Exhibit 10.01


 


[Letterhead of Fredrikson & Byron, P.A].


 


September 19, 2007


 


BY ELECTRONIC MAIL AND U.S. MAIL


 


	
  Seth G. Heald, Esq.

  	
   

  	
  SETTLEMENT COMMUNICATION

  



R. Scott Clarke, Esq.


Gregory E. Van Hoey, Esq.


Matthew C. Hicks, Esq.


P.O. Box 7238


Ben Franklin Station


Washington, D.C. 20044


 


Re: Xcel Energy Inc. v. United States (D. Minn.)


 


Gentlemen:


 


On behalf of Xcel Energy Inc., I am submitting the following offer in
compromise with regard to the past, current, and future tax liabilities of Xcel
and its affiliates (“Xcel”) relating to the income tax treatment of the PERQ II
and PERQ IV COLI plan policies for the tax years 1993 and forward:


 


The terms of the offer are:


 


1.     Xcel will pay the IRS the total amount of
$64,423,263 as follows:


 


A.    The IRS will retain the $32,230,069 of additional
tax and deficiency interest that Xcel has previously paid or is deemed to have
paid under this settlement for tax years 1993 and 1994.


 


B.    Xcel will pay the remaining $32,193,194 to the
United States on or before October 31, 2007.


 


2.            A.    The $32,230,069 of payments previously made or
deemed to have been made under this settlement for tax years 1993 and 1994 will
be allocated to tax and interest as follows:


 


i.      1993 and 1994 tax in the total amount of
$19,119,757; and


 


ii.     1993 and 1994 interest on that tax in the total
amount of $13,110,312;


 

















 


B.    The
$32,193,194 remaining payment referenced in paragraph 1B will be allocated as
follows:


 


i.      Section 6662 penalties for 1993 and 1994 in the
total amount of $2,151,861;


 


ii.     Deficiency interest on the Section 6662 penalties
for 1993 and 1994 in the total amount of $4,135,751;


 


iii.    Tax for 1995 in the amount of $10,344,509; and


 


iv.    Deficiency interest on that tax for 1995 in the
amount of $15,561,073.


 


3.     Except as stated above, Xcel will be permitted to
claim the COLI-related interest expense deductions on its tax returns for
1995-2007.


 


4.     On or before October 31, 2007, Xcel will cause PSR
Investments, Inc. (“PSRI”), its wholly-owned subsidiary that currently owns the
policies, to give notice to Provident (now “Unum”) that it is surrendering all
of its PERQ II and PERQ IV policies whose insureds have not died as of the date
of such notice. Xcel will not claim a deduction for any policy loan interest
expense paid or accrued with respect to any PERQ II or PERQ IV policy for any
date following the date of the notice of surrender.


 


5.     The government will permit Xcel to surrender those
policies without recognition of any taxable gain. The government reserves its
right, however, to review and adjust the tax treatment of any item relating to
ownership of the policies, other than the amounts paid to PSRI in consideration
of its surrender of the policies. For purposes of this provision, the amounts
payable to PSRI pursuant to the PERQ IV mortality experience refund agreement
will not be treated as amounts paid to PSRI in consideration of its surrender
of the policies.


 


6.     Following written acceptance of this offer, the
IRS and Xcel will enter into a closing agreement, a copy of which is attached
as Exhibit A to this offer letter.


 


7.     Following written acceptance of this offer, the
IRS and/or the Department of Justice Tax Division will execute a stipulation of
dismissal with prejudice in the pending suit for refund in the federal District
Court for the District of Minnesota and such other documents as may be
necessary to conclude Xcel’s three pending Tax Court petitions, with each party
to bear its own costs, disbursements, and fees.


 


2

















 


8.     If implementation of this settlement for any
taxable year results in a proposed refund or credit in an amount exceeding the
amount set forth in IRC Section 6405(a), no such refund or credit shall be made
until the expiration of 30 days from the date on which a report of such refund
or credit is made to the Joint Committee on Taxation, as required by Section
6405(a).


