Unclaimed Property: What It Is and Why You Should Care

Unclaimed Property: April 26, 2012

What It Is and Why You Should Care
Panel:

David C. Blum, Partner, Levenfeld Pearlstein, LLC

Jacqueline Amatulli, Associate, Levenfeld Pearlstein, LLC

Jennifer E. Wood, CPA, Partner, Director of International Tax Services, Sikich LLP

Moderator:

Mary O'Connor , ASA, Partner, Valuation and Dispute Advisory Services, Sikich LLP

Copyright 2012, Levenfeld Pearlstein, LLC and Sikich LLP, All rights reserved 1

Introduction

• One of the hottest topics among state and local taxation
is not a tax at all.
• Unclaimed Property is a major source of revenue for
many states.
• What constitutes Unclaimed Property varies by state, is
uncertain and continues to evolve.

Copyright 2012, Levenfeld Pearlstein, LLC and Sikich LLP, All rights reserved April 26, 2012 2

Overview of Unclaimed Property

• Unclaimed Property very broadly covers most types of tangible
and intangible property including dormant accounts held in
financial institutions, and money owed by a business,
government, or not-for-profit to its customers, owners,
employees, vendors, etc.
• Generally falls under property law and is not considered a tax.
• As a result,
- No nexus requirements
- Limited statute of limitations
- Uncertain appeal procedure
• Think of state unclaimed property laws as a type of consumer
protection law which is designed to benefit owners of tangible
and intangible property.


History & Evolution of Unclaimed Property

• Unclaimed property and the term “escheat” originated in
feudal England and related solely to land.
- In feudal England, “escheat” meant that when an individual died
without an heir, land was returned to the tenant’s lord, or in
absence of such a lord, to the Crown.
• “Bona Vacantia” allowed the Crown to claim certain
personal property against all but rightful owner.


History & Evolution of Unclaimed Property (cont’d)

• In the U.S., modern custodial state statutes have been in
existence since the 1940s.
• Concept was further advanced in 1951 in Standard Oil
Co. v. New Jersey, which solidified state’s rights to take
possession of Unclaimed Property (in this case, stock
and dividends that were abandoned for 14 years).
• The Court established a base premise of modern
Unclaimed Property law:
- Unclaimed Property is better held by the states and used for the
general good (i.e., public benefit) than held by an individual or
entity for a singular enrichment.


History & Evolution of Unclaimed Property (Today)

• Implicit adoption of bona vacantia doctrine.
• States “step into the shoes” of the true owner and claim
the same rights, second only to the missing true owner.
• Thus, states take custody, but not ownership, of
unclaimed property.
• However, states are generally free to use this money until
it is claimed by the owner.
• As a result, states are increasing audit efforts and
aggressively collecting unclaimed property.


Audits of Unclaimed Property

• States are dramatically increasing their audits of compliance with
unclaimed property laws, oftentimes with third party “contract”
auditors who may audit on behalf of 20 or 30 states simultaneously.
• There has been widespread non-compliance with unclaimed property
statutes.
• States are finding unclaimed property audits to be an easy source of
revenue – and one that doesn’t require imposition of new taxes or
even new legislation.
• Vast majority of money collected through assessments is never
returned to property owners.
• One of the biggest problems with Unclaimed Property Audits is a
state (or contract auditor’s) ability to “estimate” for prior periods
(especially when there is no statute of limitations).


What is At Stake?

• According to NAUPA, state treasurers and other agencies
are safeguarding nearly $32.9 billion in unclaimed
property.
• Almost $1.8 billion was returned to rightful owners in
2006, leaving the majority in the hands of the states.


Example: Delaware

• Delaware is particularly active in pursuing unclaimed
property audits.
- Unclaimed property collections rose from $106 million
in 1998 to $493 million in 2010
- Third largest source of revenue for the state
- Accounts for 15% of revenue
• More than state lottery, corporate income taxes, cigarette
taxes, alcoholic beverage taxes and inheritance taxes
combined.
• It is not uncommon for Delaware to audit back to 1981.


