Free Motion for Summary Judgment - 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 PROPOSED FINDINGS OF UNCONTROVERTED FACT _____________

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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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 PROPOSED FINDINGS OF UNCONTROVERTED FACT _____________ Pursuant to Rule 56(h) of the Rules of the United States Court of Federal Claims, plaintiff respectfully submits the following proposed findings of uncontroverted fact. Background 1. The years at issue in this case are the tax years ending December 31, 1981;

December 31, 1982; December 31, 1983; December 31, 1984; December 31, 1985; December 31, 1986; and December 31, 1987 (the years at issue ).1

1

Def. s Ans. 1st Am. Compl. ¶ 1 (Verdolini Aff., Ex. 4).

1

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2.

During the years at issue, NatWest was one of the largest banks in the world and

one of the few that had a triple-A credit rating.2 3. During the years at issue, NatWest conducted international wholesale money

center operations in the United States through offices located in New York, Chicago and San Francisco (the U.S. branch operations ).3 4. The U.S. branch operations dealt in wholesale transactions involving low risk and

narrow spreads.4 5. corporations.5 6. The U.S. branch operations funded their loans by selling money market The U.S. branch operations made short-term, high denomination loans to large

instruments in U.S. and international markets, by borrowing inter-bank money, and by using funds on deposit in dollar clearing accounts, mainly those maintained for members of NatWest s worldwide group and several foreign central banks, including the Bank of England.6

Report by Marcia L. Stigum, Ph.D., dated Nov. 15, 2001 ( Stigum Rep. ) at 6 (Verdolini Aff., Ex. 52); see also Declaration of Anthony Eric Scott dated April 26, 2005 ( Scott Decl. ) at ¶5; Payseur Tr. 111:15-23 (Verdolini Aff., Ex. 82). Declaration of Roger Walmsley dated April 28, 2005 ( Walmsley Decl. ) at ¶4; Stigum Rep. at 7-8 (Verdolini Aff., Ex. 52); see also Payseur Tr. 31:3-20 (wholesale) (Verdolini Aff., Ex. 82).
4 3

2

See Walmsley Decl. at ¶6. Id. Id. at ¶¶6, 33, 39; Affidavit of Robert T. Clair dated May 2, 2005 ( Clair Aff. ), App.

5

6

1.

2

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7.

The U.S. branch operations also traded in domestic and international money

markets to manage their interest rate and liquidity risk and, in the case of the New York operations, to make a trading profit.7 8. The aggregate assets of the U.S. operations were in the range of three to eight

billion dollars during the years at issue, and the daily turnover of funds often exceeded $10 billion.8 9. NatWest s original federal income tax returns for the years at issue show an

aggregate liability of approximately $62 million in federal income taxes, which NatWest paid.9 10. The U.S. branch operations purchased approximately $42 million in premises and

equipment during the years at issue.10 11. During the years at issue, the U.S. branch operations repaid approximately $12

million in balances due to the head office with respect to fixed assets and capital loans from prior years.11

7

Walmsley Decl. at ¶7. Total Assets for each of the

Id. at ¶8 (turnover); see Balance Sheets (line AZD years at issue) (assets) (Verdolini Aff., Exs. 12-18).
9

8

See id.; Revenue Agent Reports for tax years 1981-1984 and 1985-1987, dated May 3, 1995 ( Revenue Agent Reports ) (for taxable income and taxes paid) (Verdolini Aff., Ex. 26); see also ¶157 below ($62 million equals sum of rows 1 (Prior Year Overpayment) through 6 (Amount Credited)). Declaration of Kevin D. Bandoian, PricewaterhouseCoopers, LLP dated May 1, 2005 ( Bandoian Decl. ), Ex. C.
11 10

Id.

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12.

During the years at issue, NatWest conducted its U.S. branch operations pursuant

to a number of banking licenses.12 13. During the years at issue, NatWest operated an agency in San Francisco which

was licensed by the State of California to make loans and take deposits (other than certain domestic deposits).13 14. During the years at issue, NatWest operated a branch in Chicago which was

licensed by the State of Illinois to make loans and take deposits.14 15. During the years at issue, NatWest operated a branch in New York, which was

licensed by the State of New York to make loans and take deposits.15 16. The New York branch, like many other U.S. banks and U.S. branches of foreign

banks, established an International Banking Facility, or IBF, in 1981 as a segregated set of asset and liability accounts on [its] books pursuant to Federal banking regulations.16 17. Through its New York office, NatWest managed and controlled branches licensed

by the Bahamas (Nassau) and the Cayman Islands.17

12

Walmsley Decl. at ¶4. Id. Id. Id. See 12 C.F.R. § 204.8(a)(1) and (d) (Verdolini Aff., Ex. 75); Walmsley Decl. at ¶4. Walmsley Decl. at ¶¶17, 4.

13

14

15

16

17

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18.

During the years at issue neither the IBF nor the Nassau or Cayman branches had

any employees, premises or equipment of their own.18 19. For management and operational purposes, NatWest viewed the New York

branch operations (i.e., the IBF and New York, Nassau and Cayman branches) as a single unit during the years at issue.19 20. The New York branch recorded on its books all of the overhead expenses relating

to the IBF and New York, Nassau and Cayman branches.20 21. The New York branch recorded on its books all of the U.S. federal, state and local

taxes relating to the IBF and New York, Nassau and Cayman branches.21 22. No fixed assets were recorded in the balance sheets of the IBF and Nassau and

Cayman branches during the years at issue.22

18

Id.

Walmsley Decl. at ¶17; Scott Decl. at ¶14; Affidavit of Scott Payseur dated April 26, 2005 ( Payseur Aff. ) at ¶11; Payseur Tr. 16:6-16:18, 61:14-61:19, 87:17-88:2 (Verdolini Aff., Ex. 82). Compare Profit and Loss Statements of New York branch (showing operating expenses on New York s statement,) with Profit and Loss statements of the IBF or Nassau or Cayman branches (showing no operating expenses) (Verdolini Aff., Exs. 28-34). Id. (showing reserve for taxes on New York s statements and no tax reserve on statements for the IBF or Nassau or Cayman branches).
22 21 20

19

See Balance Sheets of the IBF, Nassau and Cayman branches (Verdolini Aff., Exs. 36-

42).

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23.

During the years at issue, the fixed assets of all of the New York branch

operations were recorded on the certified balance sheet of the New York branch.23 24. In 1985, the fixed assets of the Chicago and San Francisco offices were

transferred to the books of the New York branch.24 25. The New York branch kept track of credit limits on a combined basis for the IBF

and the New York, Nassau and Cayman branches.25 26. The New York treasury desk squared the books of Nassau, Cayman and IBF with

the New York branch. That is, with respect to the books of each of the IBF and the New York, Nassau and Cayman branches, the New York treasury desk was responsible for (i) advancing funds to each of these books to the extent the funds disbursed from those books exceeded the funds received on those books during the day and (ii) investing any excess funds held by any of these books by the end of each day.26 The New York branch in turn squared its books with the market. 27. The treasury desk of NatWest s New York operations included a money market

desk and a foreign exchange desk.27

Compare Balance Sheets of New York branch (showing fixed asset balances) with Balance Sheets of the IBF, Nassau and Cayman branches (showing no fixed asset balances) (Verdolini Aff., Exs. 36-42).
24

23

Bandoian Decl. at ¶24.

Walmsley Decl. at ¶17. See, e.g., Report B133 Limits and Utilizations by L.A. and S.I.C., for December 31, 1986 (Verdolini Aff., Ex. 46).
26

25

Payseur Aff. at ¶¶11, 13. Payseur Aff. at ¶10.

27

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28.

