Bernard Daines, founder of Packet Engines Inc., of Spokane, has filed suit in U.S. District Court here against Paris-based Alcatel S.A. and Texas-based Alcatel USA Inc., the company that bought Packet last December.


In his suit, Daines claims Alcatel wrongfully directed the issuance of two IRS form 1099s earlier this year for $6 million being held in escrow for him as part of the payment for his share of Packet. By doing so, the suit says, Alcatel informed the IRS that Daines was in possession of the escrowed funds and should be taxed on the money as income in the current tax year, creating a tax liability for Daines thats projected to total more than $2.4 million.


When companies pay individuals or unincorporated businesses more than $600 in any given tax year for services, they must report those outlays to the IRS in a 1099.


In Daines case, he contends he hasnt actually received the $6 million, because its still being held in escrow, says William Hyslop, one of Daines attorneys. He says the total amount Daines is owed is greater than $6 million held in other escrow accounts.


The lawsuit is related to, yet separate from, another lawsuit Daines filed earlier this summer in Spokane County Superior Court against Packet Engines. In that complaint, Daines claims he is owed an unspecified sum that is being held in escrow by the Bank of New York as part of the $325 million sale of Packet to Alcatel. In that complaint, Daines says he has submitted multiple requests for release of the escrowed funds, but that Alcatel has withheld the money and is disputing payment of it.


Hyslop says that Packet sought to force that matter into arbitration. Daines filed a motion asking the court for a stay on arbitration proceedings, and the court has granted the motion. Hyslop says the case now will proceed.


Meanwhile, in the most recent suit, Daines claims that this past February Alcatel not only wrongfully directed the Bank of New York to issue two IRS form 1099s for various escrowed amounts, but also has refused to rescind the forms.


According to the complaint, when Alcatel bought all the outstanding stock in Packet, that resulted in the creation of several escrow agreements established, in part, to hold proceeds of more than $6 million owed to Daines.


In the complaint, Daines says he signed an agreement stating that for federal income tax purposes, Alcatel would own the escrowed amounts until those funds were dispersed. Daines also says in the complaint that he signed another agreement that stated if Daines were subject to income tax on the escrowed funds, Alcatel would advance to Daines the funds necessary to pay the taxes.


Daines contends that he never had possession of the escrowed funds. He is asking the court to declare that Alcatel wrongfully directed the issuance of the two IRS 1099s and that those forms must be rescinded. If the court determines that the 1099s were validly issued, Daines wants it to issue an order stating that hes entitled to the tax advance in the amount of the tax liability he incurs, plus penalty and interest resulting from Alcatels actions.


Hyslop says Daines now must wait for Alcatel to file a response, which the company has yet to submit.