Who is Liable for Unclaimed Property?

• Almost everyone has an obligation to account for and
report unclaimed property, including:
- Corporations
- Partnerships
- Limited Liability Companies
- Business Trusts
- Not-for-Profit Organizations
- Local Governments and Instrumentalities


What is Unclaimed Property Today?
• Unclaimed property refers to the transferring of abandoned property to the
state custodian for owners that cannot be located after a certain period of
time.
• All 50 states and the District of Columbia have enacted unclaimed property
statutes; many have adopted or modified one of four different Model Acts
(discuss later).
• Common forms of Unclaimed Property:
- Accounts Payable - Dormant Savings or checking
- Uncashed Payroll Checks accounts
- Uncashed checks to vendors - Unclaimed stocks and certificates
- Gift certificates and gift cards of deposit
- Insurance payments or refunds - Uncashed dividends
and life insurance policies - Deposits of all types
- Customer Overpayments - Unredeemed travelers checks and
- Customer Refunds money orders
- Benefits (non-ERISA) - Trust distributions
- Almost any other credit account - Contents of Safe Deposit Boxes
carried on books


Key Unclaimed Property Terms

- Unclaimed or Abandoned Property
• Property which has reached dormancy and is subject to escheat laws
- Escheatable
• The point when the burden of being the custodian of unclaimed property shifts to
the state
- Owner
• The person or entity that owns the rights to the property
- Holder
• The entity that holds property owed to another
- Custodian
• The entity or governmental unit that maintains the property for safe keeping
- Dormancy
• The period of time that a company has to hold on to a liability before it is
considered escheatable
- Common Exceptions
• Business to Business
• De minimis


What are the Elements of Unclaimed Property?

• “Fixed and Certain”
• There must be a fixed and certain legal obligation of the holder to the owner – Unclaimed
property is not the physical instrument by which the obligation is evidenced, but rather,
the right of the owner against the holder. The obligation of the holder must be absolute
and for a specific amount.
• Example: In many states unclaimed property does not include credit card points
programs and other uncertain value programs.
• Dormancy must run
• The property must remain unclaimed by the owner for the dormancy period - The dormancy
period represents a period of inactivity. If the owner demonstrates an interest in the
property then the dormancy period may start over again. The dormancy period
generally begins at the time the property first becomes payable or distributable and
continues until the state-imposed limit in years is reached.
• Example: Gift card last activity date.
• Owner cannot be located
• The apparent owner of the property cannot be located – State laws require the holder to
perform due diligence by attempting to locate the true owner and requires the owner to
respond to the letter to toll the dormancy period
• Example: If the owner receives a due diligence letter but does not respond to the letter
within the dormancy period, the property in question becomes escheatable to the state.


Uniform Acts

• All 50 states and the District of Columbia have enacted unclaimed
property statutes; many have adopted or modified one of four different
Model Acts:
- Uniform Disposition of Unclaimed Property Act (1954) – Resolved
the multiple liabilities issue through enactment of reciprocity provisions,
which had come as a result of more than one state imposing its
jurisdiction over the same property.
- Revised Uniform Disposition of Unclaimed Property Act (1966) –
Addressed problems involving money orders and travelers checks.
- Uniform Unclaimed Property Act (1981) – Replaced the earlier acts,
codified priority standards set out in Texas v. New Jersey, 379 U.S. 674
(1965).
- Uniform Unclaimed Property Act (1995) – Superceded the 1981 Act.
Reaffirmed Texas v. New Jersey. Clarified the debtor’s identity when
payments made by intermediaries.


