Consolidated Edison Co. v. United States

OPINION

HORN, Judge.

FINDINGS OF FACT

The plaintiff, Consolidated Edison Company of New York, Inc. (Con Ed), and its subsidiaries, brought this claim to recover funds allegedly overpaid to the Internal Revenue Service (IRS) for the 1997 tax year, *232 when the IRS disallowed certain rental, interest and transaction cost deductions taken by the plaintiff, associated with a leveraged lease transaction the plaintiff entered into in 1997. This complex, leveraged lease transaction, referred to in a number of ways by the parties, including “leveraged lease,” “lease-leaseback,” or “lease-in, lease-out,” also known as a “LILO” transaction, 1 took place between Consolidated Edison Leasing, Inc. (CEL), a wholly-owned subsidiary of Consolidated Edison Development, Inc. (CED) 2 and Electriciteitsbedrijf Zuid-Holland, N.V. (EZH), a Dutch utility. The Facility that was the subject of the LILO agreement was a gas-fired, combined cycle cogeneration plant (the RoCa3 Facility) located in The Netherlands. The RoCa3 Transaction involved the lease of an undivided 47.47% interest in EZH’s RoCa3 Facility for a term of 43.2 years (which constituted 80% of the Facility’s estimated remaining useful life on the closing date of 54 years) by the plaintiff, pursuant to a Lease Agreement, and a shorter term sublease of this same undivided 47.47% interest in the RoCa3 Facility back to EZH, for a term of 20.1 years, pursuant to a Sublease Agreement, and various other related agreements.

In order to determine the appropriateness of tax deductions claimed by a taxpayer, each transaction seeking qualification for relevant tax benefits under applicable Internal Revenue Code (IRC) sections and related regulations must be evaluated on its own merits, based on the documents which established the transaction and on the specific facts that led to the transaction. Consequently, in order to evaluate the complex transaction at issue, a five-week trial was held, over 1,600 exhibits containing over 25,000 pages were submitted, and lengthy post-trial briefings on the legal and factual issues raised in this case were filed by both parties. Additionally, the parties stipulated to a set of basic, undisputed facts. After presiding at the trial and conducting a thorough review of the transcripts, the testimony, the exhibits entered into the record and the submissions filed by the parties, the court has made extensive findings of fact, which are incorporated throughout this opinion. The conclusions of the court offered in this opinion are based on the specific and unique facts which led to, and were part of, the RoCa3 Transaction.

According to the company’s former Chairman and Chief Executive Officer, Con Ed originated in 1823 as a gas company in New York State. In 1884, following the merger of a group of gas companies, the company was named the Consolidated Gas Company. During the 1930s, it became the Consolidated Edison Company of New York, following the merger of many smaller electric and gas companies in the area.

In the mid-to-late 1990s, Con Ed was a publicly held, “vertically integrated” utility company, organized under the laws of the State of New York. The company generated, transmitted and distributed electricity and provided customer service. As of December 31, 1996, Con Ed provided services to over eight million people in New York City and Westchester County, New York. In addition, Con Ed maintained a vertically integrated steam business and delivered natural gas to one million customers in Westchester County and parts of New York City, including the Bronx, Manhattan, and parts of Queens.

The New York Public Service Commission (PSC), which regulates the electric industry in New York, regulated all of Con Ed’s operations prior to the deregulation of New York’s electricity utilities, which took place during the mid-1990s. The PSC sought to deregulate electric companies in order to encourage competition in the electricity industry. After engaging in a study on deregulation, the PSC ordered Con Ed and certain other major electric utilities in New York State to file plans describing how they would restructure their operations to bring about a more competitive marketplace, including for electric generation, and to propose corporate structures, including unregulated subsidiaries, that would advance the PSC’s restructuring goals. The order contemplated Con Ed’s *233 investment through development companies, investment funds, joint ventures and other vehicles, but noted that Con Ed’s proposed investment in energy infrastructure projects (domestic and international) would be through established investment funds. On May 2, 1995, Con Ed requested permission from the PSC to invest up to 5% (approximately $504 million) of its consolidated capital in unregulated subsidiaries. On July 12, 1996, the PSC issued an order deferring action on Con Ed’s May 2, 1995 request, but granting Con Ed the authority to invest up to $50 million in unregulated subsidiaries that would subsequently invest and/or participate in energy infrastructure projects and market technical services. As Con Ed further explored options to enable it to comply with the PSC’s deregulation order, an internal Con Ed memorandum, dated September 18,1996, discussed seeking approval from the Con Ed Board of Trustees to form and invest up to $50 million in a wholly-owned subsidiary that could, in turn, invest in energy infrastructure development projects and market technical services worldwide. One month later, on October 18, 1996, Con Ed established a development company, initially named Gramercy Development, Inc. (GDI), which, on September 24, 1997, changed its name to Consolidated Edison Development, Inc. (CED). 3 As of December 15, 1997, Con Ed owned 100% of the outstanding stock of the development company.

In March 1997, the development company (GDI/CED) entered into an agreement with International Energy Partners, L.P. (IEP), pursuant to which the Con Ed subsidiary was given preferred rights to participate in certain investment opportunities identified by IEP. A number of potential projects were reviewed. Early on in this relationship, GDI/CED and IEP gained a minority ownership investment in a relatively small power facility in Eastern Guatemala, known as Gen-eradora Eléctrica del Norte, Limitada. The development company additionally contemplated investing in other projects in Guatemala, as well as projects in Peru, Indonesia and the Philippines. In 1998, GDI/CED participated in a utility project in China. After review of each proposed project, the development company made individual risk assessments as to whether to proceed.

In September 1997, the PSC and Con Ed agreed that Con Ed would be restructured as a holding company comprised of unregulated subsidiaries. The agreement also required Con Ed to divest at least 50% of its New York City electric generating, fossil fueled, megawatt capacity plants to unregulated third parties by the end of 2002, and permitted the new holding company to invest up to 5% of its consolidated capital in unregulated subsidiaries. 4 Consolidated Edison, Inc. (CEI), therefore, was formed on January 1, 1998, as a holding company, and Con Ed and several other unregulated subsidiaries became subsidiaries of CEI. According to Kevin Burke, Chairman and Chief Executive Officer, and President of CEI at the time of the trial, and formerly Vice President for Corporate Planning, prior to establishing the holding company structure, investments that Con Ed pursued had to be approved by the PSC. However, under the new holding company structure, Con Ed could pursue certain opportunities, up to a percentage of its consolidated capital, in energy and non-energy fields, without prior PSC approval. Between 1999 and 2001, Con Ed sold much of its electrical generating capacity, after which the remaining electric generating assets owned by Con Ed were connected with, or ancillary to, its steam generation business.

According to Joan Freilich, the former Comptroller, Chief Financial Officer (CFO) and member of the Boards of Con Ed and CEI, Con Ed, as a subsidiary of CEI, sought *234 to enter into one or more LILO investments in order to offset losses it was expected to sustain as a result of deregulation of the electric utilities in New York State and the resulting divestiture of some of its assets. According to Ms. Freilich:

Con Ed was entering a lot of new areas at this time in terms of the competitive markets, different areas away from the geographic area and the regional markets that we were familiar with. And we certainly, to the extent we were looking at assets, including leasing, we wanted to go to familiar assets, which we understood, which we felt that we could better evaluate, both before and after acquisition.

Among other investments, the development company was investing in long-term “greenfield” projects, and was expected to operate at a loss into 2001, due to the up-front costs associated with these projects. According to Charles Muoio, a former management employee and ultimately Chief Executive Officer of the development company, the “greenfield” projects were “new project[s], [that] can take you four or five years before you actually start getting cash flow out of the project.” 5

A LILO transaction is designed to provide a pretax profit that, for accounting purposes under Financial Accounting Standards (FAS) 13, 6 is front-loaded into the early years of the transaction. According to testimony at the trial, separate phases accounting does not change the total income attributed to the transaction, but changes the timing of the recognition of income. Several witnesses for both parties testified at the trial that such a tax advantage is normal and expected in leveraged leases. Furthermore, as a result of deregulation, the development company (GDI/CED) specifically sought international LILO investments in order to diversify its assets and develop strategic alliances abroad. According to numerous senior level employees of the plaintiff and its subsidiaries, including Ms. Freilich; Mr. Muoio, a former Chief Executive Officer of the development company; Ms. McCartney, a former Chairman of the Board of the development company; and Mr. Burke, GDI/CED went about evaluating prospective investments in a very deliberate manner, rejecting many proposed opportunities prior to choosing the RoCa3 Transaction.

On December 15, 1997, the RoCa3 Transaction with EZH was entered into by the development company, at the time known as CED, through its wholly owned subsidiary, Consolidated Edison Leasing, Inc. (CEL). CEL set up a Trust, the CEL Trust, with Wilmington Trust Company, a third party Trustee, to enter into the Lease Agreement, Sublease Agreement, and the other agreements that were involved in the RoCa3 Transaction. 7

The history of the RoCa3 Transaction relates back to May 1997, when the development company (GDI/CED) began discussions with Cornerstone Financial Advisors L.P. (Cornerstone) to obtain advice on possible leasing investments. Cornerstone was subsequently retained to provide financial services in connection with the RoCa3, LILO Transaction with EZH, at issue in this case, as well as several other possible LILO transactions involving various energy assets in The Netherlands.

At the time the RoCa3 Transaction was being explored, EZH was one of four national power-generating companies in The Netherlands, engaged in the business of coordinating and transporting electrical energy in *235 the southern part of The Netherlands. Since 1941, EZH had been an energy company which owned assets, including several energy generating facilities in The Netherlands. The issued capital stock of EZH was owned by several municipalities in the southern part of The Netherlands. EZH’s RoCa3 Facility opened for commercial operation in 1996 and delivered heat, electricity and carbon dioxide to its customers.

On August 25, 1997, Cornerstone notified GDI/CED of the possibility of entering into a leveraged lease with EZH regarding the RoCa3 Facility. On September 26, 1997, Cornerstone, on behalf of the development company, by that time named CED, and Banc One Leasing (Banc One), 8 another entity which invested in the RoCa3 Facility, submitted a proposal to EZH to enter into a LILO agreement with respect to the RoCa3 Facility. EZH, however, did not execute that proposal. On October 21, 1997, CED submitted a proposal directly to EZH, also involving the RoCa3 Facility, which EZH accepted on October 22, 1997. CED stipulated that its proposal was subject to: (a) participation of lenders on terms acceptable to CED; (b) issuance of necessary approvals within CED; (e) receipt of satisfactory opinions (including a tax opinion) and accounting determinations; (d) satisfactory third party expert letters and reports concerning (i) the reasonableness of the interest rate on the third party nonrecourse loan, the debt defea-sance and related matters, (ii) insurance matters, (hi) environmental matters, (iv) an engineering report, and (v) an appraisal report; and (e) negotiation of documentation mutually acceptable to EZH and CED. According to Robert Holzman, a representative of Cornerstone and a witness at trial, Cornerstone assisted CED’s due diligence efforts, and hired some of the experts to review the Facility and the proposed Transaction, including credit due diligence, asset due diligence, environmental due diligence, legal and regulatory due diligence, and accounting due diligence.

In furtherance of its extensive due diligence efforts, prior to entering the RoCa3 Transaction, and because the plaintiffs entering the RoCa3 Transaction was contingent on the results of the due diligence reports, CED retained the law firms of Shearman & Sterling, LLP as its United States legal counsel, and Loeff, Claeys, Verbeke as its Dutch legal counsel, as well as Deloitte & Touche LLP (Deloitte) as its appraiser, Duke Engineering and Services (Duke Engineering) as its independent engineer, and Tauw Milieu, International (Tauw Milieu), as its environmental consultant. Con Ed and CED representatives testified at trial that CED based its decision to hire each of these firms on their reputations and/or their prior relationships with CED.

The results of key due diligence evaluations are summarized briefly below. The record, however, includes the detailed studies documenting CED’s and Con Ed’s comprehensive due diligence efforts. Upon review, and reinforced by credible testimony at the trial of those involved in the preparation of the various reports submitted to CED and Con Ed prior to the RoCa3 Transaction, the reports appear to have been thoroughly and carefully prepared by knowledgeable experts and, therefore, deserving of credibility. The court notes that a number of the expert reports were commissioned by the same companies whose names have appeared as performing some of the pre-transaction reviews in several other eases in which the deductions claimed on leveraged lease transactions have been disapproved. The reports in the record before the court, however, are specific to the RoCa3 Transaction and Facility and should be reviewed on their own merits, and not compared to separate, unrelated transactions, which do not even invoke electric generating facilities.

• Duke Engineering concluded in its Report, titled “EZH — RoCa CHP Station Unit No. 3 Due Diligence Engineering Report,” that various aspects of the quality of the RoCa3 Facility (Plant Life Expectancy; Availability; Reliability; *236 Efficiency; Environmental Compliance; and Plant Staff Support, Training, and Incentives) were above average and others (Operability; Plant Safety; Site Plan and Structures; and Future Plant Improvement/Renewal) were average. The Report stated:

The evaluation rates each of the above 10 areas either below average, average or above average. Average is defined as how a typical U.S. combined cycle or European CHP CC plant would measure up to the criterion. However, we noted that this plant compared favorably with other Dutch and European plants of similar size and design that DE & S [Duke Engineering & Services] has reviewed in that it had been designed for high efficiency and high availability as discussed in Section 3.

The useful life of the RoCa3 Facility was reported by Duke Engineering as above average, at least a total of 55 years. The Duke Engineering Report also addressed the assets and services CED would need to operate the RoCa3 Facility and concluded that, given Con Ed’s extensive and lengthy experience and expertise as a utility running many power plants, it would have the ability to operate the RoCa3 Facility.

• Deloitte reported in its Appraisal of the RoCa3 Electric Generation Facility, among other conclusions, that:

The fair market values of the Subles-sor’s Lease Interest, the Facility and the Undivided Interest are equal to US$148,200,000, US$316,000,000 and US$150,000,000, respectively, as of the Closing Date. 9 The equity investment of the Investor is at least 20 percent of the value of the interest of the Sublessor’s Lease Interest as of the Closing Date,

and,

Based on the comparative costs of the reasonably anticipated alternatives expected to be available to the Sublessee on the Sublease Basie Termination Date, the Sublessee is not expected to be under any economic compulsion to exercise the Sublease Purchase Option.

The Deloitte Report concluded that the remaining useful life of the Facility as of the closing date was at least 54 years and, as of the lease termination date, would be at least 10.8 years. Furthermore, Deloitte found that there was no economic or non-economie factor which would create a material inducement or cause EZH to exercise the Sublease Purchase Option, and that on the Lease Termination date, the remaining useful life of the RoCa3 Facility was expected to be at least 20% of the Facility’s remaining useful life as of the December 15, 1997 closing date. Therefore, the Deloitte Report concluded that, upon termination of the Sublease, the Subles-sor’s Lease Interest would be commercially viable and expected to be able to be placed with an unrelated party.

• Tauw Milieu, a Dutch company, following on-site inspections, issued its Report titled “EZH — RoCa3 Power Station: Due Diligence Environmental, Safety and Health Report.” The Report concluded that the RoCa3 Facility’s overall environmental condition was “very good,” with no direct evidence indicated of any significant contamination problems affecting the site. “[P]roper operating, maintenance and upgrade procedures, and all appropriate regulatory requirements are followed[.]” No major non-compliances were identified in the Report, and only minor non-compliances were identified, which could require administrative action or a minimum investment. According to the Report, the only health and safety non-compliances were minor, and likely would mainly entail personnel costs to remedy. The Report described the Facility as “a state of the art power station. The Facility employs best available technology to minimize environmental impact, is well managed and is in good condition____Tauw is of the *237 opinion that the Facility doesn’t present any significant environmental concern.” Tauw concluded that EZH has a positive attitude and compliant approach toward health and safety issues.

• The law firm of Shearman & Sterling, LLP was asked to provide outside legal counsel regarding a “Cross-Border Lease/Leasebaek Transaction,” “Amendments to the [IRS] Code and Treasury Regulations Impact on Leveraged Lease Financing Transactions,” and also to give specific advice on the “EZH RoCa3 Facility Lease.” The “Cross-Border Lease/Leaseback Transaction” Memorandum, provided by Shearman & Sterling on November 20,1997, identified the types of risks to be considered when entering into such a transaction, including the conditions under which a leveraged lease transaction will be considered a valid lease by the IRS and United States courts, and whether the transaction serves a valid business purpose. The analysis on “Amendments to the Code and Treasury Regulation Impact on Leveraged Lease Financing Transactions,” and on the impact of these amendments on leveraged lease financing transactions, concluded that “none of the examined amendments [since 1985] were enacted with retroactive effect.” The Final Tax Opinion of Shearman & Sterling, on the RoCa3 Facility Lease stated:

Based upon the foregoing and in reliance thereon and subject thereto, and based upon an analysis of the Code, the Treasury Regulations promulgated thereunder (including proposed, temporary and final regulations), revenue rulings and revenue procedures of the Internal Revenue Service, court decisions and such other laws and facts as we have deemed relevant and necessary, it is our opinion that for Federal income tax purposes:

1.Each of the Lease and the Sublease is a “true lease”; the Trust will be treated as the lessee under the Lease and as the sublessor under the Sublease; the Trust will be treated as a grantor trust pursuant to Sections 671 et seq. of the Code; the Investor will be the owner and sole beneficiary of the Trust and the Investor will be entitled and required to take into account each item of income, gain, loss, deduction and credit of the Trust with respect to its interest in the Facility, the Lease, the Sublease and the Loan evidenced by the Loan and the Security Agreement.

