Abandoned and unclaimed property 04 16 13 robbie howell

UNCLAIMED PROPERTYAND ESCHEATS

Presented By:

Robbie Howell

PoynerSpruill LLP

[email protected]

919.783.1170

www.poynerspruill.com

These materials have been prepared by Poyner Spruill LLP for informational purposes only and are not legal advice. This information is not intended to create, and receipt of it does not constitute, a lawyer-client relationship.

Overview

• General information regarding escheats and abandoned and unclaimed property

• Examples of unclaimed property• Not a tax, but like a tax• Uniform Unclaimed Property Act• Unclaimed property in NC• When is the NC Unclaimed Property Act Triggered?

Overview

• When property is abandoned• When NC law applies• Exclusions from NC Unclaimed Property laws• Reporting unclaimed property to the state• Unclaimed property audits• Industry specific considerations• Trends• Questions

Escheats & Abandoned, Unclaimed Property

• Escheat – Historically used to refer to the reversion of property to the state upon the death of an intestate owner without heirs. In practice the term is used more broadly for reporting and delivering property to a state.

• The concept of escheat, which the Supreme Court says has “ancient origins,” is based on English common law.

• Up until the 20th century, escheat applied only to real property. States begin passing unclaimed property statutes for personal property in the 1950s.


• NC law uses “escheat” to describe the process by which real property (or sometimes money or other property interests) are transferred or forfeited to the state’s “Escheat Fund” when the owner dies intestate or dies testate without disposing of property by will and without leaving surviving heirs to inherit

• Now all 50 states, including DC, and some foreign jurisdictions have adopted unclaimed property statutes


• Unclaimed property – used interchangeably with abandoned property. Unclaimed properties are liabilities retained by an individual or entity that are truly owed to another individual or entity and have been held for the dormancy period.

• Dormancy period – the period of time that property remains inactive before it is presumed abandoned by state law. Dormancy periods vary both by property type and by state. The dormancy period is imposed by state statute.


• Owner – the individual to whom the property rightfully belongs. Also known as the creditor. Owners can be heirs of the original owner.

• Holder– any person or entity in possession of property of another subject to the unclaimed property laws. The term is used interchangeably in this context with debtor. Successor holders are subject to the same statutory obligations with respect to the property as the original holder.


• Due diligence – the state’s requirement that holders attempt to contact owners of the property when it becomes dormant, and before it becomes escheatable property

• Activity – clear action taken by the owner, including making a deposit or withdrawal, which provides evidence of a continued interest in the property

• Holder domicile – the state of incorporation of the holder’s business


• Custodian – an individual or entity that holds property until it is delivered to the rightful owner. Most states’ laws identify the state as the custodian of unclaimed property.

• Date of last activity – date of the owner’s last activity on property or the owner’s contact with the holder


• Indemnification – protects the holder from loss in connection with transferring the legal responsibility for the unclaimed property to a third party (e.g., the state or an unclaimed property reporting agent acting on behalf of the state).

• Reciprocal agreement – agreement between states to impose joint audit agreements and, in some cases, to act as collection agents for each other

Examples of Unclaimed Property

• Bank accounts; unclaimed contents of a safety deposit box• Uncashed checks• Payroll checks; commissions• Accounts receivable credit balances, refunds, and

customer deposits• Rebates, gift cards, other stored value card items• Insurance proceeds• Utility deposits• Securities-related property• Mineral-related proceeds (royalties, etc.)

Not a Tax, But Like a Tax

• Unclaimed property is NOT a tax– The state’s right to collect unclaimed property is the derivative rights

doctrine. The state stands in the shoes of the owner.

– A state does not need to have any constitutional minimum level of contacts or nexus with the holder like it would were it collecting a tax from the holder

– The majority of states do not provide relief for audit reach-back based on a statute of limitations, as is usually the case with taxes

• Where statute of limitation provisions exist, the limitation period is typically longer than a typical tax statute of limitation. Statute of limitations in North Carolina is five years.

• Failure to report or the filing of a fraudulent report generally eliminates reach-back relief afforded by limitation provisions

• Delaware has audited companies on years as far back as 1981


• Unclaimed property is NOT a tax– Few states provide for a traditional administrative process/remedy

as are typically available in the tax area. Litigation is sometimes the only recourse available to holders that dispute an assessment.

