Unclaimed Property Essentials Presented by: Heela Popal, PricewaterhouseCoopers LLP Robert Joseph, True Partners Consulting LLC UPPO Presentation Disclaimer Use of the Unclaimed Property Professionals Organization, Inc., (UPPO) name of copyrighted materials in this presentation does not constitute an endorsement by UPPO of a member, vendor, product or service. The content represents the opinions of the author and not necessarily those of UPPO. This information is not intended as legal advice and should not be used to replace the advice of legal counsel. UPPO Antitrust Statement UPPO has a policy of strict compliance with U.S. federal antitrust laws. UPPO members and/or meeting attendees cannot come to understandings, make agreements, or otherwise concur on positions or 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. 1
Today s Agenda What are the basic elements of Unclaimed Property? This session will explore the essential concepts of unclaimed property and cover basic state statutes, regulations and court decisions, as well as their impact on compliance. In addition, this session will include typical examples of unclaimed property, discuss the rules of jurisdiction, the numerous types of unclaimed property and how unclaimed property differs from a tax. Unclaimed Property 101 An introduction to unclaimed property law Common definitions in unclaimed property Jurisdictional issues and cases important in unclaimed property What is Unclaimed Property? Property not claimed by an owner for a specified period of time (dormancy period) 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. 2
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 used interchangeably 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 state. Common Terms Holder Domicile State of incorporation of a corporation. Federal law unclear regarding the domicile of a non-corporate entity, such as a partnership or LLC. Activity Clear action by owner that expresses an interest in the property. Custodian A person that holds property for safekeeping for another. States act as the custodian of unclaimed property remitted to them. Date of Last Activity Date of last owner-generated 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. 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 1995. NCCUSL 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 (Delaware, Kentucky, Massachusetts, New York, Ohio and Texas). The current Uniform Act is in the process of being rewritten. 3
Elements of the Uniform Acts States only take custody of Unclaimed Property, not title. Uniform priority rules. 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. Purpose of Unclaimed Property Laws To reunite lost Owners with their property. To protect the Holder from subsequent claims by Owners. To ensure that any economic windfall benefits the state and its citizens. Jurisdictional priority Texas v. New Jersey (1965) First Priority: State of the Owner s last known address as shown on the Holder s books and records has highest claim over Unclaimed Property. 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 Unclaimed Property. 4
Last Known Address A description of the location of the apparent owner sufficient for the purpose of delivering mail. Generally, the Owner s mailing address. Address contained in the Holder s books and records controls. The Holder is not required to verify its accuracy. Some states have adopted different definitions or leave the term undefined. State Law definitions may be preempted as inconsistent with Federal Law. Reporting Requirements All 50 states plus 4 jurisdictions (D.C., 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 (May) filing deadline. Dormancy periods vary by state and by property type. Some states require negative (zero) reporting. Recommended to retain records 10 years after remitting abandoned and Unclaimed Property. It s 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 shoes 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. 5
Common Property Types Money, checks, drafts, deposits. Credit balances, overpayments, gift certificates, security deposits, refunds, credit memos, wages, mineral proceeds. Stock or other evidence of ownership of an interest in a business Bonds, debentures, notes, interest and dividend checks. Proceeds from annuity or insurance polices (life, property, casualty, worker s compensation, health or disability). Distributions from trusts or other custodial funds (health, welfare, pension, vacation, severance, death, stock purchase, retirement, etc.). Money deposited to redeem stocks, bonds or other securities or to make distributions. 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. Holders Obligations 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. 6
Why Comply? Failure to report and remit Unclaimed Property liability could result in a material misstatement under ASC 450-20 (formerly FAS 5). Possible Unclaimed Property liabilities should be accrued or disclosed under FAS 5 if: Enforcement of Unclaimed Property laws is probable in entity s state of incorporation or the state where the owner is located, and/or Liabilities can be estimated. Unclaimed Property compliance is statutorily required in all states. Compliance by SEC registrants is non-negotiable. Why Comply? Legal responsibility of the company/holder to file. Avoid interest and penalties and potential criminal conviction (Sarbanes Oxley 302 and 404). Avoid extensive state audits, typically DE goes back to 1981, other states generally go back 10 report years (there is generally no statute of limitation). Avoid assessments due to the lack of records for earlier years: Extrapolation/Estimation for prior years (state of incorporation). Write off of liabilities (outstanding checks, customer credits). Merger/ Acquisitions. Questions? 7
Contacts Heela Popal Robert Joseph, Jr. Director, State and Local Tax Manager, Unclaimed Property PricewaterhouseCoopers LLP True Partners Consulting LLC Phone: 678.419.1462 Phone: 972.338.3671 heela.popal@us.pwc.com robert.joseph@tpctax.com 8