The head of the New York money desk oversaw traders, ranging from about three

to five in number during the years at issue, who ran the four money books in the New York office (New York, IBF, Nassau and Cayman).28 29. Of the traders supervised by the head of the New York money desk, at any given

time there were one or two traders who ran the New York and IBF books, and one or two traders who ran the Nassau and Cayman books.29 30. One of the traders supervised by the head of the New York money desk handled

all repo activity engaged in by the New York operations.30 31. All of the traders engaging in money market activities on behalf of the IBF or the

New York, Nassau or Cayman branches reported to a single head of the New York money market desk, who was responsible for the combined performance of all four of these books and was evaluated on the basis of their aggregate results.31 32. The New York money market desk managed the liquidity and interest rate risk of

each of the four New York books (i.e., the books of the IBF and the New York, Nassau and Cayman branches) on a collective basis.32 33. The New York office maintained separate accounts for the IBF and New York,

Nassau and Cayman branches in order to record transactions that were subject to different bank
28

Payseur Aff. at ¶10; Payseur Tr. 61:14-61:19 (Verdolini Aff., Ex. 82). Payseur Aff. at ¶10. Id. Id.; see Payseur Tr. 61:14-62:22, 87:17-88:2 (Verdolini Aff., Ex. 82). Payseur Aff. at ¶11; Payseur Tr. 76:3-78:14 (Verdolini Aff., Ex. 82).

29

30

31

32

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regulatory rules and, in the case of the IBF, that were subject to favorable state and local tax treatment. 33 34. NatWest s management in London evaluated the profitability of the Nassau and

Cayman branches and the IBF together with the New York branch.34 35. The managers of each of the New York, Chicago and San Francisco branch

operations reported to NatWest s Regional General Manager, North America, in New York.35 36. The Treasurer in New York was responsible for all Treasury activities conducted

in the United States.36 37. For each of the years at issue, NatWest was required to and did file a single U.S.

federal income tax return for its U.S. branch operations.37 38. NatWest s U.S. branch operations maintained separate accounts, including profit

and loss statements and balance sheets, in the ordinary course of their banking business as a

33

Scott Decl. at ¶14; Blessley Tr. at 50:2-51:13, 60:10-61:12 (Verdolini Aff., Ex. 86). Scott Decl. at ¶14.

34

Tugwell Tr. at 13:22-14:13, 29:7-31:22, 32:7-33:18 (Verdolini Aff., Ex. 87); Blessley Tr. at 103:12-105:18 (Verdolini Aff., Ex. 86).
36

35

Blessley Tr. at 105:24-106:11 (Verdolini Aff., Ex. 86.)

Treas. Reg. §1.6012-2(g)(1) ( every foreign corporation which is engaged in a trade or business in the United States . . . shall make a return on Form 1120-F ) (Verdolini Aff., Ex. 74); see Form 1120-F for each of the years at issue (Verdolini Aff., Exs. 5-11); see also Def. s Res. Pl. s Req. Adm. 2.43 (NatWest timely filed its returns) (Verdolini Aff., Ex. 67).

37

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matter of good business practice and banking custom and as required under U.S. bank regulatory law.38 39. During the years at issue, NatWest s U.S. branch operations had accurate and

reliable records.39 40. As required by bank regulation, the branches had extensive internal controls to

ensure accurate records.40 41. The daily activity of the U.S. branch operations was captured on a computer

system, which automatically generated numerous reports each day, including profit and loss statements and balance sheets.41 42. There were daily procedures for confirming the accuracy of entries into the

computer system.42 43. Consistent with common banking practice, the U.S. operations performed

ongoing reconciliations of account differences resulting from misdirected payments or from

See Report of Robert R. Bench, PricewaterhouseCoopers LLP, dated Jan. 14, 2002 ( Bench Supp. Rep ) at ¶13 (U.S. bank regulations require separate books and records) (Verdolini Aff., Ex. 54); Walmsley Decl. ¶¶12, 15, 17; Tatz Tr. (1/23/02) at 14:18-14:19 (separate books and records maintained) (Verdolini Aff., Ex. 80).
39

38

Walmsley Decl. at ¶12. Walmsley Decl. at ¶12, ¶14.

40

See Harasek Tr. at 13:22-14:14, 15:15-17:10, 20:8-23:21, 67:14-68:19, 69:16-70:7 (Verdolini Aff., Ex. 83); Samaroo Tr. at 26:8-28:21 (Verdolini Aff., Ex. 81); Walmsley Decl. at ¶14.
42

41

Id.

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items in transit, in clearing, or awaiting settlement, as was typical in a banking operation of NatWest s size and scope.43 44. Reconciliation processes are a normal and important aspect of reliable record-

keeping in the banking business.44 45. NatWest s reconciliation procedures are evidence of its good business practices,

not of unreliable or inaccurate records.45 46. 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 in accordance with detailed internal verification procedures.46 47. 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.47

Scott Decl. at ¶15; Bench Supp. Rep. at ¶¶5, 12 (Verdolini Aff., Ex. 54); see Tatz Tr. (1/23/02) at 17:2-18:22, 59:6-17 (Verdolini Aff., Ex. 80); Samaroo Tr. at 36:2-51:2 (Verdolini Aff., Ex. 81); see also Tatz Tr. (1/23/02) at 49:18-51:4 (regulators reviewed the reconciliation procedures) (Verdolini Aff., Ex. 80).
44

43

See Bench Supp. Rep. at ¶¶5, 12 (Verdolini Aff., Ex. 54); Scott Decl. at ¶15. See id.

45

See Walmsley Decl. at ¶15 (detailed verification procedures); Tatz Tr. (1/23/02) at 16:19-17:17 (balance sheets and income statements derived from computer reports) (Verdolini Aff., Ex. 80); Samaroo Tr. at 33:2-44:25, 54:17-54:22 (Verdolini Aff., Ex. 81).
47

46

See Walmsley Decl. at ¶15.

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48.

NatWest s head office regularly inspected the U.S. books and records, without

advance notice, in order to ensure their compliance with the bank s internal standards, as well as those of the Bank of England, which supervised the bank as a whole.48 49. U.S. bank regulators conducted regular examinations of the books and records of

the U.S. branches and consistently found them to be satisfactory.49 50. The Bank of England cited NatWest s internal controls, which were established

on a bankwide basis and therefore applied in the United States as well as in the United Kingdom, as a model for U.K. branches of foreign banks to follow.50 51. For each of the years at issue, the U.S. federal income tax return NatWest filed in

respect of its U.S. branch operations reported taxable income derived from the separate accounts maintained in the ordinary course of NatWest s U.S. branch operations.51 52. For each of the years at issue, the differences between the taxable income shown

on the returns and the profit and loss statements of the U.S. branch operations were identified in schedule M-1 of those tax returns.52

48

Walmsley Decl. at ¶¶20-21, Tatz Tr. (1/23/02) at 26:15-26:18 (Verdolini Aff., Ex. 80). Walmsley Decl. at ¶20-21; Tatz Tr. (1/23/02) at 27:22-29:12 (Verdolini Aff., Ex. 80). Walmsley Decl. at ¶21.

49

50

Report of Kevin D. Bandoian, Partner, PricewaterhouseCoopers LLP dated March 4, 2005 ( Bandoian Rep. (3/4/2005) ), Ex. 4 (reconciliation of tax returns with profit and loss statements) (Verdolini Aff., Ex. 58).
52

51

Id.

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Money Market Transactions 53. NatWest s U.S. money market desks took and placed Euro time deposits, bought

and sold Fed funds, traded government securities subject to repurchase agreements ( repos and reverse repos ), bought and sold negotiable certificates of deposit ( CDs ), and sold commercial paper of NatWest PLC.53 54. Most of the transactions of NatWest s U.S. money market desks during the years

at issue were with third parties, and thus by definition were at arm s-length rates.54 55. A minority of the transactions of NatWest s U.S. money market desks during the

years at issue occurred with non-U.S. NatWest branches and other NatWest affiliates.55 56. During the years at issue, money market transactions between NatWest s U.S.

money market desks and non-U.S. NatWest branches and affiliates generally arose as a result of transactions between the non-U.S. NatWest branch or affiliate and one of its own third party customers that desired to deposit or borrow dollars.56 57. During years at issue, the rates used by the NatWest U.S. money desks on

interbranch and intercompany money market transactions were arm s length market rates.57

53

Payseur Aff. at ¶15. Payseur Aff. at ¶16. See Bandoian Rep. (3/4/05) at 6-7 (Verdolini Aff., Ex. 58). Walmsley Decl. at ¶9.

