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.


 


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


 


2

















 


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;


 


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;


 


1

















 


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


 


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;


 


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,


 


2

















 


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.


 


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:

  	
   

  
						



 


3

















 


[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