IRS & Apple to Arbitrate Tax Case

WASHINGTON - The Office of Chief Counsel for the Internal Revenue Service announced today that it has reached its first agreement to enter into binding arbitration to resolve an intercompany pricing issue.

The agreement was reached with Apple Computer, Inc., with respect to its 1984, 1985 and 1986 tax years. The case is currently docketed for litigation before Judge Julian I. Jacobs in the United States Tax Court. Binding arbitration of factual issues is an alternative to traditional Tax Court litigation. This procedure is provided for in the Tax Court Rules of Practice and Procedure.

Both Chief Judge Arthur L. Nims and IRS Chief Counsel Hap Shashy have advocated the use of arbitration in intercompany pricing cases. Shashy commented, "I'm convinced that the use of arbitration can be an effective vehicle for the resolution of intercompany pricing cases."

In the Apple case, arbitration proceedings will be conducted before a three member panel consisting of a retired federal judge, an economist and an industry expert. Under the arbitration format selected by the parties -- known as baseball arbitration -- each party submits a dollar amount representing their computation of the correct intercompany price. They then present the panel with data to support the appropriateness of these amounts.

The panel evaluates the facts and ultimately selects one of the two amounts presented. The panel is not allowed to substitute a figure. The panel then submits their findings to the Tax Court for approval.

Shashy praised Judges Nims and Jacobs for their efforts to bring the parties to agreement. He also stated, "I commend Apple and its representatives as well as the Chief Counsel attorneys for the hard work and cooperation that led to the agreement to arbitrate."

Commenting on the format, Eric D. Ryan, Director of Taxes for Apple said, "The baseball arbitration process should help us achieve a lot of the benefits of arbitration. In litigation, both parties spend inordinate amounts of time and effort attacking the position of the other side. Much of the activity ahead of the trial is pure lawyering -- motions, cross-motions, etc. -- which adds almost nothing to determining what the right answer should be. And the Tax Court is often left with little choice but to craft a third position from boxcars of exhibits and testimony. We eliminate most all of these problems with the baseball arbitration process."

The preliminary aspects of the arbitration will begin almost immediately after the Tax Court approves the agreement. The arbitration hearing is scheduled for July of 1993 with a decision expected no later than December of 1993.

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