2. The Investor should be entitled to rental deductions under Section 162 of the Code for scheduled installments of the Lease Basic Rent payable under the lease in the amounts and the periods to which such installments relate, as specified in the lease, in accordance with Section 467(b)(1) of the Code. The Investor should be entitled to include in gross income all scheduled installments of Sublease Basic Rent (and Sublease Renewal Rent, if any) receivable under the Sublease during the Sublease Term in the amounts and in the periods to which such installments relate, as specified in the Sublease, in accordance with Section 467(b)(1) of the Code. Neither the Lease nor the Sublease constitutes a “disqualified leaseback” or “long-term agreement” within the meaning of Section 467(b)(4) of the Code.

3. The Loan evidenced by the Loan and Security Agreement constitutes a debt obligation of the Trust and all amounts payable thereon as interest with respect thereto will be deductible by the Investor, when accrued in accordance with the terns thereof, pursuant to Section 163 of the Code and the Treasury Regulations promulgated thereunder.

4. The Investor will be entitled to deductions for amortization of Transaction Expenses on a straight-line basis over the Lease Term, the Sublease Term and the Term of the Loan evidenced by the Loan and Security Agreement, respectively, and we believe that the allocation of the Transaction Expenses in accordance with *238 the terms of the Pricing File constitutes a reasonable allocation thereof.

5. The German lease constitutes a financing rather than a “true lease,” under which the German Lessor is a secured lender and the Lessor is a borrower and owner of the German Equipment.

6. Provided that the Closing Date is prior to the effective date of the Final Treasury Regulations under Section 467 of the Code, a court should not construe such final Treasury Regulations to apply to Lease Basic Rent, Sublease Basic Rent or Sublease Renewal Rent, if any, unless either the Lease or the Sublease constitutes a “disqualified leaseback” or a “long-term agreement,” within the meaning of Section 467(b)(4) of the Code.

In addition, the Dutch firm of Loeff Claeys Verbeke issued an opinion on the impact of Dutch law on the Transaction.

A Standard & Poor’s credit analysis of EZH also was performed, which concluded that if a rating were requested, companies like EZH are likely to be rated at or above an A rated company. CED also asked Cornerstone to assist in obtaining an accounting opinion regarding whether the RoCa3 Transaction qualified as a leveraged lease for accounting purposes. The accounting firm of Arthur Anderson LLP was hired and performed the accounting analysis on the RoCa3 Transaction, and concluded in a memorandum provided to Cornerstone that the Transaction qualified as a leverage lease for accounting purposes.

Prior to the closing of the RoCa3 Transaction, CED employees and representatives on their behalf prepared numerous documents and briefings used by CED and Con Ed management during their internal review of the Transaction. Among these was a late-stage, “Leasing White Paper,” dated December 9, 1997, and submitted to then Chairman of Con Ed’s Board, Eugene McGrath. The Leasing White Paper summarized the nature of leveraged leasing transactions, projected the benefits and risks, projected earnings of such transactions, and projected a 90%, anticipated success if such a transaction were to be challenged by the IRS, under current regulations, based on tax counsel advice, and noted that the RoCa3 Transaction was under consideration. The Leasing White Paper also stated, “the transactions [referring generally to leveraged leasing LILO transactions] will be structured in ways that will make any challenges to the structure by the IRS under current regulations difficult to support or litigate.” On December 10, 1997, CED personnel presented a resolution to approve involvement in the RoCa3 Transaction to the CED Board of Directors. On the same day, the CED Board authorized investment participation in the RoCa3 Transaction, subject to the approval of the holding company, CEI, and provision of the necessary funds. At a CEI Board of Directors meeting on December 12, 1997, the CEI Board gave authorization to CED to proceed with the investment strategy described in the December 9,1997 Leasing White Paper.

Thereafter, on December 15, 1997, EZH and CED’s subsidiary, CEL, directly or through CEL Trust, 10 entered into the RoCaB Transaction, along with third parties, by executing a series of agreements including, among others: (1) the Participation Agreement; (2) the Lease Agreement; (3) the Lease Certificate of Acceptance; (4) the Sublease Agreement; (5) the Sublease Certificate of Acceptance; (6) the Loan and Security Agreement; (7) the Sublessee Loan Agreement; (8) the Tax Indemnity Agreement; (9) the IJssel Agreement; (10) the Rotte Agreement; (11) the Sublease Deposit, Pledge and Repledge Agreement; (12) the Sublessee Pledge and Security Agreement; (13) the Custody Agreement; (14) the Facility Operating Agreement; (15) the Common Facilities Use Agreement; (16) the Facility Support Agreement; (17) the Access Agreement; and (18) the Assignment Agreement. 11 *239 Among the key instruments governing the RoCa3 Transaction, addressed below, are the Participation Agreement; the Lease Agreement; the Hollandsche Bank-Unie (HBU) Nonrecourse Loan documents; the Sublease Agreement; the Rotte Agreement; and the IJssel Agreement establishing the Defea-sance Accounts.

• The Participation Agreement

In brief, the Participation Agreement established the agreements made by the various parties to promote participation in the RoCa3 Transaction. These included conditions precedent to the parties’ willingness to close the RoCa3 Transaction, as well as a complex list of documents to be provided, and representations and warranties to be made by CEL Trust and EZH. In addition, the Participation Agreement addressed Credit Arrangements, Refinancing Rights, Investment and Holdings of Funds, Transfer of Interests, General and Tax Indemnity Conditions, Limitations on Liability, as well as a number of other items, including jurisdiction, service of process, language, currency and confidentiality.

• The Lease Agreement

By way of the Lease Agreement, EZH, as lessor, conveyed to CEL Trust, 12 as Trustee for CED, a Lease Interest of an undivided 47.47% in the RoCa3 Facility for a Lease Term of 43.2 years, commencing on December 15, 1997 and ending on February 24, 2041. CEL Trust then entered into a Sublease Agreement with EZH, and subleased an undivided interest in the RoCa3 Facility for a sublease term of 20.1 years to EZH. Section 7(a) of the Lease Agreement provides that, prior to the Sublease Termination Date, CEL Trust, at its own expense, is required to maintain, repair and preserve the RoCa3 Facility, in accordance with the standards set forth in section 7(a) of the Sublease Agreement, and that by entering into the Sublease Agreement with EZH, and prior to the Sublease Termination Date, CEL Trust was deemed to have complied with its maintenance, repair and preservation obligations as defined by the Lease Agreement. At the end of the Sublease Basie Term, three separate Options could be exercised pursuant to the agreement, the terms of which will dictate the parties’ relationship for the remainder of the Lease Term. These include the Sublease Purchase Option, which could be exercised by EZH, the Sublease Renewal Option and the Retention Option, either of which could be exercised by CEL Trust.

According to the Lease Agreement, CEL Trust was required to make two rent pay- *240 mente to EZH during the term of the Lease. An immediate Initial Basic Rent Payment in the amount of $120,112,270.36 was due on the closing date, December 15,1997. CEL Trust paid this amount to EZH by combining CEL Trust’s equity commitment of $39,320,000.00, with an $80,792,270.36 nonrecourse loan, at 7.10% interest, to CEL Trust, from HBU. To secure the prompt payment of principal and interest, and all other amounts due with respect to the Loan Certificates issued pursuant to HBU’s Nonrecourse Loan, CEL Trust assigned to HBU a lien (the Lien of the Loan Agreement), including on the Lease Agreement, the Sublease Agreement, all rents, profits, revenues and other income from the property, subject to the Lien of the Loan Agreement, and CEL Trust’s right to receive rent from EZH. Additionally, so long as the Lien of the Loan has not been discharged, EZH is to pay its sublease rents, except for certain specifically excluded payments, to HBU. At the time of the RoCa3 Transaction, although no longer, HBU was a wholly-owned subsidiary of ABN AMRO Bank, N.V. (ABN AMRO). Section 10(c) of the Participation Agreement provides that HBU is regularly engaged in banking, is making the loan in the ordinary course of its business, its day-to-day operations are separate from ABN AMRO Bank, it has not transferred any part of the loan or risks associated with making such loan to any person or affiliate thereof (including ABN AMRO) with obligations under the operative documents, and the Operative Documents contain all of the agreements on the part of the lender or any affiliate thereof, relating to the transactions contemplated by the Operative Documents. As noted above, and testified to by plaintiffs expert witness, Dr. David M. Ellis, a leveraged lease typically has nonrecourse debt in order to qualify as a leveraged lease for accounting purposes under FAS 13. Paul Bent, an expert witness who testified at trial for the defendant, also remarked that it is standard practice for a lender in a leveraged lease to finance up to 80% of the purchase price with nonrecourse debt, although the percentage can vary. In this case, HBU’s loan provided about 67% of the financing of the RoCa3 Transaction. A payment schedule for repayment of the nonrecourse loan from HBU, to begin on January 2, 2004, and certain triggering events for prepayment, including CEL Trust’s election of the Retention Option, are set forth in the Loan Certificate.

The RoCa3 Transaction was effected when CEL transferred its $39,320,000.00 equity investment to the Wilmington Trust Company Account, which, in turn, assigned its rights in the account to CEL Trust. HBU also transferred its rights in another funded account, held by ABN AMRO, in the amount of $80,792,270.36, to CEL Trust. CEL Trust subsequently transferred and assigned these two accounts to EZH in satisfaction of the Initial Basic Rent Payment of $120,112,270.36. CEL Trust’s second and Final Basic Rent Payment, in the amount of approximately $831,525,734.00, is due on the Lease Termination Date, February 24, 2041.

The Lease Agreement lists a series of events which would constitute Lessor Events of Default, including the following:

(a) EZH breaches the covenant of quiet enjoyment provided in section 4(c) of the Lease after the Sublease Term, and does not timely cure the breach;

(b) EZH fails to perform or observe in any material respect its covenants, obligations, or agreements under the Lease Agreement or sections 11(d) and (e) of the Participation Agreement, and EZH cannot timely cure such failure;

(c) EZH is declared bankrupt and does not successfully appeal such determination in a timely manner;

(d) EZH is dissolved or liquidated, other than by reason of an allowed merger, if the rights of CEL Trust or CEL are adversely affected;

(e) EZH proposes or enters into an arrangement for the benefit of its creditors;

(f) EZH fails to maintain the Letter of Credit;

(g) EZH defaults under the German Lease and the German Lessor exercises its remedies under the German Lease or gives notice of its intent to do so;

(h) A termination of the German Lease without EZH obtaining title to the German Equipment;

*241 (i) A payment default under the Sublessee Loan Agreement as of the last day of the Sublease Basic Term, unless EZH has already purchased Lessor CEL Trust’s interest in the Facility;

(j) EZH fails to pay the Settlement Amount which has not been timely resolved.

The Lease Agreement also provides that if a Lessor Event of Default occurs and the Sublease is not in effect, then: (a) EZH is to pay CEL the Settlement Amount, set forth in Exhibit D to the Lease Agreement; (b) CEL Trust’s Lease Interest is to be automatically assigned to the Designated Successor Lessee (which is any entity chosen by EZH, so long as that entity is organized under the laws of The Netherlands); and (e) CEL Trust is to transfer its rights in certain collateral, subject to the prior payment of the Settlement Amount, to the Designated Successor Lessee, except as otherwise provided. The Lease Agreement further provides that if a Lessee or Lessor Event of Default occurs while the Sublease is in effect, the sole action that may be taken by either EZH or CEL Trust is to exercise any of its remedies or take other appropriate action under the Sublease.

• Sublease Agreement

The Sublease Agreement between CEL Trust and EZH sets out the terms of the Sublease, in which CEL Trust was the Sub-lessor and EZH was the Sublessee of an undivided 47.47% interest in the RoCa3 Facility. The Sublease took effect on the closing date, December 15, 1997. The Sublease was entered into for a period of 20.1 years, expiring on January 1, 2018. The Sublease Basic Term is for approximately 46.53% of the Lease Term. The Sublease Agreement requires EZH to “maintain, overhaul, inspect, test, repair and service” the Facility at its own expense during the Sublease Basic Term on a basis comparable to EZH’s maintenance of similar facilities that it owns, leases or operates and in line with “Prudent Industry Practice,” in compliance with applicable Dutch Law, any insurance requirements and the requirements of the German Documents, and to keep the appropriate ree-ords, at a level and in a manner that will maintain any existing manufacturers’ warranties. Under the Sublease Agreement, EZH is required to pay annual sublease rents to CEL Trust, beginning January 2, 1998 through January 2, 2018, as follows: on December 15, 1997: $0.00; on January 2, 1998: $424,960.00; on each January 2 from 1999 on on on on to January 2, January 2, January 2, January 2, January 2, and on each January 2 from 2012 to January 2, 2018: 2007 2008 2009 2010 2011 January 2, $8,999,161.52 $8,964,978. $7,358,487.86 $7,362,962.76 $7,362,950.30: January 2, $7,362,950.33.

The Sublease Agreement obligates EZH to pay the periodic Sublease Rents under any and all circumstances, including any setoff, counterclaim, recoupment or defense it may have against the plaintiff. EZH is to pay its Sublease Rent Payments, except for certain excluded payments, directly to HBU in satisfaction of CEL Trust’s obligation to HBU under the Loan Certificates. The Sublease further provides that EZH may only sub-sublease the Facility if it complies with stated conditions and agreements. In the event of a sub-sublease, EZH retains liability for all obligations under the Operative Documents of the Transaction. Furthermore, any modifications that EZH makes to the Facility are permitted under the Sublease Agreement, so long as they do not impair the operation, remaining useful life or residual value of the Facility. As discussed in greater detail below, CEL Trust established the Sublessee Loan for the benefit of EZH to allow EZH to defer payment on the Sublease from 1997 through a portion of 2004. On each stated date set forth in the Sublessee Loan Agreement, CEL Trust is to lend to EZH the amount due on the annual Sublease Basic Rent, at an interest of 7.43% per an-num.

The Lease or the Sublease may be terminated prematurely by the occurrence of certain Premature Termination Events described in the Sublease Agreement, such as: (a) a Burdensome Buyout Event; (b) a Voluntary Termination for Economic Obsolescence; (c) an Early Purchase Option; (d) a *242 Sublease Facility Event of Loss; or (e) a Sublessee Event of Default. In the event of a termination, a specific termination value would be determined.

A Sublessee Event of Default is defined in the Sublease Agreement, as follows:

(a) EZH fails to make payments of Sublease Basic Rent, Sublease Renewal Rent, Sublease Termination Value, Sublease Special Termination Value, Fair Market Sales Value of Sublessor’s Lease Interest, Sublease Purchase Option Price or Sublease Supplemental Rent required to be paid pursuant to the Sublessee Loan Agreement;

(b) Representations or warranties made by EZH are discovered to be untrue, inaccurate, or misleading in any material respect and EZH cannot timely cure such default;

(c) EZH fails to perform or observe in any material respect its covenants, obligations, or agreements and EZH cannot timely cure such default, with certain limited exceptions;

(d) EZH is declared bankrupt and does not successfully appeal such determination in a timely manner;

(e) EZH is dissolved or liquidated, other than by reason of an allowed merger, if the rights of CEL Trust or CEL are adversely affected;

(f) EZH proposes or enters into an arrangement for the benefit of its creditors;

(g) EZH fails to maintain required insurance;

(h) EZH fails to maintain the Letter of Credit;

(i) EZH fails to maintain and protect HBU’s security interest in the Facility;

(j) CEL Trust fails to have a first priority perfected security interest in the IJssel Deposit, unless waived by CEL Trust and CEL;

(k) EZH fails to arrange for the Lease Collateral Deposit as of the last day of the Sublease Basic Term (unless it has purchased CEL Trust’s Lease Interest);

(l) If CEL Trust elects the Sublessee Renewal Option, and EZH fails to obtain necessary governmental approvals or fails to take any required action with respect to the Loan Certificates, including the purchase thereof, provided that certain conditions are met;

(m) A payment default under the Subles-see Loan Agreement as of the last day of the Sublease Basic Term, unless EZH has already purchased CEL Trust’s Lease Interest;

(n) Termination of the Leasehold Right, the Building Right, or the Turbine Building Right;

(o) Foreclosures on liens on the Facility having a value in excess of $1 million;

(p) Defaults under the German Lease and the German Lessor exercises its remedies under the German Lease or gives notice of its intent to do so;

(q) Termination of the German Lease without EZH obtaining title to the German Equipment;

(r) Failure by EZH to pay ground rent due under the Notarial Deed of Establishment;

(s) Failure by Stichting RoCa to pay the Sale Remedy Purchase Price as defined in the Change of Law Agreement;

(t) The Pledge fails to constitute a first priority security interest in the Euro-Clear securities, continuing for 30 days;

(u) EZH exercises the Sublease Purchase Option and fails to comply with its terms as of the last day of the Sublease Basic Term.

• Defeasance Accounts

The parties entered into complex agreements to finance the project. EZH established two Defeasance Accounts, the Sublease Deposit (the Debt Defeasance Account) and the IJssel Deposit (the Equity Defea-sance Account). On December 12, 1997, EZH established the Rotte Foundation, “to purchase debt instruments, to make deposits, and to grant security interests in its assets to third parties to secure EZH’s payment obli-gations____” EZH made the Sublease Pay *243 ment Amount to the Rotte Foundation by transferring and assigning its rights in the ABN AMRO account. The Rotte Agreement provided that EZH’s payment obligations are limited to the Sublease Deposit. The IJssel Foundation was established on December 12, 1997, by EZH, to purchase debt instruments, make deposits, and grant security interests in its assets to third parties to secure certain payment obligations of EZH under the Sublease. These accounts, established by EZH, help mitigate and give more certainty to the economic impacts of its Sublease payment obligation that could result from fluctuating currency rates. EZH was a company functioning with the Dutch Guilder and the payment of EZH’s Sublease obligations were to be in United States dollars.

