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Foundations of Unclaimed Property

James O. Santivañez

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History

• Origins from British Common Law/Feudal Times

• Escheat– Traditional – Custodial

• Bona Vacantia

• Unclaimed Property is not a “tax”

What is Unclaimed Property?

• Generally Consists of intangible personal property that has a business or organization has in its possession that has not been claimed by the true owner

• Also referred to as “abandoned property” or “escheat”

• Monetary & other assets such as bank accounts, refunds, uncashed checks, securities, and credit balances

Terminology

• Activity– Action taken by the owner of the property which may include

making a deposit, a withdrawal, correspondence with the holder, or any other action that the statute deems adequate.

• Aggregate– The threshold dollar amount of an individual owner’s account which

would require detailed reporting and/or due diligence efforts.

• Custodian– An individual or entity that holds property until it is delivered to the

rightful owner (State).

Terminology Continued

• Dormancy Period– Period of time the holder retains the property before reporting

compliance is required.

• Due Diligence– A series of efforts required by law that a holder must perform to find

the rightful owner before remitting the property to the state.

• Holder– The entity that is in possession of, or controls the property until it is

transferred to the state on behalf of the lost owner

• Holder Domicile– The holder’s state of incorporation or organization

Terminology Continued

• Indemnification– An agreement that protects a party from loss by transferring the

responsibilities to the third party.

• Intangible Personal Property– A right or possession of a non physical or abstract nature that has

value, such as a financial asset having no intrinsic value but representing value.

• Last Known Address– The location of the owner of unclaimed property as reflected on the

holder’s records; often meaning sufficient for the purposes of the delivery of mail.

Terminology Continued

• Rightful Owner– A person and/or entity who has the legal right to make a claim to

the property (parens patriae)

• State– Can mean any jurisdiction (Most often a state, U.S. District or

Territory), that “steps into the shoes” of a holder after a statutorily defined dormancy period.

• Uniform Unclaimed Property Acts– The Uniform Acts are the basis for states unclaimed property laws.

Uniform Acts were promulgated in 1954, 1966, 1981 and 1995.

Originating U.S. Case Law

• Constitutionality of Escheat Statutes

– Hamilton v. Brown (1896)

– Cunnius v. Reading School District (1905)

– United States v. Klein (1938)

– Anderson National Bank v. Luckett (1944)

The Uniform Acts

• Uniform Unclaimed Property Acts– The Uniform Disposition of Unclaimed Property Act originated in

1954; with subsequent revisions occurring in 1966, 1981 and 1995.– The acts were originally intended to guide states as they drafted and

adopted their own unclaimed property laws.– All states and U.S. Territories have unclaimed property laws of their

own, but these laws vary in the degree of adherence to the Uniform Acts.

– The Uniform Acts were intended to promote uniformity.– Does uniformity really exist?

The Uniform Acts - Continued

• Uniform Disposition of Unclaimed Property Act (1954)– Was adopted in 12 states

• Revised Disposition of Unclaimed Property Act (1966)– Adopted with modifications by 13 states and the District of Columbia

• Uniform Unclaimed Property Act (1981)– Adopted by 33 states and the Virgin Islands

• Uniform Unclaimed Property Act (1995)– Adopted by 6 states

Currently Applicable Case Law

• U.S. Supreme Court Case Law– Texas vs. New Jersey, 379 U.S. 674 (1965)

• Court concluded that unclaimed property goes to “state of last known address of the creditor, as shown on the debtor’s books and records”

– Pennsylvania vs. New York, 407 U.S. 206 (1972)• Examined the transaction priority rule not as a default to the first and second

priority rules established in Texas vs. New Jersey, but rather as a means for “allowing the State of the ‘place of purchase’ to escheat under the primary rule.”

– Delaware vs. New York, 507 U.S. 490 (1993)• Court concluded that “no State my supersede [the Texas rule] by purporting to

prescribe a different priority under State law”

Reporting Basics• Where to Report?

– Priority Rules/Texas v. New Jersey

• What Property is Reportable?– Abandoned Intangible Property; the Presumption of Abandonment

• When to Report?– Varies by State – Typically Fall & Spring

• Why Report?– It’s the Law…Avoid Penalty and Interest– Pay for Louisiana to build roads…

Louisiana Approves Funding to Finish I-49

• “HB370 allows the Department of Transportation and Development to use bonds secured by unclaimed property funds to help complete the extension that will stretch from Interstate 220 north of Shreveport to the Arkansas line.”

