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Report Details Prosser's Troubled Finances, Tax Issues

Sept. 14, 2007 — Substantial new details of the complex and troubled finances of Jeffery Prosser, owner of Innovative Telephone, have come to light with the release of one of the reports by the examiner appointed by the bankruptcy court. In it, the examiner notes the flow of more than $156 million to Prosser and one of his holding companies from 1998 to 2005, and states that "the Internal Revenue Service may have a claim in the Debtor's [i.e. Prosser's] bankruptcy case."
This is the fourth of a series of reports filed by the examiner, Steven A. Felsenthal, a former chief judge of the U.S. Bankruptcy Court in Dallas. Felsenthal was appointed earlier in the year to examine Prosser's finances by U.S. Bankruptcy Court Judge Judith K. Fitzgerald. At least one of the earlier reports is scheduled to be released from its current secret status, but that has not yet happened.
The fourth report makes for heavy reading because of the complexity of Prosser's financial arrangements, what the examiner cites as a lack of full cooperation by Prosser, and the examiner's own exceedingly careful, lawyerly writing (in which the examiner refers to himself in the third person).
As to the flow of money to Prosser's wholly-owned holding companies from his operating companies through what the examiner calls the "new ICC," the report stated: "From 1998 through 2005, New ICC loaned an aggregate amount of $156,612,000 to the Debtor and ICC LLC, which is a….company owned by the Debtor. The Examiner has not received sufficient documentation of these advances to determine how much of the $156,612,000 went to ICC LLC and how much went directly to the Debtor. However, the Debtor's attorney, John Raynor, has indicated that the ICC LLC's share of the aggregate debt is $122,099,600 while the Debtor's direct share of the obligation is $34,513,000…."
The $600 math error in the examiner's report is the least of the complexities involved with the flow of funds.
A footnote following the word "loaned" stated: "For accounting purposes, New ICC internally characterized the advances it made to the Debtor and ICC LLC from 1998 to 2002 as loans. However, the Examiner notes that the transactions do not have the elements of a loan. The Debtor has indicated that not all of these transactions were evidenced by written agreements with repayment obligations and interest provisions. Furthermore, the Debtor has indicated that New ICC understood that the Debtor never intended to re-pay the funds advanced to him by New ICC. Indeed, the Examiner has seen no evidence that any of these advances have been re-paid."
Later, the Examiner said in the report: "New ICC's decision to 'write off' the loans as not collectible does not, itself, release the Debtor's estate from those… obligations."
The report does not indicate what happened to the $156 million-plus, nor does it state how much of that total came from Innovative Telephone, and how much from Prosser's other operating companies.
Standard accounting terms such as sales, net income, and dividends do not occur in the examiner's report; instead, there are convoluted descriptions and arcane terminology.
"New ICC re-characterized the debt on its books as 'contra-equity.' The Debtor has indicated that [the] 'contra equity" amounts consist of uncollectible debt which has been charged against the debtor's equity," the report stated.
Though the IRS has not filed a proof of claim, the report also said, "the Examiner has identified troubling issues relating to the Debtor's tax returns, with particular focus on the 2004 and 2005 returns… [T]he Examiner expects that the Internal Revenue Service may have a substantial claim in the Debtor's bankruptcy."
The report said: "In an interview with the Examiner on May 23, 2007, the Debtor represented that, pre-petition, [i.e. before his filing for voluntary bankruptcy] he received $60,000 in wages and $11,000 as reimbursement of expenses every two weeks from New ICC. The Debtor also told the Examiner that New ICC and its subsidiaries — including a subsidiary of New ICC that owns airplanes used by the Debtor — paid for his pre-petition travel expenses. However on the Form 1040 filed by the Debtor for 2005, the Debtor did not report any wages, salaries, tips, etc. Furthermore, the Debtor did not attach a Form W-2 to the Form 1040 reporting wages or other compensation he received from New ICC or any of its subsidiaries… [T]he Debtor's failure to adequately report this income may result in a tax claim against the Debtor's estate."
Another section of the report was headed: "Possible unreported income from forgiveness of New ICC debt."
Copies of Prosser's income tax returns were not included in the examiner's report, though there are indications in it that Prosser reported substantial income in Schedule C of his 1040.
The report also includes several paragraphs of seemingly conflicting data that the examiner neither seeks to resolve nor comments upon.
For example, regarding Prosser's children, "The Debtor's 2005 tax return reports three dependent children. One has recently married. The other two are in college. College expenses and related travel are paid by New ICC as an employee benefit. The Debtor told the Examiner in his interview on May 23, 2007, that New ICC paid college expenses for its senior management personnel. However, [Prosser's] monthly operating report [to the court] for June 2007 states that the Debtor has paid $97,000 for tuition/education through June 30, 2007."
Similarly, on insurance coverage, the report said, "New ICC provides the Debtor with life, health and umbrella insurance. The Debtor told the Examiner that he had no health-related expenses not paid by insurance or New ICC. However, the monthly operating report for June 2007 states that the Debtor has paid $40,578.43 for medical/dental payments through June 30, 2007."
The examiner, who is paid $700 an hour for his work, has two law firms and an accounting firm helping him with his research. The $800,000 or so in professional bills that have been generated — but apparently not yet paid — have drawn critical attention from some of the lawyers in the case.
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