 


9.     The Department of Justice and/or IRS will provide
Xcel with periodic status reports regarding their review of this offer.


 


Thank you for your assistance.


 


 


	
   

  	
  Very truly yours,

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  /s/ Steven Z. Kaplan

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Steven Z. Kaplan

  	
   

  



 


Enclosure


	
  cc:

  	
   

  	
  James J. Duevel w/enclosures

  
	
   

  	
   

  	
  James L. Altman, Esq. w/enclosures

  
	
   

  	
   

  	
  James E. Dorsey, Esq. w/enclosures

  
	
   

  	
   

  	
  David Jacobson, Esq. w/enclosures

  



 


SZK:jra


 


3
















 


Exhibit A


 


Closing Agreement on Final Determination


Covering Specific Matters


 






 


Under section 7121 of the Internal Revenue code, Xcel Energy, Inc. and
Subsidiaries (EIN: 84-0296600), 414 Nicollet Mall, Minneapolis, Minnesota
55401, on behalf of itself and its subsidiaries (collectively, the “Taxpayer”),
and the Commissioner of Internal Revenue (the “Commissioner”), make the
following agreement (“Closing Agreement”):


 


WHEREAS, the Taxpayer filed consolidated federal income tax returns
with one or more affiliated corporations;


 


WHEREAS, the Taxpayer claimed deductions for interest paid or accrued
on loans secured by life insurance contracts (hereinafter referred to as the “Contracts”)
originally issued on November 1, 1984 (PERQ II Plan) and May 1, 1985 (PERQ IV
Plan) by Provident Life & Accident Insurance Company (“Provident”);


 


WHEREAS, a dispute has arisen between the parties as to whether the
interest paid or accrued on the loans secured by the Contracts (the “interest
deductions”) is deductible in the taxable years ended December 31, 1993 through
December 31, 2007;


 


WHEREAS, the Taxpayer terminated the contracts on               DATE by completely surrendering them to
Provident;


 


WHEREAS, pursuant to its termination of the Contracts, the Taxpayer
received from Provident the total surrender value of the Contracts, an amount
equal to the gross aggregate value of the policy value accounts as of October
31, 2007;


 


WHEREAS, pursuant to its termination of the Contracts, the Taxpayer
received from Provident a cash payment equal to the net surrender value of the
Contracts, which amount was equivalent to the remaining aggregate value of the
policy value accounts after repaying the outstanding policy loans and accrued
interest, which amounts were secured by the policy value accounts;


 


WHEREAS, a dispute has arisen between the parties as to how the
surrender value of the Contracts should be taxed for federal tax purposes;


 


WHEREAS, the correct federal tax treatment of any other amounts
received by the Taxpayer relative to the Contracts which are neither death
benefits nor amounts received as surrender value (for example, amounts received
pursuant to the experience refund provisions of the PERQ IV Plan) is not
determined under this Closing Agreement, and the Commissioner is not precluded
from challenging the Taxpayer’s federal tax treatment of such amounts;


 


1

















 


Closing Agreement with Xcel Energy, Inc. and
Subsidiaries (EIN: 84-0296600)


 


WHEREAS, the Taxpayer’s entitlement to the interest deductions for the
taxable years ended December 31, 1993 and December 31, 1994, together with
additions to tax under I.R.C. section 6662, are at issue in Xcel Energy Inc.
v. United States, Docket No. 04-CV-01449 (D. Minn);


 


WHEREAS, the Taxpayer’s entitlement to the interest deductions for the
taxable years ended December 31, 1995, December 31, 1996 and December 31, 1997,
together with additions to tax under I.R.C section 6662 are at issue in the Tax
Court case bearing Docket No. 24264-04;


 


WHEREAS, the Taxpayer’s entitlement to the interest deductions for the
taxable years ended December 31, 1998 and December 31, 1999, together with
additions to tax under I.R.C. section 6662, are at issue in the Tax Court case
bearing Docket No. 5833-05;


