “a very steep

learning curve” (Tr. 4154), and as a non-leasing expert, Mr. Scher’s primary responsibility was

to monitor outside counsel (Shearman & Sterling, who had been engaged much earlier by Mr.

DePlautt) and to “provide[] comments” that “were more of an editorial nature, not so much a

substantive nature.” Tr. 4278; see Tr. 4278-79 (Scher). Mr. Scher was not a decision-maker, but

was “retained to read the project documents and to help prepare the legal deliverables on the

transaction.” Tr. 4280 (Scher); JX 1150; see Tr. 4277-78 (provided opinions regarding “fairly

routine things such as . . . whether Con Edison Leasing was duly organized and duly . . .

authorized to do business, whether a transaction was duly authorized by the board, those sorts . . .

routine deal points”).

C.

The November 2000 Email System Change Effected By CED

Although its arguments at trial suggested a much broader position, in its November 14

and December 13 briefs, the Government expressly limits its spoliation of evidence claim to a

single event: CED’s late 2000 change from a vendor-supplied and externally hosted, Linux email

system to CECONY’s on-site Outlook-based system. Gov’t Nov. 14 Statement Of Spoliation

Claim at 2; Gov’t Br. 3-5. The essential facts related to that email system change are as follows.

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Case 1:06-cv-00305-MBH Document 94 Filed 01/03/2008 Page 12 of 41

Prior to November 2000, CED and CECONY used different email systems, which

operated independently. JX 1335 at 19509; JX 3556 at 19545. CECONY was a large company

that used a Microsoft Outlook-based email system and had its own network of email servers. JX

1335 at 19509. In contrast, CED was a small subsidiary located in a different office in New

York City that used a Linux-based email system which was provided, hosted, and administered

by an outside vendor. JX 1335 at 19509; see Tr. 4283-84.

In November 2000, CED’s email system was changed, and CED’s employees were

moved to Consolidated Edison’s email network. JX 1335 at 19509-10; Gov’t Br. 3. During his

deposition, Mr. Newberry explained that, unlike an Outlook system, CED’s previous Linux

system did not have a central backup or a catastrophic backup system. JX 1335 at 19510, 19513.

Moreover, emails generated using CED’s Linux-based, client-side, email system could not be

migrated or backed up to Consolidated Edison’s Outlook-based, server-side, email system. JX

1335 at 19510.

To maintain important materials, CED employees (email users) were instructed to copy

necessary emails from the Linux-based system to their hard drives (JX 1335 at 19511) by using a

specific command with which persons using that Linux-based system would have been familiar.

JX 1335 at 19512. Although Mr. Newberry did not provide an “instruction session” tailored

specifically “for saving emails locally,” the Government mischaracterizes the IT department’s

actions by asserting that “no one . . . provided assistance or instructions to employees on how to

make such transfers.” Gov’t Br. 4. In fact, CED provided individual training to its employees

on the computer system “on an as-needed basis.” JX 1335 at 19517-18 (Newberry).3

3 The Government notes that Mr. Terrence Walsh, who testified by deposition, was not

aware of any stop orders from the Consolidated Edison legal department with respect to the EZH
transaction. JX 1336 at 19548; see Gov’t Br. 4. Mr. Walsh was not employed in a position in

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Case 1:06-cv-00305-MBH Document 94 Filed 01/03/2008 Page 13 of 41

D.

Consolidated Edison’s Preservation, Collection, And Production Of
Relevant Materials

Consolidated Edison and its subsidiaries retain records of significant transactions to

satisfy myriad corporate and regulatory requirements. For instance, Consolidated Edison

maintains documentation related to large transactions when such materials may be necessary to

support the tax treatment of significant transactions in an eventual audit. See 26 U.S.C. § 6001.

Consolidated Edison’s tax return is audited by the IRS each year. See Stipulation ¶ 301,

Tr. 4281 (Scher). Because of the size of the deductions associated with the EZH transaction,

Consolidated Edison’s executives anticipated that it would be reviewed during an audit. Tr.

4025-28, 4281 (Scher). Accordingly, they maintained documents relevant to the transaction,

pursuant to IRC and other requirements. That said, “[b]ecause there were no litigations

pending,” Mr. Scher, who is a tax attorney and not a litigator, did not believe “there was [any]

reason to issue a hold order.” Tr. 4012-13, 4067.

