Friday Lost & Found

by Michael Rato

A Roundup of Odds & Ends From the Week in Unclaimed Property

GAO Issues Report on Unclaimed 401(k) Funds — The Government Accountability Office, which is responsible for providing recommendations to Congress on the responsibilities of the federal government, recently issued a report concerning the application state unclaimed property laws to retirement assets such as 401(k)s. In preparing the report, GAO sent questionnaires to the unclaimed property offices of all 50 states, interviewed industry representatives, and surveyed fund and brokerage firms on their handling of these items. Among the GAO’s recommendations are that the IRS clarify the tax treatment of plans that are escheated to the state and consider allowing taxpayers whose later claim assets that were unknowingly escheated to rollover the assets into a qualified plan.

Claim Headaches — One of the benefits of modern escheat laws is that they are generally “custodial” in nature — meaning that the state takes possession of unclaimed property on the owner’s behalf, but the property does not actually become the state’s property. That said, the claim process can be a trap for the unwary. As recounted by the Mercury News, individuals seeking to claim property from the state face (at least) paperwork and (at worst) scammers that try to take some or all of the money owed to the claimant. The article recounts these problems and has a number of tips for claimants. It is worth a review for those considering filing a claim.

2016 Uniform Act News — States continue to work on legislation relating to the 2016 Revised Uniform Unclaimed Property Act.The Washington state legislature is currently considering such a bill, as are lawmakers in Nevada. and South Carolina.

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Britons Blindsided by U.S. Escheat Laws

by Michael Rato

Why Unclaimed Property “Activity” Standard Doesn’t Make Sense for Long Term Investments

Jessica Gorst-Williams, the “Agony Aunt” of U.K. newspaper The Telegraph recently ran an help column relating to a U.K. resident’s complaint that her shares were escheated to the State of Delaware without her knowledge. Accordingly to the unlucky shareholder, her shares were turned over to the state “because I had not made any contact with the company since receiving the shares, the necessity of which I had no prior knowledge.”  Ultimately, the shareholder had to submit her driver’s license, passport, bus pass (seriously), as well as a copy of the actual stock certificate.

After jumping through these hoops, did our heroine across the pond get her stock back? Not exactly. Instead, she got a check for $1, as the state had already liquidated the stock without her consent at the then-market value. This story is far from unique. Every year, certain states require broker/dealer firms to turn over stock positions, which are in many cases summarily liquidated, based upon nothing more than the fact that the account owner did not engage in activity during the previous 3-5 years.

By way of background, all states require the reporting and delivery of dormant securities positions. However, the manner in which this “dormancy” is measured differs among the states. There are generally two styles. In “Returned Mail” (sometimes called “RPO” (Returned by Post Office)) states, the three to five year time period after which the broker must turn over “abandoned” securities to the state does not begin to run until one or more mailed account statements are returned to the broker as undeliverable by the postal service. In “activity” states, on the other hand, the dormancy period begins to run immediately after the last owner-generated activity in the account. In other words, when you open up a brokerage account subject to the unclaimed property jurisdiction of an “activity” state, the dormancy period begins to run immediately. If you don’t trade in that account or engage in some other activity, your securities will be deemed abandoned at the end of three to five years.

While the passage of time alone might make sense to require the escheat of certain items (i.e., payroll checks – which generally aren’t held for a long time), it doesn’t make sense when it comes to securities accounts, many of which are being held for the long term. While investment advice is not something this blog is qualified to provide, it is nonetheless true that “Buy and Hold” (or passive investing) has been a popular investment strategy for decades. Thus, escheating securities to the state (where they may be quickly liquidated) simply because of a lack of activity seems inconsistent with how many owners utilize their investment accounts.

Adding financial insult to injury, the overwhelming majority of states do not hold those securities escheated to them in the name of the rightful owner. Instead, most states’ laws, including those that have adopted the recent 2016 Uniform Unclaimed Property Act, provide that the state may sell securities after three years, and that generally the rightful owner is entitled only to the proceeds of the sale. In other words, the owner loses any increase in value of those securities after they are sold by the state.