 


WHEREAS, the Taxpayer’s entitlement to the interest deductions for the
taxable years ended December 31, 2000, December 31, 2001, and December 31, 2002
together with additions to tax under I.R.C. section 6662, are at issue in the
Tax Court case bearing Docket No. 19889-06;


 


WHEREAS, the Taxpayer and the United States government have reached a
global basis of settlement (the “Settlement”) in the prosecution of the
District Court case that is intended to resolve the disputed interest
deductions for all taxable years beginning with the taxable year ended December
31, 1993;


 


WHEREAS, pursuant to the Settlement, Taxpayer agreed to pay the United
States $64,423,263 in complete settlement of the Taxpayer’s past, present, and
future federal income taxes, penalties, and interest relating to the Contracts;


 


WHEREAS, pursuant to the Settlement, the Taxpayer’s required payment of
$64,423,263 was reduced to $32,193,194 to reflect a credit in the amount of
$32,230,069 for amounts paid, or deemed to have been paid by the Taxpayer with
respect to its liabilities for federal income tax and interest generated by the
disallowed deductions for the taxable years ended December 31, 1993 and
December 31, 1994;


 


WHEREAS, pursuant to the Settlement, on October 31, 2007, the Taxpayer
paid $32,193,194 to the Commissioner;


 


WHEREAS, pursuant to the Settlement, the parties have resolved their
United States District Court case by agreeing that for the tax years ended
December 31, 1993 and December 31, 1994, no interest paid or accrued on loans secured
by the Contracts shall be allowable to the Taxpayer as deduction under any
provision of the Internal Revenue Code;


 


2

















 


Closing Agreement with Xcel Energy, Inc. and
Subsidiaries (EIN: 84-0296600)


 


WHEREAS, pursuant to the settlement, the taxpayer paid or was deemed to
have paid the amounts of $32,230,069 in tax and interest for the taxable years
ended December 31, 1993 and December 31, 1994;


 


WHEREAS, pursuant to the settlement, the taxpayer paid or was deemed to
have paid the amounts of $19,119,757 in tax and $13,110,312 in interest for the
taxable years ended December 31, 1993 and December 31, 1994;


 


WHEREAS, the correct federal tax treatment of the interest amounts
deemed to have been paid by the taxpayer pursuant to this settlement is not
determined under this Closing Agreement, and the Commissioner is not precluded
from challenging the taxpayer’s federal tax treatment of such amounts;


 


WHEREAS, pursuant to the Settlement, for the taxable year ended December
31, 1993, the Taxpayer is liable for a penalty and interest on that penalty in
the amounts of $964,619.00 and $1,981,313.58, respectively;


 


WHEREAS, pursuant to the Settlement, for the taxable year ended
December 31, 1994, the Taxpayer is liable for a penalty and interest on that
penalty in the amounts of $1,187,242.00 and $2,154,436.62, respectively;


 


WHEREAS, pursuant to the Settlement, the parties have resolved their
Tax Court case (Docket No. 24264-04) by agreeing that for the tax year ended
December 31, 1995, there is an underpayment of taxpayer’s federal income taxes
in the amount of $10,344,509.57 attributable to the disallowance of
$29,555,741.63 in COLI deductions, that the taxpayer is liable for statutory
interest on that underpayment in the amount of $15,561,073.21, that the
taxpayer is not liable for any penalty for 1995 due to the disallowed COLI
deductions, and that for the tax years ended December 31, 1996 and December 31,
1997, the Taxpayer will be allowed to deduct the interest paid or accrued on
loans secured by the Contracts;


 


WHEREAS, pursuant to the Settlement, the parties have resolved their
Tax Court case (Docket No. 5833-05) by agreeing that for the tax years ended
December 31, 1998 and December 31, 1999, the Taxpayer will be allowed to deduct
the interest paid or accrued on loans secured by the Contracts;


 