– Record retention requirements are typically longer than those in the tax area. The 1995 Uniform Act requires that holders retain records for ten years after the report is actually filed.

– Many states use contract auditors in the area of unclaimed property


• But unclaimed property acts very much like a tax– Annual filing/reporting requirement– Interest assessment for late filing/reporting

• Assessments range from 10% to 18%, or more

– Enforcement through audits• But many audits are conducted by contract auditors

– Generates significant revenue for states• California is holding over $6 billion in unclaimed property

• Delaware collects approximately 20% of its total annual revenues through unclaimed property reporting

Uniform Unclaimed Property Act

• Uniform Acts were prepared in 1954, 1966, 1981, and 1995

• North Carolina has adopted, with some modifications, a version of the 1995 Uniform Act

• “Uniform” is a misnomer – as was the case in North Carolina, the legislative process has left its mark on each state’s unclaimed property laws, leaving them with varying dormancy periods, due dates for reporting, exemptions, look-back periods, reporting forms, and voluntary disclosure agreement procedures– Filing deadline

Unclaimed Property in NC

• There is currently $344 million in the unclaimed property fund

• Income derived from the investment or deposit of the unclaimed property fund is distributed annually the State Education Assistance Authority for grants and loans to aid worthy and needy students

When is the NC Act Triggered?

• Property is deemed “unclaimed” if the apparent owner has not communicated with the holder concerning the property and has not otherwise indicated an interest in the property such as by:– Cashing a check– Directing activity with respect to an account in which the property

is held– Making a deposit or withdrawal– Payment of a premium– Activity in another account with the same holder

When is Property Abandoned in NC?

• Property is deemed “unclaimed” if the apparent owner has not communicated with the holder concerning the property and has not otherwise indicated an interest in the property for the length of the dormancy period:– Selected property types

• Traveler’s checks – 15 years

• Time deposits – 10 years after the later of initial maturity or date of last indication by owner of interest

• Money order, cashier’s or certified check – 7 years

• Stock - 3 years of an unclaimed cash dividend, returned mailing, or the discontinuation of mailings

• Business debt – 3 years from the date of unclaimed interest

• Dividends – 3 years of an unclaimed dividend

When is Property Abandoned in NC?

– Selected property types• Demand or savings deposit – 5 years from an indication of interest

• Gift cards – 3 years from the date of sale, but only 60% of the unredeemed portion of the face value of the card is deemed abandoned

• Wages – 1 year from the date the wages are payable

• Utility refund – 1 year after the deposit is payable

• All other property – 5 years after the owner’s right to demand the property or after the obligation to pay or distribute the property arises, whichever first occurs.

When Does NC Law Apply?

• Property that is presumed abandoned, whether located in NC or elsewhere, is subject to the custody of NC if, for instance, the last known address of the apparent owner, as shown on the holder’s records, is in NC, or the holder’s records do not reflect the last known address of the apparent owner and it is established that the last known address of the person entitled to the property is in NC.


• What happens when another state disagrees?– Texas v. New Jersey, 379 U.S. 674 (1965)

• Interesting circumstances– Original jurisdiction case; Article III, Section II of the Constitution.– Under the Due Process Clause of the 14th Amendment, property can

escheat to only one state.– Texas, New Jersey and Pennsylvania all have claims on Sun Oil

Company’s abandoned intangible personal property.– Sun Oil operated in Pennsylvania, was incorporated in New Jersey, and

Texas claimed it had the most significant contacts with the property.– Sun Oil claimed no interest in the property, but asked to be protected from

double liability.– Court indicates that as the states lack the power to create a rule for this

situation and no federal statute applies, it must create a rule to settle the dispute.


• What happens when states disagree?– Texas v. New Jersey, 379 U.S. 674 (1965)– Supreme Court says the following priority rules shall apply

• First to the state of the owner’s last known address• To the holder’s state of incorporation or domicile if the owner’s address is not

known• To the holder’s state of incorporation or domicile if address of apparent owner

is in a foreign country and if holder is incorporated or domiciled in the United States

• If owner is unknown or no record of any address, and state of domicile of the holder has no law providing for escheat of the property, approximately 35 states’ statutes require reporting if the transaction giving rise to the property occurred in the state. This rule lacks support from the Supreme Court.