The IRS’ audit of Consolidated Edison’s 1997 tax return began in 1999, and in May

2001, Mr. Scher became responsible for collecting documents responsive to the IRS’ major

EZH-related Information Document Requests (“IDRs”). Tr. 4303. When IDR No. 74 was

issued in May 2001, JX 1337, Mr. Scher immediately began to collect the relevant documents by

sending an email message to all the potentially relevant employees. JX 1319; Tr. 4295-303

(comparing IDR No. 74 with Mr. Scher’s email). As a result of Mr. Scher’s efforts, a large

which he would have received such instructions. JX 1336 at 19548. In addition, Mr. Walsh’s
testimony related to the CECONY’s system, not CED’s different system (before November
2000)—which, as explained above, did not allow for system backups. JX 1335 at 19510. The
Government implies that hold orders prior to 2000 were commonly used and structured to
capture electronic materials in the same way as they are today following enactment in December
2006 of the new Federal Rules. This implication is erroneous and misleading.

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volume of documents, including contemporaneous emails, were collected from two sets of

locations.

First, Mr. Scher personally collected documents from the CECONY and CED officials

who were involved in the EZH transaction and who continued to work for one of the companies.

Ms. McCartney and Ms. Freilich (through her secretary) provided Mr. Scher all of their

responsive documents, which included “printed out copies of emails” from the relevant time

period. Tr. 4307-08 (Scher). Mr. DePlautt’s secretary “may have collected th[e documents] for

him” and had “stacked them[] up in a room” at CED’s offices for Mr. Scher to review. Tr. 4308.

Mr. Scher did not meet with Mr. Muoio in 2001 because Mr. “Muoio had left by that time” (Tr.

4329); however, Mr. Scher explained that “particularly [for] Con Edison Development [people],

the documents for the various people at [CED] were collected for me, and kept in a room” at

CED’s headquarters. Tr. 4306. Nothing in the record indicates that Mr. Muoio’s documents,

including his emails, were not collected and produced in this manner. See Gov’t Br. 4.

Second, Mr. Scher also collected the materials in CED’s EZH transaction file. That file

included copies of “printouts of emails,” as well as memoranda and faxes.” Tr. 4323-24 (Scher).

Those voluminous materials included emails and correspondence involving all of the participants

in the transaction described above, and the documents were produced to the IRS in response to

the IDRs, and in response to discovery in this lawsuit. The Government did not produce any

evidence to suggest otherwise.

ARGUMENT

I.

This Court Dismisses Claims Under RCFC 52(c) When A Party Fails To
Establish The Elements Of Its Claim

RCFC 52(c) provides that, during trial, the Court may enter judgment against a party

when it determines that, under controlling law, an issue must be decided against that party. The

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applicable standard is not whether the party with the burden of proof—here, the Government—

has made a prima facie case, as it would be for a directed verdict motion in a jury trial. Cooper

v. United States, 37 Fed. Cl. 28, 35 (1996). Instead, because the Judges of this Court serve “as

both the trier of fact and the trier of law,” Rule 52(c) “envisions a different role for the judge

than does Fed. R. Civ. P. 50(a).” Id. (citing Persyn v. United States, 34 Fed. Cl. 187, 194-95

(1995)). Rule 52(c) “permits the judge to weigh the evidence and does not require that the judge

resolve all credibility determinations in favor of” the party presenting the claim. Id.; see Hooker

v. United States, — Fed. Cl. —, No. 03-1501, 2007 WL 4238998 (Nov. 28, 2007).

II.

The Evidence Offered By The Government Does Not Satisfy The Basic
Requirements Of A Spoliation Of Evidence Claim

A.

The Government Misstates The Elements Of A Spoliation Claim

The Government generally states, “[s]poliation is the destruction or significant alteration

of evidence, or failure to preserve property for another’s use as evidence in pending or

reasonably foreseeable litigation.” Gov’t Br. 5 (quoting United Medical, 77 Fed. Cl. at 263); see

West v. Goodyear Tire & Rubber Co., 167 F.3d 776, 779 (2d Cir. 1999).4

When the Government moves beyond its generalized definition of spoliation, and

attempts to address the requirements to prove a spoliation claim, its analysis fails to address the

required elements and is misleading.

The Government attempts to create its own spoliation test, i.e., that, before spoliation can

be found, “[t]he Court here must determine whether there was spoliation, what evidence Plaintiff

was required to preserve, and whether Plaintiff in fact preserved the required information.”

