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DuPont mediates case through IRS program.

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Vol. 14, No. 4
April 1996
CPR Institute h r Dispute Resolution
Alternatives 47
DuPont Mediates Case Through IRS Program
A tax dispute involving E.I. du Pont de
Nemours is the first case resolved under a pilot mediation program of the
Internal Revenue Service
This case raised questions about how
the purchase price of a manufacturing
facility would be allocated for tax purposes. DuPont, which had heard about
the IRS program, requested mediation,
says Thomas C. Louthan, the agency
official overseeing the pilot. Other details of the dispute, involving audits of
DuPont’s tax returns from 198486,are
The dispute was a good candidate for
ADR because it involved “a lot of
money”and a factual issue, rather than
a question of law, says Samuel Sterrett,
a former tax court judge now with the
firm of Vinson & Elkins in Washington,
D.C.,who co-mediated the case.
Under the pilot program, which will
continue until October, taxpayers in
certain cases involving $10 million or
more can request mediation if other
efforts to settle the case have failed. An
IRS announcement outlining the procedure says that mediation is appropriate for factual issues “such as valuation,
reasonable compensation and transfer
price cases,” Announcement 95-86,
I.R.B. 1995-44.
On the surface, the procedure seems
more formal than one that private parties might draw up on their own. For
instance, it says that the taxpayer and
the IRS must enter into a written mediation agreement which should:
specify the issues to be mediated, and
identify the location and proposed
dates of the mediation session. At the
end of the session, the mediator must
issue a brief written report.
Other parts of the procedure seem
to anticipate potential conflicts of interest. Under the procedure, the mediator can’t later represent the taxpayer
in any action that involves “the transactions or issues’’ in mediation. For the
mediator’s firm, this restriction applies
only to the same tax year. The firm is
free to represent the taxpayer or other
parties in an action that involves the
same transactions or issues if they relate to another tax year. To do that, the
firm must screen the mediator “from
any form of participation in the matter,” and cannot apportion to the mediator any part of the fee from the case.
One section of the procedure, which
was controversial during the public
comment period, provides that when
an IRS employee facilitates,the IRS pays
all expenses. On the other hand, if the
taxpayer and the IRS agree on a mediator from outside the agency, they share
expenses equally.
In the DuPont case, the parties had
agreed on co-mediation. In advance,
the two mediators-Mr. Sterrett and an
IRS appeals lawyer-met to work out
the procedures. Even if at moments
they disagreed with each other, they
promised to “present a united front” to
the parties, Mr. Sterrett recalls.
Mr. Sterrett’sretainer agreement permitted him to express his views, but his
role in mediation was far different from
the one he played in settlement conferenceswhile he was on the bench. Injoint
sessions after trial, Mr. Sterrett says, he
would frequently get both attorneys in
chambers, tell them the strengths and
weaknesses of their case, and encourage
them to settle. As a mediator “I don’t
lean on [the parties] ,”he says.
The DuPont case settled Sept. 21 after
a single day of mediation. A company
spokesman says ADR was a “workable
method” of resolving the dispute. Mr.
Louthan, of the IRS, says that at least two
other cases are now in the pipeline to be
resolved through the pilot program.
Size of GiantJury Verdicts Dropped Last Year
Overall, the size of large jury verdicts
droppedsigniflcantlyin1995,but awards
were higher for wrongful death, medical malpractice, and product liability
suits, the National Law Journal reports.
For the first time since 1991,the Nutional LawJournal’s annual study of the
largestjury awards did not include one
exceeding $1 billion. The highest damages, $773.2 million, were awarded in a
group of individual and class action
suits for human rights abuses by
Ferdinand Marcos, the former Philip
pines dictator. An additional $1.2 billion was awarded in this case in 1994,
the second highest award that year.
Three insurance companies faced
giant awards, two of them in suits
broughtby government entities.American Samoa won $86.7 million from Affiliated FM Insurance Co. after the
company refused to pay claims for damage from hurricane Val. Polk County,
Fla. received $25.9 million from Reliance Insurance Co. after the company
shirked responsibility for faulty construction of a new courthouse.
One of the highestjury awards in the
employment arena went to a whistleblower. A former employee of Ryder
Commercial Leasing and Service, fired
for reporting his supervisor’s thefts,
won $5 million because the company
reneged on its promise to reinstate him.
Awards in wrongful death suits increased so dramatically-three awards
in 1995 were among the top 40 verdicts-that they warranted a separate
category. Onejury awarded damages of
$500 million to the parents of two boys
who died after falling into a dumpster
filled with illegal toxic waste. The defen-
dant in the case was William Recht Co.,
the parent of Durex Industries, which
cleans printing press equipmentwiththe
chemical that killed the boys.
One of the largest awards in any category stemmed from a counterclaim.
After buying an airbag business from
Talley, the purchaser, TRW Inc., sued
for breach of a non-compete clause.
Talley countersued, winning $138 million for future royalty payments.
As one might expect, many large
awardsfrom 1995and other recent years
were reduced or reversed on appeal last
year. Among the largest: a $50 million
award againstWal-Mart for sexual harass-ment,which was reduced to $5 million,
and a breach of contract and fraud case
against Trustmark National Bank in
which the damages were reduced from
$38.5 million to $5.5 million.
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