Unfortunately, it does not look like these practices are waning. For example, a bill currently making its way through the Arkansas legislature would permit the Administrator of unclaimed property in that state to sell escheated securities immediately upon receipt, instead of holding them for three years. Thus, the states’ every increasing appetite for unclaimed property has shifted the burdens of maintaining ownership squarely onto the shoulders of the owner. Now, more than ever, it is important for owners to keep tabs on their securities accounts, even if they are holding for the long term.

Friday Lost & Found

by Michael Rato

A Roundup of Odds & Ends From the Week in Unclaimed Property

Ohio Oops — The Ohio Division of Unclaimed Funds recently issued 1099 tax forms to those individuals who claimed abandoned property from the state during the prior year. Unfortunately, it appears that many of the forms were not sent to the correct individuals. Those who may be affected are encouraged to contact the Division of Unclaimed Funds for more information and a free year of identity theft protection.

Municipal Unclaimed Funds — While we focus most of our attention on unclaimed property held by state governments, municipalities and counties may also hold unclaimed property. A municipal or county government may be holding payment refunds, jury service checks, or deposit refunds for rightful owners who have not claimed those amounts. For example, CBS 58 in Milwaukee reports that Milwaukee County is holding more than $2.2 million in unclaimed funds for its residents and business partners.

2016 Uniform Act News — The Revised Uniform Unclaimed Property Act was released in 2016 and has been adopted in several states. Other states continue to consider getting on the bandwagon. Last week Colorado Senate Bill 88 (which would implement a version of the Uniform Act) was referred to the full state senate for consideration. At the same time, however, the Illinois legislature is considering bills to amend or repeal its early adoption of the UUPA.

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IRS Extends Compliance Deadline for Withholding & Reporting Requirements on IRA Accounts Remitted to States as Unclaimed Property

by Michael Rato

Earlier this year, in Revenue Ruling 2018-17 the IRS issued guidance stating that holders of traditional IRAs required to report IRA assets to a state as unclaimed property were required to withhold federal income tax upon such amounts and issue a 1099-R form indicating the owner as the recipient of the funds.  The IRS originally set the compliance date for this guidance as January 1, 2019.

This ruling was not without controversy.  For example, it seems incongruous to impose taxes upon the owner of an IRA on account of that owner taking a “distribution” from the IRA when, in fact, the reason that the proceeds are being transferred as unclaimed property is because there has been no contact with, or activity by, the IRA owner for several years.  In addition, the Revenue Ruling raised practical problems for the securities broker-dealer and/or trustees.  For example, when a securities account such as an IRA is escheated to the state, the state generally takes custody of those securities.  In order to withhold taxes from an IRA containing only securities before escheat, however, would the holder be required to liquidate those securities?  If so, is that consistent with the federal securities laws and/or the holders other duties to the owner?  In light of these questions, the “Holders Coalition” (a group of unclaimed property trade associations and similar entities) issued a comment letter seeking additional guidance.

While the IRS has not directly responded to the questions raised regarding the Revenue Ruling, it did issue a notice this week extending the compliance date until January 1, 2020.  This will hopefully give states and the holder community time to work with the IRS to clarify holders’ obligations with regard to the reporting and remittance of IRA accounts.

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Ohio Legislative Update (With Interesting Stats)

by Michael Rato

Recently, Ohio passed House Bill 353, which broadens the scope of the current exemptions for gift cards and gift certificates under the unclaimed property act.  Effective January 22, 2019 the bill will exempt certain “open-loop” prepaid cards, “closed-loop” prepaid cards, and rewards cards.  The revised legislation also exempts any “obligation” due to a retail customer (as opposed to just “credits”).

