1. As is clear from the law applied in this case and the result , and the result, the liability of a business for unpaid taxes "follow the assets." Why?
2. What action can Gadley take now to avoid suffering the loss of the funds required to cover Gresh unpaid taxes
3. What action should a buyer take before purchasing the assets of a business to avoid liability for the seller's unpaid taxes?
POP that are tax-exempt until the funds are with lawn Case Analysis 36.1 A. Gadley Enterprises, Inc. v. Department of Labor and Industry Office of Unemployment Compensation Tax Services Commonwealth Court of Pennsylvania, A.3d 2016 WL 55591 (2016) In the Language of the Court purchaser to require such certificate shall render such purchaser liable to the department for the unpaid contributions, interest and SIMPSON, Judge. penalties. assets other than those used in the opera- tion of Romper Room *** Four days after executing the Agreement, *** Predecessor notified the Department of the sale. *** The Department issued Pur- chaser a Notice of Assessment (Notice) in the amount of $43,370.49 for UC contributions, interest and penalties owed by Predecessor. The Notice stated Purchaser was liable because it purchased 51% or more of Predecessor's assets. In response, Purchaser filed a petition with the Department) for reassessment. Based on the evidence presented at the hearing (held on the petition), the Department issued its decision and order denying the petition for reassessment. (Julianne Gresh (Predecessor)] oper ated (Romper Room Day Care (Romper Room)), a childcare center, as a sole proprietorship for 12 years. Predecessor owed the [Pennsylvania Department of Labor and Industry Office of Unem- ployment Compensation Tax Services (Department) substantial unpaid UC (unemployment compensation) contributions, interest and penalties. She admitted liability and entered pay- ment plans with the Department ***, Pursuant to these payment plans, she made monthly payments in the minimal amount of $50. Predecessor was on the verge of losing her license to operate, and sought another entity to operate the location as a childcare facility. [A. Gadley Enterprises, Inc. (Pur- chaser) operated a childcare center, Young Environment Learning Center, in Erie, Pennsylvania. Purchaser decided to purchase assets from Predecessor in order to open a satellite location of Young Environmental Learning Center at the prior location of Romper Room. Pur- chaser and Predecessor executed an asset purchase agreement (Agreement). Through the Agreement, Purchaser paid a total of $37,000 for Predecessor's tangible and intangible assets. This total was comprised of $10,000 for the use of the name "Romper Room," $10,790 for a covenant not to compete, and $17,210 for tangible assets listed on [an attached] Inventory List. *** The Inventory List did not include any of Predecessor's personal Purchaser then filed a petition to review to this Court. **** [43 Pennsylvania Statutes Section 788.3(a), part of the state's Unemploy- ment Compensation Law] provides: There is no dispute that Purchaser did not obtain a clearance certificate reflecting Predecessor's pavme liability. There is also no dispute Predecessor owed the Department for outstanding UC contributions in est and penalties in the amount of $43,370.49 at the time of the sale. **** Purchaser argues substantial evidence does not support the Department's find. ing that it purchased more than 51% of the (Predecessor's assets. ** ** The Agreement establishes that the Inventory List sets forth all business assets of Predecessor. Gresh confirmed the Inventory List was a complete list of assets used in the operation of her business. The Inventory List reflects a total value of assets equaling $19,210.*** The parties reduced the purchase price by $2,000 to account for the reduced value of the assets when Purchaser removed certain assets from the complete Inventory List. Purchaser acquired all the assets included in the Inventory List, other than those removed, for $17,210. The amount constitutes approximately 90% of the value of the complete list of assets ($19,210 x 9 = $17,289). The Agreement, supplemented by corroborating (supporting, testimony, (a) Every employer ***, who shall sell in bulk fifty-one percent or more of his assets, including but not lim- ited to, any stock of goods, wares or merchandise of any kind, fixtures, machinery, equipment, building or real estate, shall give the department ten (10) days' notice of the sale prior to completion of the transfer ***. The employer shall present to the purchaser of such property, a certifi- cate *** showing that all reports have been filed and contributions, interest and penalties paid to the date of the proposed transfer. The failure of the CHAPTER 36 Small Businesses and Franchises 693 Case 36.1 Continued ritutes substantial evidence to sup- or the Department's finding that the qualified as a bulk sale of more than 51% of Predecessor's assets. Purchaser also argues the Department erred in construing the term "assets" in the bulk sales provision to include only business assets when determining whether a sale met the 51% threshold. Purchaser asserts