1

Abandoned/Unclaimed Property

Presented by

Marshal Kline, Managing Director, CBIZ MHM Email: mkline@cbiz.com | Phone: (864) 241-0455

linkedin.com/in/pub/marshal-kline/6/a35/259

2

Every business creates and/or holds AUP

Few businesses appropriately report and/or remediate AUP (“. . . It is estimated that less than 25% of companies in U.S. are in full compliance “ – Accounting Today 6/1/2011)

Audit exposure exists for 15+ years in most states (30+ years in Delaware)

It’s easy to acquire AUP through M&A (asset deals are not immune)

AUP represents a significant revenue source for many states and lately it’s become a very aggressive audit area

*AUP is often a material “unknown” exposure for many companies

Introduction to AUP: Why It Matters

3

Committees/Task Forces - Delaware Unclaimed Property Task Force - Uniform Law Commission - Michigan Chamber Tax & Regulatory Reform - U.S. Chamber Institute for Legal Reform - Michigan Chamber Tax Policy Committee - COST Unclaimed Property Committee

2014 Legislation (Enacted/Pending) - Delaware Senate Bill 228 enacted - Illinois House Bill 4242 pending - Delaware Senate Bill 215 considered but not advanced - Louisiana House Bill 411 pending - Michigan House Bill 4289 enacted - Maryland Senate Bill 690/House Bill 797 pending - Illinois Senate Bill 1988 enacted - Massachusetts House Bill 20 pending - Georgia House Bill 920 enacted - Michigan House Bill 4703 pending - Iowa Senate Bill 2342 enacted - Oklahoma House Bill 3287 pending - Iowa House Bill 2296 enacted - Pennsylvania House Bill 1937pending - Indiana Senate Bill 220 enacted - West Virginia Senate Bill 263 pending - Indiana Senate Bill 208 enacted - Mississippi Senate Bill 2796 enacted - Missouri House Bill 1075 enacted - Pennsylvania Senate Bill 278 - Rhode Island House Bill 7031/Senate Bill 2308 enacted - Tennessee Senate Bill 2516 enacted

It’s on the States’ Agenda

4

10/01/2014 – Sent to the Delaware Unclaimed Property Task Force

Of all audits currently underway, at least half have been open for 3 years or more

Of all audits completed, 100% took more than 3 years

All respondents estimated that the cost to them in conducting the audit (not including any resulting assessments) would exceed $100,000. In fact, more than half responded that the cost would be over $1,000,000.

*Full survey downloadable here:

http://www.cost.org/WorkArea/DownloadAsset.aspx?id=88319

Lately in the News – COST Survey

5

“Audit length and volume of data were both excessive. In excess of 20,000 hard copy

pages and many electronic files were provided. More than 3,700 man hours of internal resources were needed to respond to audit requests.”

“I have no idea who our “DE Audit Supervisor” is – that has never

been conveyed to us. The letter came from Mark Udinski, and we’ve had calls that included Mark (before he joined Kelmar) ranting and threatening. . . VERY unprofessional. . . and a DE attorney (didn’t rant, but did threaten – he’s been ