Free Reply to Response to Motion - District Court of Federal Claims - federal

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IN THE UNITED STATES COURT OF FEDERAL CLAIMS _______________ No. 95-758T (Judge Nancy B. Firestone) _______________

NATIONAL WESTMINSTER BANK PLC, Plaintiff, v. THE UNITED STATES, Defendant.

_______________ PLAINTIFF'S REPLY IN FURTHER SUPPORT OF ITS MOTION FOR SUMMARY JUDGMENT _______________

D. SCOTT WISE Attorney of Record for Plaintiff Davis Polk & Wardwell 450 Lexington Avenue New York, New York 10017 (212) 450-4000 (telephone) (212) 450-3800 (facsimile)

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TABLE OF CONTENTS Page TABLE OF AUTHORITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ii TABLE OF EXHIBITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iv PRELIMINARY STATEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 ARGUMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 I. II. Defendant has Not Identified a Material Question of Fact on the Interest Rate Issue . . . . 5 Defendant has Not Identified a Material Question of Fact on the Capital Issue . . . . . . . . 9 A. Defendant's responses to plaintiff's proposed findings are legally insufficient . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Defendant has not identified specific facts that support an adjustment or prevent summary judgment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

B.

CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

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TABLE OF AUTHORITIES Cases Page

Arthur A. Collins, Inc. v. Northern Telecom Ltd., 216 F.3d 1042 (Fed. Cir. 2000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Ferguson Propeller, Inc. v. United States, 59 Fed. Cl. 51 (2003) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Gregory Lumber Co. v. United States, 11 Cl. Ct. 489 (1986) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Johnston v. IVAC Corp., 885 F.2d 1574 (Fed. Cir. 1989) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574 (1986) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 National Westminster Bank PLC v. United States, 58 Fed. Cl. 491 (2003) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9, 11 Novartis Corp. v. Ben Venue Labs., Inc., 271 F.3d 1043 (Fed. Cir. 2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Precision Pine & Timber, Inc. v. United States, 63 Fed. Cl. 122 (2004) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4-5 Seal-Flex, Inc. v. Athletic Track & Court Construction, 98 F.3d 1318 (Fed. Cir. 1996) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 SRI Int'l v. Matsushita Elec. Corp. of Am., 775 F.2d 1107 (Fed. Cir. 1985) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Union Carbide Corp. v. Am. Can Co., 724 F.2d 1567 (Fed. Cir. 1984). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

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Statutes & Rules RCFC 16(f) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 RCFC 56 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 RCFC 56(e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 RUSCC 56(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Treas. Reg. § 1.482-1(d)(2) (as amended in 1968) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Treas. Reg. § 1.882-5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

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TABLE OF EXHIBITS Supplemental Declaration of Roger Walmsley dated August 15, 2005 ("Walmsley Supp. Decl.") . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . H Supplemental Affidavit of Robert T. Clair, Ph.D, KPMG LLP dated August 16, 2005 ("Clair Supp. Aff."). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I Supplemental Declaration of Kevin D. Bandoian, Partner, PricewaterhouseCoopers LLP dated August 18, 2005 ("Bandoian Supp. Decl.") . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . J Supplemental Declaration of Edward Jukes dated August 16, 2005 ("Jukes Supp. Decl.") . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . K Supplemental Affidavit of Mario J. Verdolini, Jr. dated August 18, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . L Plaintiff's FRE summary with respect to NatWest Holdings Inc. and Subsidiaries - Summary of Taxable Income for Tax Years 1983-1987 and excerpts of the United States Federal Income Tax Returns of NatWest Holding Inc. and Subsidiaries for the years 1983-1987 . . . . . . . . . . . . . . . . . . . . . . . . . . 90 Excerpts from Plaintiff's Responses and Objections to Defendant's Eighth Set of Requests for Production and Copying of Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 Excerpts from the Transcript of the Status Conference before Judge Firestone on July 13, 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92 A220 report from the New York branch, for the account of NatWest Commercial Services, Inc., dated June 30, 1982 . . . . . . . . . . . . . . . . . . . . . . . 93 Excerpts from the Transcript of the Status Conference before Judge Firestone on March 9, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94

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IN THE UNITED STATES COURT OF FEDERAL CLAIMS _______________ No. 95-758T (Judge Nancy B. Firestone) _______________ NATIONAL WESTMINSTER BANK PLC, Plaintiff, v. THE UNITED STATES, Defendant. _______________ PLAINTIFF'S REPLY IN FURTHER SUPPORT OF ITS MOTION FOR SUMMARY JUDGMENT _______________ Plaintiff respectfully submits this Reply in further support of its Motion for Summary Judgment pursuant to Rule 56 of the Rules of the United States Court of Federal Claims. PRELIMINARY STATEMENT In its initial moving papers, NatWest established that it was entitled to summary judgment because the evidence was uncontroverted that (i) the interest paid and received by its U.S. branch operations on interbranch and intercompany borrowings was at arm's-length rates and (ii) the interest expense deducted from NatWest's U.S. branch profits was incurred in the ordinary course of NatWest's banking business and was not deducted on amounts designated as capital or in fact allotted to the branch for capital purposes.

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In its opposition papers, defendant makes no serious attempt to address the substantial evidence plaintiff has adduced in support of its motion, or to identify, as it must, any evidence in the record that would create a genuine issue of material fact requiring trial. Indeed, apart from a proposal by defendant's tax computation specialist to reduce plaintiff's refund claim by $426,260 in taxes (which plaintiff is willing to accept solely for purposes of this motion), defendant's opposition papers amount to nothing more than a patchwork of previously rejected legal arguments, unsupported opinion, unfounded speculation and petty complaints that are all legally insufficient to delay further the proper resolution of this case. Although defendant expresses disagreement with many of plaintiff's proposed findings of uncontroverted fact, it defies the Court's March 10, 2005 order by failing to include "a proposed revision for each finding with which it does not agree in addition to noting the basis for its objection." Defendant ignores uncontroverted testimony on the interest rate issue, despite its own expert's admission that a direct comparison of the transactions he examined "is consistent with arm's-length rates . . . ." (Read Decl. App. ¶ 69.)1 As to the clearing accounts, defendant's expert has abandoned his prior criticisms and now proposes an adjustment based almost entirely on a contention that one of NatWest's U.S. subsidiaries should have paid an overdraft rate of interest on a revolving loan facility (not a clearing account). Even if defendant had based its proposal on a comparable transaction, the proposal would be inappropriate because income from a U.S. affiliate has never been at issue in

Defendant also complains that it did not have sufficient time to perform a sampling analysis of NatWest's money market transactions, even though the Court ordered plaintiff to establish the repository over a year ago after defendant's counsel argued that "[w]e haven't ever had an opportunity to do that sort of [sampling] analysis" and requested six months to do it. (Conf. Tr. 30:9-10, 33:12-14, July 13, 2004 (Pl.'s Ex. 92).) 2

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this case and is not within the scope of the pleadings. Moreover, any increases to income from a U.S. affiliate ­ if proposed by the I.R.S. on audit ­ would have required corresponding decreases to the income of the U.S. affiliate, with no net effect on taxes paid to the U.S. government. In any event, defendant's proposed adjustment is unacceptably speculative. It is based on Mr. Read's extrapolations from data for just three months selected from the last two of the seven years at issue, and includes adjustments for periods in which the records indicate that at least one of the accounts did not even exist. As to the capital issue, neither defendant nor any of its experts has proposed any adjustment. Indeed, Mr. Akin concedes that the "methodology adopted by Plaintiff could conceivably have been accepted by [Inland] Revenue" (Akin Decl. ¶ 16(b)), while Dr. Kolbe states that he is "unable to propose particular adjustments" (Kolbe Decl. ¶ 77). Defendant also improperly disputes nearly all of plaintiff's proposed findings of fact with respect to the capital issue on the basis of evasive, nonresponsive allegations or statements of experts unsupported by specific facts. In some cases, defendant bases its denial on the lack of specific documentation ­ ignoring the direct testimony of witnesses and documents made available to defendant in the repository for six months. Defendant proposes factual inquiries far beyond those contemplated by the Treaty and for which it adduces no meaningful evidence. And defendant's experts continue to advance their theory, previously rejected by the Court, that "economic" principles of bank capital should determine the outcome here. In sum, defendant's opposition papers do not and cannot controvert the substantial evidence NatWest has adduced in support of its motion. The law is clear that the Court need not accept defendant's efforts to create a triable issue of fact on the basis of unsupported opinion and 3

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speculation. For this reason, and the additional reasons set forth below, summary judgment in the amount of $65,808,076, plus interest, should be granted in favor of NatWest. (Def.'s Ex. 5 ¶ 8.) ARGUMENT As the moving party in this summary judgment motion, plaintiff must establish the absence of any dispute of material fact. Seal-Flex, Inc. v. Athletic Track & Court Construction, 98 F.3d 1318, 1321 (Fed. Cir. 1996). Plaintiff has met its initial burden for summary judgment. "When the movant has met its initial burden, the non-movant must respond with sufficient evidence to show that there is a material factual dispute and that, on the non-movant's evidence, the movant is not entitled to judgment as a matter of law." Id. For the reasons set forth below, it is clear that defendant has failed to respond with any evidence to demonstrate a material factual dispute. First, defendant's responses to plaintiff's proposed findings of fact are similar to its responses to plaintiff's earlier requests for admission in that they are nothing more than argument. Responses of this nature are inadequate in a summary judgment proceeding, and in this case they violate the Court's order specifically directing defendant to propose revisions to plaintiff's proposed findings. Defendant "may not rest upon the mere allegations or denials of his pleading, but his response . . . must set forth specific facts showing that there is a genuine issue for trial." RCFC 56(e).2 Denials in the form of "[u]nsupported assertions or conclusory allegations are insufficient to withstand summary judgment." Precision Pine & Timber, Inc. v. United States, 63

See also Gregory Lumber Co. v. United States, 11 Cl. Ct. 489, 497-98 (1986) ("In the case where the moving party makes the proper showing pursuant to the standards of RUSCC 56(c), the entry of summary judgment, therefore, will not be withheld based simply on naked allegations or unsupported conclusions of the non-moving party . . . [rather] the non-movant must go forward and identify specific credible facts . . . ."). 4

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Fed. Cl. 122, 127 (2004) (citing SRI Int'l v. Matsushita Elec. Corp. of Am., 775 F.2d 1107 (Fed. Cir. 1985)); see also Ferguson Propeller, Inc. v. United States, 59 Fed. Cl. 51, 57-58 (2003) (Firestone, J.) ("The non-moving party must do more than simply show that there is some metaphysical doubt as to the material facts.") (quoting Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986)). Second, defendant's experts offer no credible evidence of a material fact in dispute. The Federal Circuit consistently has held that an expert's "conclusory statement" will be "wholly insufficient to raise a genuine evidentiary dispute . . . ." Johnston v. IVAC Corp., 885 F.2d 1574, 1578 (Fed. Cir. 1989); see also Novartis Corp. v. Ben Venue Labs., Inc., 271 F.3d 1043, 1051 (Fed. Cir. 2001) ("`[T]he expert must set forth the factual foundation for his opinion' . . . [t]he factual predicate of an expert's opinion must find some support in the record, and . . . mere theoretical speculations lacking a basis in the record will not create a genuine issue of fact.") (quoting Arthur A. Collins, Inc. v. Telecom Ltd., 216 F.3d 1042, 1047-48 (Fed. Cir. 2000)); Union Carbide Corp. v. Am. Can Co., 724 F.2d 1567, 1572 (Fed. Cir. 1984) (holding "unsupported conclusory opinion" of expert did not raise genuine issue of material fact). In order to justify proceeding to trial in this case, defendant must do more than rely on general denials. It has not done so. I. Defendant has Not Identified a Material Question of Fact on the Interest Rate Issue. Roger Walmsley testified in his deposition and by declaration that in his 11 years of experience in the New York and San Francisco operations, the interest rates used by the U.S. operations at all times were "market rates" and "no favors [were] given by any of the units . . . to any other units . . . ." (E.g., Walmsley Decl. ¶ 11.) In his experience, he was unaware of any 5

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money market transactions that were undertaken with other than market rates of interest. (E.g., Walmsley Decl. ¶ 47.) Scott Payseur, a trader on the money market desks in New York and Chicago during the years at issue, testified to the same effect in his deposition and affidavit. (E.g., Payseur Aff. ¶ 22.) Mr. Walmsley also testified that he always insisted on terms for clearing accounts that would yield a commercially reasonable profit for the U.S. branch operations and that those accounts reflected commercial interest rates. (E.g., Walmsley Decl. ¶¶ 29, 47.) Plaintiff's expert Dr. Clair has corroborated this testimony in his expert report and affidavits. Defendant has offered no evidence to controvert this record. In the case of the money market transactions, defendant's expert Mr. Read still offers no conclusion of his own, and indeed concedes that a "direct comparison of the interest rates on the underlying transactions [in the records he chose to examine] is consistent with arm's-length pricing . . . ." (Read Decl. App. ¶ 69.) As before, he suggests that the best way to evaluate whether the money market transactions reflected arm's-length interest rates is to perform a sampling analysis, but he admits that he, unlike Dr. Clair, has still not attempted to do so. (Read Decl. ¶ 8.) Mr. Read's and defendant's suggestion that defendant's failure is somehow plaintiff's responsibility is absurd. The Court ordered plaintiff to open up a repository of its business records over a year ago in response to defendant's request for an opportunity to perform such an analysis (Conf. Tr. 32:11-33:18, July 13, 2004 (Pl.'s Ex. 92)), and plaintiff complied fully with the Court's order. Finally, Mr. Read's criticisms of Dr. Clair's sampling analysis, including his assertion that the sample is representative only of itself and not of the population of the U.S. branch's placements and deposits, is without merit. (See Clair Supp. Aff. ¶¶ 25-30.)

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In the case of the clearing accounts, Mr. Read has abandoned the suggestion advanced in his prior report that interest expense paid by the New York branch to NatWest's London Overseas Branch and its subsidiary International Westminster Bank did not reflect arm's-length practice. Mr. Read now asserts a $10,553,577 adjustment to income that relates almost entirely to income received by the New York branch on a revolving loan facility provided to NatWest Commercial Services, Inc., a U.S. affiliate. (See Walmsley Supp. Decl. ¶ 3; Clair Supp. Aff. ¶¶ 46-48.) Interest income received from a U.S. affiliate has never been part of the adjustment at issue in this case.3 Even if interest income received from U.S. affiliates were at issue here, the adjustment Mr. Read proposes would be inappropriate. If the New York branch had charged the indirect U.S. subsidiary the additional amount of interest income asserted by Mr. Read, there would have been no net effect on taxes paid to the U.S. government because an increase in taxable income of the U.S. branches would have been offset by a corresponding decrease in taxable income reported by NatWest Commercial Services, Inc. If the I.R.S. had made such an adjustment to the income of the New York branch, it would have been required to make a correlative offsetting adjustment to the income of the U.S. affiliate.4 Defendant should not be
3

The Court permitted defendant to conduct discovery with respect to interest income of the U.S. branches on the grounds that plaintiff had put in issue the interest income received from non-U.S. branches and foreign affiliates when it rejected the I.R.S.'s Treasury Regulations section 1.882-5 calculations, which excluded those amounts from taxable income. See Conf. Tr. 9:5-10:25, July 13, 2004 (Pl.'s Ex. 92) (defendant's description of how "interest income from foreign subsidiaries" and interest income "received on an inter-branch basis" were put in issue by plaintiff because they were excluded from income under the Treasury Regulations section 1.882-5 calculations disputed by plaintiff). Interest income received from U.S. affiliates, in contrast, was fully included in taxable income under the I.R.S.'s Treasury Regulations section 1.882-5 calculations and therefore has never been at issue in this case. See Treas. Reg. § 1.482-1(d)(2) (as amended in 1968) ("Whenever the district director makes adjustments to the income of one member of a group of controlled taxpayers . . . he shall (continued...) 7
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permitted to derive a windfall from its own delay by asserting Mr. Read's newly proposed adjustment two decades after the years at issue, long after the returns of NatWest Commercial Services, Inc. closed. In any event, the adjustment Mr. Read proposes is not at arm's-length. It assumes that the revolving loan facility should have borne interest at the overdraft rates NatWest established for certain dollar clearing accounts. (See Clair Supp. Aff. ¶¶ 47-52.) This does not withstand scrutiny. The rate that Mr. Read applies, prime plus 1.5%, was intended to discourage overdrafts, and, in fact, the accounts to which it applied were rarely overdrawn; in other words, third parties did not borrow significant sums from NatWest at this rate. (Walmsley Decl. ¶¶ 28, 30; see also Clair Supp. Aff. ¶ 51.) In contrast, the revolving loan facility provided to NatWest Commercial Services, Inc. was an approved extension of credit at an interbank rate. (See Walmsley Supp. Decl. ¶¶ 3, 5.) Mr. Walmsley testifies that if the U.S. branches had sought to charge interest on that facility at overdraft rates, NatWest Commercial Services, Inc. would have declined the offer of such expensive funds and would have had no difficulty in finding alternative sources of funding at the interbank rates it was actually charged. (Id. ¶ 5.) Leaving aside Mr. Read's faulty assumption that dollar clearing accounts are comparable to revolving loan facilities, there is no justification for his reliance on just three months of data taken from the last two years at issue to create a speculative adjustment covering all seven years. This is especially true given the volume of data plaintiff has made available to defendant. (See

(...continued) also make appropriate correlative adjustments to the income of any other member of the group involved in the allocation."). During the years 1983 through 1987, there was sufficient taxable income to absorb the increased interest deductions of NatWest Commercial Services, Inc. See Pl.'s Ex. 90. 8

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Index of Materials Made Available to the United States Pursuant to Judge Firestone's July 16, 2004 Order (Pl.'s Ex. 91).) In addition, there is no evidence that he selected those months randomly, and his proposed adjustment for the seven years ignores the fact that the revolving loan facility for NatWest Commercial Services, Inc. was not even opened until mid-1982. (See June 30, 1982 A220 report for NatWest Commercial Services, Inc. (Pl.'s Ex. 93).) Mr. Read's declaration does not identify evidence raising a triable issue of fact. His assumptions are contrary to facts supported by uncontradicted direct testimony, and his extrapolation is wildly speculative and specious. Assuming that Mr. Read even qualifies as an expert on the interest rates of commercial banks,5 his submission does not suffice to defeat summary judgment. II. Defendant has Not Identified a Material Question of Fact on the Capital Issue. In 2003, the Court ruled that the Treaty requires profits of NatWest's U.S. operations to be determined from the properly maintained books of account of the branch, and that the government could examine those books and adjust them where "interest expense was deducted on amounts designated as capital on its books or on amounts that were in fact allotted to it for capital purposes, such as funding capital infrastructure." National Westminster Bank PLC v. United States, 58 Fed. Cl. 491, 505 (2003) ("NatWest II"). Defendant has not proposed any adjustments with respect to capital under the Court's 2003 opinion.6 Rather, Defendant's opposition papers merely continue its effort to avoid the
5

Compare Pl.'s Prop. Finding 70 (proposing that Mr. Read's resume does not disclose any experience with banks) with Read Decl. App. ¶ 70 (responding that his resume describes experience with insurance companies).
6

See, e.g., Def.'s Resp. to Pl.'s Req. Admis. 2.69 (Pl.'s Ex. 67) ("Defendant's position (continued...) 9

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Court's opinion, ignoring established facts and attempting to resurrect previously considered and rejected legal theories. Defendant disputes nearly all of plaintiff's proposed findings on the capital issue without proposing any alternative findings of its own, as it was expressly required to do under the Court's March 10, 2005 order.7 In addition, defendant attempts to find in the U.K. Inland Revenue Manual an economic capital imputation approach similar to that previously rejected by this Court, despite the fact that defendant's own U.K. tax expert Mr. Akin does not offer support for that approach and acknowledges that the most common approach of Inland Revenue inspectors was to determine branch capital based on the cost of fixed assets. (Akin Decl. ¶ 34.) Defendant also argues for a range of potential factual inquiries relating back to the inception of the U.S. operations ­ inquiries that would impose an extraordinary burden on any taxpayer attempting to establish that it had met the requirements of the Treaty. This cannot be what the drafters of the Treaty had in mind when they adopted the separate accounting method with the aim of "interfering as little as possible with existing business organization and refraining from inflicting demands on foreign enterprises, which are necessarily onerous." OECD Model Treaty 81-82, Commentary on Art. 7(1) ¶ 9. A. Defendant's responses to plaintiff's proposed findings are legally insufficient.

Defendant disputes plaintiff's proposed findings of fact relating to the capital issue on the

(...continued) on this request will be expressed in and consistent with its experts' report."); Kolbe Report 4 (Pl.'s Ex. 61) ("I am unable to identify an economically reasonable approach to determine the amounts to be treated as allotted capital for NatWest's U.S. branches."); Kolbe Decl. ¶ 77 (Def.'s Ex. 3) (". . . I have been unable to propose particular adjustments.") RCFC 16(f) describes the Court's authority, among other things, to treat plaintiff's proposed findings of fact as having been established. 10
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basis of evasive, nonresponsive allegations or statements of experts unsupported by specific facts.8 In some cases, defendant bases its denial on the lack of specific documentation, ignoring testimony of witnesses and documents made available to it in the repository for six months.9 In other cases, defendant incorporates the objections of its experts who rely on defendant's previously rejected theory that either the Court's opinion or the Inland Revenue Manual requires "economic" principles of bank capital to determine the outcome here.10 Specifically, defendant and Dr. Kolbe allege that "the language `designated as or in fact allotted as'" capital is "Plaintiff's, not the Manual's or the Court's, and it materially misinterprets the plain language of the Manual" (Kolbe Decl. App. ¶ 121; Def.'s Opp'n 35-36), even though the Court expressly agreed with NatWest that under the Treaty the government could examine plaintiff's books and adjust them where "interest expense was deducted on amounts designated as capital on its books or on amounts that were in fact allotted to it for capital purposes, such as funding capital infrastructure." NatWest II at 505 (emphasis added). Defendant's response to Plaintiff's Proposed Finding of Fact 115 is one example of defendant's nonresponsiveness. Plaintiff proposed a finding that "the New York branch posted its capital loan charges to account 89072103, entitled `Interest Paid, Capital Funds.'" As support for this statement, plaintiff cited to copies of account statements that had been attached to Mr. Bandoian's October 29, 2004 report on the capital issue. For its response, defendant states "disputed" and ­ rather than addressing the specific facts proposed or proposing a revision ­ refers

See, e.g., Def.'s Resp. to Pl.'s Prop. Findings 95-97, 101-105, 110-112, 114-117, 120123, 125, 127-137.
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8

Def.'s Resp. to Pl.'s Prop. Findings 95-97, 99-101, 103, 106-108. Def.'s Resp. to Pl.'s Prop. Findings 102, 104, 105, 107-109, 121, 129, 130. 11

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generally to the Inland Revenue Manual and its experts' declarations. Dr. Kolbe offers his own response to Proposed Finding of Fact 115, but, like defendant, he never addresses the specific fact that plaintiff proposed, i.e., that the New York branch posted those entries to account 89072103 Interest Paid, Capital Funds. Defendant's response is inadequate to controvert the point and certainly cannot establish that there is any genuine dispute that would justify a trial. In another example, defendant disputes Plaintiff's Proposed Finding of Fact 39, which states that during the years at issue, "NatWest's U.S. branch operations had accurate and reliable records." Defendant does this even though it has not disputed the following key facts: The daily activity of the U.S. branches was captured on a computer system which automatically generated numerous reports each day, including profit and loss statements and balance sheets. (Pl.'s Prop. Finding 41; Def.'s Resp.) There were daily procedures for confirming the accuracy of entries into the computer system. (Pl.'s Prop. Finding 42; Def.'s Resp.) Reconciliation processes are a normal and important aspect of reliable recordkeeping in the banking business. (Pl.'s Prop. Finding 44; Def.'s Resp.) Consistent with common banking practice, the U.S. operations performed ongoing reconciliations of account differences resulting from misdirected payments or from items in transit, in clearing, or awaiting settlement, as was typical in a banking operation of NatWest's size and scope. (Pl.'s Prop. Finding 43; Def.'s Resp.) During the years at issue, NatWest's U.S. branches prepared profit and loss statements, balance sheets and other reports for each branch using data from the computer-generated reports. (Pl.'s Prop. Finding 46; Def.'s Resp.) During the years at issue, NatWest's U.S. branches regularly submitted financial statements and reports for each branch to the head office and certified them to be in accordance with the books and, to the best of their knowledge and belief, to be true and accurate. (Pl.'s Prop. 12

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Finding 47; Def.'s Resp.) Defendant does not dispute any of these facts, and plaintiff submits that they establish the reliability and accuracy of the books and records of its U.S. branches. Defendant nevertheless attempts to dispute the accuracy and reliability of plaintiff's books and records by making unsupported and speculative statements. Defendant disputes testimony that bank regulators examined the books of the U.S. branches and consistently found them to be satisfactory, but the documents defendant cites (management charts) have nothing to do with books and records. (Def.'s Resp. to Pl.'s Prop. Finding 49 (citing Def.'s Ex. 11).) Defendant implies that the London office performed error checking that was not reflected in the books of the U.S. branches (Def.'s Opp'n 13; Def.'s Resp. to Pl.'s Prop. Findings 40, 42, 43, 45), but the deposition transcript it cites supports the opposite conclusion (Samaroo Dep. 80:24-82:23 (Def.'s Ex. 9) (describing a collaborative reconciliation process between New York and the head office and entry of adjustments in New York's records resulting therefrom)). Contrary to defendant's assertion, the "quick close" nature of the U.S. branch financial statements is not evidence of their unreliability; if it were, the financial statements of most public companies would be unreliable. (See Bandoian Supp. Decl. ¶ 12.) The fact that some operational matters for the U.S. branches were accounted for centrally on the books of the New York branch (Def.'s Opp'n 17) is evidence that the U.S. branches should be viewed in the aggregate ­ not that their records were inaccurate or unreliable. Defendant asserts that the books and records of the U.S. branches are not complete even though the record contains profit and loss statements and balance sheets for each of the branches for each year at issue and the repository plaintiff made available to defendant and its experts contained daily microfiche records for the great majority of the business days during the years at issue. (See Pl.'s Exs. 28-42, 51.) 13

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B.

Defendant has not identified specific facts that support an adjustment or prevent summary judgment.

Although defendant professes to dispute proposed findings of fact, it declines to identify any additional amounts of interest deducted on capital that it asserts was in fact allotted to the U.S. branches. Instead, it speculates that additional areas of factual inquiry might uncover evidence of interest deducted on amounts advanced to the U.S. branches for capital purposes. This unfounded speculation is insufficient to prevent summary judgment. Defendant contends that NatWest must establish by a tracing of funds that its purchases of fixed assets were undertaken with a branch's retained profits rather than capital from the head office. (Def.'s Opp'n 26.) This argument is based upon a misreading of the paragraph 10.1a of Appendix 9A. of the Inland Revenue Manual, which states that, even where a newly established branch receives an advance from the head office to fund the purchase of fixed assets, the interest expense on that advance may be deductible if the taxpayer is able to trace the advance to an external borrowing by the head office.11 Where, as here, the branch was in existence for some time and the evidence establishes that the head office did not fund fixed asset purchases, the Manual does not suggest that direct tracing would be required. (Jukes Supp. Decl. ¶ 22.) Defendant asserts that NatWest lacks records necessary to determine the amount the U.S. branches spent on fixed assets and therefore that it is not entitled to summary judgment: NatWest has not retained (or at least has not made available) records of the amounts its U.S. branches spent on fixed assets over the years. Without records of the branches' total cost of fixed assets, it is impossible to determine how much to presume (in the absence of Inland Revenue Banking Manual, App. 9.A ¶10.1a ("If premises are acquired when the branch is set up they are capital assets and prima facie where the funds came from Head Office it will be treated as allotted capital. . . . [B]ut it is up to the bank to show that the acquisition is not to be treated in this way. The bank can do this by tracing the cost of the building through to a specific borrowing. . . ."). 14
11

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tracing) should be treated as allotted capital. Without records, NatWest can't trace the funding of fixed assets purchases in an effort to meet its heavy burden of showing that funds other than capital from the head office were actually used in the acquisitions. (Def.'s Opp'n 26-27.) Defendant is or should be aware (i) that the repository contained contemporaneous records (on a form "Ret 9") of fixed asset purchases for each of the years at issue;12 (ii) that the certified balance sheets and daily microfiche records plaintiff made available for the years 1979 through 1987 contained detailed information relating to the fixed asset accounts during those years;13 (iii) that financial statements from 1977 included a policy statement that fixed assets should not be paid for with interest-bearing funds and that the policy continued during the years at issue;14 and (iv) that from 1977 through 1981, the U.S. branches made adjustments to an interest-free balance sheet line item entitled "balance due to head office re: fixed assets" to reflect periodic changes in the amount of fixed assets shown on the balance sheet.15 These records are more than sufficient to evaluate fixed asset purchases. Moreover, the evidence establishes that the U.S. branches had retained profits and other branch capital sufficient to cover their fixed assets as of the beginning of the years at issue, so there is no need to consider records of fixed asset purchases going back to the inception of the U.S. operations. (See Def.'s Opp'n 26-27; Jukes Supp. Decl. ¶ 23.)

12

See Pl.'s Ex. 48 (available in Repository Box 112).

See Pl.'s Ex. 28-42 (profit and loss statements and balance sheets for years at issue); Pl.'s Ex. 51 (index of microfiche available for the years at issue); see also Pl.'s Ex. 91 (index of boxes in repository); Boxes 115, 159 (microfiche for U.S. branches for years 1979 and 1980); Box 112 (Folders 3, 5, 6, 7), Box 113 (Folders 2-4) (pre-1981 paper records, including financial statements from the 1970s). See Scott Decl. and Ex. A thereto which was available to defendant in Box 112 (Folder 3); see also Pl.'s October 29, 2004 Report on the Capital Issue.
15 14

13

See Pl.'s Ex. 51 (regarding microfiche for 1981); Boxes 112, 113, 115, 159. 15

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Defendant asserts that "[p]ayments over the years that reduce the balance of the branches' so-called `capital loans' could be considered repatriations which, as the Court has indicated, are a problem that require adjustments to the books," citing to the Court's January 18, 2005 Order Denying Motion for Reconsideration. (Def.'s Opp'n 28.) Plaintiff submits that the repatriations to which the Court was referring were related to the capital loan charges plaintiff described as having been paid on retained profits, which could be viewed as having been automatically repatriated and advanced back to the branch as a loan. Plaintiff has identified and conceded all of those amounts, and defendant's attempt here and in the reports of its "experts" to find a broader capital imputation principle in the Court's language should again be rejected. Defendant asserts that plaintiff is not entitled to summary judgment because when the U.S. branches are viewed separately from each other, some of their books reflect losses. Although defendant recites the Inland Revenue Banking Manual's instruction that losses merely present "grounds for a detailed examination" and directs inquiry to whether "funds have come into the branch from Head Office to cover losses or bad debts" (Def.'s Opp'n 30), defendant does not pursue such an inquiry, and simply asserts that summary judgment should be denied. Plaintiff and its experts did in fact undertake such an inquiry. Uncontroverted testimony establishes that, if there had been advances from the head office for capital purposes, as a matter of bank policy they would have been separately identified in the books and records. (Scott Decl. ¶ 12.) Plaintiff and its experts have scrutinized plaintiff's books to identify any interest deducted on capital advances. (See plaintiff's October 29, 2004 Report on the Capital Issue). The only interest payments identified (the "capital loan charges") were paid in respect of retained profits, not advances to fund losses, and plaintiff has conceded all such amounts. Moreover, plaintiff has shown that 16

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when viewed together the U.S. branches had sufficient capital and cash flow to fund their own operations and that, when viewed separately by physical location, in the only case where cash flow was not sufficient (Chicago during the years 1981 and 1982), the only advances from head office consisted of short-term money market transactions that were repaid within the taxable year. (Bandoian Supp. Decl. ¶ 43 and Ex. H thereto.) Dr. Kolbe's speculation without evidence that the New York branch might have acted as a conduit from the head office to Chicago is plainly insufficient to raise a material issue of fact. (Kolbe Decl. ¶¶ 63-65.) In an attempt to avoid the consequence of these facts, defendant asserts that the "branches' respective accumulated retained profits can't simply be added together." (Def.'s Opp'n 33.) Given the fact that the U.S. branches were required to and did file a single U.S. tax return, and therefore were required to add up their results at some point at or prior to the "taxable income" line on that return, plaintiff submits that it is appropriate to treat all of the profits reported on that return as part of the capital of the operations reflected on that return. Notably, defendant has not responded to plaintiff's argument that where the Internal Revenue Code calculates the capital of the U.S. branch operations of a foreign corporation, it does so on an aggregate basis, and there is nothing in the Treaty contrary to that rule. (See Pl.'s Mot. 32-33.) Defendant's U.K. tax expert Barrie Akin states that he "never encountered a foreign bank operating in the United Kingdom through more than one branch." (Akin Decl. ¶ 44.) Plaintiff's expert Mr. Jukes confirms that while serving in the International Division of Inland Revenue from 1985 through 1995, he was in fact aware of a foreign bank that operated in the United Kingdom through more than one branch and that he was not aware of any effort on the part of Inland Revenue to determine the U.K. capital of that foreign bank on a branch-by-branch basis. (Jukes 17