• “The unclaimed property funds will account for $7.5 million.”

• Article published July 8, 2011 by LandLinemag.com

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Compliance and State Reporting Requirements

Timothy Goodyear & Jay Starr

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Compliance Reporting Requirements

• Property Subject to Custody– The 1954, 1966 and 1981 Uniform Acts did not specify the property that was

subject to the state’s custody– In these Acts, the property was identified by the type of holder– The 1995 Uniform Act addresses both the specific types of property and the

type of holder

• Periods for Presumption of Abandonment– Varies under the Uniform Acts for different types of property– Have been shortened with each succeeding Act– Varies even under specific state laws, with an overall trend towards

shortening dormancy periods all property types

Compliance Reporting Requirements – Where?

• Where to Report– State of owner’s last known address– State of holder’s incorporation or domicile if not known

• All states and the District of Columbia, Virgin Islands, Guam and Puerto Rico have Unclaimed Property Laws

• Several Provinces in Canada Now Mandate Unclaimed Property Compliance

• Foreign Address Property

Compliance Reporting Requirements – What?

• Types of Unclaimed Property Associated with Banks:– Checking and Savings Accounts– Matured CDs– Security Deposits– Trust Accounts– Unidentified Deposits– Safety Deposit Box Contents

Compliance Reporting Requirements – What?

• Types of Unclaimed Property Associated with Insurance Companies:– Individual and Group Policies– Proceeds Due Beneficiaries

• Matured Policies

– Premium Refunds– Unidentified Premium Payments– Aged Credit Balances– Drafts Not Presented

Compliance Reporting Requirements – What?

• Types of Unclaimed Property Associated with Retail, Manufacturing, and Other Types of Companies:– Uncashed Vendor/Payables Checks– Uncashed Payroll Checks– Unredeemed Gift Certificates– Accounts Receivable Credit Balances– Benefits Payments– Commission Payments– Unused Groupons?

Compliance Reporting Requirements – What?

• Types of Unclaimed Property Associated with Utilities:– Customer Deposits– Refunds and Rebates– Membership Fees– Utility Refunds– Court Ordered Refunds– Special Assessment Fees

Compliance Reporting Requirements – What?

• Types of Unclaimed Property associated with Health Care Organizations:– Patient Credit Balances– Salary/Wages– Accounts Payable– Unidentified Remittances– Self-insurance Payments– Stocks/Dividends Checks– Debt/Interest Checks

Compliance Reporting Requirements – What?

• Types of Unclaimed Property Associated with Oil and Gas Companies:– Royalties– Production Payments– Net Revenue Interest– Salary/Wages– Payment to Participants– Bonuses– Delay Rentals– Surface and Subsurface minerals

Standard Dormancy Periods

• Depends on the Property Type and the State• Typical Dormancy Periods:

– Payroll/Commissions MS01 1 Year– Accounts Payable MS08 3-5

Years– Accounts Receivable MS09 3-5 Years– Other Outstanding Checks MS16 3-5

Years– Gift Certificates/Cards MS12 3-5 Years

• Recent Activity Includes Numerous States Reducing Dormancy Periods In Order To Close Budget Gaps

Examples of State Specific Requirements• California

– Requires both a “notice” and “remit” report

• Indiana– Requires filing electronically on state website

• New York– Requires sending additional due diligence letters for amounts greater than

$1,000

• North Carolina– Recently passed legislation requiring SSN, DOB, DL# and additional

information

• Tennessee– Requires electronic NAUPA format with paper coversheet for all reports and

must be encrypted

Quantification of Reporting Responsibilities

• Determining Your Liability: Documents– Know the law: how far are we to look back?– Corporate Structure– Chart of Accounts & Trial Balances– Systems/ERP History– Prior UP Report/Audit Activity– O/S Check Listings from all disbursement Accounts– Accounts receivable aging reports– Journal Entries of amounts written-off– Description of third party administered programs– Mergers/Acquisitions

Exposure & Quantification

• Determining Your Liability: Exemptions & Deductions

–Review applicable state statutes to determine exemptions and deductions

–Common examples:• Business to Business (B2B)• Gift Certificates• Payroll Exemptions

Exposure & Quantification

• Preparing the Report: Basic Checklist

– Have you performed due diligence?– Does the report need to be filed electronically?– Does the payment need to be made electronically?– Who can sign the report?– Are negative reports required?– When is the report due?