4 Consolidated Edison agrees that any potential spoliation sanction in this case would be
based on the Court’s “inherent authority” (and not RCFC 37), because the conduct about which
the Government complains occurred before a discovery order was issued. See United Medical,
77 Fed. Cl. at 268; Gov’t Br. 5.

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Case 1:06-cv-00305-MBH Document 94 Filed 01/03/2008 Page 16 of 41

Gov’t Br. 5. Significantly, that formulation does not comport with the three elements of a

spoliation of evidence claim routinely described by this Court and other courts: “(1) there was a

duty to preserve the lost evidence; (2) evidence was lost due to a culpable breach of that duty;

and (3) the non-breaching party was prejudiced by the loss of the evidence.” Columbia First

Bank, FSB v. United States, 54 Fed. Cl. 693, 702 (2002) (quoting the Government’s brief); see

Residential Funding Corp. v. DeGeorge Financial Corp., 306 F.3d 99, 105, 108 (2d Cir. 2002).

While, the Government attempts to address (albeit inadequately) the “duty to preserve evidence”

and prejudice issues, Gov’t Br. 6-10, 10-13, it fails to address how the purported spoliation

occurred with a required “culpable state of mind.”

In an apparent effort to downplay the defects in its evidence, in its brief, the Government

also fails to address which party bears the burden of proof. See also Sept. 28, 2007 Joint

Statement—Issues of Law at 2. The relevant precedent makes clear that, as the proponent of the

spoliation of evidence claim, the Government bears the burden of proof with respect to each

element of the claim. See Residential Funding, 306 F.3d at 107 (holding that the party seeking

sanctions for destruction of evidence “must establish” the three elements described above);

Jandreau v. Nicholson, 492 F.3 1372, 1375 (Fed. Cir. 2007); Duy Ngo v. Storlie, No. 03-3376,

2006 WL 1046933, *3 (D. Minn. Apr. 19, 2006) (“The moving party has the burden to prove

spoliation.”); Tri-County Motors, Inc. v. Am. Suzuki Motor Corp., 494 F. Supp. 2d 161, 177

(E.D.N.Y. 2007) (“The party moving for sanctions bears the burden of establishing all . . . of

these elements.” (emphasis added)).

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B.

The Government’s Attempts To Establish Consolidated Edison’s
Duty To Preserve Evidence At A Time That Would Support The
Spoliation Of Evidence Claim Are Fundamentally Flawed

At trial and in its brief, the Government failed to address the timeline of objective

contemporaneous facts requested by the Court concerning when a party in Consolidated Edison’s

position could have anticipated litigation. Instead, defendant focuses primarily on litigation

materials submitted by plaintiff in this lawsuit. We address the Court’s requested timeline in

section II.B.2 below, and explain the errors in the Government’s arguments in sections II.B.3 and

II.B.4 below.

1.

The Government’s Legal Position Regarding When A Party
Should Be Deemed To Anticipate Litigation Is Erroneous

To determine when a party anticipated litigation, the Court must conduct a reasonableness

inquiry based on objective facts. AAB Joint Venture v. United States, 75 Fed. Cl. 432, 445 (2007);

see In re SmithKline Beecham Corp., 243 F.3d 565 (Fed. Cir. 2000) (analyzing work product

assertion; unpublished). As this Court recognized in its June 2007 ruling, that reasonableness

inquiry has two parts. First, in light of the timeline of events from 1997 through 2004, the Court

needs to determine when the relevant Consolidated Edison executives formed “a subjective belief

that litigation was a real possibility” with respect to the EZH transaction. EEOC v. Lutheran

Social Services, 186 F.3d 959, 968 (D.C. Cir. 1999). Second, most importantly, the Court must

determine “whether that subjective anticipation of litigation was objectively reasonable.” United

States v. Roxworthy, 457 F.3d 590, 594 (6th Cir. 2006); see United States ex rel. Fago v. M&T

Mortgage Corp., 235 F.R.D. 11, 16 (D.D.C. 2006); Energy Capital Corp. v. United States, 45 Fed.

Cl. 481, 485 (2000) (when litigation became a “real possibility”).