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Supp. Decl. ¶ 19.) He confirms that, in his view, the International Division would not have taken that position. (Id.) Defendant ignores the factual basis for evaluating the capital of the branches operated out of New York as a whole. There is no factual dispute that the operational expenditures of the New York operations (including the IBF and Nassau and Cayman branches) were reflected entirely on the books of the New York branch, that the IBF and Nassau and Cayman branches had no separate employees or offices of their own, and that beginning in 1986, the assets of all the U.S. branches were reflected on those books. Despite defendant's protestation (Def.'s Resp. to Pl.'s Prop. Finding 16), as a definitional matter the IBF was merely a "set of asset and liability accounts segregated on the books and records of a . . . U.S. branch." (Pl.'s Mot. 35 n.21.) The dispute, if there is one, is over what conclusion should be drawn from these facts. Defendant suggests that these facts are evidence of unreliability or inaccuracy in the books and records. Far from discrediting its books, these facts support the conclusion that the New York operations must be examined as a unit when evaluating their profits. Indeed, the "loss" on the New York books was really not a loss at all from NatWest's perspective because it resulted from the fact that the New York branch bore the operational expenses for the operations located in New York and the "bank regarded the four books [in New York] as elements of a single unit." (Walmsley Decl. ¶ 18.) In any event, the uncontroverted fact remains: if there had been advances for capital purposes, they would have been separately identified in the books and records. (Scott Decl. ¶ 12.) Defendant's experts Kolbe and Dorfman attempt to find in the Inland Revenue Banking Manual support for previously rejected legal arguments that U.S. branch capital should be restated under "economic" principles. (See, e.g., Kolbe Decl. ¶¶ 20-35 ("In short, the `economic' 18

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principles I introduce are entirely consistent with the statements in paragraph 9 of the Manual's Appendix 9.A."); Dorfman Decl. ¶ 26, 27 ("[A]n arm's length analysis of the branch's activities and the economic activity of the bank (including its use of capital) must be applied to determine the amount of capital the branch actually used . . . .").) The Court has repeatedly rejected this argument, as the Court itself observed in the March 9, 2005 conference. (Conf. Tr. 12:21-13:21, March 9, 2005 (Pl.'s Ex. 94).) Notably, the declaration of defendant's U.K. tax expert does not advance the economic argument.16 Indeed, Mr. Akin testifies that "the most common negotiated settlement was to increase [London Free Capital] by reference to premises and fixed assets cost" (Akin Decl. ¶ 34), and that the "methodology adopted by Plaintiff could conceivably have been accepted by [Inland] Revenue . . . ." (Id. ¶ 16(b)). Because the amounts of capital acknowledged by plaintiff exceed fixed assets and plaintiff has identified and conceded any interest deducted on those amounts, no further inquiry is required on the capital issue. (See Jukes Supp. Decl. ¶ 15.) Neither defendant nor any of the Declarations of Mr. Akin, Dr. Kolbe, or Mr. Dorfman has demonstrated the existence of a genuine issue of material fact or any legal basis for denial of summary judgment in favor of plaintiff with respect to the capital issue.

Neither Dr. Kolbe nor Mr. Dorfman describes experience that would support their qualification to testify as experts with respect to the Inland Revenue Banking Manual. 19

16

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CONCLUSION For the foregoing reasons, plaintiff respectfully requests that the Court grant its Motion for Summary Judgment and enter judgment in favor of plaintiff in the amount of $65,808,076 in taxes, plus interest. Dated: New York, New York August 18, 2005

/s/D. Scott Wise D. Scott Wise Attorney of Record Davis Polk & Wardwell 450 Lexington Avenue New York, N.Y. 10017 (212) 450-4000 Of Counsel: Mario J. Verdolini, Jr. Leslie J. Altus Davis Polk & Wardwell 450 Lexington Avenue New York, N.Y. 10017 John L. Carr, Jr. Michael C. Moetell Thomas M. Buchanan Winston & Strawn LLP 1400 L Street, N.W. Washington, D.C. 20005

20

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IN THE UNITED STATES COURT OF FEDERAL CLAIMS

No. 95-758T (Judge Nancy B. Firestone)

NATIONAL WESTMINSTER BANK PLC, Plaintiff,
V.

THE UNITED STATES, Defendant.

SUPPLEMENTAL DECLARATION OF ROGER WALMSLEY

United Kingdom)

ss

)
County of Essex)

7 Grosvenor Gardens Upminster Essex, United Kingdom

I, ROGER WALMSLEY, of 7 Grosvenor Gardens, Upminster, Essex, in accordance with 28 U.S.C. 1.

§

1746 (2000), hereby DECLARE as follows:

I have previously provided testimony in connection with this

litigation in a deposition on January 31, 2005 and February 1, 2005 as well as in a declaration dated April 28, 2005. I submit this supplemental declaration in order to provide information relating to transactions entered into between National Westminster Bank PLC's New York branch and Natwest Commercial Services, Inc., an indirect United States subsidiary of Natwest PLC.

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2.

1 understand that Mr. James Read has proposed an adjustment to

Natwest's U.S. branch income by comparing Natwest's overdraft charges on its U.S. dollar clearing accounts with the interest it charged on an account of Natwest Commercial Services, Inc. held at the New York branch. Mr. Read suggests that the interest rate the New York branch charged Natwest Commercial Services, Inc., which was based on the interbank Federal funds rate, should have been set at the Prime Rate plus 1.5%, the rate applied to overdrafts on smaller clearing accounts. 3. I recall that the account of NatWest Commercial Services, Inc. was

a revolving loan facility to fund its factoring operations. The facility would have been sanctioned and approved by the NatWest Advances Department of New York. My recollection is consistent with the substantial debit balances reflected on the A220s relating to the NatWest Commercial Services account on which Mr. Read based his adjustment and with a document located by NatWest in the files of NatWest Commercial Services, Inc. See the attached A220s forthe NatWest Commercial Services account for certain months during the years at issue and the attached copy of 1986 and 1987 Consolidated Financial Statements for Natwest Commercial Services, Inc. with KPMG Report theron. 4. A line of credit is very different from a clearing account, on which,

as I noted in my April 28, 2005 Declaration, overdrafts were generally discouraged. Because the computer system required data to be entered into an interest rate field, all accounts had to have an interest rate allocated to them when opened in the books of New York. Such rate cannot be interpreted when looking

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at the computer print--outs as an indicator that the customer had approval to overdraw the account or even that the customer had any knowledge that a rate of interest had been allocated to it.