• What happens when states disagree?– Texas v. New Jersey, 379 U.S. 674 (1965)

• Court confirms that for tangible personal property, the unquestioned rule is that only the state in which the property is located may escheat

• As a practical matter, most states interpret their unclaimed property laws as broadly as constitutionally permitted by Texas v. New Jersey

Exclusions from NC Unclaimed Property Law

• The following items are specifically excluded in NC from the definition of unclaimed property– Forfeited reservation deposit– Gift cards bearing certain provisions– Prepaid calling card issued by a public utility– Certain buyer deposits– Business to business credits– Lottery prizes

Reporting Unclaimed Property to NC

• Unclaimed property reports are due on October 31 of each year and cover the 12 months next preceding July 1 of that year

• An extension may be requested and granted upon good cause shown

• A reasonable dormancy (service) charge may be imposed by a holder with respect to reported unclaimed property if there is a valid and enforceable written agreement between the holder and owner providing for the imposition of the charge


• Due diligence requirements– Provided by statute

– NC• Good faith effort to locate owner required• Holder must send written notice, by first-class mail, to the last known address

between 60 and 120 days before reporting the subject the unclaimed property at issue to NC

• Notice must contain a description of the property and a statement as to the amount of the property

• Name and address of the holder• Indication that the property will be placed in the custody of the state• No penalties for not performing due diligence, but holder must submit an affidavit

with annual report that it has performed due diligence


• Due diligence requirements– Failure to perform due diligence can bring unwanted attention from

a state– Example

• A contingent fee auditor discovers an uncashed payroll check and the holder reports it to a state without performing any due diligence. Later, a third party service notifies the payee of the unclaimed property. The payee has been continuously employed with the holder, is still employed by the holder, and could have been easily located by performing due diligence.

– State reasonably suspects that the holder is not careful with respect to its unclaimed property reporting and initiates additional inquiries


• Report of unclaimed property– Property description– Name and last known address of owner– Tax identification number of owner– Date the property became payable– Date of the last communication with owner


• Items valued at under $50 can be reported to NC in aggregate, without identifying information

• Upon filing the report, the property shall be paid or delivered to the state

• A holder that remits unclaimed property to the state in accordance with the law shall not be liable to an apparent owner and must be indemnified against any claims by an apparent owner

• In certain circumstances, a holder may request the property be returned

Unclaimed Property Audits

• As soon as a holder receives an audit notice, it should retain counsel– When deciding whether to seek the assistance of

consulting/accounting/law firms, consider: • Unauthorized practice of law considerations

• Privilege / work product protections

• Audits can last up to five years or more, and holders often eventually settle on unfavorable terms due to audit fatigue

• Most audits are performed by contingent fee auditors


• Most states have only skeleton audit staff, which is logistically unable to audit a sufficient number of the holders that must report to the state– However, New York State employs a full complement of unclaimed

property auditors

• Contingent fee auditors customarily collect in the range of 12% to 17% of the amount that is discovered and remitted to the state

• Contingent fee auditors typically have agreements with most states so that once a holder is audited, the contract auditors can audit on behalf of many or most states


• Request a non-disclosure agreement from any contingent fee auditor before providing any records

• Attempt to limit the scope of an audit• Statute of limitations – North Carolina may not audit a

holder more than five years after the holder filed a report identifying the property. Exceptions for failure to file report and fraud.


• Voluntary disclosure – Given the increasingly aggressive posture taken by many states with respect to unclaimed property, holders of abandoned property who have not reported and delivered such property to the appropriate state should consider approaching the state and attempting to negotiate a voluntary disclosure agreement. Often, holders can avoid or limit retroactive liability and the imposition of any applicable penalties and interest.– Allows the holder to control its records and the presentation of

information. By reporting through voluntary disclosure, holders can avoid the invasive audit process.


• Amnesty programs – States periodically offer amnesty programs. For example, California’s 2002 amnesty program provided for the waiver of interests (otherwise imposed at a rate of 12%).– Some states impose interest at such high rates (at 18% or more)

that the interest effectively acts like a penalty.


