**Exhibit 10.01**

 

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

 

September 19, 2007

 

**BYELECTRONIC 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:

 

Onbehalf of Xcel Energy Inc., I am submitting the following offer in compromisewith regard to the past, current, and future tax liabilities of Xcel and itsaffiliates (“Xcel”) relating to the income tax treatment of the PERQ II andPERQ IV COLI plan policies for the tax years 1993 and forward:

 

Theterms 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 ofadditional tax and deficiency interest that Xcel has previously paid or isdeemed to have paid under this settlement for tax years 1993 and 1994.

 

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

 

2.                                    A.           The $32,230,069 of payments previouslymade or deemed to have been made under this settlement for tax years 1993 and1994 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 thetotal amount of $13,110,312;

 

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

 

i.                  Section 6662 penalties for 1993 and1994 in the total amount of $2,151,861;

 

ii.               Deficiency interest on the Section 6662penalties 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 1995in the amount of $15,561,073.

 

3.               Except as stated above, Xcel will bepermitted to claim the COLI-related interest expense deductions on its taxreturns for 1995-2007.

 

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

 

 

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

 

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

 

7.               Following written acceptance of thisoffer, the IRS and/or the Department of Justice Tax Division will execute astipulation of dismissal with prejudice in the pending suit for refund in thefederal District Court for the District of Minnesota and such other documentsas may be necessary to conclude Xcel’s three pending Tax Court petitions, witheach party to bear its own costs, disbursements, and fees.

 

8.               If implementation of this settlement forany taxable year results in a proposed refund or credit in an amount exceedingthe amount set forth in IRC Section 6405(a), no such refund or creditshall be made until the expiration of 30 days from the date on which a reportof such refund or credit is made to the Joint Committee on Taxation, asrequired by Section 6405(a).

 

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

 

Thank you for yourassistance.

 
|   | 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

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*Exhibit A*

 

**Closing Agreement on FinalDetermination**

**Covering Specific Matters**

 

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Undersection 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 returns with one or moreaffiliated corporations;

 

WHEREAS,the Taxpayer claimed deductions for interest paid or accrued on loans securedby 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 oraccrued on the loans secured by the Contracts (the “interest deductions”) isdeductible in the taxable years ended December 31, 1993 through December 31,2007;

 

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

 

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

 

WHEREAS,pursuant to its termination of the Contracts, the Taxpayer received fromProvident a cash payment equal to the net surrender value of the Contracts,which amount was equivalent to the remaining aggregate value of the policyvalue 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 the surrender value of theContracts should be taxed for federal tax purposes;

 

WHEREAS,the correct federal tax treatment of any other amounts received by the Taxpayerrelative to the Contracts which are neither death benefits nor amounts receivedas surrender value (for example, amounts received pursuant to the experiencerefund provisions of the PERQ IV Plan) is not determined under this ClosingAgreement, and the Commissioner is not precluded from challenging the Taxpayer’sfederal tax treatment of such amounts; ClosingAgreement with Xcel Energy, Inc. and Subsidiaries (EIN: 84-0296600)

 

**WHEREAS, the Taxpayer’sentitlement 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 yearsended December 31, 1995, December 31, 1996 and December 31,1997, together with additions to tax under I.R.C section 6662 are at issue inthe Tax Court case bearing Docket No. 24264-04;

 

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

 

1

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WHEREAS,the Taxpayer and the United States government have reached a global basis ofsettlement (the “Settlement”) in the prosecution of the District Court casethat is intended to resolve the disputed interest deductions for all taxable yearsbeginning 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 futurefederal income taxes, penalties, and interest relating to the Contracts;

 

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

 

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

 

WHEREAS,pursuant to the Settlement, the parties have resolved their United StatesDistrict Court case by agreeing that for the tax years ended December 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;

 

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

 

WHEREAS,the correct federal tax treatment of the interest amounts deemed to have beenpaid by the taxpayer pursuant to this settlement is not determined under thisClosing Agreement, and the Commissioner is not precluded from challenging thetaxpayer’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 theamounts 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 theamounts 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 amountof $10,344,509.57 attributable to the disallowance of $29,555,741.63 in COLIdeductions, that the taxpayer is liable for statutory interest on thatunderpayment in the amount of $15,561,073.21, that the taxpayer is not liablefor any penalty for 1995 due to the disallowed COLI deductions, and that forthe tax years ended December 31, 1996 and December 31, 1997, theTaxpayer will be allowed to deduct the interest paid or accrued on loanssecured 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 theinterest 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 beallowed 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

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**ClosingAgreement with Xcel Energy, Inc. and Subsidiaries (EIN: 84-0296600)**

 

**NOW IT IS HEREBY DETERMINED ANDAGREED 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 theinterest paid or accrued on 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 value receivedby, or credited to the benefit of the Taxpayer pursuant its termination of itspolicies 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 finaland 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.

 

**Bysigning, the above parties certify that they have read and agreed to the termsof this document.**

 
| XCEL ENERGY,  INC. AND SUBSIDIARIES |
|-------------------------------------|
|                                |   |
| By:                                 |   |   | Date Signed |   |   |
|                                |   |
| Title:                              |   |
|                                     |  |  |  |  |  |

 
| COMMISSIONER OF  INTERNAL REVENUE |
|-----------------------------------|
|                              |   |
| By:                               |   |   | Date Signed |   |   |
|                              |   |
| Title:                            |   |
|                                   |  |  |  |  |  |

 

3

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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. 6thSt., 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, inthe above-titled action. This is to advise you that the offer has been acceptedon behalf of the Attorney General. We will advise you on the method for makingthe 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                    |               |
|        |                                   |                    |  |

 

 

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