The Government ignores this two-part test. In an effort to support its position, the

Government also renews its erroneous argument that AAB Joint Venture supports the proposition

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that “the [anticipation of litigation] standard for triggering the duty to preserve relevant evidence

is a lesser standard than the anticipation of litigation necessary for a party to successfully claim

work product protection.” Gov’t Br. 7. But the AAB Joint Venture defendant was denied work

product protection because it failed to meet the only applicable standard, i.e., “that the documents

[at issue] were prepared in anticipation of litigation rather than for a business purpose.” 75 Fed.

Cl. at 445. Nothing in the Court’s reasoning indicates that the “anticipation of litigation” standard

is different in the work product and document preservation contexts. More fundamentally, in its

brief (repeating a failure made during oral argument), the Government does not explain any

functional, purported difference between “anticipation of litigation” for preservation purposes and

“anticipation of litigation” for work product purposes. See Tr. 3335-43 (Government counsel was

unable to explain any meaningful distinction in the purportedly different requirements). The

purportedly differing language from AAB Joint Venture referenced in the Government’s brief is

not a proper distinction,5 and defendant’s argument is not otherwise supported. See Tr. 3335-43.

2.

The Earliest Point In Time At Which Consolidated Edison
Could Reasonably Have Anticipated Litigation Regarding The
EZH Transaction Was The Completion Of The IRS’ Audit

Mr. Scher testified that it was not until sometime in late 2004 or early 2005 that he

determined that Consolidated Edison was unlikely to be able to resolve the dispute with the IRS in

the Service’s Appeals process, as most disputes are resolved. Tr. 4360-65. That subjective

understanding must be considered in light of a series of objective events from which the Court

5 In AAB Joint Venture, the Court denied work product protection, because, among other

reasons, “Defendant does not show that there was a real possibility, rather than . . . just a remote
possibility, of litigation at the time of preparation of the work product.” AAB Joint Venture, 75
Fed. Cl. at 445. Contrary to the Government’s assertions on page seven of its brief, however, the
Court in AAB Joint Venture did not rule that a “remote” possibility of litigation was sufficient to
establish a duty to preserve documents (see id. at 440-42), and we are aware of no precedent
supporting either that formulation or any materially different standard regarding when a party
can reasonably anticipate litigation.

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could conclude that a party could reasonably anticipate litigation. As we demonstrate below, even

if the Court were to disagree with Mr. Scher, the earliest Consolidated Edison could have

reasonably anticipated litigation was at the conclusion of the audit process, when the IRS issued

its Notice of Proposed Adjustment (“NOPA”) on December 13, 2002. JX 10222.

In December 1997, CED completed the EZH transaction. As part of that transaction, it

obtained leasing and tax counsel from leading American law firms and consultants, and its

executives, and Board members, and executives and Board members of Consolidated Edison,

believed the transaction, including the tax treatment, was appropriate. Tr. 903-06 (McCartney).

One does not enter into a large transaction with the hopes or anticipation of litigating over the tax

treatment involved; and there is no contemporaneous evidence that in 1997, Consolidated

Edison’s executives believed that litigation with the IRS was a “real possibility.” To the contrary,

Consolidated Edison received an opinion from outside tax counsel expressing a high level of

confidence (a so-called “should” level or better opinion) that the transaction entitled it to the

expected tax benefits. See JX 86.

Consolidated Edison and Mr. Scher always believed that the Company’s tax return for

1997, like virtually every other tax year, would be audited. Tr. 4281; see Tr. 4026, 4349 (Scher).

The Company also recognized that the size of the deductions involved in the EZH transaction

likely would cause it to be called out in the audit. See Tr. 4025-28, 4281 (Scher). But in 1997,

Consolidated Edison had no reason to believe that the potential dispute that might occur as part of

the audit of the EZH transaction could not be resolved either in the standard IRS audit or in the

Appeals process. Tr. 4286-87; see Tr. 4026, 4281, 4340-41 (Scher). Nothing about such an audit

and appeal, or the Service’s initiation or performance of the audit, would reasonably cause a

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sophisticated taxpayer like Consolidated Edison to anticipate a lawsuit.6 See Tr. 4281 (Scher).

To the contrary, as explained below, the Service conducted an audit and appeal using its normal

procedures, and Consolidated Edison had no reason to infer from the Government’s conduct that

a lawsuit was imminent.

The Government argues that the IRS’ March 1999 issuance of Revenue Ruling No. 99-14

is the latest date at which Consolidated Edison should have anticipated litigation. We

demonstrate the flaws in this argument at section II.B.4 below.