The Rotte Foundation granted CEL Trust a first priority right of pledge in the Sublease Deposit. CEL Trust repledged a first priority right of pledge to HBU as security for CEL Trust’s obligation to repay the secured loan amounts. The Sublease Deposit, Pledge and Repledge Agreement provides that the Sublease Deposit or Payment Amount of $80,792,270.36, was to be deposited by EZH on the Closing Date. EZH made the Sublease Deposit by transferring and assigning its rights in an ABN AMRO Account, which had an interest rate of 7.10% per annum or 6.98% compounded semi-annually. Under the Sublease Deposit, Pledge and Repledge Agreement, the Sublease Deposit is to be used, to the extent available, to pay EZH’s annual rent obligations to CEL Trust during the Sublease Basic Term. Furthermore, if ABN AMRO makes the payment obligations it agreed to make under the Sublease Deposit, Pledge and Repledge Agreement, the remaining payments that ABN AMRO agreed to make at any time will equal the remaining principal and interest payments due on the HBU Loan. Notwithstanding the Sublease Deposit, EZH remains liable for all Sublease Obligations. Bankruptcy of EZH or any other Sublessee does not terminate or otherwise affect the rights, obligations and liabilities of the parties with respect to the Sublease Deposit. Additionally, if ABN AMRO’s long-term, unsecured, senior debt obligations rating falls below A2 by Moody’s or A by Standard & Poor’s, EZH may replace the Sublease Deposit with Acceptable Substitute Credit Protection at its own option and expense. This would be contingent upon EZH finding a new lender to purchase the Loan Certificates from HBU for a purchase price of at least the principal remaining and any outstanding interest thereon. Further, if EZH were to replace the Sublease Deposit with Acceptable Substitute Credit Protection, EZH would be required to provide CEL and HBU first priority security interest in such security.

The IJssel Deposit was established pursuant to the IJssel Agreement, when EZH transferred $31,252,643.73 to the IJssel Foundation on the day after closing of the Transaction, to be deposited and credited to the IJssel Account, held at Credit Suisse First Boston, and to be used to purchase United States Government Securities (Treasury STRIPS). Treasury STRIPS (Separate Trading of Registered Interest and Principal of Securities) are zero-coupon Treasury bonds with a face value payable at maturity, requiring the United States to make a onetime payment at a specific future date, the maturity date, although purchased at a discount from face value. EZH granted CEL Trust a first priority interest in the IJssel Deposit as security for its payment obligations. The Treasury STRIPS contained in the IJssel Deposit were to cover the equity portion of the Sublease Basic Rent, if made, and the equity portion of the Purchase Option Price, if paid, with a maturity date prior to the date such amount is due, and with a value at maturity at least equal to each such amount. The maturity dates on the Treasury STRIPS were in 2011 for one, 2017 for another, and 2018 for the rest. The IJssel Agreement provides that, notwithstanding the agreement for the IJssel Deposit to cover certain payments, EZH remains liable for all Payment Obligations. Furthermore, EZH may terminate the IJssel Agreement, but not prior to the termination of the Sublease and the Payment Obligations. Both the Sublease Deposit and the IJssel Deposit were established to help EZH repay its Sublease Obligation. Nonetheless, the Sublease Obligation remained on EZH. As further security for its obligations under the Operative Docu- *244 merits, the Participation Agreement requires EZH to maintain one or more Letters of Credit in favor of and for the benefit of CEL and CEL Trust. EZH obtained such Letters of Credit on December 15, 1997 to secure EZH’s obligations to those entities.

• Additional Agreements

Among the additional agreements entered into as part of the RoCa3 Transaction are: the Sublessee Loan Agreement, the Facility Operating Agreement, the Facility Support Agreement, the Access Agreement, and the Tax Indemnity Agreement. The Sublessee Loan Agreement allows EZH to defer its Sublease Basic Rent Payments from 1997 through part of 2004, and provides that CEL Trust shall lend to EZH the amounts due in those years. In brief, the Sublessee Loan Agreement provides that the amounts borrowed by EZH were equal in amount and timing to the Sublease Basic Rent owed to CEL Trust from 1998 through 2003 and, in 2004. In 2004, the amount of the Sublessee Loan from CEL to EZH equals a portion of the Sublease Basic Rent. From 1998 through 2003, the amounts of the Sublessee Loans made by CEL Trust to EZH were equal in amount and timing to the amounts set forth for the Sublease Basic Rents for the same time period. In 2004, the amount of the Sublessee Loan made from CEL Trust to EZH was equal to a portion of the 2004 Sublease Rent. Thus, under the Agreement, EZH would not make payments from the Sublease Deposit or from any other source between 1998 and the first part of 2004. EZH borrowed the following amounts from CEL Trust, pursuant to the Sublessee Loan, on January 2, 1998: $424,960.41; on each January 2 from January 2, 1999 to January 2, 2003: $8,999,161.52; and on January 2, 2004: $669,041.51.

The Facility Operating Agreement was entered into by EZH, CEL Trust and Banc One Trust, and was created “to establish their respective rights and obligations in respect of matters relating to the operation of the Facility” during the Lease Term. It provides that EZH shall be the original Operator of the RoCa3 Facility, and that during the CEL Trust and Banc One Trust Sublease Terms, EZH may not be removed as Operator of the Facility, unless there is an uncured Facility Operating Agreement Default or a Sublessee Event of Default, and CEL Trust and Banc One Trust, who together possess the necessary two-thirds of Entitlement Shares 13 in these circumstances for an effective vote, agree to remove EZH as Operator. During the Sublease, the Sublease principally governs EZH’s duties and responsibilities. However, certain decisions, such as a Final Shutdown, require a two-thirds vote by the Leaseholders, not including EZH as the Operator.

After the Sublease terminates, the Facility Operating Agreement provisions with respect to the Operator and CEL Trust would come into effect. The Facility Operating Agreement mandates that the Operator at that time is responsible for operating the RoCa3 Facility in accordance with “Prudent Industry Practice” and has the responsibility for decisions regarding maintenance and operations of the RoCa3 Facility; need and timing of any modifications, including those required to keep the RoCa3 Facility in compliance with Dutch law; scheduling outages for modifications; determining the nature and timing of capital expenditures and other operating expense budgets; and integrating the RoCa3’s Facility with other units at the Station Site. The Facility Operating Agreement also provides that, after the respective terms of the Subleases, EZH or any successor Operator is entitled to receive monthly fees from CEL Trust and Bank One Trust, according to their respective entitlement shares, for EZH’s or successor’s continued operation of the RoCa3 Facility.

The Facility Support Agreement provides that EZH grants CEL Trust and Bane One Trust, or anyone subleasing from those two entities, the right to use certain equipment, parts, and supplies necessary or useful for operating, maintaining, repairing, testing, renewing or inspecting the Facility. This includes access to the high-voltage transmission grid for the transmission of its share of *245 the electricity generated by the RoCa3 Facility, in addition to the use of other systems required for the proper functioning of the Facility. Furthermore, EZH agreed to provide certain services, such as waste disposal services, access to water and laboratory testing facilities. The agreement also provides that Facility Users are required to pay EZH a fee for the equipment, parts, services and supplies provided. The Access Agreement provides that EZH grants to CEL Trust an easement on the Station Site as necessary for the leasing and operation of the Facility.

The Tax Indemnity Agreement provides that CEL and EZH intend that the Lease and Sublease be treated as a “true lease” for United States federal and state income tax purposes, that EZH would be treated as the Lessor and Sublessee and that CEL Trust would be treated as Lessee and Sublessor of the undivided 47.47% interest. That agreement further provides that during the Lease Term, neither EZH nor the German Lessor will take any written position inconsistent with the Tax Assumptions set forth in Section 2 of the Tax Indemnity Agreement, unless it is required to avoid a tax penalty; and EZH will not claim Lease Basic Rent payable under the Lease as an item of gross income on a United States federal, state or local income tax return in a manner inconsistent with the tax treatment of such Lease Basic Rent assumed by CEL. Furthermore, the Tax Indemnity Agreement provides that, on the date of closing, EZH was not a party to, nor did it have any present intention or understanding to enter into any written or oral agreements or like arrangements, other than as set forth in the Operative Documents and in the Specified Documents, legally requiring or economically compelling the exercise or non-exercise of the Sublease Purchase Option, or altering any of the agreements or terms or conditions set forth in the Operative Documents. Moreover, throughout the first five years of the Sublease, there will not be any written or oral agreements not described in the Operative Documents.

The Tax Indemnity Agreement also includes the following Transaction assumptions:

(a) The Trust [CEL Trust] will be treated as a grantor trust or otherwise disregarded for federal income tax purposes, and CEL, as the owner of the Trust will be required to take into account all items of gain, loss, deduction and credit in connection with its Undivided Interest;

(b) The Lease and Sublease will each be treated as “true leases”; EZH will be treated as the Lessor of the Undivided Interest, CEL Trust will be treated as the Sublessor and EZH will be treated as the Sublessee;

(e)CEL will amortize the transaction expenses on a straight-line basis, one-third of which over the Lease Term, one-third over the Sublease Renewal Term, and one-third over the term of the Loan. That the Lease and Sublease will each be treated as “true leases,” EZH will be treated as the Lessor of the Undivided Interest, and CEL Trust will be treated as the Sublessor, and EZH will be treated as the Sublessee;

(d) CEL will be allowed annual rental deductions under Section 162 of the I.R.C. for the Lease Basic Rent during the Lease Term as set allocated in Exhibit A to the Lease Agreement;

(e) CEL is required to take into account items of income, gain, loss and deductions in accordance with the accrual method of accounting;

(f) The obligations evidenced by the Loan Certificate will constitute indebtedness of CEL Trust and CEL will be entitled to interest deductions in connection therewith under I.R.C. section 163;

(g) CEL always will have sufficient income to utilize the Interest Deductions, Amortization Deductions and Rent Deductions; and

(h) CEL will not be subject to I.R.C. section 467(b)(2) with respect to Lease Basic Rent, Sublease Basic Rent or Sublease Renewal Rent.

• Options

Under the terms of the Transaction, the Sublease Basic Term ends on January 2, 2018, at which time three Options may be exercised, either by EZH or CEL Trust in accordance with the terms of the Agree *246 ments: (1) the Sublease Purchase Option, exercisable by EZH; (2) the Sublease Renewal Option; or (3) the Retention Option, the latter two both exercisable by CEL Trust if EZH does not exercise the Sublease Purchase Option.

1. Sublease Purchase Option

At the end of the Sublease Basic Term, EZH may exercise the Sublease Purchase Option to purchase CEL Trust’s remaining Lease Interest in the Facility for the Sublease Purchase Option Price of $215,450,949.20. 14 EZH can accomplish this payment, either by transferring, in cash, the full amount to CEL Trust, or by transferring $123,615,472.00, in cash, together with the delivery of STRIPS from the IJssel Deposit, valued at their respective maturity dates. The scheduled balance of the Sublease Deposit, as of January 2, 2018, plus the value of the United States Government Obligations remaining in the IJssel Deposit (on their respective maturity dates), together, would equal the Sublease Purchase Option Price. EZH also would be liable for the Final Sublease Basic Rent Payment of $7,326,950.33, which would be satisfied by using one of the Treasury STRIPS from the IJssel Deposit, valued at that amount upon maturity. Furthermore, EZH would assume CEL Trust’s obligation to make the Final Basic Rent Payment, therefore owing the Final Basic Rent Payment to itself. Such exercise of the Sublease Purchase Option would result in EZH buying back the remainder of the lease term and, therefore, CEL Trust would then transfer the Sublessee Loan to EZH. If EZH exercises the Sublease Purchase Option, and if ABN AMRO has made all the payments it is required to make under the Sublease Deposit to HBU, the HBU Loan will be paid in full. Under the Sublease Purchase Option, after the $123,615,472.00 balance of the Loan from HBU is repaid, HBU will release its Lien on the Lease. CEL Trust then may distribute the $7,326,950.33 it receives as the Final Sublease Basic Rent Payment to CEL, along with all subsequent payments from the IJssel Deposit (totaling $91,835,477.24). Therefore, the total amount receivable by CEL, upon Sublease termination, under the Sublease Purchase Option, will be $99,162,427.57, in addition to $5,221,000.00 from a Treasury STRIP with a maturity date of November 15, 2011.

If EZH does not exercise the Sublease Purchase Option, CEL Trust can either exercise the Sublease Renewal Option, which would require EZH to renew the Sublease for 16.5 years, and pay Sublease Renewal Rents, or it can exercise the Retention Option and cause the undivided 47.47% interest to be returned to CEL Trust for the remaining Lease Term.

2. Sublease Renewal Option

Under the Sublease Renewal Option, the Sublease would remain in effect at CEL Trust’s option from January 2, 2018 through June 15, 2034. The Sublease Renewal Rents from EZH to CEL Trust would be $18,225,000.00, due annually from January 2, 2019 to January 2, 2026, and $14,546,488.08 due on January 2, 2027, at which point the Sublease Deposit would be exhausted. The Sublease Renewal Rents are set at a rate of 90% of the projected fair market value. Under the Sublease Renewal Option, EZH will be required to maintain an acceptable Letter of Credit in favor of CEL and CEL Trust, securing its obligations under the Sublease Renewal Option. EZH will be responsible for paying the fees associated with the maintenance of this Letter of Credit. The Sublease Deposit, Pledge and Repledge Agree *247 ment will not be terminated in the event the Sublease is renewed. Accordingly, the Sublease Deposit continues with its scheduled investments and withdrawals. The schedule is set forth in Annex B of the Sublease Deposit, Pledge and Repledge Agreement and would be exhausted on January 2, 2027. The Sublease Renewal Period would terminate on July 15, 2034, at which point EZH would return the undivided 47.47% interest to CEL Trust, which would hold the interest, or lease the interest to a third party, until the end of the Lease Term on February 24, 2041. The time remaining on the lease after the end of the Sublease Renewal Term is referred to as the “Shirt-Tail Period,” and lasts from June 15, 2034 through the end of the Lease Term on February 24, 2041. If the Sublease Renewal Option were to be exercised, CEL Trust would be responsible for the operation, maintenance and output of the RoCa3 Facility during the Shirt-Tail Period, or could lease its undivided interest to EZH or another party. CEL Trust would have continuing nonrecourse debt service payments to make to HBU, which would equal $18,225,000.00 on each January 2, from January 2, 2018 to January 2, 2026, and $14,546,488.08 on January 2, 2027. If the Sublease Renewal Option is elected, the Lease Agreement provides that CEL Trust will be required to make the Final Basic Rent Payment of $831,525,734.00 on February 24, 2041.

If CEL Trust elects the Sublease Renewal Option, the Lease Agreement provides that CEL, on behalf of CEL Trust, shall, with a limited exception, fund two deposits to provide collateral for the Final Basic Rent Payment. These deposits are the Lease Collateral Deposit and the Trustee Treasury Collateral. Alternately, CEL or CEL Trust may elect to use Acceptable Substitute Collateral, as discussed further below.

Unless CEL or CEL Trust elects to use Acceptable Substitute Collateral, the Lease Agreement provides that CEL will make deposits in the Lease Collateral Deposit. These deposits will be made with an AA/Aa2 rated financial institution, will bear a fixed rate of interest and will be available to make scheduled payments. The Lease Collateral Deposit will be pledged to EZH to secure the Final Basic Rent Payment owed on February 24, 2041. Deposits will be equal to $3,678,511.92 on January 2, 2027 and thereafter $18,225,000.00 on each January 2 from 2028 to, and including, 2034, and then $8,251,875.00 on June 15, 2034. On the date of the last scheduled deposit into the Lease Collateral Deposit, it would have a balance of $176,210,292.09.

Unless CEL or CEL Trust elects to use Acceptable Substitute Collateral, the Lease Agreement provides that, under the Sublease Renewal Option (and the Retention Option, also discussed more fully below), CEL, pursuant to the Participation Agreement, will purchase United States Government Obligations on each date, and with maturity amounts set forth in the Participation Agreement, and maturity dates as close to, but not later than, the Lease Termination Date (February 24, 2041). CEL would then deposit those United States Government Securities in a custodial account established by CEL, for the benefit of CEL Trust, with a security interest in EZH’s favor (Trustee Treasury Collateral) to secure a portion of CEL Trust’s obligations to make the Final Basie Rent Payment.

The payment of the Final Basic Rent Payment is a recourse liability of CEL to the extent of $141,671,596.40. This amount would be satisfied by the creation of the Trustee Treasury Collateral (if CEL chooses to create that account), or the Acceptable Substitute Collateral, to the extent CEL used such collateral to replace the Trustee Treasury Collateral. CEL has a recourse liability to EZH for the remaining portion of the approximately $831.5 million to the extent of amounts, if any, CEL receives from the CEL Trust after the Sublease Basie Termination Date (January 2, 2018).

According to the Joint Stipulations Regarding Undisputed Facts, the total amount of the final payment due pursuant to the Sublessee Loan Agreement ($414,931,341.00), plus the amount of the Trustee Treasury Collateral ($141,671,596.40) and the Lease Collateral Deposit would total $831,525,734.00 as of February 24, 2041, as *248 suming that (i) CEL funds the Lease Collateral Deposit and the Trustee Treasury Collateral, and (ii) that CEL is able to earn an interest rate of 6.86% on the Lease Collateral Deposit from June 15, 2034 until February 24, 2041.

