Pall Workers Feel Tax Ax

Four employees are held to blame for botching the accounting of transactions between an overseas subsidiary and a U.S. unit.
Stephen TaubJanuary 30, 2008

Pall Corp. has fired four employees it had placed on administrative leave after completing an inquiry into previously announced understatements of the company’s federal income tax payments and its provision for income taxes.

These employees had principal responsibility for tax and treasury matters during substantially all of the period under review. None of them were officers.

Pall said in early August that it would restate some or all of its annual and quarterly financial reports for fiscal years 1999 through 2006, as well as for the first three quarters of the current fiscal year, to correct the understatements. The company said the revisions would be material.

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The restatements relate to the taxation of intra-company payable balances resulting from sales of products from one of its foreign subsidiaries to a U.S. subsidiary. Under the Internal Revenue Code, the unpaid balances may have given rise to “deemed dividend income” that was not properly taken into account on the company’s U.S. income tax return and provision for income taxes.

In its latest announcement, Pall said it has not yet determined the impact on its financial statements for the affected periods and that it cannot predict when its pending restatement will be completed or the impact on its provision for income taxes. “As we continue to cooperate with the authorities, we also remain focused on completing our restatement as soon as practicable,” said chairman and CEO Eric Krasnoff.

The company placed the four finance employees on administrative leave in September. At the same time, it deposited $135 million with the Internal Revenue Service, almost all of it related to the company’s estimated tax liability. The sum includes interest but not penalties, which Pall warned could be material.

Pall also revealed in September that the Securities and Exchange Commission and the Department of Justice were investigating the matter, and two class-action complaints relating to it have been filed against the company.

As a result of these circumstances, Pall said, it may have one or more material weaknesses in its internal control over financial reporting.

In its latest announcement, Paul said it discovered intercompany balances that resulted mainly from sales of products by a branch of Pall Netherlands BV, a Dutch company, for substantially all of the period in question, to Medsep Corp., a U.S. subsidiary.

The accrual of these intercompany balances began in fiscal 1999 and continued through management’s discovery of the matter in the fourth quarter of fiscal 2007. The balances gave rise to dividend income to the company under Section 956 of the Internal Revenue Code that was not properly taken into account in its U.S. federal income tax returns and its provision for income taxes for the relevant periods.

The company’s tax liability will include taxes that would have been due with respect to any deemed dividend income, interest on overdue amounts of taxes payable, and penalties that may be assessed by the IRS on the eventual resolution of this matter.