Category: new laws

Delaware Adopts New Unclaimed Property Audit Regulations, Starting 60 Day Audit Conversion Clock for Some Holders

On October 1, 2017, the Delaware Department of Finance issued long-awaited unclaimed property regulations, effective October 11.   The new regulations continue the overhaul of the State’s unclaimed property program and provide numerous and detailed instructions to both holders and auditors relating to unclaimed property audits.  The regulations specify, among other things, the State’s process for initiating and audit, the process of information requests and inquiries by the auditors, and specific guidelines on the use of estimation.  The guidelines also address a number of substantive issues of interest in the normal reporting process, such as:

  • a specification of records to be maintained by the holder in the ordinary course of business;
  • details on calculating the “maximum cost to the issuer” associated with gift-card or stored value instrument that must be escheated to the state;
  • specifications concerning what activities do, or do not, constitute “owner activity” sufficient to void the presumption that property has become abandoned;
  • what information is sufficient to establish the state of the owner’s last-known address; and
  • standards for requesting an extension of the annual reporting deadline.

In coming posts, we will review the details of some of the new regulations.  In the meantime, however, holders should be aware that the promulgation of these new regulations starts a 60 day period during which certain companies under audit by the State of Delaware will have the option of converting the audit to a Voluntary Disclosure Agreement with the Secretary of State.

Pursuant to legislation adopted earlier this year, for audits commenced on or before July 22, 2015, (except for securities examinations in which estimation is not required) the holder “may notify the State Escheator and the Secretary of State of the person’s intent to convert the pending examination into a review under the Secretary of State’s voluntary disclosure program.”  Holders are required to make that election “within 60 days of the adoption of regulations under § 1176(b) of this title.”  Thus, the new regulations kick-off that election period.  Holders that are currently under audit by Delaware should take this opportunity to assess whether the VDA program is more favorable.

Notice of the conversion period, as well as forms for implementing the conversion process, can be found at the Secretary of State’s VDA website.

Utah Passes Version of 2016 Uniform Unclaimed Property Act

It has been about nine months since the National Conference of Commissioners on Uniform State Laws approved the 2016 Uniform Unclaimed Property Act and recommended it for adoption.  A number of 2016 Uniform Act bills, or state variants thereof, are now working their way through state legislatures; some are crossing or nearing the finish line.

On March 24, 2017, the Governor of Utah signed Senate Bill 175 into law.  This legislation repeals and reenacts the state Unclaimed Property Act, adopting most (but not all) of the provisions of the 2016 Uniform Act.  While the new law does not change the dormancy period for most items, it does incorporate many of the Uniform Act’s structural and procedural changes, including the establishment of a formalized audit appeal procedure, detailed provisions relating to confidentiality, and rules relating to the reporting and remittance of unclaimed life insurance policies.  At the same time, Utah kept some of its state-specific differences from prior uniform acts, such as exemptions for gift cards and credit memos.


Pennsylvania Amends IRA Rules

According to the Investment Company Institute, Americans have $5.68 trillion in Individual Retirement Accounts (IRAs).  In a traditional IRA account, a person can make tax deductible contributions to an account that can grow over the years with no tax impact until distribution.  Importantly, individuals must wait until age 59.5 to make withdrawals without a tax penalty (and individuals generally must begin taking distributions at age 70.5).  In other words, an IRA is a prototypical long term investment.  Depending upon the individual’s age when he or she opens the plan, decades can go by before the money is touched, in fact, to avoid tax penalties, it is likely.

The unclaimed property laws account for the fact that long dormancy is expected.  Pursuant to the 1995 Uniform Unclaimed Property Act, the dormancy period for IRAs and similar accounts does not begin to run until (1) the attempted distribution of assets or (2) the date that distribution must begin under the tax laws.

This position is sensible – the whole purpose of these accounts is to put the money away until retirement.

Pennsylvania, however, has recently amended its unclaimed property laws for IRAs.  Under the new law (House Bill 1605) the dormancy period begins to run when two account statements are returned to the custodian as undeliverable.  In other words, if a person moves, but forgets to tell his or her IRA custodian within the period of two account statements, the IRA account is on its way to being turned over to the Commonwealth.

