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HomeNewsLocal newsProsser Steps Into New IRB Tax Cases

Prosser Steps Into New IRB Tax Cases

Two companies connected to former Innovative owner Jeffrey Prosser’s bankruptcy are suing the V.I. Internal Revenue Bureau, claiming IRB is improperly assessing taxes they do not owe, with one claiming IRB is targeting "all entities adverse to Jeffrey Prosser" for bogus tax actions. And Sen. Nereida "Nellie" Rivera-O’Reilly publicly disclosed tax information about five of Prosser’s court adversaries during a budget hearing, in apparent violation of federal law.

Philadelphia law firm Fox Rothschild LLP, which represented the court appointed bankruptcy trustee for Prosser’s personal, Chapter 7 bankruptcy, filed suit in U.S. District Court for the Eastern District of Pennsylvania in late August, claiming IRB was targeting Prosser’s enemies. [Fox Prosser IRB Complaint] Prosser’s largest creditor, the Rural Telephone Finance Cooperative, filed suit in U.S. District Court in the Virgin Islands about three weeks later. [RTFC Sues VI]

In 2014, IRB sent both companies notices claiming they owe millions in back taxes and that their incomes were derived from V.I. sources. The V.I. government was in the midst of a budget crisis and during budget hearings, senators urged IRB officials to push hard to collect more revenues.

IRB is seeking $2.5 million in corporate income tax and $398,000 in Gross Receipts tax from Fox. It is seeking much more from RTFC — about $92 million in corporate income tax, according to court documents. [RTFC Sues VI]

Both companies have sued to stop the tax assessments on the grounds that they paid federal taxes already, do not have offices and did not do substantial work within the territory.

Prosser entangled himself in the Fox case when on Sept. 21, 2014 Fox received a letter from Prosser attorney Norman Abood curiously gloating that "we have reason to believe that the Virgin Islands Internal Revenue Bureau has recently served Trustee Carroll and Fox Rothschild LLP amongst others with significant tax assessments." Fox charges IRB with illegally disclosing confidential taxpayer information, saying Abood sent the letter, "although IRB had not yet informed Fox of this," and the information was not publicly available.

Forbes Magazine published an article on Fox’s lawsuit in September, saying Abood rebutted the claim that IRB was divulging confidential information by asserting that two V.I. senators disclosed this information at a Sept. 3, 2014 budget hearing. (See: US Law Firm Sues Virgin Islands, Alleging Leaks, Faulty Tax Bills & Bad Blood in Related Links below)

Author Kelly Phillips Erb said Abood named O’Reilly and Sen. Kenneth Gittens as the sources of that information, but in a phone call with the Source, said she did not have the hearing transcript, only information from Abood.

Video of the hearing, provided by the Legislature, shows O’Reilly named the five Prosser adversaries, saying they failed to pay V.I. taxes and were being investigated:

"It is my understanding that there are five entities that apparently earned in excess of $80 million in income in the Virgin Islands in this territory, which did not file tax returns and did not pay Gross Receipt taxes and did not pay income or corporate taxes as a result of not filing. Specifically, Carroll Services from Massachusetts; Fox Rothschild from New York; Alvarez and Marsal from Florida; Stan Springel, that would be the bankruptcy guy in the Innovative case, the trustee from San Francisco; Vinson and Elkins from Texas. I also understand that there has been a complaint already filed with the bureau that alleges that these entities failed to report taxes and to pay. Can you tell us what are you doing to collect taxes from these entities since collecting taxes is such a primary concern for this government?" O’Reilly said.

IRB Director Claudette Watson-Anderson responded that she is prohibited by law from disclosing any information about specific taxpayers and court cases.

"Very well, it is on the record. That is what really matters," O’Reilly said.

Gittens also pressed Watson-Anderson about collecting taxes in "those cases," but did not name any of them.

Every single person and company O’Reilly named are court adversaries of Jeffrey Prosser. [Prosser Sanctions] Prosser personally sued all five of those O’Reilly named, in an attempt to undo court findings that he hid income and acted in bad faith in his bankruptcy. He lost the case and in January 2015, a three-judge panel of the Third Circuit Court of Appeals reinstated roughly $137,000 in sanctions against Prosser for filing bogus bribery allegations in bad faith. (See: Fed Appeals Court Reinstates ‘Bad Faith’ Sanctions Against Former Innovative Owner in Related Links below)

The court also found Prosser "vexatiously and unnecessarily multiplied the bankruptcy proceedings," in bad faith, as a delaying tactic.