54

55

56

Walmsley Tr. 262:25-263:3 (Verdolini Aff., Ex. 88); Walmsley Decl. at ¶11, Payseur Tr. 90:19-90:24 (Verdolini Aff., Ex. 82); Payseur Aff. at ¶22.

57

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58.

During the years at issue, NatWest s U.S. money desks were run as independent

professional operations.58 59. Plaintiff s expert, Dr. Robert T. Clair, concluded that there is no evidence that the

pricing on related party money market transactions was other than arm s-length.59 60. Defendant is unable at this time to render an opinion as to whether the interest

income and interest expense reported by NatWest with respect to money market transactions by its U.S. branches with related parties reflect arm s-length interest rates.60 61. Defendant s expert James Read did not develop a sampling methodology to test

Plaintiff s business records.61 62. The work Mr. Read did to prepare his report was insufficient to support a

conclusion one way or the other as to whether the interest rates on U.S. branch borrowing from and lending to related parties were or were not at arm s length.62 63. Mr. Read s report did not compare related party rates with the range of unrelated

party rates in the records he used.63

58

Payseur Tr. 31:3-31:8 (Verdolini Aff., Ex. 82).

See Report of Robert T. Clair on the Arm s-Length Nature of National Westminster Bank PLC s Money Market Transactions dated Mar. 4, 2005 ( Clair Rep. ) (Verdolini Aff., Ex. 59)); Affidavit of Robert T. Clair dated May 2, 2005 ( Clair Aff. ) at ¶9. Expert Report of James Read on The Interest Rate Issue dated March 4, 2005 ( Read Rep. ) at ¶14 (Verdolini Aff., Ex. 62).
61 60

59

See id. Id. See id. at ¶54-55.

62

63

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64.

In his report, Mr. Read claimed he used the same approach to analyze the records

of NatWest s U.S. money market transactions that was used in a letter from Plaintiff s counsel dated September 19, 2000.64 65. The September 19, 2000 letter from plaintiff s counsel to defendant s counsel, as

well as the schedules attached thereto, was marked confidential, for settlement purposes only. 66. In his analysis of NatWest s money market instruments, Mr. Read did not in fact

follow the approach described in the September 19, 2000 letter.65 67. The pattern Mr. Read observed in the average interest rates of the U.S. branch

operations was caused by his inclusion of intra-U.S. interbranch transactions in his computations.66 68. The pattern Mr. Read observed in the average interest rates of the U.S. branch

operations was consistent with arm s-length pricing of the related party transactions. 67 69. A direct comparison analysis of Mr. Read s data provides strong evidence of

arms-length pricing.68 70. Mr. Read s resume does not describe any experience with banks.69

64

Id. at ¶53. See Clair Aff. at ¶28-29. Clair Aff. at ¶¶9, 37. Clair Aff. at ¶37. Clair Aff. at ¶9. Read Rep., App. A (Verdolini Aff., Ex.62.)

65

66

67

68

69

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Clearing Accounts 71. The U.S. branches maintained dollar clearing accounts in the ordinary course of

their banking business for (i) unrelated non-U.S. banks and (ii) non-U.S. branches of NatWest, NatWest s subsidiary International Westminster Bank ( IWB ) and other NatWest affiliates.70 72. The clearing accounts at NatWest s U.S. branches worked like checking accounts

in that they were accounts into which the U.S. branch s customer could deposit funds and through which it could make and receive payments to or from other parties.71 73. In NatWest s records, the clearing accounts were often referred to as current

accounts, the U.K. term for a checking account, because even though use of the accounts differed, the basic function of and record keeping for a clearing account is the same as in the case of a checking account.72 74. The U.S. branches charged customers both related and unrelated the same

fixed per-item commission for processing payments into and out of the clearing accounts.73 75. The U.S. branches derived profits from the clearing accounts by (i) charging

transaction fees and (ii) investing the funds left on deposit in the accounts in interest-bearing assets.74

70

Walmsley Decl. ¶¶22, 25. Walmsley Decl. at ¶24. Id. Walmsley Decl. at ¶27. Walmsley Decl. at ¶27; see also Clair Aff. at ¶58.

71

72

73

74

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76.

The clearing accounts maintained at the U.S. branches bore a range of terms that

correlated with the level of activity in the accounts.75 77. interest rates.76 78. The U.S. branches paid interest to the Bank of England, National Bank of Dubai The clearing accounts for related and unrelated parties reflected commercial

and several other unrelated parties by cash managing their clearing account balances. 77 79. The rates at which the New York branch paid interest to the NatWest London

Overseas branch and IWB London clearing accounts were comparable to the rates at which the U.S. branches paid interest on the clearing account balances of the Bank of England and National Bank of Dubai through cash management.78 80. During the years at issue, the smaller clearing accounts related and unrelated

parties held at NatWest s U.S. branches were treated comparably in that they neither received interest nor were cash managed.79

75

Walmsley Decl. at ¶29. Walmsley Decl. at ¶29. See Walmsley Decl. at ¶¶32-33; Clair Aff. at ¶¶72-81; Payseur Aff. at ¶12. See Walmsley Decl. at ¶¶32-34; Clair Aff. at ¶¶72-81; Payseur Aff. at ¶12.

76

77

78

See Walmsley Decl. at ¶30 (interest not paid on positive balances in small accounts); Clair Aff. at ¶¶87, 91-93 (describing pricing terms for low-volume customers).

79

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81.

The smaller clearing accounts maintained at NatWest s U.S. branches had lower

turnover and a lower number of payments as compared with the high-turnover clearing accounts that received interest directly or through cash management.80 82. In the case of some smaller clearing accounts maintained at NatWest s U.S.

branches, the interest rate terms were so unimportant that the customer never asked what the terms were.81 83. During the years in issue, the fees and commissions received by the New York

branch on the clearing account of IWB London exceeded the amount of interest paid by $365,015. The following table accurately summarizes the interest paid by the New York branch to IWB London and the fees and commissions received by the New York branch from IWB London on the clearing account of IWB London at the New York branch:82

80

Clair Aff at ¶91. Walmsley Decl. at ¶30. Bandoian Decl. at ¶¶25-28.

81

82

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1983

1984

1985

1986

1987

Total

Interest paid to IWB London (per Read Report) Less, interest on money market transactions Net Fees and commissions received from IWB London Difference (subject to rounding) 84.

$

123,335

227,782

1,370,596

124,928 328,316 2,174,956

$ $

0 123,335

12,198 215,584 216,576

1,283,673 86,923 241,662 124,928 328,316

1,295,871 879,085

$ 210,852,852

278,049 296,961 1,244,100

$

(87,517)

(992)

(154,739) (153,121) 31,355

(365,015)

An offset of notional credit interest on a clearing account against commissions

otherwise payable by the clearing account customer is the equivalent of payment of interest.83 85. Mr. Read s claim that all third-party clearing accounts were credited interest at a

rate substantially less than the Federal Funds rate is incorrect.84 86. Crédit du Nord, a state-owned French bank, was credited interest on its clearing

account at the New York branch at the Federal funds rate.85

83

See Read Rep. at ¶42 (Verdolini Aff., Ex. 62). Read Rep. at ¶43 (Verdolini Aff., Ex. 62); Clair Aff. at ¶101. Clair Aff. at ¶101.

84

85

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87.