Presumption of Abandonment
• Under the Uniform laws, vary for different types of
property.
• Generally shortened with each succeeding Act.
• 1954, 1966 (7 years)
• 1981 (5 years)
• 1995 (3 years for most property)
- Travelers checks 15 years
- Money orders 7 years
- Stock or equity interest in business/ debt of a business 5 years
- Property distributed in dissolution of business 1 year
• Rules still vary under state laws.


What State Gets the Unclaimed Property?
The “Priority Rules”

• The U.S. Supreme Court has set forth the following
“Priority Rules” (Texas v. New Jersey) to determine which
state holds the unclaimed property:
- First: The State of the owner’s last known address.
- Second: If there is no known address or if the state of last known
address does not provide for escheat of that property, then the
state in which the entity is domiciled (i.e., incorporated).
• Note, because this is based on the state of owner’s last
known address, you could have unclaimed property
obligations to numerous states (even though you do not
have nexus in any of those states).


Throwback Rule

• Many states have a third, “transaction-based” rule.
• Not adopted by the Supreme Court in Texas v. New Jersey
- If both the state of owner’s last known address and the state of holder’s
domicile decline or fail to cover an item of property in their unclaimed
property acts, then the state where the transactions giving rise to such
property occurred has the right to claim the property.
- Premises jurisdiction by a state if the transaction out of which the
property arose occurred in this state, the holder is domiciled in a state
that does not provide for escheat or custodial taking and the last known
address of the apparent owner or other person entitled to the property is
unknown or in a state that does not provide for escheat.


Business to Business Exemption

• Some states have a B2B Exemption from reporting
unclaimed property for business transactions under the
theory that unclaimed property laws are designed to
protect consumers, not transactions between businesses.
• This exemption (if available) varies from state to state but
generally exempts outstanding checks, refunds, deposits
payments and credit balances resulting from transactions
between business.


Trends
• Shortening the dormancy period for reporting Unclaimed
Property.
• Targeting new types of property.
• (e.g., securities, store value cards, promotional
incentives)
• Creating new jurisdictional rules to claim property.
• (e.g., “place of purchase” presumption and third-priority
rule)
• Retroactively escheating Unclaimed Property.
• Increase in state audits and compliance opportunities (e.g.,
Amnesty and Voluntary Disclosure).
• States’ increased willingness to litigate contested
assessments.


Reporting & Filing Obligations


Compliance Requirements

• Relevant data
• Types of property
• Abandonment periods
• Quantifying the potential liability
• Mailing requirements
• Recordkeeping, retention and reporting
• Reciprocal reporting
• Becoming compliant
• Audit triggers
• Voluntary compliance
• IT considerations


Gathering Relevant Data

• Look at your corporate structure
• History of mergers or acquisitions
• Review general ledger and chart of accounts
• Bank reconciliations and outstanding checklist
• Journal entries
• Accounts receivable reports
• De minimis or automatic system write-offs
• Review contracts with applicable third party service
providers


What is Unclaimed Property Today?

• Common forms of Unclaimed Property:
- Accounts payable - Dormant savings or checking
- Uncashed payroll checks accounts
- Uncashed checks to vendors - Unclaimed stocks and certificates
- Gift certificates and gift cards of deposit
- Insurance payments or refunds - Uncashed dividends
and life insurance policies - Deposits of all types
- Customer overpayments - Unredeemed travelers checks and
- Customer refunds money orders
- Benefits (non-ERISA) - Trust distributions
- Almost any other credit account - Contents of safe deposit boxes
carried on books


Abandonment Period (in years) for Illinois and Reciprocal States

Quantifying the Potential Liability

• Identify periods where detailed records are available
• Review records and schedule items that are potential
unclaimed property
• For example:
- Stale dated outstanding checks
- Voided checks that were not reissued – state will ask why did you
void?
- Stale dated credit balances
• Research items to determine if they represent a fixed and
certain obligation


Due Diligence

• Due diligence is the process of a holder attempting to
contact the true owner of dormant property to give them a
last opportunity to claim the property from the holder
before it is turned over to a State Unclaimed Property
Administration.