Alternately, in lieu of the Lease Collateral Deposit and the Trustee Treasury Collateral, CEL or CEL Trust may provide Acceptable Substitute Collateral in the form of (1) a Letter of Credit, and (2) a first priority security interest in either cash or United States-baeked securities, or (3) any other collateral that is acceptable to EZH in its sole discretion, so long as, in each case described above, the property compromising the Acceptable Substitute Collateral provides for payments on the same dates and in the same amounts as the payments that would have been made from the replaced collateral. The Lease Agreement provides that, if CEL or CEL Trust chooses to fund either the Trustee Treasury Collateral or Lease Collateral Deposit, they may, at any time during the Lease Term, replace either with Acceptable Substitute Collateral.

3. Retention Option

If CEL Trust exercises the Retention Option, EZH would be required to return the Sublessee’s undivided interest to CEL Trust on January 2, 2018 through the end of the Lease Term, February 24, 2041. The Sublease Deposit, Pledge and Repledge Agreement will be terminated and EZH will be required to maintain an acceptable Letter of Credit in favor of CEL Trust securing its obligations under the Sublessee Loan. A condition of the Retention Option is that CEL Ti'ust must prepay the nonrecourse loan when the Retention Option is elected. In the event that CEL Trust is unable to make reasonably acceptable arrangements for the prepayment of the nonrecourse loan, and if HBU timely notifies both CEL Trust and EZH of this failure on or before the forty-fifth day prior to the Sublease Basic Termination Date, the Sublease Renewal Option will be deemed to have been exercised. Furthermore, under the Retention Option, EZH may withdraw the projected Sublease Deposit balance of $123,615,471.96. Such Option would result in CEL and CEL Trust’s exposure to the risks and opportunities with respect to the operations of the RoCa3 Facility during the Retention Option Period, including the opportunity to benefit from the economic successes of the RoCa3 Facility and bear the risks and costs, including any economic failures. Under the Retention Option, CEL also would be required to either fund the Trustee Treasury Collateral and the Incremental Collateral Pledge, under which it would enter a custody arrangement to hold, on behalf of EZH, either United States Government Obligations, or other corporate bonds with ratings of at least Aa2 and AA, with fixed rates of interest and maturity amounts to secure the Final Basic Rent Payment, or, CEL or CEL Trust could elect to provide Acceptable Substitute Collateral in the form of a Letter of Credit and a first priority security interest to EZH, either in cash or in United States Government-backed securities, or in any other collateral acceptable, in EZH’s sole discretion, to meet the requirements of the Agreement. Such collateral would be considered Acceptable Substitute Collateral and payments must be provided on the same dates and in the same amounts as the payments that would have been made from the replaced collateral.

In the event that CEL elects to fund the Incremental Collateral Pledge and the Trustee Treasury Collateral, and CEL is able to earn an interest rate of 6.86% on the Incremental Collateral Pledge from the date it is funded until February 24, 2041, the total amount of the final payment due pursuant to the Sublessee Loan Agreement, plus the amount of the Lease Collateral Deposit and Trustee Treasury Collateral and projected value of the Incremental Collateral Pledge will total $831,525,734.00 on February 24, 2041. The payment of the Final Basic Rent Payment in the amount of $831,525,734.00 is a recourse liability of CEL to the extent of $141,671,596.40, which could be satisfied by the creation of the Trustee Treasury Collateral account or the Acceptable Substitute Collateral. In addition, CEL has a recourse liability to EZH for the remaining portion of the $831,525,734.00 to the extent of amounts, if any, CEL receives from CEL Trust after *249 the Sublease Basic Termination Date, January 2, 2018.

• Income Reporting and Deductions

CED, as a subsidiary of Con Ed, reported no income from the RoCa3 Transaction for 1997. In 1998,1999 and 2000, CED reported income from the RoCa3 Transaction as $8,096,792.00, $7,664,972.00, and $10,477,019.00, respectively. These amounts were the same as those reported for accounting purposes. Con Ed and CEI reported $835,744,192.00 in Taxable Income and $291,003,408.00 in Tax Liability for the year 1997. Con Ed reported $399,693.00 in rental income for 1997. Furthermore, Con Ed claimed the following deductions on its 1997 federal income tax return with respect to the EZH RoCa3 Transaction: rent paid to EZH in the amount of $1,072,652.00, pursuant to IRC § 162(a)(3) and calculated under IRC § 467; interest expense allocated to 1997 and attributable to the nonrecourse debt incurred by way of the HBU loan in the amount of $254,944.00, pursuant to IRC § 163(a); and amortization of the fees and expenses paid in connection with the Transaction in the amount of $9,698.00, pursuant to IRC § 162(a). As was annually normal for Con Ed, the IRS audited the reporting. In response to Con Ed’s filing, the IRS’s proposed adjustments in connection with the RoCa3 Transaction, resulting in an increase of $937,331.00 in Con Ed’s 1997 Taxable Income. The IRS assessed against Con Ed a deficiency in the amount of $328,066.00. Con Ed paid this amount on November 3, 2005 and filed a claim for refund with the IRS on December 2, 2005, which was subsequently denied on March 15, 2006, leading to the present ease. 15

DISCUSSION

I. Spoliation of Evidence

As an initial matter, the defendant filed a “Spoliation of Evidence Claim,” as part of its case, in which the defendant alleged that the plaintiff “destroyed emails in 2000, at a time when it was anticipating litigation.” According to the defendant, in 2000 the plaintiff anticipated or should have anticipated litigation, and had a duty to preserve any possibly relevant emails and email attachments, which discussed the RoCa3 Transaction, and which could be relevant to the government’s claims and defenses. Specifically, the defendant claimed that the plaintiff destroyed potentially relevant emails when it failed to backup or save emails prior to a migration of the email server at CED to the Con Ed email server that took place in 2000, at which time the defendant argues plaintiff had “knowledge of the likelihood of litigation,” and “anticipated that it was going to be a party to a lawsuit.” The defendant did not allege that specific emails or other relevant documents were destroyed, and that, as a result of that destruction, specific testimony should be excluded. Rather, the defendant argued that Con Ed’s failure to preserve emails incident to the 2000 migration from the Linux-based email system to the new Microsoft-based email system resulted in prejudice to the defendant. Defendant argued, for example, that comments on the revisions of documents may have been lost. Defendant also asserted that officers and directors of CED “frequently testified that they did not recall with specificity contemporaneous thoughts and impressions,” and that “in other situations an officer or director for Plaintiff would testify to remembering events occurring in a certain way, only to admit that they may have in fact occurred in a different manner when shown a document contradicting that recollection.” Therefore, according to the defendant, “[wjithout all of the emails from this time period, the United States was deprived of the opportunity to fully probe the recollection of the Plaintiffs witnesses and was thereby prejudiced.” Although the email migration did not occur until November 2000, defendant argues that plaintiff had the duty to preserve emails, either (1) following the preparation of an October 23,1997 memoran *250 dum by in-house, tax attorney Andrew Scher on the proposed RoCa3 project or (2) following the release of IRS Revenue Ruling 99-14, titled, “Business Expenses; Interest; Lease-In/Lease-Out Transactions,” on March 11, 1999, which was published on March 29,1999.

As a sanction for the plaintiffs alleged failure to preserve the email traffic, the defendant requested “an adverse inference that the destroyed information, if now available, would have been favorable to the United States and harmful to Consolidated Edison.” In the alternative, the defendant requested that “Plaintiff be prohibited from relying upon testimony of witnesses to the extent such testimony concerns the existence of emails discussing the EZH LILO Transaction where such emails have not been produced to the United States.”

The defendant contended that, in November 2000, when CED migrated its email accounts from the separate CED, Linux-based, “client-side” email system to the parent company’s Microsoft Outlook Exchange-based, “server-side” email system, emails contained on the hard drives of CED employees were destroyed. It was known that the emails from the old system would not migrate to the new system, but, the company decided that a backup of the entire email system would not be made prior to the changeover. Instead, CED employees were instructed to save “important” emails on their own hard drives in preparation for the migration. The defendant pointed out, for example, that among the emails that did not migrate, and were not otherwise saved, were those of Charles Muoio, who was president of CED during the time of the RoCa3 Transaction, but who left CED in 1999. As a result, neither Mr. Muoio, nor any other employees of CED, saved Mr. Muoio’s emails during the changeover. The defendant maintained that its case has been prejudiced by the plaintiffs failure to preserve such CED emails, because the defendant was precluded from being able to examine the emails generated by CED during the time period surrounding the development of the RoCa3 Transaction.

The defendant argued that litigation was anticipated in the October 23,1997 memorandum drafted by in-house tax attorney, Andrew Scher, on the proposed RoCa3 Transaction, which indicated that CED’s tax position on the Transaction was based on “a relatively aggressive reading of Internal Revenue Code § 467.” Mr. Scher’s memorandum indicated that there was a risk that the tax benefits of the Transaction may not be fully realized, either because “(i) the IRS and the courts will disagree with the CED’s interpretation of § 467 under the currently existing law, or (ii) during the term of the Head Lease, the proposed § 467 regulations would be finalized and the EZH transaction will not be grandfathered.” As a second basis for its motion, according to the defendant, IRS Revenue Ruling 99-14, released on March 11, 1999, published March 29, 1999, “gave notice of its [the IRS’s] decision to deny deductions generated as a result of entering into LILO transactions such as the one before the Court,” and was acknowledged when Mr. Scher prepared a “Draft analysis of IRS Ruling as applied to the EZH and Nuon 16 transactions,” which, thus, discussed the application of Revenue Ruling 99-14 to the EZH/RoCa3 Transaction.

The plaintiffs argument in response to defendant’s motion was that, in 2000, at the time of the migration of CED’s email system to the Con Ed system, the plaintiff did not, and should not have, anticipated litigation and, therefore, was not under a duty to preserve CED emails at the time. The plaintiff argues that, in fact, it did not anticipate litigation until 2004, and that the earliest it could have anticipated litigation was December 13, 2002, at the conclusion of the audit process of the plaintiffs 1997 tax return, when the IRS issued a Notice of Proposed Adjustment (NOPA). In the alternative, the plaintiff proposes as the date plaintiff anticipated litigation when Mr. Scher “determined that Consolidated Edison was unlikely to be able to resolve the dispute with the IRS in the Service’s [IRS’s] Appeals process,” in late 2004 or early 2005. The plaintiff asserts that it has produced all available relevant materia], with the exception of those documents and communications protected by attorney-client privilege. Opposing the defen *251 dant’s spoliation claim, the plaintiff asserts that the primary purpose of the 2000 migration of CED’s email system to the Con Ed network was to make the email system more reliable, stable, and to bring it into conformance with the rest of the parent company. There is no contradictory information in the record. The possible loss of emails that may have been relevant to this case was a byproduct of a much larger corporate task in which the existing CED emails did not migrate onto the new system and were, thereby, lost. The plaintiff explains that, prior to the email migration, CED’s emails were maintained by a Linux “client-side” server and only existed on the server until downloaded and viewed by the email account holder, at which point these emails then only existed on the user’s hard di’ive. Furthermore, CED’s previous Linux based system did not have a central backup or catastrophic backup system. In contrast, copies of emails sent via a “server-side” system, such as Con Ed’s new Microsoft Outlook Exchange-based system, are maintained on the server even after downloaded and viewed by the email account holder. According to the plaintiff, emails from the old client-side system could not be backed up centrally, or migrated onto Con Ed’s Microsoft-based server-side email system. These facts led to the plaintiffs decision to direct that, prior to the migration, CED employees should copy important emails from the Linux-based system to their hard drives, and instructed employees on how to do so, with assistance available, if requested.

Plaintiffs employee, Dawson Newberry, who was in charge of information technology systems for CED, confirmed that because there was no central backup for the old system, all emails would have been destroyed during the migration unless they were specifically designated by individual users to be saved. Mr. Newberry indicated that instructions were given regarding individuals saving emails, and that the burden to save emails was on the individual user, since CED itself could not centrally save the emails on a user’s hard drive. Although emails were undoubtedly lost in the migration, no intent on the part of CED or Con Ed to destroy emails, including any possibly relevant to the RoCa3 Transaction, has been established.

The plaintiff argued that the government has failed to meet its burden of proof as to the reasonable anticipation of litigation element of its spoliation claim and asserts that “Con Edison could not have reasonably anticipated litigation until years after the November 2000 conclusion of the period covered by the Government’s claim.” The plaintiff also rejected the defendant’s spoliation claim for failure to carry its burden to demonstrate “that any electronic communications purportedly lost would have been favorable to the Government and therefore any such destruction caused harm or prejudice to the Government’s ability to present its case.” The plaintiff opposed the defendant’s motion, asked for dismissal of the government’s spoliation claim and for the court to deny the defendant’s request for sanctions.

The IRS began to audit Con Ed’s 1997 tax return in 1999. According to uncontested testimony offered by the plaintiff, Con Ed’s tax returns were routinely audited every year and the plaintiff came to expect a corporate tax audit. Moreover, in past years, Con Ed had been able to settle multiple disputes with the IRS through administrative channels, rather than by litigation, and reasonably expected a similar resolution of disputes with the IRS regarding the 1997 tax year, including disputed deductions from the RoCa3 Transaction, as well as at least one other issue. Although an audit may have been anticipated by the plaintiff, based on the prior history of Con Ed’s dealings with the IRS, litigation was not necessarily anticipated. Indeed, the only course reasonably anticipated by the plaintiff during the time the plaintiff performed its risk analysis leading up to its decision to engage in the RoCa3 Transaction, was a possible administrative challenge, with which it was familiar, and which historically had allowed the plaintiff to resolve disputes without resorting to litigation. In May 2001, Mr. Scher, in his role as a tax attorney and Assistant General Counsel of Con Ed, became responsible for collecting documents responsive to the IRS Information Document Requests (IDRs). Mr. Scher *252 testified that he collected a large number of documents, including relevant emails.

As noted above, in 2005, the IRS disallowed the deductions reported from the RoCa3 Transaction and proposed adjustments amounting to an increase of $937,331.00 in Con Ed’s 1997 tax year obligation. The IRS assessed Con Ed a deficiency for 1997 in the amount of $328,066.00, which Con Ed paid on November 3, 2005. Subsequently, on December 2, 2005, Con Ed filed a refund claim with the IRS, which was denied on March 15, 2006. Thereafter, the plaintiff’s refund claim was filed in this court.

Also relevant to understanding the events underlying defendant’s spoliation claim is a previous motion filed by the defendant to compel filed in this ease, one of a series of motions to compel, brought by the parties during discovery, pursuant to Rule 37(a)(2)(B) of the Rules of the United States Court of Federal Claims (RCFC). In the defendant’s motion to compel, the government requested that the court compel the plaintiff to produce three documents generated in 1997: a letter prepared by outside counsel Shearman & Sterling discussing tax risks, another letter prepared by the same law firm discussing tax changes and an internal memorandum prepared by in-house counsel Scher regarding the application of IRC § 467. Prior to the motion, and during its dealings with the IRS, the plaintiff had released a number of documents on its privilege log. During the IRS audit process, Con Ed acknowledged that it had produced certain documents, otherwise protected as attorney-client communications and, thereby, effected a subject matter waiver of the attorney-client privilege. In opposition to the defendant’s motion to compel production of the three documents, the plaintiff, therefore, argued that the documents requested were created in anticipation of litigation and were protected by the work product doctrine. 17

In the plaintiffs memorandum responding to the defendant’s motion to compel, the plaintiff stated:

The Tax Risk Letter, the Tax Change Letter, and the In-House Memorandum were all created in anticipation of litigation. Con Edison N.Y. recognized that any contemplated lease-leaseback transaction that it entered into, including the EZH Investment, was certain to lead to an IRS audit and extremely likely to result in litigation. Although each of the three documents at issue addresses a different legal issue, each document was created to prepare for the anticipated IRS audit and subsequent tax refund litigation.

Also of note in the motion to compel proceeding was the submission of an affidavit from in-house attorney Scher, executed on May 10, 2007, in support of plaintiffs position to withhold the requested documents based on the work product doctrine. Mr. Scher stated in his affidavit that the “Tax Risk Letter, the Tax Change Letter and the In-House Memorandum were all created in anticipation of litigation,” and that “Con Edison N.Y. has not waived work product protection with respect to the Tax Risk Letter, the Tax Change Letter and the In-House Memorandum, and they remain protected as opinion work product.” Following an in camera review of the three documents and the submissions in support of each party’s position, including Mr. Seller’s affidavit, this court issued an order on June 11, 2007, confirming an earlier oral decision, and finding that the specific documents at issue, the Tax Risk Letter and the Tax Change Letter, both written on November 20, 1997, and the In-House Memorandum, written on October 23, 1997, were not protected from discovery under the work product privilege. At the hearing, as memorialized in the court’s order, “[t]he court concluded that the plaintiffs documents sought by defendant did not meet the test of preparation in anticipation of litigation, and were not protected from disclosure under the attorney work-product privilege.”

The court concluded that the Shearman & Sterling Tax Risk memorandum, prepared in November 1997, was prepared as part of a decision-tree process as to whether or not to *253 engage in the Transaction, not an analysis of anticipated litigation, and turned it over to the defendant, as requested. The second document, also prepared by Shearman & Sterling in November 1997, analyzed tax code and regulatory changes. The court also turned it over to the defendant, as requested, based on a review of the document as a general review of the tax code and regulatory issues on leveraged lease financing transactions, not created in anticipation of litigation, with nothing indicated respecting the RoCa3 Transaction or anticipated tax litigation over the RoCa3 Transaction.