It is unclear if there are any positive impacts from this change, but there certainly could be negative impacts.  Under the former law, if a person moved without notifying his/her broker, their funds would not be escheated until the mandatory distribution date (therefore there is no adverse tax consequence).  Now, if the same move happens, and the property is escheated, the account owner may suffer tax implications as a result of the “distribution” of his or her property to the Commonwealth.

Moreover, it wouldn’t seem that delivering the property to the Commonwealth does not make it any more likely that it will be returned to the owner.  If an individual remembers that he or she had a forgotten IRA account, he/she is more likely to remember (and contact) the broker rather than to contact the Commonwealth.  Accordingly, other than simply bringing more money into Pennsylvania’s treasury, the reasons for this change are not clear.

Arizona to Take a Closer Look at Contingent Fee Audits

A few days ago, the Governor of Arizona signed House Bill 2343 into law.  The legislation makes some welcome and well-meaning changes to the way that unclaimed property audits (including, specifically, contingent fee audits) are conducted.  For example, the legislation provides that all holders will receive a “notice of rights” (1) making clear that the Department of Revenue makes all final decisions “that any unclaimed property is reportable;” (2) setting forth appeals procedures; (3) notifying holders where they can file complaints regarding auditor conduct; and (4) contact information for designated employees.

In addition to these changes, the new legislation also signals that Arizona is taking a fresh look at the use of contingent fee audits, and whether there are any practical alternatives.  The law requires the Department of Revenue to issue a Request for Information by the beginning of next year to “explore the feasibility of contracting for audits . . . that are not directly or indirectly contingent on the auditor recovering unclaimed property.”  This is obviously an important issue to the holder community.  Because the audit firm’s payment at the end of an unclaimed property audit is generally calculated as a percentage of reportable property “identified” by the auditor, it is in the auditor’s financial interest to take aggressive and novel positions intended to increase the amount due.  That is not to suggest that all audit firms do so, but the incentive alone is enough to cause many in the holder community to question the fairness of impartiality of these audits.  Hopefully, this is a first step in Arizona to formulating an audit process designed to locate unclaimed property actually due to the state, no more and no less.

Legislative Updates: Texas, Nevada & Maine

Texas Lowers Aggregate Reporting Threshold . . . Texas Senate Bill 1021 lowers the aggregate reporting threshold from $50 to $25, effective September 1, 2015.

. . . And Provides for Cash Redemption of Certain Low Value Gift Cards — Also in the Lone Star State, Texas House Bill 2391 provides that consumers may obtain a cash refund for stored value cards with balances of $2.50 or less after purchase.

Nevada Enacts Business-to-Business ExemptionNevada Senate Bill 348 enacts a business-to-business exemption, providing that certain credits (but not checks) among businesses need not be reported if there is an ongoing business relationship between the parties.

Maine Enacts Savings-Bond Escheat BillMaine Senate Bill 320 extends the provisions of that state’s unclaimed property act to matured U.S. Savings Bonds.

California Amends Definition of “Owner” to Give Charities Greater Access to Unclaimed Funds


On September 15, California Assembly Bill 1712 became law.

This legislation expands the definition of an “owner” under the Act authorized to make a claim for unclaimed property in the Controller’s possession.  In particular, the definition of “owner” was amended to add “a nonprofit civic, charitable, or educational organization that granted a charter, sponsorship, or approval for the existence of the organization that had the legal right to the property prior to its escheat but that has dissolved or is no longer in existence, if the charter, sponsorship, approval, organization bylaws, or other governing documents provide that unclaimed or surplus property shall be conveyed to the granting organization upon dissolution or cessation to exist as a distinct legal entity.”  In other words, if the California Controller’s office is holding unclaimed property for the American [Charity] Association – LA Chapter, and that entity is dissolved or no longer exists, the property can be claimed by the nationwide American [Charity] Association so long as the charter or organizational documents provide the national organization with that power.

According to a report on the bill by the Assembly Judiciary Committee, the bill arose from the acknowledgment that “there is a large amount of unclaimed property  . . . that is owned by nonprofit chapters or affiliates that have dissolved.”  By amending the definition of owner to include the parent or sponsoring entity of the dissolved organization, the bill’s sponsors intend to “retrun [the funds] to the charitable sector where it can once again benefit the community.”

While the legislation is certainly laudable, insofar as it requires that the organizational documents of the dissolved entity provide that unclaimed property will pass to the parent entity, it is unclear what impact it will have on the millions of dollars already in the Controller’s possession.

