July 30, 2012
On July 11, 2012 Governor Jack Markell signed into law Senate Bill No. 258 ("SB 258"), which creates new incentives for holders of abandoned and unclaimed property who are not in full compliance with Delaware's abandoned and unclaimed property law to voluntarily come forward and report such unreported property to the State of Delaware. SB 258 authorizes the Delaware Secretary of State (the "Secretary") to shorten the beginning of the audit "reach-back" period for unclaimed property audits from calendar year 1981 to calendar year 1996 (or to 1993 in certain cases) in exchange for the holder entering into an unclaimed property voluntary disclosure agreement ("VDA") with the Secretary. Holders that wish to take advantage of the 1996 "reach-back" period must enroll in the program by June 30, 2013, and complete the VDA process by June 30, 2014. A less generous 1993 "reach back" period will apply to those holders that enroll in the program after June 30, 2013, but before June 30, 2014, and complete the VDA process by June 30, 2015.
What is unclaimed property and where should it be reported?
Unclaimed property is generally defined as tangible or intangible property that has gone unclaimed by its rightful owner for a specific period of time (commonly referred to as the "dormancy period"). For example, under Delaware law, an uncashed payroll check is deemed unclaimed after the expiration of a 5-year dormancy period. A holder of unclaimed property is generally required to report and remit the unclaimed property to the state of the lost owner's last known address (as shown on the books and records of the holder), and where the address of the owner is unknown, is in a foreign country or is in a state which does not provide for the remittance of the property type being reported, to the state of the holder's incorporation (Delaware, for entities incorporated there).
Common forms of property held by a business that may go unclaimed are:
- uncashed checks (such as payroll and vendor checks);
- customer rebates, credit balances, overpayments and refunds;
- unused gift card and pre-paid card balances;
- layaways and security deposits;
- shares of stock, bonds, and other securities; and
- distributions with respect to stock, bonds or other securities and money used to redeem such property.
When does property become unclaimed under Delaware law?
There are generally two categories of unclaimed property that Delaware requires to be reported, "general ledger-type" properties and "investment-type" properties. The dormancy period for "general ledger-type" properties (such as uncashed checks, rebates, credit balances, overpayments, refunds, unused gift card or pre-paid card balances, layaways and security deposits) is generally 5 years. In contrast, the dormancy period for "investment-type" properties (such as shares of stock, bonds, and other securities including dividends and interest paid thereon, and any payments or distributions made with respect to such property) is 3 years.
What happens if my business does not currently report unclaimed property?
Companies that fail to annually report and remit unclaimed property to Delaware may be subject to interest and penalties (up to a maximum of 125%) for failure to comply with Delaware's abandoned and unclaimed property laws. In addition, under current law, such companies are at a greater risk of being audited for periods dating as far back as calendar year 1981. Delaware's position has consistently been that the statute of limitations does not bar it from applying a 1981 audit "reach-back" period where unclaimed property reports have not been filed. What makes the 1981 reach-back period even more troublesome is that Delaware law specifically allows the state to use estimation techniques for periods where the available records of the holder are insufficient to determine the actual amount of unclaimed property due and owing to the state. Many businesses are unlikely to have records dating back that far, and as a result such estimation techniques can lead to unreasonably high unclaimed property exposure, especially when applied to numerous years dating as far back as calendar year 1981. SB 258 reduces the potential exposure resulting from unclaimed property audits for holders that enter into a VDA with the Secretary by reducing the beginning of the "reach-back" period from 1981 to 1996 (or to 1993 in certain cases). In addition, under rules governing the earlier VDA program administered by the State Escheator (as opposed to the Secretary), holders generally have been able to have interest and penalties abated, and generally have been allowed to perform a self-audit to determine their unclaimed property liability. These issues have not been specifically addressed in SB 258 but, as was the case with the earlier VDA program, are likely to be addressed by the Secretary in future rules and regulations.
Benefits and specific terms of the Voluntary Disclosure Program under SB 258
- A 1996 "reach-back" period will apply to holders that indicate in writing their intent to enter into a VDA with the Secretary on or before June 30, 2013, and enter into a formal VDA and make payment in full or enter into a payment plan on or before June 30, 2014.
- A 1993 "reach-back" period will apply to holders that indicate in writing their intent to enter into a VDA with the Secretary after June 30, 2013 and on or before June 30, 2014, and enter into a formal VDA and make payment in full or enter into a payment plan on or before June 30, 2015.
- Once a VDA is accepted by the Secretary, neither the Secretary nor the State Escheator may audit the unclaimed property disclosed in the VDA, unless there is evidence of fraud or willful misrepresentation.
- The State Escheator may not initiate an audit of any holder prior to July 1, 2015, who has indicated in writing its intent to enter into a VDA with the Secretary by June 30, 2014, unless the Secretary and the holder are unable to come to an agreement regarding the unclaimed property involved and the Secretary refers the resolution of such property to the State Escheator.
- Holders currently under audit or who have received a notice of audit prior to the filing of a written intent to enter into a VDA with the Secretary are not eligible for the shortened "reach-back" periods.
- Holders that are currently participating in a VDA program with the State Escheator or that have indicated in writing their intent to enter into a VDA with the State Escheator prior to June 30, 2012, are not eligible to enter into a VDA with the Secretary, but are eligible for the shortened "reach-back " periods so long as they make payment by the June 30, 2014, or June 30, 2015, deadline.
Who should consider taking advantage of the Voluntary Disclosure Program under SB 258?
Any business that is currently not in full compliance with Delaware's abandoned and unclaimed property laws (even if only with respect to a particular property type) should consider enrolling in the new voluntary disclosure program, especially if the business is currently or was previously incorporated in Delaware and was in existence prior to 1996.
Holders that are interested in enrolling in the voluntary disclosure program should consult with legal counsel prior to contacting the State of Delaware to ensure that all legal privileges are maintained throughout the VDA process.
This article was prepared by Sheldon Elefant (email@example.com or 212 318 3127). For more information contact Sheldon Elefant, Jim Dreyfus (firstname.lastname@example.org or 212 318 3248) or Michael Flamenbaum (email@example.com or 212 318 3079) from Fulbright's Tax Practice.
Fulbright's Tax Practice
Fulbright & Jaworski's Tax Practice Group has sustained a national reputation for our experience with federal, state, and local tax matters. In addition to counseling and advising our clients, Fulbright's Tax Practice Group is often retained by other law firms to provide tax advice to their clients. Our attorneys are experienced in a wide-range of tax-related issues, positioning Fulbright as the law firm of choice for clients who recognize the value of thorough representation on tax-sensitive issues. To learn more about our tax practice go to www.fulbright.com/tax.