The next “critical path step” was the IRS’ conclusion of the field audit and issuance of

the IRS’ NOPA on December 13, 2002. JX 10222; Tr. 4343; see Tr. 4341-44 (Scher). There,

the IRS essentially disregarded the transaction in its entirety, i.e., the Service disallowed relevant

rental and interest deductions, and it disregarded the income Consolidated Edison was “picking

up as rental income under the sublease.” Tr. 4348. Although the IRS’ total disallowance of the

deductions appears to be a substantial change, such audit decisions constitute “the process,” and

Consolidated Edison gets similar “notices of proposed adjustment every year on every audit.”

Tr. 4349. The Company “anticipated that there would be a challenge of the EZH transaction,”

and that the challenge would be initiated by the IRS in this manner. Tr. 4349. That said, the

IRS’ issuance of the NOPA expressly set forth the Service’s disagreement with Consolidated

Edison’s tax treatment of the EZH transaction. Given that statement, it might be argued that,

6 The Government correctly refrains from asserting that either the IRS’ initiation of the
1997 tax year audit during 1999, or the initiation of IDRs related to that tax year would have
resulted in an anticipation of litigation.

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despite the fact that it was expected, a reasonable taxpayer could have believed that the

probability of litigation increased as a result of the NOPA.7

Finally, the Appeals process consisted of an initial protest filing in approximately March

2003 and several meetings with the “appeals agents.” Tr. 4349-51 (Scher). The IRS’ team (led

by Mr. Luis Arritola) and Consolidated Edison’s representatives met three times: (1) in late

2003, for a “meet and greet” type meeting in which general positions were explained, Tr. 4352-

53; (2) in mid-2004, for a substantive meeting in which proposals were made and the IRS

personnel were “fairly sympathetic to [Consolidated Edison’s] arguments” and were discussing

matters in good faith, Tr. 4355-59; and (3) a final meeting in “the summer of 2005, when the

proposals were not accepted and the negotiations came to an end.” Tr. 4360-66. Between the

second and third meetings, the IRS issued its settlement guidelines for LILO transactions and,

even though the specific amounts for which settlements could be made were redacted, Mr. Scher

came to understand that the range of permissible settlements for the IRS probably was below the

amount Consolidated Edison’s management would likely be willing to accept. Tr. 4361-62. At

that time, “hopes began to dim” that a negotiated resolution could be reached, and although the

IRS continued to negotiate during the third meeting, Mr. Scher began to believe that the dispute

regarding the EZH tax treatment would likely lead to a lawsuit. See Tr. 4362-66.

In its brief, the Government does not contest that the audit, IDRs, NOPA, IRS Appeals,

and settlement meetings are standard parts of the dispute resolution process; nor does defendant

contest that virtually all disputes with the IRS are settled through the audit and Appeals

processes—and thus do not involve litigation. The Government cannot seriously, in good faith,

7 Another issue in the 1997 audit related to a change in accounting for depreciation of

assets and involved significant deductions that were disallowed in their entirety. That issue was
resolved during the appeals process. See Tr. 4305-06 (Scher).

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contend that there was no serious chance of resolution of this matter without litigation, as doing

so would imply that the Service and Mr. Arritola were not negotiating in good faith. Indeed, the

IRS issued settlement guidelines—not “non-settlement mandates”—and a settlement proposal

was made by the IRS. The Government’s position in this lawsuit would render the IRS’

resolution process a sham because the defendant is telling the Court that any reasonable taxpayer

should have known that the Appeals process was a waste of time and that a lawsuit was

inevitable.

3.

The Government’s Assertions That Consolidated Edison
Anticipated Litigation In 1997 Are Flawed

The Government primarily argues that Consolidated Edison should have anticipated a

lawsuit in 1997. Defendant supports this assertion with two, mid-2007 legal submissions in this

lawsuit. Even putting aside the fact that the Government’s argument is not based on objective

contemporaneous facts, the brief and affidavit in question used the phrase “anticipation of

litigation” in connection with the tax audit and Appeals process in a manner that the Government

has repeatedly mischaracterized. When read fairly and in conjunction with the Court’s rulings,

those submissions make clear that in 1997 Consolidated Edison did not consider a lawsuit to be a

“real possibility.”

a.