The court struggled more with the third disputed document addressing the Con Ed proposed RoCa3 project, generated by in-house counsel Seher in October 1997, because of the affidavit filed by Mr. Seher in support of plaintiffs response to the motion to compel in May 2007. The October 23, 1997 memorandum prepared by Mr. Seher states as its purpose, “to provide a broad overview of the proposed EZH transaction, and the intended tax benefits to be derived from the transaction.” As noted above, the Seher memorandum concludes only that there is a risk that “the IRS and the courts will disagree with the CED’s interpretation of [IRC] § 467 under the currently existing law,” but does not conclude that any of the documents were prepared in anticipation of litigation. In Mr. Seher’s May 2007 affidavit filed in support of the plaintiffs response to the defendant’s motion to compel, however, Mr. Seher stated that “[t]he Tax Risk Letter, the Tax Change Letter and the In-House Memorandum” (Mr. Seher’s memorandum) all “were prepared in connection with Con Edison NY’s decision to enter a leasing transaction with N.V. Eleetrieiteitsbedrijf Zuid-Holland (‘EZH’),” and “were all created in anticipation of litigation.”

Mr. Seher also stated in his affidavit, filed with this court in May 2007 in support of plaintiffs work product privilege claim, that:

5.Due to the large tax deductions associated with lease-leaseback transactions and the unsettled legal questions regarding application of certain Code provisions, including section 467, to lease-leaseback transactions, coupled with the fact that Con Edison NY’s federal income tax returns for each of the 20 tax years preceding the year’ of the EZH transaction had been audited by the IRS, Con Edison N.Y. had ample reason to believe that any contemplated lease-leaseback transaction that it entered into was likely to be challenged on audit by the IRS and might result in litigation.

6. Con Edison N.Y. retained Shearman & Sterling to provide legal advice regarding the potential outcome of litigation regarding the tax aspects of the EZH transaction.

7. As part of the legal advice requested from Shearman & Sterling, Con Edison N.Y. requested advice concerning the arguments likely to be made by the IRS in any litigation regarding the tax aspects of the EZH transaction. This advice was set forth in the “Tax Risk Letter.”

8. As part of the legal advice requested from Shearman & Sterling, Con Edison N.Y. requested legal advice concerning the potential retroactive application of new statutes or regulations to the EZH transaction. This advice was set forth in the “Tax Change Letter.”

9. The Tax Risk Letter and the Tax Change Letter attempt to identify potential tax risks that needed to be considered prior to Con Edison NY’s participation in any lease-leaseback transactions.

10. The In-House Memorandum was written at the request of the then General Counsel of Con Edison NY, Peter O’Shea, and discusses the anticipated tax treatment of the lease-leaseback transaction, the likelihood that it would be scrutinized by both the IRS and a court, and the potential arguments which might be made by the IRS regarding the tax aspects of the EZH transaction.

The court concluded that, based on the words of and a contemporaneous context reading of the In-House Memorandum, the memorandum assessed risk, but did not “anticipate litigation,” with any degree of certainty, and that, therefore, the In-House Memorandum should be turned over to the defendant and was not protected by the work product privilege. This conclusion was ar *254 rived at despite Mr. Scher’s affidavit in opposition to the motion to compel and the plaintiffs claim of work product privilege for the document during discovery before this court. The court has concluded that M[r. Scher’s affidavit in opposition to defendant’s motion to compel was prepared as a retrospective comment, many years after his 1997 memorandum was prepared and offered only to urge a work product privilege once the attorney-client privilege had been waived and in order to keep documents from being turned over to the defendant.

The court also notes that such was not the only inconsistent behavior on the part of Mr. Scher. At trial, Mr. Scher was found to be nervous, self-preservationist, contradictory and plagued by selective memory. He was considered by the court an unreliable witness, perhaps willing to write or say whatever he thought would assist his then current assignment. At trial, Mr. Scher testified that although in 1997, the company anticipated a tax audit, because they were audited every year, “[w]e have [sic] no reason to believe this would lead to litigation.” During his testimony, Mr. Scher also disavowed the plaintiffs memorandum in opposition to the motion to compel and the statement that the RoCaB Transaction was “extremely likely to result in litigation,” as not written by him. He stated that he could only speak for himself and did not “know what Con Edison as a company was anticipating in 1997.” Moreover, in his testimony, Mr. Scher wavered and indicated that he “probably” read his affidavit before signing it, may have reviewed it and may have made changes, without recalling any specifics. The inconsistencies between the text of the 1997 Scher Memorandum, which anticipated a near certain audit, and that litigation “might result,” but was actually a risk analysis of the proposed RoCa3 Transaction which did not predict the inevitability of litigation or the outcome of litigation, as opposed to his conclusion in the later affidavit claiming the work product privilege for documents prepared in “anticipation of litigation,” as a basis for withholding documents during discovery, 18 do not encourage credibility of his testimony.

“ ‘Spoliation is the destruction or significant alteration of evidence, or failure to preserve property for another’s use as evidence in pending or reasonably foreseeable litigation.’ ” United Med. Supply Co. v. United States, 77 Fed.Cl. 257, 263 (2007) (quoting West v. Goodyear Tire & Rubber Co., 167 F.3d 776, 779 (2d Cir.1999)); see also Multiservice Joint Venture, LLC v. United States, 85 Fed.Cl. 106, 112 (2008); Morse Diesel Int’l, Inc. v. United States, 81 Fed.Cl. 220, 221 (2008). Sanctions for spoliation arise out of the court’s inherent power “ ‘governed not by rule or statute but by the control necessarily vested in courts to manage their own affairs so as to achieve the orderly and expeditious disposition of cases.” Chambers v. NASCO, Inc., 501 U.S. 32, 43 , 111 S.Ct. 2123 , 115 L.Ed.2d 27 (quoting Link v. Wabash R.R. Co., 370 U.S. 626, 630-31 , 82 S.Ct. 1386 , 8 L.Ed.2d 734 (1962)), reh’g denied, 501 U.S. 1269 , 112 S.Ct. 12 , 115 L.Ed.2d 1097 (1991); see also United Med. Supply Co. v. United States, 77 Fed.Cl. at 263-64 ; Pueblo of Laguna v. United States, 60 Fed.Cl. 133, 135-39 (2004). The inherent power of courts is broad, but must be exercised by judges cautiously, based on the specific facts of the case presented. According to the United States Supreme Court, because of their very potency, inherent powers “must be exercised with restraint and discretion.” Roadway Express, Inc. v. Piper, 447 U.S. 752, 764 , 100 S.Ct. 2455 , 65 L.Ed.2d 488 (1980). “In invoking the inherent power to punish conduct which abuses the judicial process, a court must exercise discretion in fashioning an appropriate sanction.” Chambers v. NASCO, Inc., 501 U.S. at 44-45 , 111 S.Ct. 2123 (citing Roadway Express, Inc. v. Piper, 447 U.S. at 764 , 100 S.Ct. 2455 ). Alternately, although not at issue in this case, when spoliation violates a court order or otherwise disrupts the court’s discovery regime, sanctions may be imposed under RCFC 37, which is essentially identical to Rule 37 of the Federal Rules of Civil Procedure. United Med. Supply Co. v. United States, 77 Fed.Cl. at 264 . The court in United Medical Supply noted that “[spoliation may result in a variety of sanctions, with ‘the oldest and most venera *255 ble remedy’ being an ‘adverse inference,’ under which the finder of fact may infer that the destroyed evidence would have been favorable to the opposing side.” Id. at 263 (quoting Jonathan Judge, Reconsidering Spoliation: Common-Sense Alternatives to the Spoliation Tort, 2001 Wis. L. Rev. 441 , 444 (2001)); see also Multiservice Joint Venture, LLC v. United States, 85 Fed.Cl. at 112 (quoting United Med. Supply Co. v. United States, 77 Fed.Cl. at 263 ).

In Jandreau v. Nicholson, the United States Court of Appeals for the Federal Circuit wrote:

The general rales of evidence law create an adverse inference when evidence has been destroyed and “(1) ... the party having control over the evidence had an obligation to preserve it at the time it was destroyed; (2) ... the records were destroyed with a culpable state of mind; and (3) ... the destroyed evidence was relevant to the party’s claim or defense such that a reasonable trier of fact could find that it would support that claim or defense.” Residential Funding Corp. v. DeGeorge Fin. Corp., 306 F.3d 99, 107 (2d Cir.2002) (internal citation and quotation marks omitted); see also 31A C.J.S. Evidence § 168 (2007); 2 Kenneth S. Brown, McCormick On Evidence § 264 (6th ed.2006). The burden is on the party seeking to use the evidence to show the existence of each criterion. Residential Funding, 306 F.3d at 107 .

Jandreau v. Nicholson, 492 F.3d 1372, 1375-76 (Fed.Cir.2007); 19 see also Morse Diesel Int’l, Inc. v. United States, 81 Fed.Cl. 220, 221-22 (2008); Zubulake v. UBS Warburg, LLC, 229 F.R.D. 422, 430 (S.D.N.Y.2004). Other articulations differ somewhat. For example, in the United States Court of Appeals for the Second Circuit, a “ ‘culpable state of mind’ for purposes of a spoliation inference, includes ordinary negligence. When evidence is destroyed in bad faith (i.e., intentionally or willfully), that fact alone is sufficient to demonstrate relevance.” Id. at 431 . In Thompson v. United States Department of Housing & Urban Development, 219 F.R.D. 93 (D.Md.2003), the United States District Court for the District of Maryland explained the three states of mind that could satisfy the culpability requirement for sanctions to be imposed as “bad faith/knowing destruction; gross negligence; and ordinary negligence.” Id. at 101 . 20

In its motion, the defendant referenced the United Medical Supply case to support its claim, both to find spoliation based on the plaintiffs duty to preserve and to establish that spoliation does not require a finding of “bad faith.” United Med. Supply Co. v. United States, 77 Fed.Cl. at 268 . The facts in the United Medical Supply ease are notably different and distinguishable from the present case. In United Medical Supply, the defendant, who was the party accused of spoliation, did not contest its duty to preserve the information at issue, nor that its employees repeatedly violated that duty. Id. at 265 . In United Medical Supply, virtually *256 all of the spoliation offenses occurred after federal court litigation had begun, and the circumstances were serious enough for the court to observe that the “defendant misled plaintiff and this court,” that the defendant “was regularly destroying documents” and that the “defendant miseharaeterized the extent of its efforts to locate responsive documents and prevent further spoliation.” Id. at 272, 273-74 . In its ruling, the court concluded that employees of the United States “must be deemed purposely to have made false statements to this court.” Id. at 274 . The court in United Medical Supply found that “irrefutable evidence demonstrates that over an extended period of time, the United States acting through at least some of its employees, recklessly disregarded that duty [that documents relevant to a case be preserved], thereby undoubtedly damaging plaintiffs ability to present its case....” Id. Nonetheless, the sanctions imposed did not include an adverse inference sanction, as is requested by the defendant in this ease. Id. at 274-75 .

When deciding whether to impose sanctions based on spoliation in a particular case, given the potential harshness of negative inferences, the discretion of the court must be exercised in a common sense manner, individually, with respect to the facts of each case. As stated in Fujitsu Limited v. Federal Express Corporation:

Once a court has concluded that a party was under an obligation to preseive the evidence that it destroyed, it must then consider whether the evidence was intentionally destroyed, and the likely contents of that evidence....The determination of an appropriate sanction for spoliation, if any, is confined to the sound discretion of the trial judge, see West v. Goodyear Tire & Rubber Co., 167 F.3d 776, 779 (2d Cir.1999), and is assessed on a case-by-case basis. See United States v. Grammatikos, 633 F.2d 1013, 1019-20 (2d Cir.1980).

Fujitsu Ltd. v. Fed. Express Corp., 247 F.3d 423, 436 (2d Cir.), cert. denied, 534 U.S. 891 , 122 S.Ct. 206 , 151 L.Ed.2d 146 (2001).

A party need not “preseive every shred of paper, every e-mail or electronic document, and every backup tape,” upon recognizing the threat of litigation. Zubulalce v. UBS Warburg LLC, 220 F.R.D. 212, 217 (S.D.N.Y.2003). “Such a rule would cripple large corporations ... that are almost always involved in litigation.” Id. The Zubu-lake court offered the following guidance:

anyone who anticipates being a party or is a party to a lawsuit must not destroy unique, relevant evidence that might be useful to an adversary. “While a litigant is under no duty to keep or retain eveiy document in its possession ... it is under a duty to preseive what it knows, or reasonably should know, is relevant in the action, is reasonably calculated to lead to the discovery of admissible evidence, is reasonably likely to be requested during discovery and/or is the subject of a pending discovery request.”

Id. (quoting Turner v. Hudson Transit Lines, Inc., 142 F.R.D. 68, 72 (S.D.N.Y.1991) (quoting William T. Thompson Co. v. Gen. Nutrition Corp., 593 F.Supp. 1443, 1455 (C.D.Cal.1984))). Furthermore,

[w]hile a litigant is under no duty to keep or retain every document in its possession, “[o]nce a party reasonably anticipates litigation, it must suspend its routine document retention/destruetion policy and put in place a ‘litigation hold’ to ensure the preservation of relevant documents.” Zubulake v. UBS Warburg LLC, 220 F.R.D. 212, 218 (S.D.N.Y.2003).... Relevant documents are those that a party should reasonably know are “relevant in the action, [] reasonably calculated to lead to the discovery of admissible evidence, [] reasonably likely to be requested during discovery and/or [are] the subject of a pending discovery request.” Id. at 217 (quoting Turner v. Hudson Transit Lines, Inc., 142 F.R.D. 68, 72 (S.D.N.Y.1991)).

Adorno v. Port Auth. of New York and New Jersey, 258 F.R.D. 217, 227 (S.D.N.Y.2009) (brackets in original).

As to when the duty to preseive potential evidence arises, one trial court suggested:

“ ‘The duty to preserve material evidence arises not only during litigation but also extends to that period before the litigation when a party reasonably should know that *257 the evidence may be relevant to anticipated litigation.’ ” World Courier v. Barone, No. C 06-3072 TEH, 2007 WL 1119196 , at *1 (N.D.Cal. April 16, 2007) (quoting Kronisch v. United States, 150 F.3d 112 , 126 (2d Cir.1998)); see AmeriPride Servs., Inc. v. Valley Indus. Serv., Inc., No. CIV S-00-113 LKK/JFM, 2006 WL 2308442 , at *4 (E.D.Cal. Aug. 9, 2006) (“[A]s soon as a potential claim is identified, a litigant is under a duty to preserve evidence which it knows or reasonably should know is relevant to the action.”).... Additionally, “[t]he obligation to retain discoverable materials is an affirmative one; it requires that the agency or corporate officers having notice of discovery obligations communicate those obligations to employees in possession of discoverable materials.” Nat’l Ass’n of Radiation Survivors [v. Turnage], 115 F.R.D. [543,] 557-58 [ (N.D.Cal.1987) ].

Dong Ah Tire & Rubber Co. v. Glasforms, Inc., No. 06-3359, 2008 WL 4298331 , at *3 (N.D.Cal. Sept.19, 2008).

“The scope of the duty to preserve extends to electronic documents, such as emails and back-up tapes.” AAB Joint Venture v. United States, 75 Fed.Cl. 432, 441 (2007) (citing Renda Marine, Inc. v. United States, 58 Fed.Cl. 57, 61 (2003); Thompson v. United States Dep’t of Housing & Urban Dev., 219 F.R.D. at 100 ). The court in Convolve, Inc. v. Compaq Computer Corporation, wrote:

Moreover, in the world of electronic data, the preservation obligation is not limited simply to avoiding affirmative acts of destruction. Since computer systems generally have automatic deletion features that periodically purge electronic documents such as e-mail, it is necessary for a party facing litigation to take active steps to halt that process. “Once a party reasonably anticipates litigation, it must suspend its routine document retention/destruction policy and put in place a ‘litigation hold’ to ensure the preservation of relevant documents.” Zubulake v. UBS Warburg LLC, 220 F.R.D. 212, 218 (S.D.N.Y.2003). “Identifying the boundaries of the duty to preserve involves two related inquiries: when does the duty to preserve attach, and what evidence must be preserved?” Id. at 216 .

Convolve, Inc. v. Compaq Computer Corp., 223 F.R.D. 162, 175-76 (S.D.N.Y.2004) (emphasis in original), other matters clarified, No. 00-5141, 2005 WL 1514284 (S.D.N.Y. June 24, 2005).

Once a showing of spoliation has been established, the burden shifts to the party against which the motion was made to show that the destruction of the evidence and failure to produce the documents did not prejudice the opponent. See DaimlerChrysler Motors v. Bill Davis Racing, Inc., No. 03-72265, 2005 WL 3502172 , at *1 (E.D.Mich. Dec.22, 2005). Moreover, “spoliation is not a substantive claim or defense but a ‘rule of evidence’ and thus is ‘administered at the discretion of the trial court.’” Hodge v. Wal-Mart Stores, Inc., 360 F.3d 446, 450 (4th Cir.2004) (quoting Vodusek v. Bayliner Marine Corp., 71 F.3d 148, 155 (4th Cir.1995)). If spoliation has occurred, the court should design sanctions “to: (1) deter parties from engaging in spoliation; (2) place the risk of erroneous judgment on the party who wrongfully created the risk; and (3) restore ‘the prejudiced party to the same position he [or she] would have been in absent the wrongful destruction of evidence by the opposing party.’ ” West v. Goodyear Tire & Rubber Co., 167 F.3d at 779 (quoting Kronisch v. United States, 150 F.3d at 126).