Pennsylvania Shortens Dormancy Periods

On July 10, Pennsylvania House Bill 278 was approved by the Governor.  The 112 page budget bill makes a number of legislative changes, but for purposes of this blog the most notable is the reduction in dormancy period for most property types from 5 years to 3 years.

What’s behind the Pennsylvania push for shorter dormancy periods?  As usual, it appears to be a response to a nearly $1 billion budget deficit.  According to a Fiscal Study by the Pennsylvania House Appropriations Committee, “it is estimated that the reduction in holding period for the newly identified classes of unclaimed property will generate $150,000,000 in revenue for the General Fund in 2014.”

There are a number of problems, however, with this statement:

  • First, with the exception of a clarification regarding IRA accounts, the new legislation does not contain any “newly identified classes of property”; rather, it simply shortens the dormancy period for the classes of property already covered by the Act.
  • Second, if the legislative purpose of state unclaimed property laws is to effect only a change in “custody” of unclaimed property (i.e., from the holder corporation to the state) allegedly because the state is a better guardian of the funds, than the characterization of these amounts as Commonwealth “revenue” is misleading.  Assuming that the Commonwealth will make all reasonable efforts to reunite its citizens with their unclaimed money (an assumption we won’t challenge for purposes of this post) than the “revenue” received by the Commonwealth is temporary at best.
  • Finally, it should be reasonably clear that the shortening of dormancy period itself does not “generate” any unclaimed property.  Instead, it essentially requires holders to triple the years reported next April 15.  That is, instead of reporting all property that is 5 years old, each will report all property that is 5 years old, 4 years old and 3 years old.  The upshot is that the $150 million increase cited is a one time only event, due not to any change in the structure of the Act, but simply because holders next year will be required to essentially report three years worth of property.

This is yet another example of dormancy periods being modified to produce a short-term, artificial increase in governmental revenue.

There are a few other notable provisions of the law that we will get to later in the week.

New Michigan Law Will Apply “Generally Accepted Auditing Standards” to Unclaimed Property Audits

Last week, the Governor of Michigan signed House Bill 4289 into law.  The new law revises the “Examination of Records” provision of the Michigan Unclaimed Property Act to provide certain specific standards relating to audit techniques, memorializes the holder’s right to receive a copy of the audit report, and guidelines for the use of estimates in connection with unclaimed property audits.  For example the new law requires that audits conducted by the state (or by private firms on behalf of the state) “be performed in accordance with generally accepted auditing standards to the extent applicable to unclaimed property audits.”  Those Generally Accepted Auditing Standards require, among other things, that an auditor maintain “independence in mental attitude in all matters related to the audit,” which may provide a holder with some protection from unreasonable, overzealous, and/or legally incorrect positions taken by private auditing firms in connection with unclaimed property audits.  The new law also requires the Administrator to propose rules for “auditing standards” within six months.

The law also contains a number of provisions concerning the use of estimates in connection with audits.  First of all, the law expressly provides statutory authority for the use of those estimates (as did prior law), but now further provides that such estimation shall only be used when the holder does not have “substantially complete records,” now defined as “at least 90% of the records necessary for unclaimed property examination as defined under the principles of internal controls.”  The ambiguity of that provision (e.g., how do you determine what records are “necessary”?  Who gets to decide?  What are the “principles of internal controls” referred to?) is compounded by the clarification that the calculation is not made “solely as a percentage of the total overall individual records to be examined, but also on a materiality level of value of the records.”  Other provisions make clear that the determination of “substantially complete records” can be made on a property type by property type basis.  The new law thus appears to provide some helpful protections, but the scope and extent of those protections will have to be fleshed out by regulations, administrative practice, and subsequent lawsuits.

All in all, even somewhat malleable or unclear auditing standards are preferable to the complete lack of standards in most states’ laws.  Congrats to Michigan for taking the first step.

California Lowers Aggregate Reporting Threshold

The unclaimed property laws of most states provide for “aggregate reporting” of all items under a specified dollar amount.  For items under the threshold, the holder must still deliver the property to the state, but is not required to report the owners’ name and address information.  The measure is generally considered to be an accommodation to holders – relieving them, for example, of the obligation to report dozens (or hundreds, or thousands) of lines of name and address information for “small balance” items from $0.01 to up to $50 or $100.