A number of unrelated banks, including the National Bank of Dubai and the Bank

of England, received interest with respect to balances in their clearing accounts with the New York branch at rates at or close to a Federal funds rate through cash management.86 88. The common characteristic of the clearing accounts maintained at the U.S. branches

that were credited or paid interest at Federal funds rates was that they had a higher turnover and a larger number of payments running through them.87 89. The common characteristic of the clearing accounts maintained at the U.S. branches

that were credited interest at substantially lower rates was that they had a much lower turnover and fewer payments running through them.88 90. These differences in turnover and number of payments (i.e., entries) in clearing

accounts can be determined from records Mr. Read cites in his report.89 91. NatWest Singapore s clearing account with the New York branch had an annual

turnover of more than $31 billion in 1985.90 92. Bank Leumi le Israel s clearing account with the New York branch had an annual

turnover of less than $15 million in 1985.91

86

Clair Aff. at ¶99. Clair Aff. at ¶91. Id.

87

88

See Read Rep. at App. B-2 (citing 12/31/86 A220 reports bearing Doc. Control Nos INT 537-001191 to INT 537-1271) (Verdolini Aff., Ex. 62).
90

89

Clair Aff. at App. 1. Clair Aff. at App. 1.

91

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93.

The differences in the rate of interest accrued on overdrafts of various clearing

accounts at the U.S. branches were a function of the differing levels of activity in the accounts.92 94. In the case of most of the clearing accounts at NatWest s U.S. branches, overdrafts

were infrequent during the years at issue.93 Capital Issue 95. From the inception of NatWest s U.S. branch operations in the 1970s, advances

from the head office to branches outside the U.K. that were to be used to purchase fixed assets (or for other capital purposes such as initial working capital for start-up expenses) were separately identified in the books and records.94 96. It was NatWest s practice, when it established a branch, to record its initial
95

extension of funding for fixed assets and initial working capital in the form of a capital loan. 97.

Beginning in 1977, NatWest s Financial Control department took the position that

branches should not incur interest expense to fund their fixed assets.96

92

See Walmsley Decl. at ¶29. See Walmsley Decl. at ¶30, 33, 34, 40. Scott Decl. at ¶11-12.

93

94

See Scott Decl. at ¶12; Tatz Tr. (1/23/02) 31:7-31:17 (Verdolini Aff., Ex. 80); Tatz Tr. (5/14/02) 12:2-12:14 (Verdolini Aff., Ex. 84).
96

95

Scott Decl. at ¶11 and Ex. A attached thereto.

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98.

A note to a balance sheet for the New York, Chicago and San Francisco branches as

of the end of April 1977 states that In April Financial Control decided that fixed assets should not be funded at the expense of local branches (buying in funds). 99.
97

The policy adopted in 1977 against charging interest on head office advances in

respect of fixed assets continued to be in effect during the years in issue.98 100. The profit and loss statements of the U.S. branches did not include any interest

expense deducted on the Balance due Head Office re Fixed Assets during the years at issue.99 101. The records of the U.S. branches demonstrate that the combined amount of the

Balance due Head Office re Capital Loan and Balance due Head Office re Fixed Assets did not increase during the years at issue.100 102. The aggregate net cash flow from the U.S. operations during each of the years at

issue (excluding proceeds of ordinary course borrowings) was sufficient to pay for the fixed asset acquisitions of the U.S. branches during those years without the use of borrowed funds.101 103. During the years at issue, the U.S. branch operations did not seek funding from

NatWest s head office for operating expenses or capital expenditures.102

97

1977 balance sheet (Verdolini Aff., Ex. 47). Scott Decl. at ¶11.

98

See PwC Rep., Ex. 2 (Verdolini Aff., Ex. 57); Scott Decl. at ¶11; Tatz Tr. (5/14/02) 13:7-13:13 (Verdolini Aff., Ex. 84).
100

99

See PwC Rep., Ex. 2 (Verdolini Aff., Ex. 57). Bandoian Decl. at ¶¶20-21. Walmsley Decl. at ¶19; Payseur Aff. at ¶13.

101

102

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104.

The San Francisco operations had sufficient interest-free funds to cover the total of

its fixed asset expenditures during each of the years at issue.103 105. The New York branch operations (including the New York branch, the IBF, and the

Nassau and Cayman branches) had sufficient interest-free funds to cover total fixed asset expenditures during each of the years at issue.104 106. The New York operations posted a specific bad debt reserve of approximately

$16.3 million relating to new sovereign risk on the books of the IBF on December 31, 1987.105 107. Prior to the entry on the IBF s books of an addition to the reserve for specific bad

debt relating to new sovereign risk, the interest-free funds available to the New York operations for 1987 exceeded fixed asset purchases in that year.106 108. All fixed asset purchases made by the New York operations in 1987 were made

prior to December 31, 1987.107 109. The Chicago operations had sufficient interest-free funds to cover the total of its

fixed asset expenditures during each of the years 1983 through 1987.108

103

Bandoian Decl. at ¶¶20, 21. Id. at ¶¶20, 21, 22. Id. at ¶22. Id. Id. Id. at ¶¶20, 21.

104

105

106

107

108

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110.

All of the interest expense paid by the Chicago branch to the head office in 1981 is

traceable to specific short-term money market deposits from the head office.109 111. The money market deposits that account for all of the interest paid by the Chicago

branch to NatWest s head office in 1981 were fully repaid during the year 1981.110 112. 113. The Chicago branch did not pay any interest expense to the head office in 1982.111 During the years at issue, the U.S. branch operations occasionally paid interest

( capital loan charges ) on a balance (referred to herein as net capital balance ) consisting of the sum of the Retained Profits or Accumulated Losses, Profit and Loss, Balance due to HO re Capital Loan, and Balance due to HO re Fixed Assets less the balance of Premises and Equipment, all as of the prior year-end.112 114. The capital loan charges paid by the U.S. branches to NatWest s head office during

the years at issue were clearly identifiable in branch books and records.113 115. The New York branch posted its capital loan charges to account 89072103, entitled
114

Interest Paid, Capital Funds.

109

Id. at ¶23.

See Ex. F to Plaintiff s June 8, 2001 FRE 1006 Summaries With Respect to 1981 Interbranch Interest Expense (Verdolini Aff. Ex. 50).
111

110

See Bandoian Decl. at ¶23. See PwC Rep. at 4 (Verdolini Aff., Ex. 56). See id.

112

113

See, e.g., documents attached to PwC Rep. at Ex. 2, Binder 4 of 5, 1981 Tab 6 at PwC-NWB 0000420 (Verdolini Aff., Ex. 57).

114

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116.

In some years, the capital loan charge was presented on a U.S. branch s certified

profit and loss statements as a separate line item bearing the three-letter code PKC and identified as Capital Funds (i.e., loan charges). 117.
115

When a capital loan charge was not presented as separate line item on the certified

profit and loss statement of a U.S. branch, it was included in interest shown as paid to IBD Head Office and Participations on a schedule detailing the breakdown of interbranch interest expense, but it continued to be identified as interest paid on capital funds in underlying account statements (for account 89072103 in the case of the New York branch), as well as in daily reports (A207 reports of non-dealing transactions) on the capital loan charge payment dates.116 118. The amounts of interest expense recorded on the profit and loss statements of the

U.S. branches as an interest expense payable to the head office and therefore reported on NatWest s original 1120F federal income tax returns for the tax years at issue included the following net amounts described in U.S. branch books and records as capital loan charges:117 Tax Year 1981 1982 $ $ Capital Loan Charge 465,868 209,433

See, e.g., New York Profit and Loss Statement dated as of June 30, 1981 (Verdolini Aff., Ex. 28). See, e.g., documents attached to PwC Rep., Ex. 2, Binder 4 of 5, 1982 Tab 3 at PwCNWB 00000466 (interest paid to IBD Head Office and Participations); 1982 Tab 5 at PwC-NWB 0000483 (account statement for 89072103) (Verdolini Aff., Ex. 57).
117 116

115

PwC Rep., Summaries of Annual Capital Loan Charges, at Ex. 1(Verdolini Aff., Ex.