the provision does not differentiate between business and per- sonal assets of an employer and there is no legal distinction when the employer is a sole proprietor. assets. This conclusion is buttressed sales provision. That purpose is to ensure reinforced by the context of the statute an employer does not divest itself of assets as a whole, which pertains to employers without satisfying outstanding liabilities, operating businesses and paying employ! either itself or by the purchaser. This Court ees as part of their business operations. agrees with the Department that Gresh's The factual circumstances surround- repayment agreement in the minimal ing the sale also indicate the term "assets" amount of $50 per month does not sat- means "business assets." Here, the context isfy the UC liability. [Emphasis added.] is the sale of a business, in the childcare industry, to another business engaged in In sum, the Department's construc- the same industry that intends to operate tion of assets as business assets is reason- a childcare facility at the location of the able and consistent with the context and former business. The Agreement reflects purpose of [the] bulk sales provision. the intention of the parties that Purchaser Purchaser's failure to obtain a clearance would operate the childcare facility as a certificate rendered it liable for Predeces- satellite location. [Emphasis added.] sor's unpaid UC contributions, interest and penalties, regardless of Predecessor's *** The provision does not treat repayment agreement. Therefore, this sole proprietors differently than other Court upholds the Department's inter- raplayers. The provision contains no pretation of the bulk sales provision. excmption of liability for a purchaser **** when an employer operates as a sole *** For the foregoing reasons, we proprietorship. Nor does it contain an affirm the Department. exemption from liability when the for- mer employer entered a repayment plan with the Department. Moreover, Purchaser's interpretation does not consider the purpose of the bulk * * * ** che UC Law) includes a sole proprietor like Predecessor. The word "assets" is not defined in the (UC) Law. In Section 788.3(a)] the term "assets precedes a list of examples, fol- lowed by the phrase "including but not limited to." **** *** The examples *** indicate that the term "assets" refers to business Legal Reasoning Questions Is clear from the law applied in this case, and the result, the liability of a business for unpaid taxes "follows the assets." Why? hat action can Gadley take now to avoid suffering the loss of the funds required to cover Gresh's unpaid taxes? at action should a buyer take before purchasing the assets of a business to avoid liability for the seller's unpaid taxes? 3. What action shoul POP that are tax-exempt until the funds are with lawn Case Analysis 36.1 A. Gadley Enterprises, Inc. v. Department of Labor and Industry Office of Unemployment Compensation Tax Services Commonwealth Court of Pennsylvania, A.3d 2016 WL 55591 (2016) In the Language of the Court purchaser to require such certificate shall render such purchaser liable to the department for the unpaid contributions, interest and SIMPSON, Judge. penalties. assets other than those used in the opera- tion of Romper Room *** Four days after executing the Agreement, *** Predecessor notified the Department of the sale. *** The Department issued Pur- chaser a Notice of Assessment (Notice) in the amount of $43,370.49 for UC contributions, interest and penalties owed by Predecessor. The Notice stated Purchaser was liable because it purchased 51% or more of Predecessor's assets. In response, Purchaser filed a petition with the Department) for reassessment. Based on the evidence presented at the hearing (held on the petition), the Department issued its decision and order denying the petition for reassessment. (Julianne Gresh (Predecessor)] oper ated (Romper Room Day Care (Romper Room)), a childcare center, as a sole proprietorship for 12 years. Predecessor owed the [Pennsylvania Department of Labor and Industry Office of Unem- ployment Compensation Tax Services (Department) substantial unpaid UC (unemployment compensation) contributions, interest and penalties. She admitted liability and entered pay- ment plans with the Department ***, Pursuant to these payment plans, she made monthly payments in the minimal amount of $50. Predecessor was on the verge of losing her license to operate, and sought another entity to operate the location as a childcare facility. [A. Gadley Enterprises, Inc. (Pur- chaser) operated a childcare center, Young Environment Learning Center, in Erie, Pennsylvania. Purchaser decided to purchase assets from Predecessor in order to open a satellite location of Young Environmental Learning Center at the prior location of Romper Room. Pur- chaser and Predecessor executed an asset purchase agreement (Agreement). Through the Agreement, Purchaser paid a total of $37,000 for Predecessor's tangible and intangible assets. This total was comprised of $10,000 for the use of the name "Romper Room," $10,790 for a covenant not to compete, and $17,210 for tangible assets listed on [an