Unclaimed Property: What You Need to Know ~ Part 1 ~ Heela Popal & Troy Wangen June 15, :00p 3:00p 25084

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1 Unclaimed Property: What You Need to Know ~ Part 1 ~ Heela Popal & Troy Wangen June 15, :00p 3:00p 25084

2 Legal Disclaimer This presentation does not constitute legal, financial, accounting or any other type of advice. It is provided solely for educational and informational purposes for the attendees of this webinar which is sponsored by UPPO. Attendees are urged to consult with their own attorneys and other advisors about their particular facts and circumstances. The analysis and opinions expressed herein are those of the presenters and do not necessarily represent the views of their employers, the Unclaimed Property Professionals Organization, or its officers, directors or members. Anti-Trust Statement UPPO members and/or meeting attendees cannot come to understandings, make agreements, or otherwise concur on positions or activities that in any way tend to raise, lower or stabilize prices or fees. Members and/or attendees can discuss pricing models, methods, systems, and applications, as well as certain cost matters that do not lead to an agreement or consensus on prices or fees to be charged. However, there can be no discussion as to what constitutes a reasonable, fair or appropriate price or fee to charge for any service or product. Information may be presented with regard to historical pricing activities so long as such information is general in nature and does not include data on current prices or fees being charged in any trade area. Any discussion of current or future prices, fees, discounting, and other terms and conditions of sale, which may lead to an agreement or consensus on prices or fees to be charged, is strictly prohibited. Any questions about UPPO s antitrust policy should be directed to UPPO s Executive Director.

3 Today s Agenda Unclaimed Property Overview Common Terms Property Types Jurisdictional Priority Rules Reporting Requirements Recent Trends in Enforcement, Reform & Legislation

4 Unclaimed Property Overview

5 What is Unclaimed Property? Property not claimed by an owner for a specified period of time is considered abandoned or unclaimed The underlying obligation must be fixed and certain After statutorily defined holding periods, the holder of the property has an obligation to remit the property to the appropriate state(s) Unclaimed property is not a tax on holders, but can be a source of revenue to the state In excess of 100 types of property are considered potential sources of unclaimed property States have become increasingly aggressive in recognizing unclaimed property as a good source of non-tax revenue

6 Purpose of Unclaimed Property Laws To protect the interests and property rights of a lost owner Relieve the holders from the expense and liability associated with holding and tracking the property Ensure the economic windfalls from unclaimed property benefit the public, not an individual owner

7 It Not a Tax Derivative Rights Doctrine The state s rights are derivative in nature. This is commonly referred to as the state standing in the shoe of the owner. Nexus does not apply, i.e., a physical presence is not required for reporting. The majority of states do not provide relief for reach-back based on a statute of limitations. Where statute of limitations provisions exist, the limitation period is typically longer than that applicable in taxation. Failure to report or the filing of a fraudulent report generally eliminates reach-back relief afforded by limitation provisions. Few states provide for a traditional administrative appeals process/remedy.

8 Governing Laws The US Supreme Court has created federal common law rules which determine when a state has the right and jurisdiction to claim unclaimed property. Once it has been determined under these rules that a state has the right to claim a particular type of property, that state s laws then apply to determine if and when the property is reportable. Many states have modeled their statutes after one of the Uniform Acts adopted by the National Conference of Commissioners on Uniform State Laws (NCCUSL) in 1954, 1966, 1981, and NCCUSL s goal is to promote fair and adequate treatment among the states and provide uniform laws for the benefit of multistate businesses. One of the Uniform Acts has been adopted at least in part by all but six states (DE, KY, MA, NY, OH, TX). The current Uniform Act is in the process of being rewritten and the final draft is scheduled to be released in Summer 2016.

9 States only take custody of unclaimed property, not title. Uniform priority rules. Elements of the Uniform Acts Criteria for a presumption of abandonment. Requires a minimum effort to locate owner. Annual reporting and remittance requirements. Record retention rules. Interest and penalties for noncompliance.

10 Common Terms

11 Common Terms Unclaimed Property Liabilities held by one person, but owed to another; interchangeable with abandoned property. Escheat Property Technically refers to property where title is taken by the state when a person dies intestate and without heirs; in practice, interchangeable with abandoned or unclaimed property. Dormancy Period Period of time property remains inactive before it is presumed abandoned. Holder Person in possession of property. Owner Individual entitled to the property. Due Diligence Process whereby the holder must contact owner prior to remitting property to the state.

12 Common Terms Holder Domicile State of incorporation of a corporation. An issue of Federal Law as states are not consistent. Activity Clear action by owner that express an interest in the property. Custodian A person that holds property for safekeeping for another. Date of Last Activity Date of last ownergenerated activity. Indemnification Protection offered by the state to a holder against subsequent claims for property remitted to the state. Tangible Property Physical property. Intangible Property Unsatisfied legal obligation or debt owed by a holder to an owner.