56).

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Tax Year 1983 1984 1985 1986 1987 $ $ $ $ $

Capital Loan Charge 202,745 390,459 0 2,336,260 1,936,537

119.

During the years at issue, the New York branch collected any capital loan charges

paid by the U.S. branches and paid them on to the head office.118 120. Apart from the amounts identified in Proposed Finding of Uncontroverted Fact 118,

the U.S. branches did not pay or deduct any interest during the years at issue on Retained Profits, Profits or Loss, Balance due to HO re Capital Loan or Balance due to HO re Fixed Assets.119 121. Apart from the amounts identified in Plaintiff s Proposed Finding of

Uncontroverted Fact 118, the U.S. branches did not pay or deduct any interest on any amount designated or in fact allotted as capital on their books and records.120 122. Plaintiff has conceded the amounts of interest expense identified in Proposed

Finding of Uncontroverted Fact 118 that were recorded in the profit and loss statements and described in the U.S. branch books and records as capital loan charges.121
118

See PwC Rep. at 4 (Verdolini Aff., Ex. 56). PwC Rep. at 9 (Verdolini Aff., Ex. 56). See PwC Rep. at 12 (Verdolini Aff., Ex. 56). Letter from M. Carr Ferguson (Plaintiff s counsel) to Steven I. Frahm (Defendant s (continued...)

119

120

121

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123. 124.

Plaintiff has conceded all capital loan charges reflected in its books and records.122 The aggregate amount conceded by plaintiff as capital loan charges exceeded the

actual capital loan charges deducted by plaintiff on its U.S. federal income tax returns during the years 1981 through 1987 in the amount of $267,323.123 125. For the year ended December 31, 1986, plaintiff made an over-concession with

regard to capital loan charges for the fourth quarter for the Nassau branch in the amount of $266,510.124 126. For the year ended December 31, 1986, plaintiff made an over-concession with

regard to capital loan charges for the fourth quarter for the San Francisco agency in the amount of $813.125 127. The amounts recorded on the balance sheets of the U.S. branches as retained profits,

profit and loss, balance due to head office re fixed assets, and provision for bad debts constitute all of the amounts that were designated as capital on the books of the U.S. branches or in fact allotted to the U.S. branches for capital purposes.126

(...continued) Counsel) dated June 5, 2001 and supporting schedules thereto ( Plaintiff s Revised Refund Claim ) (Verdolini Aff., Ex. 27); PwC Rep. at 9 (Verdolini Aff., Ex. 56).
122

121

See PwC Rep. at 9 (Verdolini Aff., Ex. 56). See PwC Rep. at 9 (Verdolini Aff., Ex. 56). See PwC Rep. at Ex. 1: 1986-4, Ex. 2, Ex. 3 (Verdolini Aff., Exs. 56, 57). See PwC Rep. at Ex. 1: 1986-6, Ex. 2, Ex. 3 (Verdolini Aff., Exs. 56, 57).

123

124

125

See Bandoian (1/14/02) Rep at 14-22 (discussing capital on the books of the U.S. branch Operations) (Verdolini Aff., Ex. 55).

126

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128.

Apart from the amounts in Proposed Finding of Uncontroverted Fact 127, there

were no amounts that were designated as capital on the books of the U.S. branches or in fact allotted to the U.S. branches for capital purposes. 129. Plaintiff has identified and conceded all amounts of interest expense that its U.S.

branches paid on amounts designated as capital or in fact allotted to them for capital purposes. 130. Defendant has not proposed any additional adjustments with respect to capital

under the Court s November 2003 opinion.127 131. Defendant is unable to reach a conclusion on the capital issue under the

circumstances in this lawsuit.128 132. The Kolbe report does not identify as one of its assignments the question whether

Plaintiff identified and conceded all of the capital loan charges included on its original returns.129 133. Dr. Kolbe s resume discloses no prior experience with banking or forensic

accounting matters or with U.K. tax law.

See, e.g., Def. s Resp. to Pl. s Req. Adm. 2.69 ( Defendant s position on this request will be expressed in and consistent with its experts report. ) (Verdolini Aff., Ex. 67); Kolbe Report at 4 ( 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. ) (Verdolini Aff., Ex. 61). See Def. s Res. Pl. s Req. Adm. 2.69 (Verdolini Aff., Ex. 67); (Expert Report of A. Lawrence Kolbe on the Capital Issue date of March 4, 2005 at 4 (the Kolbe Rep. ) (Verdolini Aff., Ex. 61). See, e.g., Def. s Resp. to Pl. s Req. Adm. 2.69 ( Defendant s position on this request will be expressed in and consistent with its experts report. ) (Verdolini Aff., Ex. 67); Kolbe Report at 4 ( I am unable to identify an economical reasonable approach to determine the amounts to be treated as allocated capital for NatWest s U.S. branches. ) (Verdolini Aff., Ex. 61).
129 128

127

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Tax Liability 134. During the years at issue, the profit and loss statements and balance sheets of the

U.S. Branch accurately recorded the profits and losses, and assets and liabilities, of the U.S. branch operations.130 135. The U.S. federal income tax returns filed by NatWest during the years at issue agree

to the certified profit and loss statements with only one de minimis exception of $701 in 1986.131 136. The aggregate amount of interest income recorded on the profit and loss statements

of the U.S. Branch for each of the years at issue was as follows:132 Tax Year 1981 1982 1983 1984 1985 1986 1987 $ $ $ $ $ $ $ Aggregate Interest Income 701,738,887 635,002,839 486,454,589 635,242,556 529,248,172 498,814,159 584,410,256

130

Bandoian Rep. (3/4/05) at 7 (Verdolini Aff., Ex. 58). Bandoian Rep. (3/4/05) at 6 (Verdolini Aff., Ex. 58). See Profit and Loss Statements (Verdolini Aff., Ex. 28-34).

131

132

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137.

The amounts set forth in Proposed Finding of Uncontroverted Fact 136 above

include the following aggregate amounts of interest income received or accrued by the constituent offices of the U.S. Branch from each other:133 Interest Income from Constituent Offices of the U.S. Branch $ $ $ $ $ $ $ 82,542,486 80,609,935 57,681,447 70,244,991 48,578,877 58,297,666 78,169,477

Tax Year 1981 1982 1983 1984 1985 1986 1987 138.

The aggregate amount of interest expense recorded on the profit and loss statements

of the U.S. Branch for each of the years at issue was as follows:134 Tax Year 1981 1982 1983 1984 1985 Aggregate Interest Expense $ $ $ $ $ 671,036,957 601,557,461 444,832,199 602,794,686 459,184,135

See Profit and Loss Statements (Verdolini Aff., Exs. 28-34); Interest Income and Expense Details (on an annual basis for 1981-1987) in Plaintiff s Revised Refund Claim (Verdolini Aff., Ex. 27).
134

133

See Profit and Loss Statements (Verdolini Aff., Ex. 28-34).

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Tax Year 1986 1987 139.

Aggregate Interest Expense $ $ 436,383,691 552,888,878

The amounts set forth in Proposed Finding of Uncontroverted Fact 138 above

include the following amounts of interest expense paid or accrued by the constituent offices of the U.S. Branch to each other:135 Interest Expense with respect to Constituent Offices of the U.S. Branch $ $ $ $ $ $ $ 82,507,529 80,633,926 57,601,531 70,476,154 48,617,123 58,293,692 78,241,354

Tax Year 1981 1982 1983 1984 1985 1986 1987 140.

NatWest timely filed its U.S. federal income tax return as a calendar year, accrual

method taxpayer for each of the years 1981 through 1987 on Internal Revenue Service ( IRS ) Form 1120F.136

135

See Profit and Loss Statements (Verdolini Aff., Ex. 28-34).