attached] Inventory List. *** The Inventory List did not include any of Predecessor's personal Purchaser then filed a petition to review to this Court. **** [43 Pennsylvania Statutes Section 788.3(a), part of the state's Unemploy- ment Compensation Law] provides: There is no dispute that Purchaser did not obtain a clearance certificate reflecting Predecessor's pavme liability. There is also no dispute Predecessor owed the Department for outstanding UC contributions in est and penalties in the amount of $43,370.49 at the time of the sale. **** Purchaser argues substantial evidence does not support the Department's find. ing that it purchased more than 51% of the (Predecessor's assets. ** ** The Agreement establishes that the Inventory List sets forth all business assets of Predecessor. Gresh confirmed the Inventory List was a complete list of assets used in the operation of her business. The Inventory List reflects a total value of assets equaling $19,210.*** The parties reduced the purchase price by $2,000 to account for the reduced value of the assets when Purchaser removed certain assets from the complete Inventory List. Purchaser acquired all the assets included in the Inventory List, other than those removed, for $17,210. The amount constitutes approximately 90% of the value of the complete list of assets ($19,210 x 9 = $17,289). The Agreement, supplemented by corroborating (supporting, testimony, (a) Every employer ***, who shall sell in bulk fifty-one percent or more of his assets, including but not lim- ited to, any stock of goods, wares or merchandise of any kind, fixtures, machinery, equipment, building or real estate, shall give the department ten (10) days' notice of the sale prior to completion of the transfer ***. The employer shall present to the purchaser of such property, a certifi- cate *** showing that all reports have been filed and contributions, interest and penalties paid to the date of the proposed transfer. The failure of the CHAPTER 36 Small Businesses and Franchises 693 Case 36.1 Continued ritutes substantial evidence to sup- or the Department's finding that the qualified as a bulk sale of more than 51% of Predecessor's assets. Purchaser also argues the Department erred in construing the term "assets" in the bulk sales provision to include only business assets when determining whether a sale met the 51% threshold. Purchaser asserts the provision does not differentiate between business and per- sonal assets of an employer and there is no legal distinction when the employer is a sole proprietor. assets. This conclusion is buttressed sales provision. That purpose is to ensure reinforced by the context of the statute an employer does not divest itself of assets as a whole, which pertains to employers without satisfying outstanding liabilities, operating businesses and paying employ! either itself or by the purchaser. This Court ees as part of their business operations. agrees with the Department that Gresh's The factual circumstances surround- repayment agreement in the minimal ing the sale also indicate the term "assets" amount of $50 per month does not sat- means "business assets." Here, the context isfy the UC liability. [Emphasis added.] is the sale of a business, in the childcare industry, to another business engaged in In sum, the Department's construc- the same industry that intends to operate tion of assets as business assets is reason- a childcare facility at the location of the able and consistent with the context and former business. The Agreement reflects purpose of [the] bulk sales provision. the intention of the parties that Purchaser Purchaser's failure to obtain a clearance would operate the childcare facility as a certificate rendered it liable for Predeces- satellite location. [Emphasis added.] sor's unpaid UC contributions, interest and penalties, regardless of Predecessor's *** The provision does not treat repayment agreement. Therefore, this sole proprietors differently than other Court upholds the Department's inter- raplayers. The provision contains no pretation of the bulk sales provision. excmption of liability for a purchaser **** when an employer operates as a sole *** For the foregoing reasons, we proprietorship. Nor does it contain an affirm the Department. exemption from liability when the for- mer employer entered a repayment plan with the Department. Moreover, Purchaser's interpretation does not consider the purpose of the bulk * * * ** che UC Law) includes a sole proprietor like Predecessor. The word "assets" is not defined in the (UC) Law. In Section 788.3(a)] the term "assets precedes a list of examples, fol- lowed by the phrase "including but not limited to." **** *** The examples *** indicate that the term "assets" refers to business Legal Reasoning Questions Is clear from the law applied in this case, and the result, the liability of a business for unpaid taxes "follows the assets." Why? hat action can Gadley take now to avoid suffering the loss of the funds required to cover Gresh's unpaid taxes? at action should a buyer take before purchasing the assets of a business to avoid liability for the seller's unpaid taxes? 3. What action shoul
