Unclaimed Property: What It Is and Why You Should Care

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Panel of experts from Sikich and Levenfeld Pearlstein, LLC presented this introduction to unclaimed property highlighting: Uniform Model Acts and State law regulating unclaimed property; Types of unclaimed property and dormancy periods; Requirements for reporting unclaimed property; How to identify hidden unclaimed property in your organization; and, How to prepare for, and help prevent, an audit.

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  • 1. Unclaimed Property: April 26, 2012What It Is and Why You Should CarePanel:David C. Blum, Partner, Levenfeld Pearlstein, LLCJacqueline Amatulli, Associate, Levenfeld Pearlstein, LLCJennifer E. Wood, CPA, Partner, Director of International Tax Services, Sikich LLPModerator:Mary OConnor , ASA, Partner, Valuation and Dispute Advisory Services, Sikich LLPCopyright 2012, Levenfeld Pearlstein, LLC and Sikich LLP, All rights reserved 1Introduction One of the hottest topics among state and local taxationis not a tax at all. Unclaimed Property is a major source of revenue formany states. What constitutes Unclaimed Property varies by state, isuncertain and continues to evolve.Copyright 2012, Levenfeld Pearlstein, LLC and Sikich LLP, All rights reservedApril 26, 20122

2. Overview of Unclaimed Property Unclaimed Property very broadly covers most types of tangibleand intangible property including dormant accounts held infinancial 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 procedureThink of state unclaimed property laws as a type of consumer protection law which is designed to benefit owners of tangible and intangible property.Copyright 2012, Levenfeld Pearlstein, LLC and Sikich LLP, All rights reserved April 26, 2012 3History & Evolution of Unclaimed Property Unclaimed property and the term escheat originated infeudal England and related solely to land. - In feudal England, escheat meant that when an individual died without an heir, land was returned to the tenants lord, or in absence of such a lord, to the Crown. Bona Vacantia allowed the Crown to claim certainpersonal property against all but rightful owner.Copyright 2012, Levenfeld Pearlstein, LLC and Sikich LLP, All rights reserved April 26, 2012 4 3. History & Evolution of Unclaimed Property (contd) In the U.S., modern custodial state statutes have been inexistence since the 1940s. Concept was further advanced in 1951 in Standard OilCo. v. New Jersey, which solidified states rights to takepossession of Unclaimed Property (in this case, stockand dividends that were abandoned for 14 years). The Court established a base premise of modernUnclaimed Property law:- Unclaimed Property is better held by the states and used for thegeneral good (i.e., public benefit) than held by an individual orentity for a singular enrichment.Copyright 2012, Levenfeld Pearlstein, LLC and Sikich LLP, All rights reserved April 26, 2012 5History & Evolution of Unclaimed Property (Today) Implicit adoption of bona vacantia doctrine. States step into the shoes of the true owner and claimthe same rights, second only to the missing true owner. Thus, states take custody, but not ownership, ofunclaimed property. However, states are generally free to use this money untilit is claimed by the owner. As a result, states are increasing audit efforts andaggressively collecting unclaimed property.Copyright 2012, Levenfeld Pearlstein, LLC and Sikich LLP, All rights reserved April 26, 2012 6 4. Audits of Unclaimed PropertyStates 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 doesnt 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 auditors) ability to estimate for prior periods (especially when there is no statute of limitations).Copyright 2012, Levenfeld Pearlstein, LLC and Sikich LLP, All rights reserved April 26, 2012 7What is At Stake? According to NAUPA, state treasurers and other agenciesare safeguarding nearly $32.9 billion in unclaimedproperty. Almost $1.8 billion was returned to rightful owners in2006, leaving the majority in the hands of the states.Copyright 2012, Levenfeld Pearlstein, LLC and Sikich LLP, All rights reserved April 26, 2012 8 5. Example: Delaware Delaware is particularly active in pursuing unclaimedproperty 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, cigarettetaxes, alcoholic beverage taxes and inheritance taxescombined. It is not uncommon for Delaware to audit back to 1981.Copyright 2012, Levenfeld Pearlstein, LLC and Sikich LLP, All rights reserved April 26, 2012 9Who 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 InstrumentalitiesCopyright 2012, Levenfeld Pearlstein, LLC and Sikich LLP, All rights reserved April 26, 2012 10 6. 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 cardsof deposit -Insurance payments or refunds - Uncashed dividendsand life insurance policies - Deposits of all types -Customer Overpayments - Unredeemed travelers checks and -Customer Refundsmoney orders -Benefits (non-ERISA)- Trust distributions -Almost any other credit account - Contents of Safe Deposit Boxescarried on booksCopyright 2012, Levenfeld Pearlstein, LLC and Sikich LLP, All rights reserved April 26, 2012 11Key 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 tothe 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 isconsidered escheatable - Common Exceptions Business to Business De minimisCopyright 2012, Levenfeld Pearlstein, LLC and Sikich LLP, All rights reserved April 26, 2012 12 7. 