Def s Resp. to Pl. s Req. for Ad. 2.10, 2.43 (Verdolini Aff., Ex. 67); see Plaintiff s Form 1120F original tax returns for tax years 1981-1987 (Verdolini Aff., Exs. 5-11); see also Pl. s Supp. Resp. to Def. s First Set of Interrogs., Supp. Resp. to Interrog. 1.03 and Ex. A (Verdolini Aff., Ex. 64).

136

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141.

For each of the years at issue, the total net profit (loss) set forth on the manually

prepared and certified profit and loss statements for all of the U.S. branch operations agree to the net income shown on Schedule M-1 of NatWest original federal income tax return reported on IRS Form 1120F, with only one minor exception ($701) in 1986.137 142. For each of the years at issue, the total net profit (loss) set forth on the manually

prepared and certified profit and loss statements for all of the U.S. branch operations agree to the taxable income shown on the original federal income tax returns on IRS Form 1120F, adjusting for all reconciling items on Schedule M-1 of those returns, with only one minor exception ($701) in 1986.138 143. The aggregate interest income included in NatWest s original U.S. federal income

tax return for each of the years at issue was equal to the aggregate interest income recorded on the profit and loss statements of the U.S. Branch for each of the years at issue, as set forth in Proposed Finding of Uncontroverted Fact 136 above, with the following adjustments as shown on Schedule M-1 to such returns:139 Description of Schedule M-1 Adjustment 1980 money market adjustment 1980 T-bill accrued interest 1981 money market adjustment 1981 T-bill accrued interest

Tax Year

1981

$ $ $ $

Amount 15,699 449,284 (72,622) (1,986,545)

137

Bandoian Rep. (3/4/05) at 8 (Verdolini Aff., Ex. 58). Bandoian Rep. (3/4/05) at 8 (Verdolini Aff., Ex.58).

138

See Bandoian Rep. (3/4/05) at 6-7, Ex. 4 (Verdolini Aff., Ex. 58); Plaintiff s Form 1120F original tax returns for tax years 1981-1987 (Verdolini Aff., Exs. 5-11).

139

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Tax Year 1982 1983 1984 1985

Description of Schedule M-1 Adjustment 1981 money market adjustment 1981 T-bill accrued interest None T-bill accrual Net T-bill accrual Interest Adjustment ESOP interest exclusion Foreign Exchange Income Net T-bill accrual Income Adjustment Interest Accrual Adjustment Interest Adjustment Foreign Exchange Income Net T-bill accrual

Amount $ 72,622 $ 1,986,545

$ 1,885,318 $ (1,884,246) $ $ $ $ (486,697) (525,498) 103,289 (246)

1986

1987

$ (1,185,000) $ (846,000) $ 486,697 $ 114,736 $ 98

144.

The aggregate interest expense included in NatWest s original U.S. federal income

tax return for each of the years at issue was equal to the aggregate interest expense recorded on the profit and loss statements of the U.S. branch for each of the years at issue, as set forth in Proposed Finding of Uncontroverted Fact 138 above, with the following adjustments as shown on Schedule M-1 to such returns:140 Tax Year 1981 1982 1983 1984 None None None 1976 - 1980 Add l Int. Ass d (California) $ 360,149 Description of Schedule M-1 Adjustment Amount

See Bandoian Rep. (3/4/05) at 6-7, Ex. 4 (Verdolini Aff., Ex. 58); Plaintiff s Form 1120F original tax returns for tax years 1981-1987 (Verdolini Aff., Exs. 5-11).

140

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Tax Year 1985 1986 1987 145. None None

Description of Schedule M-1 Adjustment

Amount

Interest Accrual Adjustments

$

720,000

The U.S. federal taxable income of NatWest as originally reported for each of the

years at issue (after adjustments with respect to certain employee benefits per IRS Form 870) was as follows:141 Tax Year 1981 1982 1983 1984 1985 1986 1987 Total -> 146. $ $ $ $ $ $ $ $ Amount 5,127,742 12,866,570 17,074,564 8,009,640 40,541,143 42,962,917 14,330,911 140,913,487

The IRS examined NatWest s original Form 1120F U.S. federal income tax returns

for each of the years at issue.142 147. The IRS proposed the following adjustments to the taxable income of NatWest as

reported on its original U.S. federal income tax returns:143

141

See Revenue Agent Reports (Verdolini Aff., Ex. 26). See Revenue Agent Reports (Verdolini Aff., Ex. 26). See Revenue Agent Reports (Verdolini Aff., Ex. 26).

142

143

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Tax Year 1981 1982 1983 1984 1985

Proposed Adjustment Interest Expense: Interest Income: Interest Expense: Interest Income: Interest Expense: Interest Income: Sale of Property (Chrysler Stock Sale): Interest Expense: Interest Income: Interest Expense: Interest Income: Interest Expense: Interest Income: Net Loans: Employee Benefits: Home Office Allocation: Interest Expense: Interest Income: Net Loans: Employee Benefits: Home Office Allocation: Other Deductions: Net Operating Loss Deduction: Bad Debts: $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $

Amount 152,605,551 (125,857,675) 147,337,977 (132,049,714) 101,652,347 (88,243,894) 7,853,110 126,092,694 (104,153,633) 93,539,801 (79,404,169) 108,064,089 (87,081,845) 84,426 405,849 21,903 174,292,853 (131,596,705) 174,309 332,710 3,534,289 (555,350) (12,918,821) (785,311)

1986

1987

148.

The adjustments described in Proposed Finding of Uncontroverted Fact 147 include

the following amounts to which NatWest has agreed:144 Tax Year 1983 1986 Proposed Adjustment Sale of Property (Chrysler Stock Sale): Employee Benefits: Home Office Allocation: $ $ $ Amount 7,853,110 405,849 21,903

144

See Revenue Agent Reports (Verdolini Aff., Ex. 26).

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Tax Year 1987

Proposed Adjustment Employee Benefits: Home Office Allocation: Other Deductions: Bad Debts: $ $ $ $

Amount 332,710 3,534,289 (555,350) (785,311)

149.

The adjustments described in Proposed Finding of Uncontroverted Fact 147 include

the following amounts that defendant has withdrawn:145 Tax Year 1986 1987 150.

Proposed Adjustment Net Loans: Net Loans: $ $

Amount 84,426 174,309

The adjustments described in Proposed Finding of Uncontroverted Fact 147 include

the following amount which could change depending upon the final resolution of tax years subsequent to the years at issue:146

Tax Year 1987

Proposed Adjustment Net Operating Loss Deduction:

Amount $ (12,918,821)

See Letter from M. Seidman to M. Carr Ferguson dated August 10, 2000 (Verdolini Aff., Ex. 49).
146

145

See Revenue Agent Reports (Verdolini Aff., Ex. 26).

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151.

The adjustments described in Proposed Finding of Uncontroverted Fact 147 include

the following amounts asserted by the IRS under Section 882 and Treasury Regulations section 1.882-5:147 Tax Year 1981 1982 1983 1984 1985 1986 1987 152. Proposed adjustments to interest income: (125,857,675) (132,049,714) (88,243,894) (104,153,633) (79,404,169) (87,081,845) (131,596,705) $ $ $ $ $ $ $ Proposed adjustments to interest expense: 152,605,551 147,337,977 101,652,347 126,092,694 93,539,801 108,064,089 174,292,853

The Revenue Agent Reports dated May 3, 1995 for the taxable year ended

December 31, 1987 proposed an Environmental Tax increase of $53,771, but did not include a correlative regular tax deduction for Environmental Tax.148 Both of these figures could change depending upon the final resolution of the years at issue. 153. The adjusted U.S. federal taxable income of NatWest as determined by the IRS for

each of the years at issue was as follows:149 Tax Year 1981
147

Amount $ 31,875,618

See Revenue Agent Reports (Verdolini Aff., Ex. 26).