Why Perform Due Diligence

• Due diligence is mandated by state law
• Good customer relations
- Reestablishes communication with the customer
- Increases goodwill
• Smart business practice
- Fraud prevention tool
- Prevents material misstatement on financial statements


Performing State Mandated Due Diligence

• Generally, in most states, requirement applies to property
having a value of $50 or more
- Adhere to additional state requirements
- Newspaper publication: New York
- Written notice to owner by certified mail: New Jersey, New York,
Ohio
- Specific letter content and/or format: California, Florida, Idaho,
Illinois, Iowa, Kansas, Kentucky, Maryland, Massachusetts,
Missouri, Nevada, New Hampshire, New Jersey, North Carolina,
Ohio, South Dakota, Tennessee, West Virginia


Performing State Mandated Due Diligence –
Where to Begin

• 43 fall states – all property types due Oct 31/Nov 1 with June
30 cut-off date
• What is it?
- State mandated letter, specific time period, address
- No less than 60 days, no more than 120 days
- Font/specific wording requirements
• Timeline
- Might want to choose early July date to get mailings out the door
to the owners of the assets
• California – 365 days to 180 days, Texas – by August 31st,
Iowa – July 1st to end of September, Hawaii – begin May 1st


Failure to Complete Due Diligence

• Non-completion of due diligence does not relieve the
holder from reporting unclaimed funds
• Early reporting does not relieve the holder of performing
due diligence


Mailing Requirements

• Send to valid owner addresses
• Most states accept first class mailing as proof
- Do’s
• List the owner’s name
• List your company’s name
• List the company’s contact person
• List the company’s contact information



• Letter Content – Don’ts
- List the state’s contact information
- Refer the owner to the states



• Letter Content - Do’s
- Use the specific verbiage that may be required by the reporting
state
- State the timeframe the owner has to respond in order to receive
their money or cash the check if possible before turning the
property over to the state


Sample Letter
Missing Owner Name
Missing Owner Last-Known Address
City in Texas, Texas 77000

Our records show that we, XYZ Company, are holding unclaimed property that may belong to you. We also have not had
direct contact with you since mm/dd/yyyy. The check or identifying number for the $ 0,000.00 we are holding is Nbr.
123456 and the item is dated mm/dd/yyyy.

Under Texas state law, we may be required to deliver this property to the Texas Comptroller of Public Accounts, on or
before Nov. 1 if the property is not claimed. Please complete the information below and return this letter to XYZ
Company no later than mm/dd/yyyy, so that we may meet our unclaimed property reporting obligations. Do not forget to
sign and date your response.

_____ I am entitled to the above referenced property. Please issue a new check and mail to the following address:
______________________________________________________
_____ I am not entitled to the above referenced funds or these funds have already been paid to me.
_____ I am aware of these funds and choose not to claim them at the present time.
_____ Please change the address on my account to: ______________________________________________________

Owner signature Date signed

Your response is appreciated. Please contact us at (999) 999-9999 if you have any questions.

Sincerely,
XYZ Company


Reciprocal Reporting

• Where domiciled vs. incorporated
- Not accepted by all states
- Delay in remitting property to right state
- Conflict within dormancy periods


Recordkeeping & Retention

• In general, holder must maintain records relating to
property in report for 10 years after the holder files the
report, unless a shorter period is provided by rule of the
administrator
• Consequences of failure:
- Potential liability for holder: Barron v. Fidelity Magellan Fund
- Potential liability for state: Taylor v. Westly


Unclaimed Property Audits

• New focus – securities/insurance
• Contract auditors
• What, if any, standard guidelines are used
• What oversight does the state exercise over contract
auditors?
• Authority to estimate – when and how?
• How and when are interest and penalties applied?
• What options/recourse is available for a holder?


