**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 incompromise with regard to the past, current, and future tax liabilities of Xceland its affiliates (“Xcel”) relating to the income tax treatment of the PERQ IIand 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 additionaltax and deficiency interest that Xcel has previously paid or is deemed to havepaid under this settlement for tax years 1993 and 1994.

 

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

 

2.            A.    The $32,230,069 of payments previously made ordeemed to have been made under this settlement for tax years 1993 and 1994 willbe 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 totalamount of $13,110,312;

 

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

 

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

 

ii.     Deficiency interest on the Section 6662 penaltiesfor 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 theamount of $15,561,073.

 

3.     Except as stated above, Xcel will be permitted toclaim the COLI-related interest expense deductions on its tax returns for1995-2007.

 

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

 

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

 

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

 

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

 

2

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8.     If implementation of this settlement for anytaxable year results in a proposed refund or credit in an amount exceeding theamount set forth in IRC Section 6405(a), no such refund or credit shall be madeuntil the expiration of 30 days from the date on which a report of such refundor credit is made to the Joint Committee on Taxation, as required by Section6405(a).

 

9.     The Department of Justice and/or IRS will provideXcel 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

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*Exhibit A*

 

**Closing Agreement on Final Determination**

**Covering Specific Matters**

 

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Under section 7121 of the Internal Revenue code, Xcel Energy, Inc. andSubsidiaries (EIN: 84-0296600), 414 Nicollet Mall, Minneapolis, Minnesota55401, on behalf of itself and its subsidiaries (collectively, the “Taxpayer”),and the Commissioner of Internal Revenue (the “Commissioner”), make thefollowing agreement (“Closing Agreement”):

 

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

 

WHEREAS, the Taxpayer claimed deductions for interest paid or accruedon 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 IVPlan) by Provident Life & Accident Insurance Company (“Provident”);

 

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

 

WHEREAS, the Taxpayer terminated the contracts on               **DATE** by completely surrendering them toProvident;

 

WHEREAS, pursuant to its termination of the Contracts, the Taxpayerreceived from Provident the total surrender value of the Contracts, an amountequal to the gross aggregate value of the policy value accounts as of October31, 2007;

 

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

 

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

 

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

 

1

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**Closing Agreement with Xcel Energy, Inc. andSubsidiaries (EIN: 84-0296600)**

 

WHEREAS, the Taxpayer’s entitlement to the interest deductions for thetaxable years ended December 31, 1993 and December 31, 1994, together withadditions 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 thetaxable 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 TaxCourt case bearing Docket No. 24264-04;

 

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

 

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

 

WHEREAS, the Taxpayer and the United States government have reached aglobal basis of settlement (the “Settlement”) in the prosecution of theDistrict Court case that is intended to resolve the disputed interestdeductions for all taxable years beginning with the taxable year ended December31, 1993;

 

WHEREAS, pursuant to the Settlement, Taxpayer agreed to pay the UnitedStates $64,423,263 in complete settlement of the Taxpayer’s past, present, andfuture 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 withrespect to its liabilities for federal income tax and interest generated by thedisallowed deductions for the taxable years ended December 31, 1993 andDecember 31, 1994;

 

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

 

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

 

2

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**Closing Agreement with Xcel Energy, Inc. andSubsidiaries (EIN: 84-0296600)**

 

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

 

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

 

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

 

WHEREAS, pursuant to the Settlement, for the taxable year ended December31, 1993, the Taxpayer is liable for a penalty and interest on that penalty inthe amounts of $964,619.00 and $1,981,313.58, respectively;

 

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

 

WHEREAS, pursuant to the Settlement, the parties have resolved theirTax Court case (Docket No. 24264-04) by agreeing that for the tax year endedDecember 31, 1995, there is an underpayment of taxpayer’s federal income taxesin 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 statutoryinterest on that underpayment in the amount of $15,561,073.21, that thetaxpayer is not liable for any penalty for 1995 due to the disallowed COLIdeductions, 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 onloans secured by the Contracts;

 

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

 

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

 

WHEREAS, the Taxpayer and the Commissioner desire to resolve thismatter with finality,

 

3

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**Closing Agreement with Xcel Energy, Inc. andSubsidiaries (EIN: 84-0296600)**

 

**NOW IT IS HEREBY DETERMINED AND AGREED FORFEDERAL 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 accruedon loans secured by the Contracts.

 

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

 

3.               None of the cash surrender valuereceived by, or credited to the benefit of the Taxpayer pursuant itstermination of its policies on            **Date** shall be included in the Taxpayer’sgross income.

 

4.               The provisions of the Internal RevenueCode in effect at the time of death shall determine the Federal income taxtreatment of any and all amounts paid as death benefits on the lives ofindividuals who died prior to the surrender of the Contracts.

 

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

 

This agreement is final and conclusive except:

 

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

 

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

 

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

 

4

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**Closing Agreement with Xcel Energy, Inc. andSubsidiaries (EIN: 84-0296600)**

 

**By signing, the above parties certify thatthey 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

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[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 settlementoffer, dated September 19, 2007, and transmitted on September 20, 2007, in theabove-titled action. This is to advise you that the offer has been accepted onbehalf of the Attorney General. We will advise you on the method for making thepayment 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                    |                    |
|        |                                   |                         |  |

 

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