See Revenue Agent Reports (Verdolini Aff., Ex. 26); IRC §§59A, 164(a)(5) (1987) (Verdolini Aff., Ex. 72).
149

148

See Revenue Agent Reports (Verdolini Aff., Ex. 26).

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Tax Year 1982 1983 1984 1985 1986 1987 Total -> 154. $ $ $ $ $ $

Amount 28,154,833 38,336,127 29,948,701 54,676,775 64,457,339 46,808,885

$ 294,258,278

The U.S. federal income tax liability of NatWest as determined by the IRS for each

of the years at issue, excluding interest thereon, was as follows:150 Tax Year 1981 1982 1983 1984 1985 1986 1987 Total -> 155. $ $ $ $ $ $ $ Amount 14,154,278 12,546,863 16,105,789 13,084,832 24,937,042 29,528,505 18,620,521

$ 128,977,830

The U.S. federal income tax liability shown on NatWest s original Form 1120F

U.S. federal income tax return or as adjusted prior to issuance of the Revenue Agent Report for each of the years at issue based on the amounts of U.S. federal taxable income shown on Proposed Finding of Uncontroverted Fact 145 was as follows:151

150

See Revenue Agent Reports (Verdolini Aff., Ex. 26). See Revenue Agent Reports (Verdolini Aff., Ex. 26).

151

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Tax Year 1981 1982 1983 1984 1985 1986 1987 Total -> 156. $ $ $ $ $ $ $ $

Amount 1,850,255 5,514,262 7,759,280 2,992,864 18,434,651 19,641,070 304,302 56,496,684

The deficiency in U.S. federal income tax due by NatWest for each of the years at

issue as determined by the IRS, excluding interest thereon, was as follows:152 Tax Year 1981 1982 1983 1984 1985 1986 1987 Total -> 157. $ $ $ $ $ $ $ $ Amount 12,304,023 7,032,601 8,346,509 10,091,968 6,502,391 9,887,435 18,316,219 72,481,146

The U.S. federal income tax payments made by NatWest to the IRS for each of the

years at issue were as follows:

152

See Revenue Agent Reports (Verdolini Aff., Ex. 26).

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U.S. Federal Income Tax Payments for the Years at Issue Tax Year Prior Year Overpayment1 Current Year Estimated Payments2 Payment Per Form 70043 Amount Paid Original Return4 Amount Claimed as Refund on Original Return5 Amount Credited to Estimated Tax on Original Return6 Refund Per Form 1139 Due to NOL Carryback7 Tax Paid Per Form 870 dated 08/23/898 Tax Paid in Response to Revenue Agent Report9 Tax Paid Due to Adjustment of NOL Carryback10 Aggregate Tax Payments 1981 600,170 4,250,000 0 0 (1,594,320) (1,500,000) 1982 1,500,000 4,000,000 0 0 0 (56,411) 1983 56,411 10,035,000 0 0 (732,131) (1,600,000) 1984 1,600,000 1,650,000 0 0 0 (257,136) 1985 257,136 16,340,000 1,002,864 834,651 0 0 1986 0 20,011,000 567,000 0 (936,930) 0 1987 0 6,953,000 406,000 0 (1,767,422) 0

0 94,405 12,304,023 0 14,154,278

0 70,673 7,032,601 0 12,546,863

0 0 8,346,509 0 16,105,789

0 0 10,091,968 0 13,084,832

0 0 6,502,391 0 24,937,042

0 0 9,887,435 0 29,528,505

(5,287,276) 0 18,316,219 350,564 18,971,085

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1 - See Plaintiff s Form 1120F for tax years 1981-1987 (Verdolini Aff., Exs. 5-11). 2, 3, 4 - See Def. s Ans. to 1st Amended Compl. at ¶3 (Verdolini Aff., Ex. 4). 5 - See Plaintiff s Form 1120F for tax years 1981-1987 (Verdolini Aff., Exs. 5-11). 6 - See Plaintiff s Form 1120F for tax years 1981-1987 (Verdolini Aff., Exs. 5-11). 7 - See Revenue Agent Reports (Verdolini Aff., Ex. 26). 8 - See Pl. s Resp. to Def. s Interrog. 1.04, Ex. B at B0001 (Form 870AD), B0003 (1981), B0004 (1982), and B0005 (copies of checks for $223,518 and $139,781 payable to IRS) (Verdolini Aff., Ex. 65). 9 - These tax amounts and the deficiency interest thereon were paid by: (1) application of a $50,000,000 deposit in the nature of a cash bond; (2) application of a $40,000,000 deposit in the nature of a cash bond; (3) a payment of $34,446,842; and (4) a payment of $55,802,939. See Pl. s Resp. to Def. s Interrog. 1.12, Ex. F at F00010 (1981 through 1985) and F00020 (1986 and 1987); see also F00031 (IRS Receipt for Payment of Taxes in the amount of $50,000,000); F00024-00025 (IRS stamp acknowledging receipt of $40,000,000 check); F00022 (copy of check for $34,446,842.00 payable to IRS); F00023 (copy of check for $55,802,939.00 payable to IRS) (Verdolini Aff., Ex. 66). 10 - See Form 870-AD dated June 26, 1998 at 3 (Verdolini Aff., Ex. 89) ($350,564 in additional tax due to adjustment of NOL carryback to 1987).

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158.

The interest paid by the U.S. Branch to the Internal Revenue Service Center in

Philadelphia, PA on May 31, 1995 and June 8, 1995, on the tax deficiencies asserted in the Revenue Agent Report, was as follows:153 Tax Year 1981 1982 1983 1984 1985 1986 1987 Total -> 159. $ $ $ $ $ $ $ $ Interest Paid 28,838,978 13,068,220 14,107,184 15,045,416 7,693,000 11,467,996 17,547,841 107,768,635

On July 11, 1995, NatWest filed amended returns ( Refund Claims ) for the years

at issue and on April 24, 1996, NatWest filed second amended returns ( Second Refund Claims ) for the years at issue with the Internal Revenue Service Center in Philadelphia, Pennsylvania claiming refunds of federal income tax, including interest.154

See Pl. s Resp. to Def. s Interrog. 1.12, Ex. F at F00010-00011 (1981 through 1985) and F00020 (1986 and 1987) (Verdolini Aff., Ex. 66); see also F00031 (Internal Revenue Service ( IRS ) Receipt for Payment of Taxes in the amount of $50,000,000); F00024-00025 (IRS stamp acknowledging receipt of $40,000,000 check); F00022 (copy of check for $34,446,842.00 payable to IRS); F00023 (copy of check for $55,802,939.00 payable to IRS) (Verdolini Aff., Ex. 66) (sum of check amounts, $180,249,781, less $107,768,635 aggregate interest, above, equals $72,481,146 additional taxes paid per Revenue Agent Reports.) (Verdolini Aff., Ex. 26).
154

153

Def. s Ans. to 1st Am. Compl. ¶ 15 (Verdolini Aff., Ex. 4).

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160.

By virtue of a series of agreements timely executed pursuant to Section

6501(c)(4) (Forms 872), the statute of limitations on assessment and collection for the years at issue had not expired as of the dates of filing the Refund Claims and the Second Refund Claims and, consequently, the Refund Claims and Second Refund Claims and the refunds themselves were timely filed and sought pursuant to Section 6511(c)(1) and (2).155 161. On September 7, 1995, the Internal Revenue Service Center in Philadelphia,

Pennsylvania mailed to NatWest Notices of Disallowance denying the Refund Claims.156 162. NatWest brought this action for a refund on November 17, 1995 following receipt

of the Notice of Disallowance denying its Refund Claim.157 163. The adjustments proposed under Section 882 and Treasury Regulations section

1.882-5 described in Proposed Finding of Uncontroverted Fact 155 should be withdrawn in accordance with the Court s July 1999 Opinion and Order.158 164. The interest income reported on NatWest s original Form 1120F U.S. federal

income tax returns for the years 1981 through 1987 included the amounts of interest income received or accrued by the U.S. branches from each other.159

155

Def. s Ans. to 1st Am. Compl. ¶ 17 (Verdolini Aff., Ex. 4). Def. s Ans. to 1st Am. Compl. ¶ 18 (Verdolini Aff., Ex. 4). 1st Am. Compl. (Verdolini Aff., Ex. 3). See Nat l Westminster Bank PLC v. U.S., 40 Fed. Cl. 120 (1999). See Profit and Loss Statements (Verdolini Aff., Exs. 28-34).

