United States : Nortel Judge Tells Company, IRS to Prepare for $3 Bln Tax Trial.

Nortel Networks Corp. and U.S. tax officials must prepare for a trial next month over a $3 billion bill the Internal Revenue Service sent the communications provider, the judge overseeing the company s bankruptcy said.

The two sides tomorrow must discuss what information they need to exchange before an Oct. 13 trial on the tax claim, U.S. Bankruptcy Judge Kevin Gross said today in a hearing in Wilmington, Delaware. Gross will hold a follow-up telephone conference on their progress.

The lines of communication are not exactly wide open here, the judge said.

The tax claim was filed last month, weeks before Nortel held an auction to sell its telephone-service unit. The action forced the Toronto-based company, once the largest maker of telecommunications equipment, to rewrite part of the $915 million sale contract with the winning bidder, Avaya Inc.

The timing of the claim may mean IRS officials weren t acting in good faith and were trying to gain leverage over the company, Nortel s attorney Deborah Buell said in court today.

IRS attorney Jan Geht told Gross that the claim was legitimate and that the issue is too complicated to rush toward an Oct. 13 trial. Gross responded that he would not move the date.

The agency asked the U.S. District Court in Wilmington, which oversees the bankruptcy court, to take responsibility for the tax-claim issue away from Gross. The district court has not yet ruled on the IRS motion.

Nortel and the IRS may be able to resolve their dispute by going before a court-appointed mediator, Geht said. Gross agreed to talk more about that request tomorrow during the conference call.

The case is Nortel Networks Inc., 09-10138, U.S. Bankruptcy Court, District of Delaware (Wilmington).

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