• Postmark vs. Received by

Exposure & Quantification Test Case

Owner Name Owner State Property TypeLast

Transaction Date

Amount

John Smith Louisiana Payroll 6/30/2010 $25.00

XYZ Company Arizona Accounts Payable 6/30/2008 $49.99

John Doe Ohio Payroll 6/30/2010 $45.00

Jane Doe Ohio Payroll 6/30/2010 $55.00

ABC Supermarket Louisiana Accounts Payable 6/30/2006 $125.00

123 Manufacturing Colorado Accounts Payable 6/30/2006 $26.00

Fred Flintstone Georgia Payroll 6/30/2010 $100.00

Total Population of Outstanding Checks

Exposure & Quantification Test Case

Owner Name Owner State Property TypeLast

Transaction Date

Amount

John Smith Louisiana Payroll 6/30/2010 $25.00

XYZ Company Arizona Accounts Payable 6/30/2008 $49.99

John Doe Ohio Payroll 6/30/2010 $45.00

Jane Doe Ohio Payroll 6/30/2010 $55.00

ABC Supermarket Louisiana Accounts Payable 6/30/2006 $125.00

123 Manufacturing Colorado Accounts Payable 6/30/2006 $26.00

Fred Flintstone Georgia Payroll 6/30/2010 $100.00

Is Due Diligence Required?

Exposure & Quantification Test Case

Owner Name

Owner State

Property Type

Last Transaction

DateAmount Reportable

Amount

John Smith Louisiana Payroll 6/30/2010 $25.00 $25.00

XYZ Company Arizona Accounts Payable

6/30/2008 $49.99 $0.00

John Doe Ohio Payroll 6/30/2010 $45.00 $0.00

Jane Doe Ohio Payroll 6/30/2010 $55.00 $55.00

ABC Supermarket

Louisiana Accounts Payable

6/30/2006 $125.00 $125.00

123 Manufacturing

Colorado Accounts Payable

6/30/2006 $26.00 $1.00

Fred Flintstone Georgia Payroll 6/30/2010 $100.00 $100.00

Exemptions & Deductions

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Seeking Amnesty & Voluntary Settlements

James O. Santivañez & Timothy Goodyear

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Why Comply and File?

• State Unclaimed Property Laws

– All States have enacted unclaimed property laws

– Unclaimed property reporting is mandatory, not voluntary

– States have the ability to charge penalty and interest for non- compliance

If You’ve Never Reported – What Should You Do?• Verify that all unclaimed property is captured

– Thoroughness is important

• Consideration of prior M&A activities

• Interface with other company departments

• Importance of a cohesive approach

• Developing Policies/Procedures

Voluntary Disclosure Agreements

•What is a Voluntary Disclosure Agreement• Most states have adopted some type of voluntary disclosure

program

•Amnesty Programs• Much more formal and offered by some states on an occasional

basis• FL, IL, TX as examples

Why seek a Voluntary Disclosure Agreement?

•If Accepted, the Benefits Include:

– Limited Look Back Periods– Waiver of Interest in Most Cases– Waiver of Penalty in Most Cases– Limitations on Future Audits– Written Closure = Security

VDAs: Getting Started

•Request / Petition for Admittance into the Program– Make sure you qualify

• Not Currently Under Audit in that State• No Filing History

– Contact the state(s)• In Louisiana: Mr. Benny Spann

•Examine the Need for Additional Help– Get Other Department Personnel Involved– Need to Hire Outside Counsel / Consultants?

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State Audits

James O. Santivañez

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Audits – Types

•State Audit Department– Typically conduct an audit of property owed just to that individual

State– On occasion they will perform a “Joint Audit” meaning they will

cooperate or act on behalf of another state in the audit

•Third Party Audit– A firm that typically audits on behalf of many states at one time– Typically work on a contingent fee arrangement– Increased activity as of late; new audit firms have formed

Audits – Increased Activity

• Preparing the Report: Basic Checklist

• Where most of the new property types are coming from– “Uninvoiced Payable”

• With belt-tightening, states that have historically been lenient are now pursuing interest/penalties for non-compliance

• Industry-specific audit focus is back in certain states

Audit Triggers

• Registering in a state to do business or pay tax, but not filing unclaimed property reports

• Industry type – oil & gas, financial services, and healthcare are traditionally most attractive

• State of Incorporation• History of mergers & acquisitions• Period(s) of rapid growth• Claiming property from the state with no reporting history• Drive-by audit

Audits – We Got the Notice… Now What?

