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Corporate Alert: New York Division of Tax Appeals affirms bulk sale purchaser's liability, International adoption of anti-bribery laws requires, Auditors in New Jersey face potential new exposure to negligence claims
September 2006
Authors: Edward B. Stevenson, Irwin A. Kishner

New York Division of Tax Appeals affirms bulk sale purchaser's liability in absence of compliance with notice requirements of New York Bulk Sales Tax Law

When purchasing a business or its assets in New York, be sure to notify the State at least 10 days in advance. Section 1141(c) of the New York Bulk Sales Tax Law provides that if a purchaser in a transaction, where all or substantially all of the assets of a business are being purchased and at least some of the personal property of the business is located in the State of New York (a "bulk sale"), does not give a proper and timely notice of the sale to the Division of Taxation of the State of New York at least 10 days before taking possession of, or making payment for the assets in the bulk sale, then the purchaser shall be liable for any past due sales and use taxes owed by the seller. In addition, it is the purchaser's burden to establish timely filing of notice of the bulk sale. The purchaser does not assume liability for such taxes if, upon receipt of a timely notice of bulk sale, the State fails to issue to the purchaser a notice of possible claim for taxes due from the seller within five business days.

Recently, the Division of Tax Appeals of the State of New York issued a determination that affirmed the rule in Section 1141(c). On June 18, 2004, Rony Enterprise, Inc. purchased a convenience store in Brooklyn from West End Mini Market, Inc. The purchaser filed an appropriate notice with the State but it was dated as of the June 18 sale date and not postmarked until July 23, 2004. The State issued a Notice of Claim to the purchaser on August 23, 2004, advising of a possible claim for taxes from the seller. The Division of Tax Appeals concluded that the purchaser could not establish that it filed the Notice on time since the notice was dated on the sale date (already 10 days late) and not postmarked until more than a month after that, well beyond the deadline of 10 days prior to the sale date allowed by Section 1141(c). Though the State issued the notice of Claim later than within five business days after its receipt of the purchaser's notice, the five day limit did not apply because the purchaser's notice was not timely in the first place.

The Division of Tax Appeals' determination should serve as a reminder that for transactions involving personal property in New York, the purchaser must file notice of the bulk sale at least 10 days prior to the sale. Absent such filing, the purchaser may be liable for the seller's sales and use taxes. Similar statutes should also be reviewed in other states where personal property is located.

International adoption of anti-bribery laws requires greater diligence in multinational transactions

Executives of U.S. companies involved in foreign transactions need to implement appropriate oversight and, if necessary, compliance procedures and controls to monitor the foreign activities of their officers, agents, subsidiaries, joint venture partners and other parties with whom the company is doing business.

The increased global adoption of anti-bribery laws and the rise in enforcement actions under such laws have resulted in increased enforcement against U.S.-based companies under the Foreign Corrupt Practices Act (the "FCPA") and the Convention on Combating Bribery of Foreign Public Officials in International Business Transactions (the "Convention") which has been adopted by 35 countries (including all European Union members).

The anti-bribery provisions of the FCPA make it unlawful to offer, promise, or make a corrupt payment to a foreign official, a foreign political party, a party official, a candidate for public office, or to an intermediary to influence an act or decision made in his or its official capacity, to induce him or it to do or omit to do any act or to obtain an improper advantage to obtain or retain business. Individuals and firms may also be prosecuted if they order, authorize, or assist someone else to violate the antibribery provisions or if they conspire to violate those provisions. The FCPA potentially applies to any individual, firm, officer, director, employee, or agent of a firm and any stockholder acting on behalf of a firm.

U.S. companies previously may have been able to avoid compliance with the FCPA by conducting transactions through foreign subsidiaries and affiliates. But as more countries adopt the Convention, payments to foreign officials are being scrutinized by foreign jurisdictions through enforcement actions under local law which has in turn led to greater cooperation among foreign governmental agencies, the U.S. Securities and Exchange Commission and the Department of Justice, which conduct investigations against U.S. companies under the FCPA. Under the FCPA, it is unlawful to make a payment to any person while knowing that all or a portion of the payment will be offered, given, or promised, directly or indirectly to a foreign official. The term "knowing" includes conscious disregard and deliberate ignorance. U.S. companies cannot plead ignorance of a bribery payment being made.

Auditors in New Jersey face potential new exposure to negligence claims

In a significant deviation from the application of the imputation doctrine, the New Jersey Supreme Court recently held that when an auditor is negligent within the scope of its engagement, the imputation doctrine will not prevent an action of recovery by the shareholders of the principal. (PCN Litigation Trust v. KPMG, LLP, 187 N.J. 353 (2006)). The imputation doctrine is premised on the notion that an agent's (such as an officer of a corporation) knowledge is generally attributable to its principal (the corporation). Therefore, under the traditional application of the imputation doctrine, a corporation cannot claim it was damaged by its auditors' failure to uncover frauds perpetrated by the officers of the corporation, as such fraudulent activities are imputed to the corporation under the imputation doctrine.

The PCN case involved a company called Physician Computer Network, Inc. ("PCN"), which engaged KPMG to serve as PCN's independent auditor. In connection with its duties, KPMG issued audit opinions on a yearly basis with respect to PCN's financial statements, certifying that they fairly presented PCN's financial position. But KPMG failed to uncover fraudulent activities of certain PCN officers which ultimately put PCN into bankruptcy. In connection with PCN's bankruptcy, a trust was created to enforce any causes of action PCN had for the benefit of its shareholders. The trust sued KPMG, claiming that if KPMG had exercised due care in its duties, it would have uncovered the officers' fraud and prevented the losses PCN suffered as a result. KPMG asserted the imputation doctrine as its defense, arguing that the fraudulent acts of PCN's officers should be imputed to PCN (and the trust), thereby barring the claim against KPMG.

The Court rejected KPMG's defense, ruling in part that KPMG's negligence in failing to uncover PCN's accounting irregularities for several years contributed to the fraud perpetrated by PCN's officers. This decision may open a new field of exposure to auditors who fail to properly exercise their duties to their clients, and may set the precedent that the imputation doctrine no longer protects negligent auditors.

For more information on these issues or other corporate matters, please contact:

NY Irwin Kishner at 212.592.1435 or ikishner@herrick.com
NJ Edward Stevenson at 973.274.2025 or estevenson@herrick.com

Copyright © 2006 Herrick, Feinstein LLP. Corporate Alert is published by Herrick, Feinstein LLP for information purposes only. Nothing contained herein is intended to serve as legal advice or counsel or as an opinion of the firm.