Of course, if the holder is not required to report name and address information to the state, the state will not have that owner identifying information for the purpose of reuniting owners with their property.  For that reason, the states’ willingness to allow aggregate reporting has been criticized as inconsistent with the fundamental purpose of the unclaimed property laws – to have the state serve as custodian of an owner’s money.

Perhaps in response to those criticisms, California is taking steps to reduce the aggregate reporting threshold, and thus, reduce the number of items that are reported to the state without name and address information. Under the current California Unclaimed Property Law, items under $50 are permitted to be reported in the aggregate (i.e., without owner name and address information).  Pursuant to Assembly Bill 212, which was signed into law last week, the aggregate reporting threshold was reduced to $25.  While this will increase the reporting burden on holders to some extent, the expanded availability of owner name and address information will also presumably aid owners in finding and reclaiming their money from the state.  The new law goes into effect on July 1, 2014.

California Asks: Who Is an "Owner"?

Unclaimed property laws, in a nutshell, generally require a “holder” of “property” belonging to an “owner” to report and remit (i.e., turn over) that property to a state government after a statutorily defined period of inactivity (known as the “dormancy period).  In many instances, the operation of these concepts is pretty straightforward:  If XYZ, Inc. has an outstanding check on its books owed to ABC Corp , and the check has remained uncashed for 3 years (or maybe 5 years, or some other period of time, depending on the state) than that items is statutorily deemed “abandoned” by ABC, and XYZ must report and remit that property to the appropriate state.

As with many seemingly simple things, nuances in the factual scenario sometimes complicate this analysis.  For example, in multi-party relationships, it is sometimes difficult to determine who is the “holder” of property with the obligation to report and remit to the state.  Other times, it is difficult to determine whether certain types of contingent or unliquidated claims are “property” at all.  Sometimes, even the concept of “owner” is ambiguous.  For example, many states define the “owner” of property as “a person who has a legal or equitable interest in property subject to the Act.”  (See 1995 Uniform Act at Section 1(11)). That definition, by its express terms, might include a number of people.  For example, imagine that Bob Buyer buys a vintage car from Steve Seller and agrees to pay Steve 90% of what Bob can get for the car from a dealer of vintage cars that Bob knows.  In the meantime, Bob sells that car to a dealer in exchange for a check.  Clearly, Bob might be considered the “owner” of that check, and if it remains uncashed, the dealer may report it to the state.  But what about Steve?  Under the definition, doesn’t he have at least an “equitable” interest in the property?  If the check goes unclaimed, assuming that he can prove the relationship set forth above, can Steve be considered an owner?

An appellate court in California faced a similar issue last year in a case called Weingarten Realty Investors v. Chiang, 212 Cal. App. 4th 813 (Cal. Ct. App. 2012).  In that case Weingarten was a judgment creditor (i.e., a party who was owed money as a result of winning a lawsuit) with a judgment against a company called Novadyne.  The Court in the underlying Weingarten v. Novadyne matter assigned certain unclaimed property held by California for Novadyne to Weingarten as a way to pay some of the judgment owed by Novadyne to Weingarten.  Armed with that assignment, Weingarten then petitioned the California State Controller’s Office (SCO) to turn over the funds.  The SCO refused, indicating that Weingarten was not entitled to claim the property.

Weingarten brought suit and won in the trial court.  The SCO appealed that decision to the California Court of Appeal, who ultimately found in favor of Weingarten and published a written opinion on the subject.  In rejecting the SCO’s argument that Weingarten was not a proper “owner” of the property, the Court focused on the broad definition of “owner” found in Section 1501 of the California Act, which includes “any person having a legal or equitable interest in property subject to this chapter.”  Finding that Weingarten fell within that broad definition of owner, the Court concluded that Weingarten was entitled to claim the property.

But our story doesn’t end there…

In February of this year, the California State Assembly introduced Assembly Bill 1275, which would change the definition of “owner” in the California Act to include only “the person who had legal right to the property prior to its escheat.”  That bill passed the Assembly in May and the state Senate earlier this month.  While the legislation seems relatively straightforward, it could have an unintended impact on the holder community.  For example, the narrow definition of “owner” in the bill calls into question the traditional holder practice of making payment of the previously reported unclaimed property to the owner and then seeking reimbursement for the payment from the state.  Based upon that concern, and others, the Unclaimed Property Professionals’ Organization sent a letter to the SCO seeking clarification concerning the new legislation.