In the case before this court, the specific spoliation issue presented concerns whether the responsibility of a party to preserve evidence is triggered, as “in anticipation of litigation,” when, prior to court docketed litigation, the party is engaged with the IRS to administratively resolve an IRS challenge to the taxpayer’s filed return. The plaintiff in the case before this court, for example, routinely was audited annually and was routinely engaged in extended discussions with the IRS following those annual audits. Such was the case regarding plaintiffs 1997 tax return.

As discussed above, the court previously ruled that the October 23, 1997 In-House Memorandum prepared by in-house attorney Andrew Scher on the EZH Transaction, indi- *258 eating that the IRS or the courts might “disagree” with plaintiffs interpretation of section 467 of the Internal Revenue Code, along with two additional documents prepared by the law firm of Shearman & Sterling on the EZH Transaction, were found not to have been prepared in anticipation of litigation and, therefore, not work product protected. The documents, therefore, were turned over to the defendant. Although each document was found relevant to the issues in the current ease, the words of the documents were found not to reflect preparation in anticipation of litigation. During the hearing on the motion to compel, the court indicated to the parties that “an IRS audit contemplation does not trigger necessarily a contemplation of litigation.” Based on a history of yearly audits, in which discussions with the IRS during annual audits had led to resolution of many differences between the plaintiff and the IRS over tax filings, the plaintiff certainly had reason to expect its 1997 tax filing would be audited. Based on past history, however, the plaintiff did not automatically anticipate litigation simply because the IRS questioned the plaintiffs annual tax submission.

Individual or corporate taxpayers should not have to immediately conclude that all audits by the IRS, or even extensive, IRS administrative proceedings to challenge results of those audits negative to the taxpayer, necessarily will lead to litigation. To the contrary, the IRS has an elaborate structure set up to administratively resolve disputes between the government and the taxpayer in an attempt to avoid litigation. Taxpayers engaged in IRS administrative proceedings generally anticipate, and certainly hope, that litigation will not have to ensue. Although there is a point in time during interaction with the IRS that it is reasonable to conclude that litigation is likely or should be anticipated, that determination will differ in every case based on the facts of the case. Mr. Scher’s memorandum, as well as the two Shearman & Sterling memorandums, were prepared in 1997, prior to the consummation of the RoCa3 Transaction. The record in this case is replete with documents and testimony of the extent to which, before entering into the RoCa3 Transaction, Con Ed and CED carefully and extensively analyzed the economic, environmental and utility industry strengths and weaknesses of the RoCa3 Transaction. The fact that Con Ed and CED also analyzed the possible tax implications of the Transaction does not suggest that litigation was anticipated with any degree of certainty. Rather, the testimony and documents in the record establish that Con Ed and CED attempted to conduct a complete and thorough review of the proposed RoCa3 project before closing the Transaction. The RoCa3 Transaction was completed on December 15, 1997. Plaintiffs 1997 tax return was filed shortly thereafter, the following April.

Although the plaintiff understood prior to entering the RoCa3 Transaction that there were a number of possible benefits, as well as risks, associated with the RoCa3 Transaction, including that the IRS might not agree with the tax treatment the plaintiff assumed in its analysis, there was no clarity at the time the RoCa3 Transaction was finalized that certain, or even likely, litigation would ensue. Indeed, defendant has not demonstrated facts to the contrary. Although the IRS appears to have begun the audit of the plaintiffs 1997 tax return in 1999, the audit was not concluded until December 2002, well after the 2000 CED email migration. On December 13, 2002, the IRS issued a NOP A, to disallow the net loss items from the taxpayer’s participation in the EZH Transaction. Although arguably after reading the detailed December 13, 2002 NOP A, the plaintiff may have had a clearer understanding of the government’s position as articulated in that document, even then, the internal IRS Appeals process was only about to begin, and the plaintiff could have projected the IRS process as a means to a pre-litigation resolution. Plaintiff notes in an undisputed filing with the court, that another item challenged by the IRS in the 1997 audit, in fact, was resolved in the IRS Appeals process without litigation. Indeed, not every dispute with the IRS leads to litigation or “anticipates” litigation. If both parties are dealing in good faith regarding the disputed issues during the administrative process, the goal should be to avoid court-based litigation.

*259 The record reflects that the IRS requested information and documents and that the plaintiff, ultimately led by Mr. Seher, responded to IDRs from the IRS, in connection with the audit of the plaintiffs 1997 tax return, and prior to the issuance of the NOPA in December 2002. For example, in a response to one IDR, the plaintiff transmitted a copy of an invoice showing payment to the Wilmington Trust, initial direct costs for the RoCa3 Facility, CEL’s Certificate of Incorporation and a copy of share certificates issued by CEL to CED. That during the audit process, the IRS was requesting documents, or, according to Mr. Scher’s testimony at trial, that in May 2001 he became responsible for collecting documents responsive to IRS document requests, is not dispos-itive evidence that the plaintiff anticipated litigation, given the ongoing audit process and continuing discussions towards an attempted, administrative resolution between the plaintiff and the defendant.

The plaintiff maintained that, although it “has always recognized that a reasonable person would have anticipated litigation sometime before the lawsuit was filed[,] [i]n this case, the evidence demonstrates that the most reasonable time for such a determination was when it became clear that, unlike most disputes in IRS Appeals, Con Edison’s dispute regarding the EZH tax treatment was unlikely to be resolved.” According to the record, after multiple meetings between IRS personnel and the plaintiffs representatives, negotiations ended in the summer of 2005, when the plaintiffs resolution proposals were not accepted by the IRS. On November 3, 2005, the plaintiff paid the assessed deficiency and, thereafter, filed for a refund with the IRS. There may well have been a point in time before the summer of 2005 when the plaintiff more definitely “anticipated litigation,” but it was significantly after the 2000 email migration.

As discussed in Deseret Management Corporation v. United States, 76 Fed.Cl. 88, 92-95 (2007), albeit in the context of a party attempting to invoke the work product privilege, and not a spoliation claim, the courts are split among several circuits regarding when a party involved in the IRS administrative process should be deemed to anticipate litigation. In Deseret Management Corporation , the court quoted the Restatement (Third) of the Law Governing Lawyers § 87 cmt. h. (2000), to conclude broadly that litigation can include adversarial proceedings before an administrative agency when parties present evidence or legal argument regarding legally significant factual issues. The Deseret court, however, went on to apply a “circumstances of the case” test, to conclude that “document production during the IRS’s appeals process may be conducted ‘in anticipation of litigation,’ ” also in work product, privilege claims cases. Deseret Mgmt. Corp, v. United States, 76 Fed.Cl. at 94 (emphasis added). The lesson to be learned from the Deseret Management Corporation case is that the facts and circumstances of the individual case must be assessed to decide when litigation should be deemed by a court to be anticipated, either in a work product privilege dispute or in a spoliation claim.

In the instant ease, during the formation of the RoCa3 Transaction, tax consequences and risks were evaluated, including preparation of in-house and outside legal counsel memoranda. Additionally, the plaintiff and the IRS were engaged in discussions regarding the plaintiffs claimed deductions, prior to the issuance of the NOPA by the IRS in December 2002. It was reasonable, however, for the plaintiff to conclude that the IRS audit and discussions between the parties could or would resolve the issues on which the IRS was questioning the taxpayer. As stated by the United States Supreme Court, in a somewhat different context, “the purpose of [a civil tax] audit is not to prepare for or conduct litigation, but to assess the amount of tax liability through administrative channels.” United States v. Baggot, 463 U.S. 476, 480 , 103 S.Ct. 3164 , 77 L.Ed.2d 785 (1983). Moreover, as discussed above, based on a review of the contents of the Scher in-house and Shearman & Sterling memoranda, this court concluded that none of the memo-randa at issue in the motion to compel was prepared in anticipation of litigation, because (1) they were prepared too early in the process for the plaintiff to have reasonably anticipated that its decision to enter the RoCa3 Transaction likely would result in litigation, *260 and (2) the contents of the memoranda indicated that the memoranda were not the “work product” of an attorney anticipating litigation, but instead contained advice that went into making an informed corporate decision to enter or not enter a transaction, as part of plaintiffs various other due diligence efforts to better understand the implications, including tax implications, of the proposed RoCa3 Transaction.

Several unique aspects of the instant litigation in this court make the spoliation and other issues both interesting and complex, particularly with respect to Attorney Scher’s involvement and testimony in the litigation and the affidavit he offered in response to the motion to compel. On the motion to compel, the defendant argued that the attorney-client privilege had been waived as to Mr. Scher’s and the Shearman & Sterling memoranda and that these documents should be turned over to the defendant. The plaintiff responded by invoking the work product privilege, indicating that the memoranda had been prepared in anticipation of litigation. The defendant, therefore, took the position that the three legal memoranda were prepared for business purposes and were not prepared in anticipation of litigation. The plaintiffs opposition to the defendant’s motion to compel, supplemented by an affidavit from Attorney Scher, however, argued that the documents were prepared in anticipation of litigation. Now, for the purposes of the spoliation motion, the defendant is arguing that the Scher memorandum was prepared in anticipation of litigation and the plaintiff has taken the reverse position. Neither party has taken consistent positions. Even worse, Attorney Scher, plaintiffs in-house counsel and the CED corporate secretary at different times, personally has offered inconsistent positions. His “Affidavit of Andrew W. Scher in Support of Plaintiffs Response to Defendant’s Motion to Compel,” dated May 10, 2007, indicates the three legal memoranda “were all created in anticipation of litigation,” but, during his in-person testimony offered at trial, he stated that he had “no reason to believe in 1997 that there would be litigation.” This was particularly troubling because Mr. Scher was an Assistant General Counsel of Con Ed in their Law Department, he “effectively became the General Counsel for Con Ed Development” (CED), and he functioned as corporate secretary at times for CED. Moreover, Mr. Scher was not unfamiliar with the world of tax law. At the time he joined the plaintiffs legal department, he had earned an LL.M. in taxation from New York University and had roughly ten years of experience in the field of tax law. He previously had worked for several law firms and also had worked as a Certified Public Accountant and forensic accountant.

There are numerous examples in the record of how Mr. Scher resorted to selective memory at trial, relying on his inability to recall details about his involvement in the RoCa3 Transaction, including his inability to remember his role in the RoCa3 Transaction once he arrived at Con Ed, or with whom he had had conversations regarding the Transaction. In addition, during his testimony at trial, Mr. Scher attempted on numerous occasions to minimize his role in the RoCa3 Transaction and to deny responsibility or involvement, although he was designated by the plaintiff as the RCFC 30(b)(6) deponent for the current litigation. He described himself as an “observer” to the Transaction, and stated that he only offered editorial comments to outside counsel Shearman & Sterling, despite his equivocation in response to questions and evidence in the record to the contrary. Furthermore, Mr. Scher had difficulty pinpointing how soon after he arrived at Con Ed he had become involved in the RoCa3 Transaction. At trial, after impeachment with his deposition, the approximate date was established as early October 1997, shortly after he arrived to work for the plaintiff. Moreover, the record also establishes that he had a central role in the collection of documents in response to the IRS IDRs during the 1997 tax return audit process, although in this regard, too, he had moments of forgetfulness. In addition, Mr. Scher claimed he had no experience in the leasing field when he first began working for Con Ed. He testified: Q. “So no practical leasing experience,” A. “Not that I can think of right now.” However, once again, he was impeached with his deposition on re-direct examination, when he read, “ ‘Answer: I had *261 some experience with leasing from my education and also from my prior employment but not a great deal.’ ”

Based on a careful review of the record before the court, and of Mr. Scher’s equivocal testimony, the court prefers to rely on other testimony or exhibits in the record with overlapping information, and utilize Mr. Scher’s testimony sparingly, when it was uncontested. The court’s conclusions with respect to the events of 1997, when Mr. Seher issued his in-house legal opinion, and subsequent events raising the question of whether litigation was anticipated prior to the 2000 migration of CED’s email server, therefore, are not based on conclusions offered by Mr. Seher.

In its spoliation motion, defendant also argued that CED had a duty to preserve the emails from the old Linux-based system in 2000, following the IRS’s Revenue Ruling 99-14 released on March 11,1999, and published on March 29, 1999. Rev. Rui. 99-14, 1999- 1 C.B. 835 (Mar. 29, 1999). The defendant asserted that this IRS policy position should have given plaintiff a clear indication that litigation over the RoCaS Transaction was all but certain and that the plaintiff should have begun preserving evidence starting in 1997 or 1999. The plaintiff, however, contended that Revenue Ruling 99-14 was just one piece in a multi-tiered set of IRS guidance. According to the plaintiff, because transactions on which Revenue Rulings bear are resolved and settled during the audit and appeals process regularly, this should not be the triggering event to determine when the plaintiff anticipated, or should have anticipated, litigation on the RoCa3 Transaction deductions, and, therefore, had a duty to preserve the emails at issue.

Revenue Ruling 99-14 was issued on March 29, 1999, after the EZH Transaction was consummated, but during the time that the plaintiff’s 1997 tax return was in the audit process at the IRS. The holding of the Revenue Ruling states: “A taxpayer may not deduct, under §§ 162 and 163, rent and interest paid or incurred in connection with a LILO transaction that lacks economic substance.” Id. at *13-14. Revenue Ruling 99-14 also indicates that: “The Service will scrutinize LILO transactions for lack of economic substance and/or, in appropriate eases, re-characterize transactions for federal income tax purposes based on their substance.” Id. As is typical of Revenue Rulings, Revenue Ruling 99-14 discusses the facts of a specific case, discusses legal precedent and analyzes specific facts presented in the legal context, even noting that “[s]ome of the features of the LILO transaction discussed above are present in transactions that the Service will respect for federal income tax purposes.” Id. at *13.

The purpose and impact of IRS Revenue Rulings is explained in 26 C.F.R. § 601.601 (2009), with the following statement:

However, since each Revenue Ruling represents the conclusion of the Service as to the application of the law to the entire state of facts involved, taxpayers, Service personnel, and others concerned are cautioned against reaching the same conclusion in other cases unless the facts and circumstances are substantially the same.

26 C.F.R. § 601.601 .

Revenue Ruling 99-14, by its terms, and in accordance with 26 C.F.R. § 601.601 , emphasizes the fact specific nature of any Revenue Ruling. Moreover, Revenue Ruling 99-14 indicates that the IRS will “scrutinize LILO transactions” and “economic substance” will be the test. Rev. Rui. 99-14, 1999- 1 C.B. 835 , 1999 IRB LEXIS 132, at *13-14. As is discussed below, this was hardly new information, given existing case precedent. Furthermore, it was not unreasonable for the plaintiff to assume that during the IRS audit process, there would be discussions with government personnel about the application of Revenue Ruling 99-14 to the plaintiffs 1997 tax return. In addition, the audit with respect to the plaintiffs 1997 tax return addressed the RoCa3 Transaction, but also addressed at least one additional, unrelated issue, a depreciation issue (which according to the plaintiff, ultimately, was resolved without litigation). Therefore, a negotiated resolution of the plaintiffs total 1997 tax obligations, and all outstanding issues, including those related to the RoCa3 Transaction, without litigation, remained a genuine possibility, if not probability, based on past expe *262 rience at the time Revenue Ruling 99-14 was issued.

Based on the above discussion, several questions are posed with respect to the defendant’s spoliation motion: (1) was there a duty to preserve evidence prior to November 2000, when the CED email migration occurred; and (2) if so, what, if any, are the appropriate sanctions? The CED email migration was part of a much larger management initiative to streamline and integrate various parts of Con Ed onto one email system. There is no indication in the record before the court that there was a targeted effort to erase RoCa3 Transaction related email. Given the facts of the instant case, bad faith is not an issue. The issue in this case, rather, is whether or not there was a duty to preserve, triggered before the email migration in November 2000, which was ignored by the plaintiff. As discussed above, the contradictory positions asserted regarding when litigation should be or was anticipated, make this task more difficult.

It is the court’s responsibility to review the facts of the case before it and conduct a review of the words and impact of the in-house counsel memorandum authored by Attorney Scher on October 23, 1997, and the March 29, 1999 Revenue Ruling 99-14, on which the defendant bases its spoliation motion. Having reviewed the record, including the relevant documents, testimony and submissions of counsel, the court concludes that the October 23, 1997 memorandum authored by in-house attorney Scher did not mark a point on the timeline in this ease when litigation was, or necessarily should have been, anticipated. As decided previously by the court when granting the government access to documents requested in its motion to compel, the contents of the Scher memorandum did not suggest that its author or the plaintiff anticipated litigation, but rather that there was a possible risk that the IRS and the courts will disagree with CED’s interpretation of 26 U.S.C. § 467 . Even in his affidavit, submitted in 2007 in opposition to the defendant’s motion to compel, Mr. Scher equivocates, suggesting that his 1997 memorandum was created “in anticipation of litigation” but that the issues only “might result in litigation.” Mr. Scher was not a RoCa3 Transaction decision maker at either Con Ed or CED. He was assigned the task of writing advisory memoranda and the administrative task of collecting information for production to the IRS during the audit process of the plaintiffs 1997 tax return. His 1997 memorandum, on which the defendant seeks to hang its hat, was created more than five years before the IRS NOPA was issued and another two-and-a-half years (for a total of seven-and-a-half years) before consultations and negotiations on the plaintiffs 1997 tax return regarding the RoCa3 Transaction were deemed by both sides unresolvable at the agency level and, therefore, that litigation would ensue.