– The legality of contingent fee audits may vary by jurisdiction.• Sears v. Parsons, 260 Ga. 824 (1991) – The Georgia Supreme Court

held, in a tax case, that contingent fee audits violate public policy

• Appeal of Philip Morris U.S.A. 335 N.C. 227 (1993) – The North Carolina Supreme Court held that contingent fee audits do not violate public policy

• South Carolina and Illinois do not permit contingent fee auditors to audit, on behalf of South Carolina, entities that are organized in South Carolina.

– Audit techniques – It is common practice for unclaimed property auditors to use some type of estimation or extrapolation technique to calculate the amount of unreported unclaimed property

– The 1995 Uniform Act specifically allows unclaimed property administrators to use reasonable estimation techniques


• Relief from penalties and interest– The 1995 Uniform Act specifically provides that the administrator

may waive penalties and interest for good cause shown and shall waive penalties and interest if the holder acts in good faith without negligence.• Most states will only impose penalties in extreme cases, and most

states will waive any interest if the holder cooperates with the audit. However, some states, such as California and Texas, will not waive interest


• Mitigating risk– Timely file unclaimed property reports– Maintain adequate books and records with respect to unclaimed

property– Develop a practice and procedure regarding aged credit balances

• If the term “write-off” is used with respect to such aged credit balances, there is likely a problem

– States identify audit candidates by comparing their reporting with their financial data. If a company with billions in revenue is reporting less than $100,000 a year in unclaimed property, it might be a target for an audit.

– If the company files negative reports year after year, it is more likely that it will be audited


• Mitigating risk– Know that common audit triggers include recent mergers or

acquisitions– Create internal procedures to notify owners of potential escheat

prior to the end of the dormancy period– There are entities that represent holders involved in unclaimed

property audits (e.g., Keane Unclaimed Property Reporting Service, Unclaimed Property Recovery & Reporting, etc.). Firms such as these assist companies in locating owners of property that would otherwise escheat.

Industry Specific Considerations

• Internal controls for publicly traded companies– Failure to account properly for an unclaimed property liability could

be a violation of generally accepted accounting principles (GAAP)– Mistreatment of unclaimed property could overstate income and

may require restatement of income on prior year financial statements


• Safe deposit boxes– If rental fees are 90 days past due, bank must send notice by

registered or certified mail, return receipt requested, to the last known address of the lessee, demanding payment within 30 day.

– After 30 days, pursuant to specific procedures, the box may be opened and the contents removed, sealed, identified by owner, and stored in the general vault of the bank

– A certificate with the name of the lessee, the date of the opening, and the contents of the box shall be prepared, stored with the contents, and a copy sent to the lessee, by registered or certified mail, return receipt requested


• Safe deposit boxes– After two year from the delivery of the certificate to the lessee, the

bank may send a final notice to the lessee, indicating that unless the accumulated charges are paid within 30 days of the date of the mailing of the notice, the contents will be escheated

– The bank shall submit to the State Treasurer a verified inventory of all of the contents of the box. The bank may deduct from any cash of the lessee an amount equal to the accumulated charges

– Any property, including documents or writings of a private nature, with no apparent financial value, may be destroyed if the State declines to receive the property

– State property auctions

Trends

• Legislative– Shorter dormancy periods– Increased aggregation thresholds. Holders are not required to

provide identifying information for holders with respect to amounts of less than $50. Accordingly, once amounts beneath this threshold are reported to the state, it is extremely unlikely the property will ever be returned to the owner.

Trends

• Administrative– Anecdotally, we hear that audits are becoming increasingly

aggressive and contentious– Cash strapped states need to find new sources of revenue– Areas of recent interest to examiners include lapsed insurance

policy handling, returned mail procedures, annuity maturity dates, and death benefit interest crediting on unpaid death benefits.

Questions?

Robbie Howell

Attorney

PoynerSpruill LLP

[email protected]

919.783.1170

www.poynerspruill.com

IRS Circular 230 Disclosure:

To comply with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained herein, unless specifically stated otherwise, is not intended or written to be used, and cannot be used, for the purposes of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter herein.

Abandoned and unclaimed property 04 16 13 robbie howell

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