Asked why she mentioned those five specific Prosser adversaries and no other potential taxpayers, O’Reilly said in emails and a phone conversation that she was thinking about potential sources of tax revenue.

"I have followed the Innovative bankruptcy closely after the online Daily Beast ran a story alleging pay outs," she said in an email. "I have been tracking companies who surface at one point or another to ensure they have local legal credentials and are paying taxes. I became aware that companies without a brick and mortar facility who provide services here are not required to have business license, etc. When I saw the names of the consultants who were paid in the Innovative matter I suspected they too were under the radar. I reached out to a contact that will remain anonymous and became aware of a whistleblower matter that was pending.”

Asked why she said getting it on the record is what mattered, O’Reilly said it was because "I was concerned that the IRB would not act swiftly to process the whistle blower or would roll over and not collect. Placing the names of some of them would put the information out there and perhaps motivate IRB."

In an email, O’Reilly said she got the names from court documents in the bankruptcy proceedings.

In a phone call, she said she did not "recall if it was the bankruptcy documents or somewhere else. Sometimes information makes it to my desk and it is always anonymous. I cannot give specific names."

Asked if anyone involved with the Prosser case was in contact with her, she said in an email that yes, "after the hearing when I inquired of the director I received a call from a person."

Told that Fox is claiming Prosser adversaries are being targeted by IRB, O’Reilly said, "I don’t know if they are being targeted. The only information I had was about a whistleblower in the case and I wanted to make sure they were following through. I was concerned IRB may not have the right personnel or initiative or motivation to pursue it."

She said she has a well-established record of pushing the former director to do more to collect delinquent taxes and that she has "been bearing down with the new director of IRB too.”

While disclosing taxpayer information is a federal crime, another federal law gives V.I. senators like O’Reilly and Gittens immunity for anything they say during hearings. The Revised Organic Act of 1954, says "(n)o member of the (V.I.) legislature shall be held to answer before any tribunal other than the legislature for any speech or debate in the legislature."

Meanwhile, the court will have to determine who owes what taxes and if crimes were committed.

According to Neil Kossler, a certified public accountant in the Washington D.C. area, within the States, it is often very difficult to succeed in claiming taxes for services performed outside that locale, by persons who also do not reside in that locale, even when the money itself is generated there. (Disclosure: Kossler is brother to the author) But, he said, it gets more complicated in U.S. possessions with a mirror tax code and separate local taxes.

V.I. law (Title 33, Chapter 3, section 4) says Gross Receipts taxes "shall be computed in proportion to the extent of the business done in the Virgin Islands with respect to the pertinent transactions."

That seems to suggest that it cannot be assessed on work done outside the territory. Fox asserts its attorneys spent only about 40 out of more than 1,588 work days actually in the USVI, and that the  small portion of work actually done in the territory is below the cutoff for automatic exemption.

Corporate income tax is less plain. Fox and RTFC would seem to owe the same amount, with the question being who to pay. If it is owed to the Virgin Islands, it may be a windfall of millions for the territory.

One IRS guide to dividing up income, Form IRS 570, says that corporate and personal income tax for V.I. "salaries, wages, and other compensation for labor or personal services" is owed in the location "where labor or services performed." If, as RTFC and Fox claim, the work was almost entirely done in the States, that seems to say the money is owed to the federal government, not the V.I. government.

But the actual tax code, (U.S. Code Section 932 subsection B(b)) says U.S. corporations must pay V.I. taxes on V.I. income, which is "determined by taking into account only income derived from sources within the Virgin Islands."

All the bankruptcy income ultimately comes from Innovative and its V.I. customers, which could be considered "sources within the Virgin Islands."

Another question is whether the RTFC "income" figures are really "income," as RTFC took a loss on massive loans to Prosser and Innovative.

RTFC loaned Prosser and Innovative in excess of $550 million and ended up taking Innovative in payment during the bankruptcy. It declared a loss on its books from the episode of $70 to $90 million to the U.S. Securities and Exchange Commission in June 2015. [CAH Impairment] In October, it announced plans to sell Innovative. It is unclear if money RTFC received from the bankruptcy estate is income, in the normal sense, or partial compensation for a loss.

These are some of the questions the court will have to answer. Little has happened yet in the RTFC case. In the Fox case, the government has agreed not to attempt to collect the taxes until the case is heard in court. The court has given the V.I. government a Nov. 11 deadline to respond to Fox’s complaint.

While dry stuff, the answers could mean millions of dollars for the territory — or not.

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