Revenue Ruling 99-14, published on March 29, 1999 was issued during the early part of the audit process on the plaintiffs 1997 tax liabilities. Because of the fact-based nature of Revenue Rulings, and because the broad standard of economic substance was already part of the case-based precedent, the discussions about and negotiations regarding IRS challenges to the plaintiffs 1997 tax return did not predetermine litigation. Based on its own past experience, the plaintiff had justifiable reason to believe that its 1997 tax return differences with the IRS, including those related to the RoCa3 Transaction, as well as other outstanding issues related to tax year 1997, could be administratively resolved without resort to litigation. Consequently, the court concludes that none of the documents on which the defendant bases its spoliation motion establish the plaintiffs obligation to preserve documents in anticipation of litigation, as a result of the October 23, 1997 memorandum or March 29, 1999 Revenue Ruling offered by defendant as the operative dates.

The court also notes that even if anticipation of litigation could have been inferred on or before those two dates, the imposition of sanctions, including the defendant’s requested adverse inference or prohibition of certain witnesses’ testimony, are harsh sanctions which the court must judiciously review, given the facts of each particular ease. The court would prefer to decide cases before it after having the benefit of the relevant testi *263 mony. In the instant ease, the defendant cannot establish that, during the 2000 CED email migration, relevant emails were, in fact, lost, or that the defendant was prejudiced. Tremendous quantities of documents and testimony were offered in the case. Moreover, no testimony regarding any possible lost emails was key to the court’s determination based on a review of the extensive record in the case.

Therefore, under the circumstances of the case, without intentional destruction of the emails in question, the court permitted the testimony to be offered, allowing the court to fully review the circumstances surrounding the RoCa3 Transaction. The court also has declined to exercise its discretion to impose the negative inference the defendant requests. In United Medical Supply Co. v. United States, in which significant amounts of relevant material had been destroyed after litigation had begun, and repeated reckless discovery violations were documented, the court still declined to impose an adverse inference sanction. United Med. Supply Co. v. United States, 77 Fed.Cl. at 274-75 . Nor should this court prohibit the plaintiff from offering testimony of witnesses to the extent such testimony addresses the existence of emails discussing the RoCa3 Transaction without the production of the emails. It is the responsibility of the court to determine whether or not the RoCa3 Transaction lacked economic substance for federal tax purposes. To this end, an extensive record, including the Transaction and pre-Transaetion documents, was developed by both parties. Moreover, both parties had lengthy opportunities to present evidence and cross-examine witnesses, allowing a fair opportunity to fully explore the issues.

II. The RoCa3 Transaction Deductions: The Substance Over Form and Economic Substance Doctrines

On its consolidated United States Corporate Income Tax Return (Form 1120) for taxable year 1997, the plaintiff reported rent income received in the RoCa3 Transaction and deducted rent expenses, amortized transaction costs, and interest expenses resulting from the Transaction. Specifically, plaintiff reported $399,693.00 in rental income, and deducted rental expenses of $1,072,652.00, amortization of transaction costs of $9,698.00, and interest expenses of $254,954.00, related to a property interest and indebtedness incurred in connection with the RoCa3 Transaction, for a net loss of $937,331.00. Upon audit of plaintiffs 1997 federal income tax return, the IRS disregarded the income, and disallowed the deductions reported by plaintiff from the RoCa3 Transaction. The IRS’s proposed adjustments in connection with the RoCa3 Transaction resulted in an increase of $937,331.00 in plaintiffs taxable income for 1997. As a result of all the proposed adjustments for tax year 1997, the IRS assessed the plaintiff a deficiency for 1997 in the amount of $328,066.00. The plaintiff paid this amount and filed a claim for refund (Form 1120X) with the IRS. The IRS denied the claim. Thereafter, the plaintiff filed the instant suit, seeking a refund for the amount of the deficiency.

Before the trial, the parties agreed that there were three issues to be resolved in this case:

(1) Whether the form of the Transaction will be respected for federal tax purposes.

(2) Whether the loan by Hollandsche Bank-Unie N.V. to the Plaintiff constitutes bona fide indebtedness and should be respected for federal tax purposes.

(3) Whether the investment by Con Edison N.Y. in the EZH lease and sublease transaction, which closed December 15, 1997, has economic substance.

The parties agree that the plaintiff has the burden of proof on each of these issues, including the validity of the deductions claimed by the plaintiff.

According to the defendant, the plaintiff is not entitled to the “tax sheltering benefits” it has claimed. The defendant states:

The Transaction as a whole reveals that CED did not in substance acquire a present leasehold interest in the RoCa3 Facility. Plaintiff also [did] not incur a genuine indebtedness or obtain a benefit from the use or forbearance of money. During the *264 taxable year in issue, Con Ed did not enjoy the benefits and burdens of owning an interest in the RoCa3 Facility had no debt or equity risk capital committed to or invested in the RoCa3 Facility, and possessed at most a contingent future interest in property akin to but even more ephemeral than an option.

In the alternative, the Transaction should be disregarded under the economic substance doctrine because it does not have a reasonable expectation of profit existing outside of the tax benefits and was not motivated by a valid non-tax business purpose.

The plaintiff, however, asserts that: in entering into the transaction, CED reasonably projected that it would earn a substantial pretax profit and pay substantial federal income taxes on this profit. At a minimum, the transaction is projected to generate a pretax profit of at least $61 million and CED is expected to pay incremental income taxes of $21.3 million on this profit. Second, the tax benefit that arises from the transaction is deferral, not tax elimination. Third, the transaction was structured in order to obtain the highly favorable front-loading of earnings offered by Statement of Financial Accounting Standards No. 13, Accounting for Leases (“FAS 13”). Under FAS 13, the projected pretax profits from a leveraged lease are largely front-loaded into the lease’s eai’ly years for financial reporting purposes.

In short, the RoCa3 Transaction possesses economic substance and satisfies all previously identified requirements to qualify for true lease status under the tax law. It therefore merits respect as a true lease transaction.

In a tax refund case, there is a presumption of the correctness of the findings of the Commissioner of Internal Revenue. See United States v. Fior D'Italia, Inc., 536 U.S. 238, 243 , 122 S.Ct. 2117 , 153 L.Ed.2d 280 (2002) (“An ‘assessment’ amounts to an IRS determination that a taxpayer owes the Federal Government a certain amount of unpaid taxes. It is well established in the tax law that an assessment is entitled to a legal presumption of correctness — a presumption that can help the Government prove its case against a taxpayer in court.”); Conway v. United States, 326 F.3d 1268, 1278 (Fed.Cir.) (“The ruling of the Commissioner of Internal Revenue enjoys a presumption of correctness and a taxpayer bears the burden of proving it to be wrong.”) (quoting Transamerica Corp. v. United States, 902 F.2d 1540, 1543 (Fed.Cir.1990)), reh’g denied (Fed.Cir.2003); Lima Surgical Assocs., Inc. v. United States, 944 F.2d 885, 888 (Fed.Cir.1991) (“[Determinations of the Commissioner of Internal Revenue are presumptively correct.”).

The taxpayer not only has the burden of rebutting the presumption of correctness, but also of establishing entitlement to the specific amount of the deduction claimed. See United States v. Janis, 428 U.S. 433, 440-441 , 96 S.Ct. 3021 , 49 L.Ed.2d 1046 (1976) (“In a refund suit the taxpayer bears the burden of proving the amount he is entitled to recover.”) (citing Lewis v. Reynolds, 284 U.S. 281 , 52 S.Ct. 145 , 76 L.Ed. 293 , modified, 284 U.S. 599 , 52 S.Ct. 264 , 76 L.Ed. 514 (1932)); Helvering v. Taylor, 293 U.S. 507, 515 , 55 S.Ct. 287 , 79 L.Ed. 623 (1935) (“Unquestionably the burden of proof is on the taxpayer to show that the Commissioner’s determination is invalid.”); Welch v. Helvering, 290 U.S. 111, 115 , 54 S.Ct. 8 , 78 L.Ed. 212 (1933) (“The Commissioner of Internal Revenuefs] ... ruling has the support of a presumption of correctness, and the petitioner has the burden of proving it to be wrong.”) (citing Wickwire v. Reinecke, 275 U.S. 101 , 48 S.Ct. 43 , 72 L.Ed. 184 (1927)); Charron v. United States, 200 F.3d 785, 792 (Fed.Cir.1999) (“Since the [plaintiffs] were seeking refunds of taxes they had paid, they have the burden of proving they are entitled to the amount sought.”); see also Danville Plywood Corp. v. United States, 899 F.2d 3, 7-8 (Fed.Cir.1990); Barenholtz v. United States, 784 F.2d 375, 381 (Fed.Cir.1986); Young & Rubicam, Inc. v. United States, 187 Ct.Cl. 635, 654-55 , 410 F.2d 1233, 1244-45 (1969).

To rebut the presumption of the Commissioner’s correctness, “the taxpayer *265 must come forward with enough evidence to support a finding contrary to the Commissioner’s determination.” Bubble Room, Inc. v. United States, 159 F.3d 553, 561 (Fed.Cir.1998), reh’g denied, en banc suggestion declined (Fed.Cir.1999). Stated otherwise, to overcome the presumption, the taxpayer has the burden of presenting “substantial evidence as to the wrongfulness of the Commissioner’s determination.” KFOX, Inc. v. United States, 206 Ct.Cl. 143, 151-152 , 510 F.2d 1365, 1369 (1975); Arrington v. United States, 34 Fed.Cl. 144, 147 (1995), aff'd, 108 F.3d 1393 , 1997 WL 101091 (Fed.Cir.1997) (table). The burden imposed on a plaintiff is both the burden of going forward and the burden of persuasion. Thus, a plaintiff first must come forward with enough evidence to support a finding contrary to the Commissioner’s determination. See Transamerica Corp. v. United States, 902 F.2d at 1543 ; Danville Plywood Corp. v. United States, 899 F.2d at 7-8 ; Arrington v. United States, 34 Fed.Cl. at 147 . Even after satisfying the burden of going forward, a plaintiff must still carry the ultimate burden of proof. See Transamerica Corp. v. United States, 902 F.2d at 1543 ; Danville Plywood Corp. v. United States, 899 F.2d at 8 .

The case currently before the court concerns a LILO transaction entered into on December 15, 1997. As noted above, although LILO transactions often include certain general, common characteristics, each LILO transaction is developed and formed differently, based on specific relationships, the chronology, the financial arrangements, the nature of the property involved, and any number of other variables. In a LILO transaction, a United States taxpayer generally enters into a lease for property from a tax exempt entity and then leases it back to that entity for its use. The tax exempt entity has a shorter sublease term than the lease of the United States taxpayer. At expiration of the sublease, the original owner has an option to buy back the remainder of the United States taxpayer’s lease. Additional terms often vary depending on the nature of the transaction.

In this case, plaintiff has claimed deductions “in rental expense allocated to 1997 for the acquisition of CED’s Lease Interest in the RoCa3 Facility,” pursuant to 26 U.S.C. § 162 (a)(3), applying 26 U.S.C. § 467 , “in interest expense allocated to 1997 ... attributable to the nonrecourse debt incurred to pay part of the cost of CED’s Lease Interest in the RoCa3 Facility,” pursuant to 26 U.S.C. § 163 (a), and for “transaction costs allocated to 1997,” pursuant to 26 U.S.C. § 162 (a), related to the RoCa3, LILO Transaction. The inquiry as to the validity of the deductions claimed by the plaintiff, therefore, starts with whether the Transaction and reporting were carried out in accordance with the Internal Revenue Code, including in this case, 26 U.S.C. §§ 162 (a), 162(a)(3), 163(a), and 467. See Coltec Indus., Inc. v. United States, 454 F.3d 1340, 1347 (Fed.Cir.), reh’g denied (Fed.Cir.2006), cert. denied, 549 U.S. 1206 , 127 S.Ct. 1261 , 167 L.Ed.2d 76 (2007). In addition, two related doctrines, the doctrines of “substance over form” and “economic substance,” are relevant to resolving the validity of the plaintiffs claimed deductions. See Frank Lyon Co. v. United States, 435 U.S. 561 , 98 S.Ct. 1291 , 55 L.Ed.2d 550 (1978). As discussed below, for the RoCa3 Transaction to be eligible for the deductions, the form of the Transaction must mirror its substance, and the Transaction must possess an economic purpose other than to generate tax deductions. See, e.g., Dow Chemical Co. v. United States, 250 F.Supp.2d 748, 799 (E.D.Mich.), modified, 278 F.Supp.2d 844 (E.D.Mich.2003), rev’d [on factual grounds, economic substance test maintained], 435 F.3d 594, 605 (6th Cir.), reh’g and reh’g en banc denied (6th Cir.2006), cert. denied, 549 U.S. 1205 , 127 S.Ct. 1251 , 167 L.Ed.2d 74 (2007).

The United States Supreme Court has articulated its position on the substance over form guidelines applicable in tax cases, as follows:

In applying this doctrine of substance over form, the Court has looked to the objective economic realities of a transaction rather than to the particular form the parties employed. The Court has never regarded “the simple expedient of drawing up papers,” Commissioner of Internal Revenue v. Tower, 327 U.S. 280, 291 , 66 S.Ct. 532, *266 538 , 90 L.Ed. 670 (1946), as controlling for tax purposes when the objective economic realities are to the contrary. “In the field of taxation, administrators of the laws and the courts are concerned with substance and realities, and formal written documents are not rigidly binding.” Helvering v. Lazarus & Co., 308 U.S., [252] at 255, 60 S.Ct., [209] at 210 [, 84 L.Ed. 226 (1939)]. See also Commissioner of Internal Revenue v. P.G. Lake, Inc., 356 U.S. 260, 266-267 , 78 S.Ct. 691 , 2 L.Ed.2d 743 (1958); Commissioner of Internal Revenue v. Court Holding Co., 324 U.S. 331, 334 , 65 S.Ct. 707 , 89 L.Ed. 981 (1945). Nor is the parties’ desire to achieve a particular tax result necessarily relevant. Commissioner of Internal Revenue v. Duberstein, 363 U.S. 278, 286 , 80 S.Ct. 1190 , 4 L.Ed.2d 1218 (1960).

Frank Lyon Co. v. United States, 435 U.S. at 573 , 98 S.Ct. 1291 . Litigants also favor citing the colorful language in Gregory v. Helvering, 293 U.S. 465, 470 , 55 S.Ct. 266 , 79 L.Ed. 596 (1935), of refusing to “exalt artifice above reality and to deprive the statutory provision in question of all serious purpose.” Id. The substance over form doctrine requires the court to determine the “true nature” of the transaction to ensure that tax consequences are based upon a transaction’s actual substance and not mere labels. Rogers v. United States, 281 F.3d 1108 , 1113—1118 (10th Cir.2002); see also Boulware v. United States, 552 U.S. 421 , 128 S.Ct. 1168, 1175-76 , 170 L.Ed.2d 34 (2008); Frank Lyon Co. v. United States, 435 U.S. at 573 , 98 S.Ct. 1291 ; Coltec Indus., Inc. v. United States, 454 F.3d at 1352 .

If the transaction creates actual ownership in a leasehold interest, such that the taxpayer “retains significant and genuine attributes of the traditional lessor status, the form of the transaction adopted by the parties governs for tax purposes. What those attributes are in any particular case will necessarily depend upon its facts.” Frank Lyon Co. v. United States, 435 U.S. at 584 , 98 S.Ct. 1291 ; see also Coltec Indus., Inc. v. United States, 454 F.3d at 1351-52 ; AWG Leasing Trust v. United States, 592 F.Supp.2d 953, 976 (N.D.Ohio 2008) (“In assessing whether the form of the transaction accurately captures the substance, the court should consider the totality of the circumstances under which the transaction arose.”). In other words, when the form of the transaction comports with its substance, the form will be respected for tax purposes, however, when the form of the transaction is nothing more than “ ‘the simple expedient of drawing up papers,’ ... when the objective economic realities are to the contrary,” the substance of the transaction controls. Frank Lyon Co. v. United States, 435 U.S. at 573 , 98 S.Ct. 1291 (quoting Comm’r v. Tower, 327 U.S at 291, 66 S.Ct. 532 ). The United States Supreme Court in Frank Lyon also mandated “combing all the facts” in a leasing transaction. As previously indicated:

There is no single criterion that shows the essence of a commercial deal negotiated between businessmen with differing interests. All of the aspects of the arrangement must be examined to form a judgment as to whether the parties [sic] intent was to negotiate for the use of property or for the transfer of ownership.

In fact, since most transactions exhibit a variety of circumstances which point in opposite directions, the cases have been decided on the basis of all of the facts and circumstances there presented.

Transamerica Corp. v. United States, 15 Cl.Ct. 420, 436 (1988) (quoting Kansas City So. Ry. Co. v. Comm’r, 76 T.C. 1067, 1094 , 1981 WL 11259 (1981)), aff'd, 902 F.2d 1540 (Fed.Cir.1990).

