State, feds seek The fate of a million-dollar tax delinquency is coming to blows in the bankruptcy of telecommunications services firm Summit Communications Inc.
Summit trustee
The telecom firm owes
more than $1 million
to the state and fedsBy Tim Ruel
truel@starbulletin.comIn the past several weeks, the U.S. Attorney's Office, the U.S. Trustee's Office and the state Department of Taxation have raised the heat in Summit's bankruptcy proceedings. They support the appointment of an outside trustee to manage and investigate the firm's finances.
Summit owes $528,603 to the state and $512,315 to the federal government for taxes, according to claims in Summit's Chapter 11 reorganization bankruptcy case.
In an early August court filing, attorneys for the U.S. government cited Summit's "gross mismanagement and incompe- tence" as a justification for the appointment of a trustee.
Summit opposes the appointment of a trustee and disputes the government's assertions. It says the appointment of a trustee will raise the expense of administering its bankruptcy case, a point the U.S. government concedes. Having a trustee at the helm would reduce confidence in the firm, potentially warding off customers, and make it harder for Summit to emerge from bankruptcy successfully, according to a filing by Summit's attorneys Steven Guttman and James Duca.
Summit is seeking an extension of time to submit its in-house plan for reorganization, which was due two months ago. The government says Summit shouldn't get an extension. A hearing on the disputes is scheduled for Monday before U.S. Bankruptcy Judge Robert Faris.
During a brief hearing yesterday, Summit and its creditors said they would meet outside court to talk things over. One of the potential topics was whether the government's desire to appoint a trustee would merit the potential loss of tax dollars, according to Carol Muranaka, special assistant U.S. attorney.
"We are in a bad place, I think, the state and United States," Muranaka said during yesterday's hearing.
Among the U.S. government's assertions:
>> Summit's current management is related to the management that led the firm to its tax situation. Shortly before Summit filed bankruptcy, Grant Johnston, the son of a Summit co-founder and owner, became president;
>> Summit has made a couple major revisions to its financial statements. As such, the firm's numbers are not reliable.
In response, Summit said the relationship between its management teams is not relevant. If there's a question of whether the relationship has interfered with efforts to fix Summit, "no such claim can factually be proven," the company said.
The company blames its erroneous financial statements on disarray in its finances at the time of filing bankruptcy. Since then, the company says it has hired an outside accountant.
In a March interview, Grant Johnston said Summit ran into major cash-flow problems that were more important at the time than paying taxes. According to Johnston, the firm discovered the tax problem after it changed management in 2001. Johnston could not be reached for further comment yesterday.
Unpaid taxes make up about one-third of Summit's $3 million total claims.
In a court filing, Summit noted it is current on its post-bankruptcy financial obligations, and it has made $38,223 in adequate protection payments to the federal government.
The state Tax Department, which has supported the federal government's case for appointing a trustee, has its own bone to pick with Summit. In a recent filing, the state claims Summit has been "tightfisted" with information, hindering a state audit. Before filing bankruptcy in February, Summit hadn't filed general excise tax returns since 1997. Also, Summit has refused to file public service company returns, the state said.
There's a simple reason for that, Summit said: The firm is exempt from public service company taxes, and hasn't compiled the information needed to compute the tax liability.
The state says Summit has failed to show how it can increase growth to finance a viable reorganization plan. Summit says the state misread the firm's financial statements, and understated its June and July earnings.
The firm projects its operations will generate $15,000 each month to pay its tax obligation over several years. Summit provides long- and long-distance telephone services and call center services.