2014 saw a variety of changes to state-specific unclaimed property laws. For each of these changes, there was one common theme: states are aggressively pursuing unclaimed property as a source of revenue. They continue to litigate cases with holders to determine reasonable estimation techniques and what constitutes unclaimed property. Some states have reduced dormancy periods, resulting in quicker escheatment.
Delaware’s unclaimed property estimation techniques challenged in district court
The State of Delaware has historically taken an aggressive approach to the collection of unclaimed property. This aggressiveness was even more evident in a recent Delaware unclaimed property audit of Temple Inland, Inc., a Delaware corporation headquartered outside of the state.
Delaware opened the audit in 2008, and Temple Inland provided the state with information related to its accounts payable and payroll liabilities dating back to 2004. A review of these records showed that Temple Inland failed to report only one uncashed payroll check, totaling $147.39, during this four-year period. However, because Temple Inland did not have sufficient books and records for periods prior to 2004, Delaware used its own techniques to estimate Temple Inland’s unclaimed property liability for 1986 through 2004.
Despite only having a de minimis liability for the periods 2004 through 2007, Delaware nonetheless estimated Temple Inland’s total liability to be more than $2 million. Appalled at this determination, Temple Inland filed an administrative appeal. In the appeal, an independent auditor determined Temple Inland’s liability to be approximately $1.4 million. Temple Inland, still asserting its total liability to be $147, promptly filed suit in federal district court to challenge the liability. (Complaint of Plaintiff, Temple-Inland v. Cook et al., CV-00654 (D. Del. May 21, 2014))
While this case is still pending, it should serve as a wake-up call to holders everywhere. Even holders with small amounts of unreported unclaimed property can face significant exposure upon examination. This is especially true in aggressive states like Delaware, which use long look-back periods and unfair estimation techniques when holders cannot provide records for the entire look-back period. Thus, it becomes increasingly important to be proactive when it comes to unclaimed property reporting. Holders that wait until they are selected for audit have significant exposure to inflated estimation techniques and harsh penalties. Also, negotiations with the state after an audit notice are considerably less efficient in both time and cost compared to a proactive approach, e.g., a voluntary disclosure agreement.
Highland Homes: Unclaimed property law vs. private contract rights
Highland Homes v. Texas, Tex. S.C. No. 12-0604 (Aug. 29, 2014) further demonstrates the aggressive approach states adopt to administer unclaimed property laws. Highland Homes Ltd., a Texas-based homebuilder, was the defendant in a class action lawsuit that resulted in a court-approved settlement. The court acknowledged that, while the process for distributing the settlement proceeds to all members of the class-action suit was fair and adequate, it was certain that some proceeds would not reach the members to whom the proceeds were owed. Because of this, the settlement stipulated any proceeds not received and cashed within 90 days would be distributed to an agreed-upon nonprofit organization.
The Texas Attorney General (AG) challenged the settlement provision to distribute unclaimed funds to a nonprofit organization, asserting that those funds should escheat to the state. The AG said the funds should be held for three years, the dormancy period in Texas, and then turned over to the state’s comptroller if not claimed during that time.
The Texas Unclaimed Property Act specifically prohibits the circumvention of the act through contract, settlements, and court orders. Thus, the AG argued the settlement agreement should be set aside and all uncollected proceeds be deemed unclaimed and subject to the usual unclaimed property procedures. The Texas Supreme Court rejected this argument, stating the class representative actually claimed the funds on behalf of all the members. Further, the Unclaimed Property Act does not require that property actually be collected. It did not matter that the representative did not have the ability to use the funds, so long as they were “claimed” by the class representative.
Highland Homes suggests that holders and owners, in certain circumstances, have the ability to enter contracts that determine the disposition of funds. Additionally, the case provides further evidence of aggressive positions taken by states with regard to escheatment.
In addition to the cases described above, a variety of state unclaimed property laws changed in 2014, including:
- Pennsylvania shortened its dormancy period to three years from five years for most property, including checks, accounts at financial institutions, and gift cards
- Missouri added a business-to-business exemption and shortened its dormancy period to three years from five years for unclaimed payroll checks
- New Jersey limited the maximum dormancy charge on money orders to $48 each
- Trending: Gift cards that are not redeemable for cash are not unclaimed property in 37 states
Unclaimed property laws are complex and ever-changing. States will likely continue to aggressively pursue escheatment laws. Holders, therefore, should strongly consider engaging professional assistance to ensure full compliance.
For more information on this topic, or to learn how Baker Tilly tax specialists can help, contact our team.
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