The court in H.J. Heinz Co. v. United States, 76 Fed.Cl. 570 (2007), appeal dismissed, 331 Fed.Appx. 727 (Fed.Cir.2009), further explained the proper approach as one in which the “taxpayer must prove that its transaction was both purposeful [had a business purpose] and substantive — if proof in either regard is lacking, the transaction is a sham.” Id. at 584. In other words, the taxpayer must show that “‘the transaction had any practical economic effects other than the creation of income tax losses.’” Id. (quoting Keener v. United States, 76 Fed.Cl. 455, 467 (2007) (quoting Sochin v. Comm’r, 843 F.2d 351, 354 (9th Cir.), cert. denied, 488 *267 U.S. 824 , 109 S.Ct. 72 , 102 L.Ed.2d 49 (1988))).

Regarding the issue of economic substance, in Frank Lyon Co. v. United States, the United States Supreme Court held that a transaction will be respected “where ... there is a genuine multiple-party transaction with economic substance which is compelled or encouraged by business or regulatory realities, is imbued with tax independent considerations, and is not shaped solely by tax-avoidance features that have meaningless labels attached.” Frank Lyon Co. v. United States, 435 U.S. at 583-84 , 98 S.Ct. 1291 . The United States Court of Appeals for the Federal Circuit followed this guidance in Coltec Industries, Inc. v. United States, 454 F.3d at 1355 , when it articulated the general principles of the economic substance doctrine as the relevant test to be used in this Circuit. The economic substance doctrine permits transactions to take advantage of tax benefits so long as those transactions also have a non-tax business purpose. See ACM P’ship v. Comm’r, 157 F.3d 231 , 248 n. 31 (3d Cir.1998) (“[W]e do not intend to suggest that a transaction which has actual, objective effects on a taxpayer’s non-tax affairs must be disregarded merely because it was motivated by tax considerations.”), cert. denied, 526 U.S. 1017 , 119 S.Ct. 1251 , 143 L.Ed.2d 348 (1999); Gilman v. Comm’r, 933 F.2d 143, 147-48 (2d Cir.1991) (Utilizing the business purpose/eeonomie effect analysis based on objective standards, and stating that “ ‘[a] transaction is a sham if it is fictitious or if it has no business purpose or economic effect other than the creation of tax deductions.’ ” (quoting Jacobson v. Comm’r, 915 F.2d 832, 837 (2d Cir.1990) (quoting DeMartino v. Comm’r, 862 F.2d 400, 406 (2d Cir.1988))), cert. denied, 502 U.S. 1031 , 112 S.Ct. 871 , 116 L.Ed.2d 776 (1992)).

In Coltec, the Federal Circuit wrote:

First, although the taxpayer has an unquestioned right to decrease or avoid his taxes by means which the law permits, Gregory [v. Helvering], 293 U.S. at 469, 55 S.Ct. 266 ... the law does not permit the taxpayer to reap tax benefits from a transaction that lacks economic reality....The Supreme Court later explained that “[if] ... the Gregory case is viewed as a precedent for the disregard of a transfer of assets without a business purpose ... it gives support to a natural conclusion that transactions, which do not vary control or change the flow of economic benefits, are to be dismissed from consideration.” Higgins v. Smith, 308 U.S. 473, 476 [, 60 S.Ct. 355 , 84 L.Ed. 406 ] ... (1940).

While the doctrine may well also apply if the taxpayer’s sole subjective motivation is tax avoidance even if the transaction has economic substance, a lack of economic substance is sufficient to disqualify the transaction without proof that the taxpayer’s sole motive is tax avoidance.

Second, when the taxpayer claims a deduction, it is the taxpayer who bears the burden of proving that the transaction has economic substance.

Third, the economic substance of a transaction must be viewed objectively rather than subjectively.

Fourth, the transaction to be analyzed is the one that gave rise to the alleged tax benefit____[T]here is a material difference between structuring a real transaction in a particular way to provide a tax benefit (which is legitimate), and creating a transaction, without a business purpose, in order to create a tax benefit (which is illegitimate).

Coltec Indus., Inc. v. United States, 454 F.3d at 1355-57 (footnotes omitted).

The Frank Lyon Supreme Court case and the Coltec Federal Circuit case are binding on this court. The Frank Lyon and Coltec cases set out the general approach to reviewing economic substance which has prevailed for years. Neither case, however, provides formulaic prescriptions for determining which elements necessarily will result in a finding of economic substance. Due to the fact specific nature of each taxpayer’s position and of each individual transaction at *268 issue, this is the appropriate approach. The somewhat more detailed statutory and regulatory guidance referred to by the parties in their briefings, discussed more fully below, was enacted and promulgated after the signing of the RoCa3 Transaction. In addition, a number of courts, faced with LILO and non-LILO economic substance cases, have offered a range of guidance, albeit without complete agreement, resulting in a list of possible criteria to be used, but also offer no simple measurement criteria. This court, therefore, has examined existing case law beyond binding precedent for guidance, and conducted a lengthy trial, with the introduction of extensive documentary evidence into the record, to evaluate the true nature of the RoCa3 Transaction. 21

In Jade Trading, LLC v. United States, 80 Fed.Cl. 11 (2007), recons, denied, 81 Fed.Cl. 173 (2008), appeal reinstated, 329 Fed.Appx. 263 (Fed.Cir.2009), while discussing the element of subjective intent as part of the economic substance test articulated in Coltec, the court stated,

In the context of assessing objective economic substance, Coltec has relegated this type of evidence [subjective intent] to a back seat recognizing the taxpayer’s “subjective motivation may be pertinent to the existence of a tax avoidance purpose.” [Coltec Indus., Inc. v. United States,] 454 F.3d at 1356 . Rather, the lack of economic reality of the transaction itself is the primary consideration as this is sufficient to disregard the transaction.

Id. at 48 n. 69.

This court agrees that determining the economic substance of a transaction includes an “ ‘objective determination of whether a reasonable possibility of profit from the transaction existed.’” Coltec Indus., Inc. v. United States, 454 F.3d at 1356 (quoting Black & Decker Corp. v. United States, 436 F.3d 431, 441-42 (4th Cir.2006)) (emphasis in original). The Coltec court also quoted Rothschild v. United States, 186 Ct. Cl. 709 , 407 F.2d 404 (1969), for the proposition that an important criteria for determining the authenticity of a transaction for tax purposes is whether the transaction has realistic financial benefit or whether there was “ ‘a possibility’ ” or “ ‘opportunity of profit to the taxpayer separate and apart from the tax deduction.’ ” Coltec Indus., Inc. v. United States, 454 F.3d at 1356 n. 16 (quoting Rothschild v. United States, 186 Ct.Cl. 709 , 407 F.2d at 411, 414, 417 ). The court in AWG Leasing Trust, Inc. noted that “[t]he taxpayer generally must only show a reasonably expected, minimal pre-tax profit in order to prove that a transaction has economic substance and is not required to show that its transaction will yield a higher pre-tax return than all other possible investment opportunities.” AWG Leasing Trust, Inc. v. United States, 592 F.Supp.2d at 980 .

Therefore, to prove that a business transaction possesses “economic reality,” such that the transaction should not be disregarded for tax purposes, the plaintiff must show that the transaction is imbued with a business purpose beyond the beneficial tax treatment. A reasonable opportunity for pretax profit generally will be considered significant, although not always sufficient by itself to determine economic substance. See, e.g., Johnson v. United, States, 11 Cl.Ct. 17, 25, 28 (1986) (A case in which the parties agreed that a “mere ‘modicum’ of profit will satisfy the ‘economic substance’ test;” and

*269 the court used the test of “a reasonable chance of making, a reasonable profit apart from tax considerations.”); Rice’s Toyota World Inc. v. Comm’r, 752 F.2d at 94 (Utilizing “an objective determination of whether a reasonable possibility of profit from the transaction existed apart from tax benefit,” as a test in the economic substance inquiry.); Transcapital Leasing Assocs. 1990-II L.P. v. United States, 97 A.F.T.R.2d 2006 -1916, 1946 (W.D.Tex.2006) (Stating that, “[t]he economic substance prong of the sham transaction doctrine ‘requires an objective determination of whether a reasonable possibility of profit from the transaction existed apart from the tax benefits.’ ” (quoting Rice’s Toyota World v. Comm’r, 752 F.2d at 94)), aff'd, 246 Fed.Appx. 266 (5th Cir.2007); Levy v. Comm’r, 91 T.C. 838, 860 , 1988 WL 114910 (1988) (Considering one of the key elements to determining whether there is economic substance, i.e., the benefits and burdens of ownership, is “the potential for realizing a profit or loss on the sale or re-lease of the equipment.”); Torres v. Comm’r, 88 T.C. 702, 718 , 1987 WL 39958 (1987) (Stating, “[biased on this standard, a finding of lack of economic substance is inappropriate if either a business purpose or a reasonable possibility of profit apart from expected tax benefits is found to have been present.”); Gefen v. Comm’r, 87 T.C. 1471, 1490 , 1986 WL 22070 (1986) (Stating, “[a] transaction has economic substance and will be recognized for tax purposes if the transaction offers a reasonable opportunity for economic profit, that is, profit exclusive of tax benefits.”); Packard v. Comm’r, 85 T.C. 397, 417 , 1985 WL 15389 (1985) (Stating that, “if an objective analysis of the transaction indicates that a reasonable possibility of profit existed apart from tax benefits, the transaction will not be classified as a sham.”); Rubin v. Comm’r, T.C. Memo 1989-484 , 58 T.C.M. (CCH) 25, 31-32 (1989) (Stating that the issue of whether an activity is engaged in for profit is one of fact to be resolved on the basis of all the surrounding circumstances.); Moser v. Comm’r, T.C. Memo 1989-142 , 56 T.C.M. (CCH) 1604, 1623-24 (1989) (Stating, “[o]ur inquiry into business purpose and economic substance is inherently factual____ The focus of this inquiry, however, is to perform an OBJECTIVE analysis of the transactions to determine whether a realistic opportunity for economic profit existed exclusive of any anticipated tax benefit.... Our focus is on the realistic potential for profit at the time petitioners entered into the transactions .... We analyze the transactions as a prudent investor, but with the recognition that we cannot insist upon unreasonable demands for certainty.”) (emphasis in original), aff'd, 914 F.2d 1040 (8th Cir.1990).

• The Plaintiff has Acquired the Benefits and Burdens of a Leasehold Interest in the RoCa3 Facility

A basic issue to be resolved is whether the taxpayer claiming the transaction related deductions qualifies as a true owner of a leasehold interest in the property, such that it possesses the benefits and burdens of ownership and, therefore, satisfies the substance over form test. “This is a question of fact which must be ascertained from the intention of the parties as evidenced by the written agreements read in light of the attending facts and circumstances.” Grodt & McKay Realty, Inc. v. Comm’r, 77 T.C. 1221, 1237 , 1981 WL 11305 (1981) (citations omitted).

The defendant takes the position that the RoCa3 Transaction was entered into solely for the tax benefits and that the plaintiff “did not, in substance, acquire a present leasehold interest in the RoCa3 Facility ... did not incur genuine indebtedness in connection with the deal ... and the Transaction should be disregarded under the economic substance doctrine.” The plaintiff responds that it projected a pretax profit of at least $61 million, along with other significant benefits and possible burdens from the RoCa3 Transaction. The plaintiff asserts that the Transaction was a true lease transaction, which possesses economic substance.

In H.J. Heinz Co. v. United States, the court articulated factors, any or all of which, depending on the circumstances, may be considered relevant in a particular transaction to assist in determining whether a pm-ported owner claiming tax deductions possesses meaningful burdens and benefits of ownership:

*270 (i) whether the purchaser bears the risk of loss and opportunity for gain; (ii) which party receives the right to any current income from the property; (iii) whether legal title has passed; and (iv) whether an equity interest was acquired in the property.

H.J. Heinz Co. v. United States, 76 Fed.Cl. at 582 (footnote with citations omitted). Although the Heinz case deals specifically with stock ownership, the court offered its opinion that its conclusions also might apply to leasing or loan transactions. Id. at 582; see also Frank Lyon Co. v. United States, 435 U.S. at 579 , 98 S.Ct. 1291 (discussing Revenue Procedure 75-21 and the criteria used by the IRS to issue Advance Rulings on ownership in leveraged leases). Revenue Procedure 75-28, 1975- 1 C.B. 752 (Jan. 1, 1975), generally sets forth a checklist for information requested in order to obtain an Advance Ruling regarding whether a transaction is a true lease for federal income tax calculations. The guidelines, however, under Revenue Procedure 75-21, specifically state that, “[t]hese guidelines do not define, as a matter of law, whether a transaction is or is not a lease for Federal income tax purposes.... If these guidelines are not satisfied, the Service nevertheless will consider ruling in appropriate eases on the basis of all the facts and circumstances.” Rev. Proc. 75-21, 1975- 1 C.B. 715 , 1975 IRB LEXIS 1316, at *2-3 (Jan. 1975).

The United States Tax Court also has detailed some of the factors used to determine whether a taxpayer possesses an ownership interest for tax purposes:

In previous cases involving the purchase and leaseback of computer equipment, this Court has found the following factors essentially neutral in determining whether a taxpayer is the owner of property: (1) the existence of a net lease; (2) the absence of significant positive cash flow; and (3) rent geared to interest and mortgage amortization. 22 Levy v. Commissioner, [ 91 T.C. 838 , 1988 WL 114910 ] supra; Larsen v. Commissioner, [ 89 T.C. 1229, 1267 , 1987 WL 257438 (1987) ]; Estate of Thomas v. Leven, [ 84 T.C. 412, 433-36 , 1985 WL 15324 (1985) ].

Factors of particular relevance in determining whether a taxpayer is the owner of property are: (1) the taxpayer’s equity interest in the property as a percentage of the purchase price; (2) the existence of a useful life of the property in excess of the leaseback term; (3) renewal rental at the end of the leaseback term set at fair market rent; 23 (4) whether the projected residual value of the equipment plus the cash flow generated by the rental of the equipment allows the investors to recoup at least their initial cash investment; (5) the expectation of a “turnaround” point which would result in the investors’ realizing income in excess of deductions in the later years; (6) net tax benefits during the leaseback term less than their initial cash investment; and (7) the potential for realizing a profit or loss on the sale or re-lease of the equipment.

Rubin v. Comm’r, T.C. Memo 1989-484 , 58 T.C.M (CCH) 25, 34 (1989); see also the list of factors detailed in Grodt & McKay Realty v. Comm’r, 77 T.C. at 1237-38 . “[N]one of these factors is necessarily controlling; the incidence of ownership, rather, depends upon all the facts and circumstances” of the case under consideration. H.J. Heinz Co. v. United States, 76 Fed.Cl. at 582 (citing Int’l Paper Co. v. United States, 33 Fed.Cl. 384, 393-94 (1995) and Baird v. Comm’r, 68 T.C. 115, 124 , 1977 WL 3656 (1977)).

Addressing a sale-leaseback, the United States Supreme Court in Frank Lyon Co. v. United States held:

In short, we hold that where, as here, there is a genuine multiple-party transaction with economic substance which is compelled or encouraged by business or regulatory realities, is imbued with tax-independent considerations, and is not *271 shaped solely by tax-avoidance features that have meaningless labels attached, the Government should honor the allocation of rights and duties effectuated by the parties. Expressed another way, so long as the lessor retains significant and genuine attributes of the traditional lessor status, the form of the transaction adopted by the parties governs for tax purposes. What those attributes are in any particular case will necessarily depend upon its facts. It suffices to say that, as here, a sale-and-leasebaek, in and of itself, does not necessarily operate to deny a taxpayer’s claim for deductions.

Frank Lyon Co. v. United States, 435 U.S. at 583-84 , 98 S.Ct. 1291 (footnotes omitted); see also Coleman v. Comm’r, 16 F.3d 821, 827 (7th Cir.1994).

Among the burdens and benefits that the plaintiff must possess in order to be considered a true owner of a leasehold interest in the RoCa3 Facility, are that the plaintiff must bear a risk of loss of its investment in the Facility and have created an opportunity to gain a profit as a result of the plaintiffs investment in the Facility. Understanding the plaintiffs true interest in the RoCa3 Facility is, in part, dependent upon the nature of what is likely to occur following the expiration of the Sublease Basic Term of 20.1 years. As stated above, pursuant to the Lease Agreement, the RoCa3 Transaction involved CEL Trust’s lease of an undivided 47.47% interest in EZH’s RoCa3 Facility for a Lease Term of 43.2 years, beginning on December 15, 1997 (which constituted 80% of the Facility’s estimated remaining useful life of 54 years at the closing), and terminating on February 24, 2041. Under the Sublease Agreement, an agreement running simultaneously with a portion of the Lease Agreement, CEL Trust subleased back to EZH the same undivided 47.47% interest in the RoCa3 Facility, for a Sublease Basic Term of 20.1 years, beginning on December 15, 1997 and ending on January 1, 2018. Upon the termination of the Sublease Basic Term, EZH has the right of first refusal, under the Sublease Purchase Option, to purchase the remainder of CEL Trust’s undivided interest pursuant to the Lease Agreement. If EZH does not exercise its rights under the Sublease Purchase Option, CEL Trust can exercise either the Sublease Renewal Option or the Retention Option. Under the Sublease Renewal Option, CEL Trust could require EZH to extend the Sublease Term, and a Sublease would remain in effect from January 2, 2018 through June 15, 2034. On June 15, 2034, the undivided 47.47% interest reverts to CEL Trust for the remainder of the Lease Term, from June 15, 2034 through February 24, 2041, referred to as the Shirt-Tail Period. If, at the end of the Sublease Basic Term, EZH does not choose to exercise the Sublease Purchase Option, and CEL Trust does not choose to exercise the Sublease Renewal Option, CEL Trust will exercise the Retention Option and will take possession and control of the undivided 47.47% interest in the RoCa3 Facility for the r

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