WHEREAS, pursuant to the Settlement, the parties have resolved their
Tax Court case (Docket No. 19889-06) by agreeing that for the tax years ended
December 31, 2000, December 31, 2001, and December 31, 2002, the Taxpayer will
be allowed to deduct the interest paid or accrued on loans secured by the
Contracts; and


 


WHEREAS, the Taxpayer and the Commissioner desire to resolve this
matter with finality,


 


3

















 


Closing Agreement with Xcel Energy, Inc. and
Subsidiaries (EIN: 84-0296600)


 


NOW IT IS HEREBY DETERMINED AND AGREED FOR
FEDERAL INCOME TAX PURPOSES THAT:


 


1.               For the tax years ended December 31,
2003, December 31, 2004, December 31, 2005, December 31, 2006, and December 31,
2007, the Taxpayer will be allowed as a deduction the interest paid or accrued
on loans secured by the Contracts.


 


2.               The Taxpayer will not be allowed any
deductions for interest paid or accrued on loans secured by the Contracts for
any taxable years beginning after December 31, 2007.


 


3.               None of the cash surrender value
received by, or credited to the benefit of the Taxpayer pursuant its
termination of its policies on            Date shall be included in the Taxpayer’s
gross income.


 


4.               The provisions of the Internal Revenue
Code in effect at the time of death shall determine the Federal income tax
treatment of any and all amounts paid as death benefits on the lives of
individuals who died prior to the surrender of the Contracts.


 


5.               The life insurance contracts that are
subject of this closing agreement will not be reinstated.


 


This agreement is final and conclusive except:


 


1.               the matter it relates to may be reopened
in the event of fraud, malfeasance, or misrepresentation of a material fact;


 


2.               it is subject to the Internal Revenue
Code sections that expressly provide that effect be given to their provisions
(including any stated exception for I.R.C. section 7122) notwithstanding any
other law or rule of law; and


 


3.               if it relates to a tax period ending
after the date of this agreement, it is subject to any law, enacted after the
agreement date, that applies to that contract period.


 


4

















 


Closing Agreement with Xcel Energy, Inc. and
Subsidiaries (EIN: 84-0296600)


 


By signing, the above parties certify that
they have read and agreed to the terms of this document.


 


 


	
  XCEL ENERGY, INC. AND SUBSIDIARIES

  
	
   

  	
   

  
	
  By:

  	
   

  	
   

  	
  Date Signed 

  	
   

  	
   

  
	
   

  	
   

  
	
  Title:

  	
   

  
						



 


 


	
  COMMISSIONER OF INTERNAL REVENUE

  
	
   

  	
   

  
	
  By:

  	
   

  	
   

  	
  Date Signed 

  	
   

  	
   

  
	
   

  	
   

  
	
  Title:

  	
   

  
						



 


5
















 


[Letterhead of the U.S. Department of Justice
– Tax Division]


 


September 21, 2007


 


Via E-mail and U.S. Mail


 


Steven Z. Kaplan, Esq.


Fredrikson & Byron, P.A.


200 S. 6th St., Ste. 4000


Minneapolis, MN 55402


skaplan@fredlaw.com


 


	
   

  	
  Re:

  	
  Xcel Energy, Inc. v. United States

  
	
   

  	
   

  	
  Case No. 04-CV-1449 (D. Minn.)

  



 


Dear Mr. Kaplan:


 


This letter refers to your revised settlement
offer, dated September 19, 2007, and transmitted on September 20, 2007, in the
above-titled action. This is to advise you that the offer has been accepted on
behalf of the Attorney General. We will advise you on the method for making the
payment by separate correspondence.


 


 


	
   

  	
  Sincerely yours,

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  RICHARD T. MORRISON

  	
   

  
	
   

  	
  Acting Assistant Attorney General

  	
   

  
	
   

  	
  Tax Division

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   /s/ Seth G. Heald

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  SETH G. HEALD

  	
   

  
	
   

  	
  Chief

  	
   

  
	
   

  	
  Civil Trial Section,

  	
   

  
	
   

  	
  Central Region