•Take the audit notice seriously– The auditors represent the states and have the authority to assess

interest and penalties

•Assess your potential liability– Have an idea of what the potential assessment may be. Virtually

every company has some degree of liability

•Determine how you will handle the audit– Internally or outside consultation

•Make sure the scope of the audit is clearly defined– Do not give the auditors unsupervised access to your records, assign

one point of contact to assist

Audit Elements

•Notice and request for information•Opening conference•Identification of key audit elements•Detail review/sampling•Extrapolation/estimation•Closing conference

Audits – Holder’s Rights

•Due Process•Adherence to Statutes & Regulations•Adherence to State-specific Written Audit Procedures•Claiming/Application of Exemptions and Deductions•FOIA Request•Confidentiality•Object to Audit Results

Audits – State Rights

•To audit your books and records specific to unclaimed property for participating states

•To expect a reasonable response time

•To assess interest and penalty

•To litigate

Audits – Initial Reaction & Response

•Assess Your Liability Realistically Through:– Internal investigation with general counsel’s involvement– Engage outside consultant – accountant and/or attorney

•Implement Your Strategy By:– Identifying your team– Involving in-house counsel sooner rather than later– Ensure counsel is in agreement with the audit-defense approach

Audits – Dealing with the Auditor

•Respond Quickly & Professionally•Have Defenses in Mind•Know the Auditor (or Auditing Firm) and/or the State(s) involved•Know the law•Be prepared to take control•Be prepared to take off the gloves

Audits – Dealing with the Auditor

•Can you demand that the third-party auditor agree not to bring additional states into the audit?

YES – and you should!

•A confidentiality agreement should be put in place, and must include such a provision.•As a practical matter, the audit should not proceed until such an agreement is in place.•You do not have to provide an auditor with information relating to states that are not participating in the audit.

Audits – Simple Demands

•Demand: confidentiality

•Demand: proper authorization & fulfillment of notice requirements

•Demand: to know proposed methodology at outset

•Demand: official written closure from each state represented in the audit

Audits – Limited or Unavailable Records

The burden of proof restswith the holder to contest the presumption of abandonment.

Audits – Statistical Sampling

•Many auditors may try to impose statistical sampling based on readily available records.

•Samples based on available records are used to extrapolate liability in years under audit where records are not available.

•Most states and the auditors working on their behalf have the authority to use sampling in these audits.

Audits – Sampling Questions to Ask

•Is the auditor qualified to implement a truly statistical sample?

•Is the validity and error rate within state-accepted guidelines?

•Will the results be representative once extrapolated?

•Review the methodology before any sample is pulled.

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Unclaimed Property 201

Timothy Goodyear & Jay Starr

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Compliance Calendar

•Establish Timeframes

•Prepare a timeline and calendar for important steps in the reporting process

•Design and specify procedures to detect errors or irregularities in the unclaimed amounts

Compliance – When Are Reports Due?

KEY

March 1March 10March 31April 15April 30/May 1July 1Oct 31/Nov 1Nov 1/June 15

Texas Report Due Date Changes to July 1 in 2012

Record Retention

•Unclaimed Property v. Tax•Retention Challenges

– Retention Policies Tied to Tax Requirements– Mergers and Acquisitions– Corporate Downsizing/Turnover– Accounting System Changes

Compliance – Due Diligence

•When is Due Diligence Required?– Typically 60 to 120 Days prior to the report due date

•Do I Have to Perform Due Diligence?– Yes. It is statutorily required for most states.

•I have 100 items in the amount of $.01, Do I have send a letter for those items?

– No. Most states have an amount threshold in between $20-$50

•Can I Recover my Costs for Due Diligence?– Sometimes. Some states allow a line item expense deduction on the

report total for due diligence costs.