5.

I understand that Mr. Read attempts to impose the overdraft rate

from the Prime Rate accounts onto the sanctioned extension of credit to Natwest Commercial Services. Charging the Prime Rate on that extension of credit would not have been commercially feasible. If Natwest PLC had attempted to charge the overdraft rate on a loan like the one to Natwest Commercial Services, Inc., Natwest Commercial Services, Inc. would surely have declined the loan and would have had no trouble opening lines of credit at other banks at rates similar to those actually charged by Natwest. I DECLARE UNDER PENALTY OF PERJURY UNDER THE LAWS OF THE UNITED STATES OF AMERICA THAT THE FOREGOING IS TRUE AND CORRECT. EXECUTED ON AUGUST 2005. Roger Walmsley

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IN THE UNITED STATES COURT OF FEDERAL CLAIMS No. 95-758T (Judge Nancy B. Firestone) NATIONAL WESTMINSTER BANK PLC, Plaintiff,
V.

THE UNITED STATES, Defendant.

SUPPLEMENTAL DECLARATION OF EDWARD JUKES

United Kingdom) City of London

) )

ss

148 New Road Chingford London E4 9SJ England

I, EDWARD JUKES, of 148 New Road, Chingford, London E4 9SJ, in accordance with 28 U.S.C.

§

1746 (2000), hereby DECLARE as follows: Overview

1.

1 have been retained by Royal Bank of Scotland through its counsel, Davis

Polk & Wardwell, in connection with litigation betweenNational Westminster Bank, PLC and the Government ofthe United States concerning the taxation ofNatWest's U.S. operations during the years 1981 through 1987. 2. In the course ofthis litigation, I have provided an Expert Report, dated 4

March 2004, and a Declaration, dated 2 May2005.

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Assignment 3. I have been asked to addresspoints relating to my Expert Report and

Declaration found in the Defendant's Opposition to Plaintiff's Motion for Summary Judgment and certain exhibits thereto. I also have been asked to advise whether any of my prior conclusions has changed. 4. In preparing this declaration, I have reviewed the Defendant's Opposition

to Plaintiff's Motion for Summary Judgment, dated 22 July 2005, the Declaration of Barrie Akin, dated 8 July 2005, the Declaration of Jeffrey L. Dorfinan, dated 6 July 2005, and the Declaration ofA. Lawrence Kolbe, dated 12 July 2005. 5. For the avoidance of doubt, I would like to make clear that I have read

only the documents listed above (and those identified in my Declaration and Expert Report) and have not had access to any Inland Revenue files formy assignments. I intend to address the points asserted with respect to my opinions in defendant's brief and the declarations of defendant's experts. Confirmation ofPrior Conclusions 6. As part of these assignments, I have reached the following conclusions

(which I confirm): a. The Inland Revenue Banking Manual accurately reflects the manner in which the United Kingdom Inland Revenue applied the U.S.-U.K. income tax treaty during the years at issue; b. The Court's 2003 opinion in this case is consistent with inland Revenue's actual practice during the years at issue;

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c. On the basis ofthe information set forth in Plaintiff's Report on the Capital Issue dated 29 October 2004, including the report ofKevin Bandoian attached as exhibit C thereto, Inland Revenue would not have sought any further adjustments in respect ofcapital, including working capital; d. In the appropriate circumstances, Inland Revenue would have accepted a taxpayer's position that a reserve for specific bad debts with respect to sovereign risk did not diminish cash available for other uses; e. With respectto the Chicago branch during the years in which it did not have cumulative excess cash flows, Inland Revenue would not have had grounds for asserting that any amounts, other than amounts previously identified and conceded by NatWest, should be disallowed as interest paid on capital or amounts treated as allotted capital because there were not any interest-bearing advances from the head office that could have been used to fund fixed asset purchases; f. The approach outlined by Dr. A. Lawrence Kolbe in his report on the Capital Issue, dated 4 March 2005, would not have been followed by Inland Revenue; and g. Inland Revenue would not have used separate underlying records reflecting a loss in one physical location to create an adjustment to capital when there were adequate profits in another location reported on the same tax return, let alone used separate books maintained within a single

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physical location to create such an adjustment where their aggregate capital was sufficient. Qualifications 7. Defendant's brief states that I purport to speak for every Inland Revenue

Inspector. I should make clear that I served in the International Division of Inland Revenue, which had a dual operational role whilst I was there, from early 1985 to i995. It advised Inspectors on interpretations ofthe law and it assumed responsibility for some ofthe more difficult cases, including those where litigation seemed a strong possibility. Inspectors were required to submit to the International Division those cases where an impasse had been reached. 8. The International Division in conjunction with the Board's Solicitor would

then decide whether to proceed to litigation. The procedures were such that it should not have been possible for a case to proceed to litigation on the Free Working Capital Issue without the agreement ofthe International Division. For that reason I can confirm that where an impasse had been reached the Inspector could be persuaded to drop lines of argument that did not accord with Inland Revenue's interpretation ofa treaty. Thus, even though I cannot speak for every Inspector, I would likely have been aware ofany issues as to whiclh there was any controversy. Relevance ofthe Inland Revenue Banking Manual 9. In his declaration, Mr. Akin questions the relevance ofthe Banking

Manual to the years at issue. He states that the Banking Manual likely represents the position of Inland Revenue as "it evolved over time" and concludes that "since the Manual was not published in 1981 through 1987 and contains clear indicators that an

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extremely relevant part of it did not exist in those years, I cannot see that the application of what is in the Manual as at 1994 is di