Audit Triggers

• State registration and payment of other taxes with no
compliance history
• Filing only negative unclaimed property reports
• Failing to file all property types
• Claiming property without being compliant
• Merger and acquisition history
• Transient workforce
• State of incorporation
• Media event/publicity


To Reduce the Possibility of Being Selected for a
Compliance Examination a Holder Should:

• File your report annually. Even if you have no property to report, file a
"negative" report as required by the Administrative Rules.
• Make sure your report and remittance balance. Use the Treasurer's
forms and formats when possible.
• Make sure that your report gives complete owner information/detail.
• Report all types of property that you may have. Reporting of certain
types of property and non-reporting of other types triggers a closer
look at your reporting history.
• Make sure to perform your due diligence as required by the Act.
Contact owners at their last known address and have them reactivate
accounts, cash dividend checks, etc. If contact cannot be
established, remit the property.


Voluntary Compliance

• Accurate financials
• Improved character of penalty and interest abatement
• Limited “look-back” period
• Reduced assessments
• Risk of audit
• Avoid laborious auditor requests
• Set own timetable for compliance
• Avoid whistleblowers
• Avoid litigation


Typical System Related Issues

• Transaction data is not property codified:
- Last customer initiated activity
- Property type
- At risk dormancy date
- Date remitted to state
- State of remittance
- Report ID
• Lack of seamless integration between LOB systems and
reporting systems
• Lack of closed loop process


Typical System Related Issues

• Catalog of property types
• Workflow diagram of identification of transactions
• Should have an IT unclaimed property expert by property
types
• Need to understand what data is available to you and
how to apply
• Need to document data extract rules


Best Practices and Next Steps

• Determine your company’s compliance status
• Identify areas of potential exposure
• Consider voluntary compliance programs in jurisdictions
where exposure exists
• Implement policies, procedures and mechanisms through
which to report
• Test your current procedures
• Don’t claim property if you have not been compliant


Resources

• National Association of Unclaimed Property
Administrators (NAUPA) (www.unclaimed.org)
• National Association of State Treasurers (NAST)
(www.nast.net)
• Unclaimed Property Professionals Organization (UPPO)
(www.uppo.org)
• Institute for Professionals in Taxation (IPT) (www.ipt.org)
• Council on State Taxation (COST) (www.statetax.org)


Questions?

Jennifer Wood, CPA David C. Blum
Sikich LLP Levenfeld Pearlstein, LLC
6815 Weaver Road 2 N. LaSalle St., Suite 1300
Suite 100 Chicago, Illinois 60602
Rockford, Illinois 61114 312.476.7557
815.282.6565 dblum@lplegal.com
jwood@sikich.com

Mary O’Connor, ASA Jacqueline Amatulli
Sikich LLP Levenfeld Pearlstein, LLC
123 North Wacker Drive 2 N. LaSalle St., Suite 1300
Suite 1500 Chicago, Illinois 60602
Chicago, Illinois 60606 312.476.7586
312.648.6652 jamatulli@lplegal.com
moconnor@sikich.com


Disclaimer

The information contained herein is general in nature and is based on authorities
that are subject to change. It is not, and should not be construed as, accounting,
legal or tax advice or opinion provided by Sikich LLP or Levenfeld Pearlstein. This
material may not be applicable to, or suitable for, specific circumstances or needs,
and may require consideration of non-tax factors and tax factors not described
herein. Contact Sikich LLP, Levenfeld Pearlstein or another tax professional prior to
taking any action based upon this information. Changes in tax laws or other factors
could affect, on a prospective or retroactive basis, the information contained herein;
Sikich LLP and Levenfeld Pearlstein assume no obligation to inform the reader of
any such changes.

Pursuant to requirements relating to practice before the Internal Revenue Service,
any tax advice in this communication (including any attachments) is not intended to
be used, and cannot be used, for the purpose of (i) avoiding penalties imposed
under the United States Internal Revenue Code, or (ii) promoting, marketing or
recommending to another person any tax related matter.


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