Compliance – Deductions and Exemptions

•Review Applicable State Statutes to Determine Exemptions and Deductions•Common Examples:

– Business to Business (B2B)• Examples: AZ, ID, KS, MD, MA, NC, OH, VA and WI

– Gift Certificates• Some states allow deductions and others exempt completely

– Payroll Exemptions (KY, MI and OH)– Deductions & Exclusions (CO and ID)

Exposure & Quantification Test Case

Owner Name

Owner State

Property Type

Last Transaction

DateAmount Reportable

Amount

John Smith Louisiana Payroll 6/30/2010 $25.00 $25.00

XYZ Company Arizona Accounts Payable

6/30/2008 $49.99 $0.00

John Doe Ohio Payroll 6/30/2010 $45.00 $0.00

Jane Doe Ohio Payroll 6/30/2010 $55.00 $55.00

ABC Supermarket

Louisiana AR Credit 6/30/2006 $125.00 $125.00

123 Manufacturing

Colorado Accounts Payable

6/30/2006 $26.00 $1.00

Fred Flintstone Georgia Payroll 6/30/2010 $100.00 $100.00

Exemptions & Deductions

Compliance – Options

•Manual

•Software

•Outsource

•Do Nothing (playing the audit lottery)

Compliance – Manual

•Create a matrix for due dates and review states websites for changes

– Due Diligence– Reporting by Industry

•Multiple Spreadsheets•Mail Merge for Letters•Manage/Track Due Diligence Responses•Keep Records for Retention Period•Personnel Training & Process Development

Compliance – Software

•Centralized Database to House Records•Updates Legislative Changes•Maintain Control of Records•Provides Reminders for Due Dates for Letters and Reports•Generates Due Diligence Letters•State Reports are Completed and Retained•Creates Standard Electronic NAUPA Filing Format

Compliance – Outsource

•Experts in the Field Oversee the Function– Due Diligence– Reporting

•Employees Can Focus on True Value-Added Activities•Lack of IT Resources•Payment Issuance•Reports are Done Correctly and on Time

Examples of Recent Law Changes

•Nevada S.B. 136 – Reduces from 3 years to 2 years the period after which unclaimed property is presumed to be abandoned if the holder holds more than $10 million in property presumed abandoned on the most recent report filed by the holder.•Texas H.B. 257 – The bill lowers dormancy periods for money orders from 7 to 3 years.•North Carolina H.B. 692 – Requires holders to report additional owner information including SSN, DOB, DL#, and email address where applicable.

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Recovering Funds forYour Company

Timothy Goodyear & Jay Starr

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Asset Recovery

We have told you how to manage the flowof your company’s money to the various states…

Now let’s try to get some of your money back!

Asset Recovery – Recover Funds for Your Company

•States have billions in their unclaimed property accounts waiting to be claimed•Identify your company’s history

– M&A activity– Old DBAs and Locations

•Gather corporate documents– Letter of authorization to claim funds– Address verification documents– IRS Schedule 851– Corporate Entity Map – Organization Chart

Asset Recovery

•There is no centralized source to search for unclaimed property. •There are multiple sources for unclaimed property

– Pre-Escheated Property– Escheated Property– Bankruptcy Funds– Federal Funds– Municipality Funds

Asset Recovery – Where to Look

•Start with the State UP Websites– Check the databases regularly – most update at least once per year– www.naupa.org is a good place to access each state website

•Missing Money – www.missingmoney.com– Consolidate searching source, about 40 states participate,

sometimes can be outdated

•Bankruptcy Courts•Federal Sites•Letter Requests•Recovery Professionals

Asset Recovery Claim Process

•Filling out claim forms is a manual process

•Some forms can be filled out online while others are mailed directly to you

•Provide evidence of the rightful claim in advance, to speed up the claims process

•Expect multiple follow-up requests from certain states

Asset Recovery – Tips of the Trade

•Know how each database functions– Wildcard search (* represents unknown terms, etc.)– Exact term match– Partial term match– Spelling, Spaces, & Order

• The Coca-Cola Company, Coca Cola, Coke, CocaCola, Coke Cola, Coke Co, etc.

•Track your activity & results– Timeline what you did and when you did it– Follow up on your claims in a timely fashion

•Be patient and organized– It could take a year or longer in some states to recover funds

Asset Recovery Caveats

•Is your company up to date in its filings?– DO NOT START CLAIMING PROPERTY WITHOUT BEING IN PROPER

COMPLIANCE

•Be aware of the possibility of “offsets”•Not all property is included on a website so make sure you utilize secondary sources to identify unclaimed property•Confirm that the property is not held in a fiduciary capacity or is jointly owned.

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Thank You!

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We enjoyed our time with you here today and hope that you found this presentation to be helpful.

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