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 pointsprograms 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 letterwithin the dormancy period, the property in question becomes escheatable to the state.Copyright 2012, Levenfeld Pearlstein, LLC and Sikich LLP, All rights reserved April 26, 2012 13Uniform 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 debtors identity when payments made by intermediaries.Copyright 2012, Levenfeld Pearlstein, LLC and Sikich LLP, All rights reserved April 26, 2012 14 8. 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.Copyright 2012, Levenfeld Pearlstein, LLC and Sikich LLP, All rights reserved April 26, 2012 15What 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 owners last known address.- Second: If there is no known address or if the state of last knownaddress does not provide for escheat of that property, then thestate in which the entity is domiciled (i.e., incorporated). Note, because this is based on the state of owners last known address, you could have unclaimed property obligations to numerous states (even though you do not have nexus in any of those states).Copyright 2012, Levenfeld Pearlstein, LLC and Sikich LLP, All rights reserved April 26, 2012 16 9. Throwback RuleMany states have a third, transaction-based rule.Not adopted by the Supreme Court in Texas v. New Jersey- If both the state of owners last known address and the state of holdersdomicile decline or fail to cover an item of property in their unclaimedproperty acts, then the state where the transactions giving rise to suchproperty occurred has the right to claim the property.- Premises jurisdiction by a state if the transaction out of which theproperty arose occurred in this state, the holder is domiciled in a statethat does not provide for escheat or custodial taking and the last knownaddress of the apparent owner or other person entitled to the property isunknown or in a state that does not provide for escheat.Copyright 2012, Levenfeld Pearlstein, LLC and Sikich LLP, All rights reserved April 26, 2012 17Business to Business Exemption Some states have a B2B Exemption from reportingunclaimed property for business transactions under thetheory that unclaimed property laws are designed toprotect consumers, not transactions between businesses. This exemption (if available) varies from state to state butgenerally exempts outstanding checks, refunds, depositspayments and credit balances resulting from transactionsbetween business.Copyright 2012, Levenfeld Pearlstein, LLC and Sikich LLP, All rights reserved April 26, 2012 18 10. Trends Shortening the dormancy period for reporting UnclaimedProperty. Targeting new types of property. (e.g., securities, store value cards, promotionalincentives) Creating new jurisdictional rules to claim property. (e.g., place of purchase presumption and third-priorityrule) Retroactively escheating Unclaimed Property. Increase in state audits and compliance opportunities (e.g.,Amnesty and Voluntary Disclosure). States increased willingness to litigate contestedassessments.Copyright 2012, Levenfeld Pearlstein, LLC and Sikich LLP, All rights reserved April 26, 2012 19Reporting & Filing ObligationsCopyright 2012, Levenfeld Pearlstein, LLC and Sikich LLP, All rights reserved April 26, 2012 20 11. Compliance RequirementsRelevant dataTypes of propertyAbandonment periodsQuantifying the potential liabilityMailing requirementsRecordkeeping, retention and reportingReciprocal reportingBecoming compliantAudit triggersVoluntary complianceIT considerationsCopyright 2012, Levenfeld Pearlstein, LLC and Sikich LLP, All rights reserved April 26, 2012 21Gathering 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 providersCopyright 2012, Levenfeld Pearlstein, LLC and Sikich LLP, All rights reserved April 26, 2012 22 12. What is Unclaimed Property Today? Common forms of Unclaimed Property: - Accounts payable - Dormant savings or checking - Uncashed payroll checksaccounts - 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 booksCopyright 2012, Levenfeld Pearlstein, LLC and Sikich LLP, All rights reserved April 26, 201223Abandonment Period (in years) for Illinois and Reciprocal States 13. Quantifying the Potential Liability Identify periods where detailed records are available Review records and schedule items that are potentialunclaimed property For example:- Stale dated outstanding checks- Voided checks that were not reissued state will ask why did youvoid?- Stale dated credit balancesResearch items to determine if they represent a fixed and certain obligationCopyright 2012, Levenfeld Pearlstein, LLC and Sikich LLP, All rights reserved April 26, 2012 25Due 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.Copyright 2012, Levenfeld Pearlstein, LLC and Sikich LLP, All rights reserved April 26, 2012 2...