Unclaimed Property Update
March 14, 2013
Many Delaware incorporated or organized entities owe “unclaimed property” to the State. Delaware’s new unclaimed property voluntary disclosure program gives these entities an important but limited opportunity to come into compliance with its Abandoned Property Law and avoid an expensive and time-consuming audit with the potential for substantial fines and penalties.
The law of unclaimed property is arcane, but clear in certain key respects.
As determined through a series of U.S. Supreme Court opinions, American businesses which are “holders” of unclaimed property have a legal obligation to report and remit such property to the states.
Unclaimed property can be tangible (cash, for instance) or intangible (stock, uncashed checks, unredeemed gift cards, unused rebates, credits, etc.) and must be paid to the various states for the states to hold, for the benefit of the unknown “owner” of the property or—as the law has evolved and recognized—for use by states for the public benefit. Under what are known as “priority rules,” property is to be remitted, under the first priority rule, to the state of the last known address of the “owner” who has not claimed their property, based on the holder’s books and records. In the absence of such detailed records, under the second priority rule the property is remitted to the state of formation of the holder.
Each state sets its own unclaimed property rules. For most, the dormancy period, i.e., how long property must go unclaimed before it is owed to a state, is usually between 1 and 5 years. The look back period, i.e., how far back in time states can seek to recover unreported property, also varies. Delaware “looks back” to 1981; California looks back even further.
While most companies only retain records for 7 years, the absence of records does not absolve a holder from liability. States often have a statutory or claimed common law right to “estimate” the liability of holders for those years for which records do not exist. Delaware is one such state, and as a result, unclaimed property is its third largest revenue source.
Since at least 2005, Delaware’s Division of Revenue has offered unclaimed property holders the opportunity to enter into what is commonly known as a voluntary disclosure agreement (a “VDA”) to come into compliance for past-due unclaimed property obligations under the Delaware Abandoned Property Law, 12 Del. C. §§ 1101 et seq. (the “Abandoned Property Law”). The tender of this offer was not without controversy.
The Division of Revenue approach has often been called overly aggressive by companies who have never reported, or significantly underreported, categories and amounts of unclaimed property. Many have voiced objection to, among other things, the length of its look-back period as well as the possibility of being targeted for an expensive and time consuming audit potentially involving interest and penalties if initial settlement agreement negotiations failed.
In response, Delaware enacted legislation in June 2012 creating a new voluntary disclosure program (the “New VDA Program” or the “new Program”) managed by the Delaware Department of State that is independent of the Division of Revenue and is intended to be more business-friendly. This new Program, which in effect operates as a limited amnesty, sunsets on July 1, 2015.
NEW DELAWARE VDA PROGRAM ADVANTAGES
- Shortened look-back period
- Enrollees by June 30, 2013 must only report property arising from transaction year 1996 to present (a 15-year advantage over audits)
- Enrollees between June 30, 2013 and June 30, 2014 must only report property arising from transaction year 1993 to present
- Early participants are allowed an extra 12 months to complete their VDA
- Available to all holders except those that are currently under audit or that have already begun or completed a VDA with the State Escheator
- Permits companies that previously entered into a VDA prior to June 30, 2012 to enter into a new VDA for entities, property types and periods not covered by the earlier VDA
- New VDA Program enrollees will not be charged interest or penalties
- Enrollees will receive a complete release from liability for all prior periods
- Enrollees will be protected against unclaimed property audits for all years up to the date of execution of the VDA
- Administered by an independent entity compensated on an hourly basis rather than by the third-party contingency-fee based audit firms retained by the Division of Revenue
- Accounting consultants assist to ensure the program is administered competently, fairly and consistently
- A holder, in exchange for presenting a substantive submission, gets a clean slate for past-due liability owed, improved compliance procedures, and the framework for more accurate and complete reporting going forward.
Out of 900,000 business entities organized in Delaware, the Delaware Secretary of State has sent letters to 700 companies encouraging participation in the new Program. Click here for a copy of 1) November 26, 2012 letter to holders from Delaware Secretary of State; 2) January 9, 2013 letter to holders from Delaware Secretary of State. If Delaware proceeds like other states that have offered “amnesty” programs, a final notice and invitation to participate will be forthcoming.
Concurrently, the Division of Revenue is sending out audit notices, with more to follow this spring. Companies under audit become ineligible to participate in the New VDA Program and run the risk of a multi-year investigation and the possible assessment of interest and penalties which can potentially double their liability. In short, the Delaware unclaimed property audit program is once again gearing up.
Holders who have already received letters from the Delaware Secretary of State should seriously consider entering into the New VDA Program—and even companies who have not yet received a letter are strongly encouraged to enroll—thereby avoiding receipt of an audit notice from Delaware’s Division of Revenue, and gaining the many benefits of the New VDA Program that are being offered for a limited time.
For more information please contact Michael Houghton, Esquire at (302) 351-9215 or firstname.lastname@example.org, or Andrea Tinianow at (800) 927-9801 ext. 65835 or email@example.com.