13 Property Types

14 Sources of Potential Property Types The potential for unclaimed property exists in EVERY company and industry: Employees result in uncashed/voided payroll checks Vendors result in uncashed/voided accounts payable checks Customers result in aged or written off credit balances Holder s industry may also generate specific property types, such as: Banking Insurance Manufacturing Retail Oil, Gas, Mining, Exploration Transportation

15 Common Property Types Payroll Credit Balances Deposits Interest & Dividends Self-Insured Benefits Dormant Bank Accounts Royalties Mineral Interests Accounts Payable Overpayments Customer Refunds Unidentified Remittance Layaways Gift Cards/Certificates Merchandise Credits Stock/Underlying Shares

16 Jurisdictional Priority Rules

17 Texas v. New Jersey (1965) First Priority: State of Owner s last known address as shown on the Holder s books and records Second Priority: If no Owner address on the Holder s books and records, or if the state of the Owner s last known address does not have applicable unclaimed property statute, then the Holder s state of incorporation may claim the property Third Priority: Holder s state of incorporation or domicile if address of Owner is in a foreign country and Holder is incorporated or domiciled in the US Throwback Rule: In the event the jurisdiction of the Owner s last known address does not escheat the property, then the state of incorporation may claim the property

18 Reporting Requirements

19 Reporting Requirements All 50 states plus 4 jurisdictions (DC, Guam, Puerto Rico and US Virgin Islands) require the annual filing of an unclaimed property report. The majority of states have either a fall (November) or a spring (March May) filing deadline. Dormancy periods vary by state and by property type. Holder to perform due diligence. Some states require negative (zero) reporting. Recommended to retain records 10 years after reporting.

20 The Holder s Responsibility Duty to file a report. Duty to perform due diligence. Duty to remit the property. Duty to maintain copies of the reports and supporting documentation. Duty to protect the funds until reported and transferred to the state.

21 The States Responsibility Release and indemnify the Holder from liability Secure the funds in a custodial capacity Make efforts to locate the Owners Pay claims in a timely manner

22 Why Comply? Failure to report and remit unclaimed property could result in a material misstatement under ASC (formerly FAS 5). Possible unclaimed property liabilities should be accrued or disclosed under ASC if: Enforcement of unclaimed property laws is probable in Holder s state of incorporation or state where the Owner is located; and, Liabilities can be estimated. Unclaimed property compliance is statutorily required in all states. Compliance by SEC registrants is non-negotiable.

23 Why Comply? Avoid interest and penalties and potential civil and/or criminal charges (Sarbanes Oxley Rules 302 and 404) Requires CEOs and CFOs to certify that: The financial statements are accurate and not misleading; State their responsibility for establishing and maintaining an adequate internal control structure and reporting procedure; and, Provide an assessment of the effectiveness of internal controls. Minimize exposure in the event of an extensive state audit as look back periods vary by state.

24 Recent Trends in Enforcement, Reform and Legislation

25 Recent Trends: Audits & Voluntary Disclosures Audits are becoming more common as many states have increased efforts to enforce their unclaimed property laws. Initiating a filing of an unclaimed property report on a prospective basis could trigger an audit. If the unclaimed property exposure is significant, a voluntary disclosure agreement ( VDA ) is often the best solution. A VDA involves negotiating with the state(s) to bring a holder current and close out prior year liabilities. Under most VDAs, the state(s) waive penalties and interest and limit the look-back period.

26 Recent Trends: Common Audit Triggers No filing history in state of incorporation or where Holder has a large presence Filing tax returns but not filing unclaimed property reports Unusually large or small remittances relative to size of company or past reports Established company filing for the first time without past due property Merger & Acquisition activity

27 Recent Trends: Uniform Law Commission Previous versions of the UUPA: 1954, 1966, 1981, 1995 (current) ULC agreed to create the UUPA drafting committee in Since that time the drafting committee has met five times with the most recent meeting held in February ULC drafting committee s UUPA completion goal is summer ULC meeting scheduled July 8-14 in Vermont for the final reading Late 2016 Early 2017: If approved by ULC, UUPA to be submitted to ABA House of Delegates for vote 2017 and Later: If approved, UUPA is officially promulgated for consideration by the states

28 Recent Trends: Delaware Legislation Delaware Senate Bill 141 Division of Revenue no longer has the authority to unilaterally select holders for audit Holders must receive an express written invitation to enter Delaware s Voluntary Disclosure program If Holder declines to participate or does not reply within 60 days, Holder will be referred to the Division of Revenue for potential unclaimed property audit Reduced reach-back period and beginning January 1, 2017, will begin a rolling 22-year reach back period Reinstates the ability to assess interest on past due property and audit assessments

29 Recent Trends: Notes of Interest Temple Inland v. Cook Current case in Delaware challenging Delaware s audit methodology, specifically estimations National Freight, Inc. v. Sidamon-Eristoff Current case in New Jersey challenging AR B2B property and federal preemption Michigan New law created holder friendly audit process for companies with a large presence in the state Nevada Currently does not accept consolidated reports; UPPO working with state to try to rectify their limitations

30 Questions and Answers

31 Contacts Heela Popal UPPO President Troy Wangen UPPO Midwest Region Vice President Director, State and Local Tax PricewaterhouseCoopers LLP Phone: Senior Manager True Partners Consulting LLC Phone:

Unclaimed Property Essentials

Unclaimed Property Essentials Presented by: Heela Popal, PricewaterhouseCoopers LLP Robert Joseph, True Partners Consulting LLC UPPO Presentation Disclaimer Use of the Unclaimed Property Professionals