As is often the case, a non-partisan legislative committee prepared a “Fiscal Note” regarding the potential economic impact of the new law.  That report, in turn, sets forth the amount of money reported to, and repaid by, the State of Ohio during the most recent five-year period.  For example, according to the Note, holders reported and remitted nearly $300 million to the state during Fiscal Year 2018.  During that same period, the state returned $97 million to owners.  Over the five year period 2014-2018, the state collected $1.4 billion (with a “b”) from holders while returning approximately $425 million to owners.

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Meet Your New (and Returning) Escheators

by Michael Rato

You may not have noticed, given that there was almost no news coverage of it, but this past Tuesday was Election Day in the United States.  While the consequences of that election on national policies are being hotly debated, there were several elections that may impact the future course of unclaimed property policies.  Most state unclaimed property offices are run by an elected State Treasurer (or State Comptroller).  There were several such elections this week.  Among the new (in bold) or returning unclaimed property elected officials are:

Alabama — John McMillan
Arkansas — Andrea Lea (Auditor of State)
California — Betty Yee (State Comptroller)
Colorado — Dave Young
Connecticut — Shawn Wooden
Florida — Jimmy Patronis
Idaho — Judy Ellsworth
Illinois — Michael Frerichs
Iowa — Michael Fitzgerald
Kansas — Jake LaTurner
Massachusetts — Deb Goldberg
Nebraska — John Murante
Nevada — Zach Conine
New York — Thomas DiNapoli (State Comptroller)
Oklahoma — Randy McDaniel
Rhode Island — Seth Magaziner
South Carolina — Curtis Loftis
South Dakota — Josh Haeder
Texas — Glenn Hegar
Vermont — Elizabeth Pearce
Wyoming — Curt Meier

Congratulations to these new officials.

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Developing: Jury Finds Against Gift-Card Issuer in Delaware Qui Tam Litigation

by Michael Rato

Delaware ex rel French v. Card Compliant, et al, has been one of the most closely-watched unclaimed property cases in recent memory.  The case involves a whistleblower claim by a former executive of a so-called “GiftCo” structuring entity, alleging that the “giftco” structure (whereby a company issues gift cards through a subsdiary incorporated in a state that exempts gift cards from the scope of unclaimed property laws) amounts to an improper avoidance of Delaware’s escheat laws.

According to a press release issued by the Plaintiff’s attorneys, the jury unanimously found that the card issuer violated Delaware law by using a “giftco” structure to circumvent the state’s escheat laws.  More information when it becomes available.

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Illinois State Treasurer Announces “Money Match” Reunification Program

by Michael Rato

The office of the Illinois State Treasurer, Michael Frerichs, recently announced a new program called “Money Match” which is intended to reunite more Illinois residents with their unclaimed funds.  Under the new program, the state will send written notification to all apparent owners of property held by the state where:

  • the value of the property is $2,000 or less;
  • the property is not either tangible (i.e., physical) property or securities;
  • the last-known address for the person is verified by records from the state Department of Revenue which are less than 12 months old; and
  • the Treasury department has “evidence sufficient to establish” that the person appearing in the Department of Revenue records is the owner.

This program was developed pursuant to legislation that was adopted as part of last year’s amendments to the state unclaimed property laws.  The State Treasury estimates that it will be sending 63,000 such notification letters this month.  Once the recipient verifies that his/her address is correct, the state will issue a check for the proceeds (without the need to complete the paperwork and processes generally needed for the recovery of property).  Unclaimed property owner advocates have long argued that states can and should do more with the information at their disposal to reunite owners with their missing property.  The Money Match program is a good step forward in that regard.