Consolidated Edison Understood “Litigation” For Work
Product Purposes To Encompass An IRS Audit

Consolidated Edison’s April 27 memorandum was a legal argument submitted as part of a

discovery dispute related to three documents, which plaintiff argued were prepared in anticipation

of litigation and were covered by the work product doctrine. In that April 27 brief, Consolidated

Edison specifically explained that when it used the word “litigation,” it “include[d] ‘adversarial

proceedings before an agency.’” Pl. Apr. 27 Memorandum at 10 (quoting Restatement (Third) of

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Case 1:06-cv-00305-MBH Document 94 Filed 01/03/2008 Page 23 of 41

the Law Governing Lawyers § 87 cmt. h (2000)). Accordingly, when plaintiff argued that “the

EZH investment[] was certain to lead to an IRS audit and extremely likely to result in litigation,”

and that its “expectation of litigation” was “reasonable[],” that discussion must be read in context

of the immediately preceding definition of “litigation” (id. at 10-11)—e.g., in a manner that

includes the Service’s audit and Appeals processes. The Government’s arguments in its brief—

and its counsel’s misleading questions during cross-examination on this issue at trial—

deliberately ignore the manner in which “litigation” was defined in the April 27 brief and, thus,

substantially mischaracterize Consolidated Edison’s position. See Tr. 4021-22, 4026-27, 4036-37

(Scher); Gov’t Br. 2, 8.

The Government similarly attempts to misuse Mr. Scher’s subsequent May 10, 2007

affidavit, JX 1318, which was submitted in support of the earlier April 27 memorandum with

regard to the three documents at issue. The Government’s brief focuses exclusively on

paragraphs 3 and 14 of the affidavit, which contain Mr. Scher’s conclusion that the 1997

Shearman & Sterling memoranda and the In-House Memorandum were created in anticipation of

litigation. Gov’t Br. 2, 8. But the Government ignores paragraph 5 of the affidavit, in which Mr.

Scher explains his understanding of the meaning of the phrase “anticipation of litigation.” There,

Mr. Scher explained that “Con Edison NY had ample reason to believe that any contemplated

lease-leaseback transaction that it entered into was likely to be challenged on audit by the IRS and

might result in litigation.” JX 1318 ¶ 5 (emphasis added). Mr. Scher’s affidavit, when read

fairly, is consistent with his trial testimony that he believed Consolidated Edison’s 1997 tax filing,

including the EZH transaction, would be audited, and that he knew that disputes which cannot be

resolved in the standard audit and Appeals process “might result in litigation.” Id.; see Tr. 4286-

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87.8 In short, the Government, by selectively and misleadingly quoting the memorandum and the

affidavit, attempts to portray Consolidated Edison as anticipating a lawsuit in 1997. But that is

not what the documents say—they define “litigation” as including an IRS audit and Appeals

processes.

In June 2007, this Court disagreed with Consolidated Edison’s position that anticipation of

an audit represents a sufficiently immediate threat to satisfy the objective requirement of

reasonable “anticipation of litigation.” June 6, 2007 Hearing Tr. 29-30, 32-34; Tr. 3976 (Court:

“[T]here is a lot of indication that an IRS audit does not necessarily trigger a contemplation of

litigation, but I repeated that on . . . Thursday [November 8], [and] I strongly believe that.”).

Although its understanding of the law being applied by the Court (per its June 2007 ruling)

changed, Consolidated Edison’s factual position was not altered in any way as a result of that

ruling. The Company, and Mr. Scher, always understood that an audit and an IRS appeal

regarding the EZH transaction were likely, with a subsequent lawsuit being a possibility. Tr.

4286-87. In our April 27, 2007 brief, the IRS audit and Appeals processes plainly were included

within the definition of “litigation,” and because Consolidated Edison anticipated an audit, the

manner in which litigation was defined resulted in an argument that litigation was anticipated.

The Court’s June 2007 legal ruling disaggregated the audit and Appeals process from a lawsuit.

While Consolidated Edison continued to anticipate the Service’s processes, the Court did not

8 The Government improperly continues its attack on Mr. Scher, asserting that he “now
opportunistically asserts that his understanding . . . is in fact much narrower than he previously
believed.” Gov’t Br. 8 n.4. Although he now understands (per the Court’s ruling) that
anticipating an audit is not the same as anticipating litigation, as demonstrated above, Mr.
Scher’s trial testimony and affidavit are consistent. Indeed, it is the Government’s
mischaracterization of the April 27 memorandum and the affidavit that are selective and
“opportunistic.”

