Sorting through unclaimed-property liability

Without even knowing it, your company may have unclaimed-property liability issues with one or more states.
Unclaimed property is intangible property that has not been claimed by its rightful owner after a certain amount of time has lapsed. Common examples of unclaimed property include: uncashed payroll checks, uncashed payments to suppliers, uncashed dividend checks, credit balances due to a customer, customer refunds, unreturned deposits and security deposit-box contents. Unclaimed property laws are based on the common-law doctrines of “escheat” and “bona vacantia,” which are the reversions or forfeitures of real or personal property to the state, due to either the absence of anyone competent to inherit the property or as a result of default. Under most unclaimed-property statutes, states exercise the power of escheat over abandoned property by collecting the property from the holder and assuming a custodial role over the property with the intent of returning it to its rightful owner. For example, if a former employee did not cash his or her last paycheck, the company (as the “holder”) may need to turn these funds over to the appropriate state.
All 50 states, the District of Columbia, Puerto Rico and Guam have enacted statutes requiring the reporting and delivery of unclaimed property to the appropriate state by those persons holding such property. Many states have modeled their unclaimed-property statutes based on the Uniform Unclaimed Property Acts drafted by the National Conference of Commissioners on Uniform State Laws.
In general, unclaimed property is intangible property that:
• Is held or issued in the ordinary course of the holder’s business.
• Represents a debt or obligation of the holder to a creditor or owner. • Remains unclaimed for more than the statutory dormancy period after it has become payable or distributable by the holder to the owner.
Typically, all holders of reportable property belonging to another person have a reporting responsibility upon the lapse of the statutory dormancy period for that property. A “holder” is generally defined as any person obligated to hold, deliver, or pay to the rightful owner property that is subject to the unclaimed-property laws. A holder can be an individual, a business, a government, an estate or trust, or even a nonprofit corporation.
Property becomes reportable when it remains unclaimed and reaches the end of its dormancy period. Dormancy periods vary by state and by property type. For example, the dormancy period for wages, in most states, is one year. If a payroll check remains uncashed at the end of that one-year dormancy period, the check would be reportable to the state as unclaimed property. The dormancy period for most other property types is generally three to five years.
Since the obligation to surrender unclaimed property is not a “tax,” the general income tax rules requiring “nexus” do not apply.
So to whom should the unclaimed property be reported when there are multiple states with a connection to the property?
In Texas v. New Jersey, the United States Supreme Court in 1965 developed priority rules to resolve competing claims by four different states. The court reasoned that the intangible property represented a debt and thus was an asset of the creditor. Following this reasoning, the court determined that the first priority claim belonged to the state of the last known address of the creditor or holder as shown by the debtor’s books and records. From a policy standpoint, the court was also motivated by the fact that this first priority rule was simple and clear and turned on factual issues rather than technical, legal ones. It also served the equitable benefit of distributing escheated property to states based on the commercial activities of their residents.
The court also recognized that there are instances where there may be no record of the last known address or that the owner may reside in a state that does not provide for escheat of the property owed. For those instances, the court created a second priority rule whereby the holder’s state of corporate domicile has the next right to the unclaimed property. Thus, a corporation incorporated in Delaware could have an unclaimed-property reporting obligation there even if it conducts no business within Delaware’s borders.
How can holders become compliant with unclaimed-property laws?
Many states offer amnesty or voluntary-disclosure programs to encourage noncompliant businesses to become compliant in exchange for benefits such as limited look-back periods and waivers of penalties and interest. Currently, Delaware is offering a voluntary disclosure program for certain eligible holders. The program allows holders to come forward with past-due unclaimed property obligations in exchange for audit protection, waiver of penalties and interest, and a reduced look-back period. For holders that enroll before June 30, 2014, the look-back period is dramatically shortened from 1981 to 1993. After that date holders will no longer be allowed to enter the program. •


Tarra Curran is a managing director in the tax group and leader of the state and local tax practice at CBIZ Tofias. She can be reached at tcurran@cbiztofias.com.

No posts to display