While the program’s affirmative notification efforts are certainly laudable, one should always be cautious when receiving correspondence out of the blue (whether by regular mail or by e-mail) concerning unclaimed property.  If the correspondence requires you to disclose personal financial information or pay a “search” or “recovery” fee, it likely is not genuine. When looking for or claiming abandoned property, keep the following tips in mind:

  • Don’t Pay to Search — States do not charge a fee for allowing you to search for unclaimed funds, or in most cases, even to collect unclaimed funds.
  • Don’t Trust Links — If you receive an email purporting to be from your state unclaimed property office with a link, don’t trust the link.  Instead, go to the site directly.  A link to every states’ unclaimed property office can be found on the website of the Nat’l Association of Unclaimed Property Administrators.
  • Don’t Trust Phone Numbers — Similarly, don’t call the number provided to you in an unsolicited email or voicemail.  Look up (using NAUPA or some other source) the phone number for your state unclaimed property office yourself, and call them directly.  Some scams seek to trick victims into calling an international phone number and incurring high fees for those calls.
  • Don’t Provide Financial Information — You do not have to provide any financial or bank account information to perform a search or to learn if a state is holding unclaimed funds on your behalf.
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An Update on the California Cryptocurrency Class Action

by Michael Rato

In our last post, we mentioned a potential class action against a “digital currency exchange” dealing in Bitcoin and other cryptocurrencies brought by a private plaintiff alleging, among other things, violations of California’s unclaimed property laws.  It appears that specific claim will no longer be at issue in the case.  In mid-May, the defendant, Coinbase, filed a motion to dismiss asking the court to throw out the complaint.  In its motion, Coinbase argued that the plaintiff could not bring a claim against Coinbase for failure to comply with the California Unclaimed Property Act, arguing that such a claim could only be brought by the State Comptroller’s Office.

In response, the plaintiffs amended their claims, and removed the cause of action for violation of the Unclaimed Property Laws.  Coinbase’s response to the amended complaint in due in July.

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Cryptocurrency Exchange Hit With Unclaimed Property Class Action

by Michael Rato

In May of 2010, a Jacksonville software developer named Laszlo Hanyecz made the first purchase of real world goods (2 pizzas) using the cryptocurrency Bitcoin.  Since that time, cryptocurrencies – digital currencies that rely upon computerized cryptography to control monetary flow (i.e., the amount of funds available), approve and record transactions – have become more publicly accepted and risen tremendously in value.   Today, Bitcoin – one of the most widely known cryptocurrencies – can be used to purchase a wide variety of goods at a number of retailers.

As cryptocurrencies such as Bitcoin become more widely accepted, they will also come under increasing scrutiny from financial regulators, law enforcement agencies, and consumer protection watchdogs.  Indeed, it appears that this is already happening.  Already, the IRS has issued guidance as to when cryptocurrencies will be treated as property for U.S. tax purposes.  On the unclaimed property law front, the 2016 Uniform Unclaimed Property Act includes within the definition of “property” subject to the act “virtual currency,” defined as: “a digital representation of value used as a medium of exchange, unit of account, or store of value, which does not have legal tender status recognized by the United States.”

More recently, “digital currency exchange” Coinbase has been sued in a potential class action for, among other things, purportedly failing to comply with California’s unclaimed property laws.  A digital currency exchange is generally a business where cryptocurrencies can be traded or exchanged for “fiat currency” (i.e., government-issued money).  The class action complaint was filed in a California federal court on behalf of “[a]ll persons and entities who were sent Cryptocurrencies . . . through Coinbase.com to their email address, and who never claimed such Cryptocurrency.”  The complaint alleges that, in certain instances, members of the plaintiff class who were sent cryptocurrencies by others through Coinbase were only sent a single email notifying them of the transaction.  The complaint alleges that Coinbase’s alleged failure to send follow up emails or escheat the property to the State amounts to a violation of the California Unclaimed Property Act and/or is an unlawful business practice.

Assuming the case proceeds to the merits, it will be interesting to see how the court’s attempt to impose the unclaimed property regulatory framework on this type of “asset.”  Coinbase’s response to the complaint is currently due on May 18, and indications are that it will move to dismiss the complaint.

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