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HomeNewsArchivesCourt Document: Prosser Had More Than $40 Million in Untaxed Income

Court Document: Prosser Had More Than $40 Million in Untaxed Income

May 27, 2008 — Jeffrey Prosser, former owner and CEO of Innovative Telephone, received $59 million in "payments and transfers" from one of his holding companies, Innovative Communication Corporation, from 1997 through Sept. 20, 2007, according to a court document.
The same document, recently filed with the U.S. Bankruptcy Court, said: "… a review of the signed personal tax returns by Prosser for the years 1999 through 2005 reflects that Prosser did not disclose on his tax returns or include in his adjusted gross income the value of the transfers made to or for his benefit."
Setting aside income in 2006 and 2007 — Prosser did not file income-tax returns for those years, according to earlier court filings — the gap between Prosser's income in the period covered by Stewart's memo and what Prosser reported comes to $43.8 million.
In an earlier filing with the federal bankruptcy court, Prosser reported that his "income from employment" was $1 million in 2004, $1 million in 2005, and $720,000 through Sept. 25, 2006.
The most recent information was contained in a summary of a memorandum written to the Internal Revenue Bureau by Dan Stewart, lead lawyer for Stan Springel, the court-appointed Chapter 11 trustee dealing with the former Prosser corporations.
The memorandum showed these "payments and transfers":
1997: $259,657
1998: $347,159
1999: $7,491,020
2000: $5,732,789
2001: $1,761,381
2002: $3,936,370
2003: $8,030,901
2004: $8,245,358
2005: $8,082,833
2006: $11,304,298
2007: $3,881,336 (through Sept. 20)
Total: $59,073,106
Many of these payments were made after Prosser and his companies went into bankruptcy procedures; his creditors filed a non-voluntary bankruptcy petition against him and his firms on Feb. 10, 2006, and he and his companies filed voluntary petitions on July 30, 2006. On Sept. 20, 2007, Springel obtained control of ICC's books and terminated all payments to Prosser.
The way this information came to light is interesting — and counterintuitive.
Those who have been following the documents filed in the bankruptcy case have suspected for months that the court-appointed officials — the two trustees and the examiner of Prosser's personal finances — had full knowledge of both Prosser's income and his tax returns in recent years. It might well be in the interest of one or more of these three to tell the court about Prosser's income-tax challenges.
Springel, for example, has filed papers with the court stating that "fraudulent transferences" had been used to move assets from ICC to Prosser's personal control; information on Prosser's tax problems might have been used to support Springel's position on this matter.
On the other hand, there would appear to be no reason why Prosser's own lawyers would bring up the tax issue.
But what happened was exactly the reverse. Though the document quoted above was written by Stewart, it was secured by Prosser's lawyer, Robert Craig, in a discovery procedure, and then filed with the court — and thus potentially made public — by Craig. Discovery is a process in which one set of lawyers, with court approval, extracts information from an opposing set of lawyers.
The motivations of the various parties on this matter were not discussed in any of the filings that accompanied the release of Stewart's memorandum.
Meanwhile, at the same time Craig released the Stewart memo to the court, he also released the lengthy transcript of a deposition (interview) taken by Craig of Dennis Kanai, a ranking financial official of ICC since December 2001. Much of the text was a discussion of how money and other assets were transferred from ICC up to other Prosser-controlled holding companies and to Prosser himself. There was no discussion of whether these transfers were the same as, or overlapped, those discussed in the Stewart memo.
Many of these transfers were often "poorly documented" and were treated as "receivables" and recorded as "due from LLC" (i.e., loans) in the internal books of the corporation, Kanai said. Subsequently, and for external purposes, he said, they were described as "contra-equity," a term that Kania called "ambiguous." Innovative LLC was the master holding company in what had been Prosser's corporate structure; Prosser was the sole owner of it.
Prosser's lawyers have argued for months that these transfers to Prosser's account were perfectly legitimate, that he owned the whole enterprise, and that he was a "highly compensated employee."
Kanai was often non-specific in his answers, but he did agree that these upward transfers of funds covered, among other things, a major social event sponsored by the Prossers on St. Croix, the "Millennium Party." Kanai did not attend the event, but said he gathered it was "quite a party." ICC paid for it, he said.
Whether some or all of the transfers discussed in the deposition and the memo were, in fact, taxable income is another subject, and is the continuing source of dispute among the lawyers.
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