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consider “litigation” as including those processes. Given the Court’s June 2007 ruling, it was no

longer correct to say that plaintiff anticipated litigation in 1997.

b.

The Government Is Improperly Arguing For Judicial
Estoppel

Even if the Court were to conclude that Consolidated Edison changed its position with

respect to when it reasonably anticipated litigation, the Government’s attempt to constrain the

plaintiff from relying on the Court’s June 2007 ruling cannot be reconciled with judicial estoppel

principles. See Gov’t Br. 9. Under the judicial estoppel doctrine, when “a party assumes a certain

position in a legal proceeding, and succeeds in maintaining that position, he may not thereafter,

simply because his interests have changed, assume a contrary position, especially if it be to the

prejudice of the party who has acquiesced in the position formerly taken by him.” New

Hampshire v. Maine, 532 U.S. 742, 749 (2001). But, as this Court has made clear, “judicial

estoppel does not preclude [a party] from taking the position” if the party had not “successfully

asserted [that] position” previously, i.e., the party must have “received a benefit from the

previously taken position in the form of judicial success.” Buckley v. United States, 57 Fed. Cl.

328, 341-42 (2003). As Consolidated Edison did not prevail on its anticipation of litigation

argument regarding the motion to compel, i.e., the Court denied plaintiff’s work product claim, it

would be improper to restrain plaintiff from adapting its legal position to the Court’s ruling and

statements.

What is more, the Government’s current position cannot be reconciled with the arguments

it made—and prevailed on—regarding the work product dispute in May 2007. As the Court

explained in response to Consolidated Edison’s November 5, 2007 motion to limit testimony

during trial, the Court’s June 2007 ruling applied only to the three documents at issue. Tr. 3357-

59. On April 3, 2007, the Government sought release of those documents based on the contention

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that they were not created in anticipation of litigation in 1997—and it prevailed with that

argument. Now, the Government relies on Consolidated Edison’s submissions related solely to

those same documents to contend Consolidated Edison did anticipate litigation. The Government

has no other factual basis for its argument, and by using Consolidated Edison’s rejected briefs and

affidavit, has changed its position (on an argument it won) in violation of judicial estoppel

principles. The Court’s June 2007 ruling is dispositive as to whether the In-House Memorandum

and the Shearman & Sterling materials were created in anticipation of litigation, and the

Government cannot change its position, as it is attempting to do.

4.

The Government’s Assertions That Consolidated Edison
Anticipated Litigation As A Result Of IRS Revenue Ruling
99-14 Cannot Be Supported

The Government also contends that, if Consolidated Edison could not reasonably

anticipate litigation in 1997, plaintiff should have anticipated litigation, and began preserving

evidence, when the IRS issued Revenue Ruling No. 99-14 in March 1999. Gov’t Br. 9-10.

Although Consolidated Edison was aware of the Revenue Ruling, Mr. Scher explained that it did

not change the Company’s belief that any dispute with the IRS would be resolved in the ordinary

audit and Appeals processes. The Government improperly ignores that evidence.

When Revenue Ruling No. 99-14 was issued, Consolidated Edison was concerned

initially, as the Ruling raised issues regarding LILO-type transactions. Tr. 4282, 4340-41 (Scher).

The Company’s in-house and outside counsel analyzed the Ruling carefully, and they determined

that it had no merit whatsoever. Tr. 4282; see Govt. Br. 9. At most, Mr. Scher explained that the

1999 Revenue Ruling “heightened [their] awareness that the transaction would be picked up on

audit,” as the transaction listing provisions of the Ruling made that outcome more likely. Tr.

4282-83; see Tr. 4096-99. But Consolidated Edison did not conclude that litigation was more

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likely, as it was difficult to imagine that the Government would pursue litigation based on the

weak legal position set forth in the Revenue Ruling.

Mr. Scher’s and Consolidated Edison’s legal analysis of Revenue Ruling No. 99-14 was

correct. In 2002, the IRS withdrew that Ruling and, thereby, implicitly recognized the weakness

of its analysis. See Tr. 4098-99, 4282 (Scher); IRS Revenue Ruling No. 2002-69, 2002-2 C.B.

760, 2002 WL 31272941 (Oct. 11, 2002) (“modif[ying] and supersed[ing]” Revenue Ruling No.

99-14). In light of the subsequent withdrawal of Revenue Ruling No. 99-14, and Consolidated

Edison’s undisputed contemporaneous understanding of its analytical weakness,