156

157

158

159

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165.

The interest expense reported on NatWest s original Form 1120F U.S. federal

income tax returns for the years 1981 through 1987 included the amounts of interest expense paid or accrued by the U.S. branches to each other.160 166. If all of the intra-U.S. interest expense and intra-U.S. interest income were

eliminated from NatWest s U.S. taxable income, the following net additions to, or reductions of, taxable income would result for the years at issue:161 Addition to or (Reduction of) Taxable Income $ $ $ $ $ $ $ (34,957) 23,991 (79,916) 231,163 38,246 (3,974) 71,877

Tax Year 1981 1982 1983 1984 1985 1986 1987 167.

In NatWest s Revised Refund Claim and attachments thereto submitted to

Defendant on June 5, 2001 ( Revised Refund Claim ), NatWest proposed to increase its taxable income by the amounts shown for taxable years 1982, 1984, 1985 and 1987 in Proposed Finding

160

See Profit and Loss Statements (Verdolini Aff., Exs. 28-34). See Profit and Loss Statements (Verdolini Aff., Exs. 28-34).

161

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of Uncontroverted Fact 166, but did not propose to reduce its taxable income by the amounts shown for years 1981, 1983, and 1986 in Proposed Finding of Uncontroverted Fact 166.162 168. records.163 169. issue.164 170. The aggregate amount conceded by plaintiff as capital loan charges exceeded the There is no basis for further concessions by plaintiff with respect to the capital Plaintiff has conceded all capital loan charges reflected in its books and

actual capital loan charges deducted by plaintiff on its U.S. federal income tax returns during the years 1981 through 1987 in the amount of $267,323.165 171. Accounts recorded in the U.S. branch balance sheets as Freehold Premises

(ARD), Leasehold Premises (ASD), Furniture and fittings (ATD), and Computer and other equipment (AUD), represent the U.S. branches 172. Fixed Assets.
166

During the years at issue, the U.S. branches did not fund Fixed Assets with

interest-bearing liabilities.167

See Profit and Loss Statements (Verdolini Aff., Exs. 28-34); Plaintiff s Revised Refund Claim, and supporting schedules thereto (Verdolini Aff., Ex. 27). PwC Rep. at 9, 12 (concluding all capital loan charges have been identified and accounted for. ) (Verdolini Aff., Ex. 56). See PwC Rep. at 9, 12 (Verdolini Aff., Ex. 56); Expert Report of Edward Jukes dated March 4, 2005 at 3 ( Jukes Rep. ) (Verdolini Aff., Ex. 60).
165 164 163

162

PwC Rep. at 9 (Verdolini Aff., Ex. 56); Bandoian Decl. at ¶¶15-17. Def. s Resp. to Pl. s Req. for Ad. 2.107 (Verdolini Aff., Ex. 67). Scott Decl. at ¶13.

166

167

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173.

During the years in issue, NatWest s U.S. branches purchased approximately $42

million in premises and equipment.168 174. The aggregate of the amounts recorded as Fixed Assets on the year-end balance

sheets of the U.S. branch operation for the taxable year ended December 31, 1980 and each of the years at issue was:169 Tax Year 1980 1981 1982 1983 1984 1985 1986 1987 175. $ $ $ $ $ $ $ $ Aggregate Fixed Assets 9,167,969 11,969,698 15,862,602 16,631,023 25,976,913 23,322,331 26,977,617 29,477,629

The aggregate of the provisions for B&DD - Non-Specific recorded on the

year-end balance sheets of the U.S. branch operation for the taxable year ended December 31, 1980 and each of the years at issue was:170 Provision for B&DD - Non-Specific $ $ 10,539,202 10,807,318

Tax Year 1980 1981

168

See Bandoian Decl. at Ex. C (purchases of fixed assets). See Balance Sheets (Verdolini Aff., Exs. 35-42). See Balance Sheets (Verdolini Aff., Exs. 35-42).

169

170

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Tax Year 1982 1983 1984 1985 1986 1987 176. $ $ $ $ $ $

Provision for B&DD - Non-Specific 10,363,993 13,108,406 11,851,486 12,679,446 20,013,077 20,013,077

During the years at issue, the U.S. branch operations did not transfer or repatriate

to the head office any of their Retained Profits generated during the years at issue.171 177. The aggregate of the balances recorded as Retained Profits (net of any amounts

recorded as Accumulated Losses ) on the year-end balance sheets of the U.S. branch operation for the taxable year ended December 31, 1980 and each of the years at issue was:172 Tax Year 1980 1981 1982 1983 1984 1985 1986 1987 Aggregate Retained Profits $ $ $ $ $ $ $ $ 15,677,567 2,564,846 4,312,898 19,625,765 25,993,019 51,706,718 63,301,445 29,732,486

171

See Bandoian Rep. (1/14/02) at Ex. 6 (Verdolini Aff., Ex. 55). See Balance Sheets (Verdolini Aff., Exs. 35-42).

172

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178.

The aggregate of the balances recorded as Balance due to HO re Capital Loans

on the year-end balance sheets of the U.S. branch operations for the taxable year ended December 31, 1980 and each of the years at issue was:173 Aggregate Balance due to HO re Capital Loans $ $ $ $ $ $ $ $ 3,223,184 869,893 900,770 645,032 42,437 1,085,000 0 0

Tax Year 1980 1981 1982 1983 1984 1985 1986 1987 179.

During the year 1981, NatWest s U.S. branches repaid $1,665,042 in balances

due to the head office with respect to capital loans from prior years.174 180. During the year 1986, the U.S. branches repaid the outstanding balance of the

Balance due Head Office re Capital Loan, i.e., $1,085,000.175

173

See Balance Sheets (Verdolini Aff., Exs. 35-42). Bandoian Decl. at Ex. C (repayment of Balance due to HO re: Capital Loans). Bandoian Decl. at Ex. C (repayment of Balance due to HO re: Capital Loans).

174

175

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181.

The aggregate of the balances recorded as Balance due to HO re Fixed Assets

on the year-end balance sheets of the U.S. branch operations for the taxable year ended December 31, 1980 and each of the years at issue was:176 Aggregate Balance due to HO re Fixed Assets $ $ $ $ $ $ $ $ 8,344,816 9,033,064 9,002,188 9,257,926 9,860,521 8,817,958 0 0

Tax Year 1980 1981 1982 1983 1984 1985 1986 1987 182.

During the year 1986, the U.S. branches repaid the outstanding Balance due HO

re Fixed Assets, i.e., $8,817,958.177 183. The aggregate of the balances recorded as Profit and Loss on the year-end

balance sheets of the U.S. branch operations for the taxable year ended December 31, 1980 and each of the years at issue was:178 Aggregate Profit & Loss Balance $ 0

Tax Year 1980

176

See Balance Sheets (Verdolini Aff., Exs. 35-42). Bandoian Decl. at Ex. C (repayment of Balance due to HO re: Fixed Assets). See Balance Sheets (Verdolini Aff., Exs. 35-42).

177

178

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Tax Year 1981 1982 1983 1984 1985 1986 1987 184. $ $ $ $ $ $ $

Aggregate Profit & Loss Balance 0 4,604,145 5,117,386 5,109,745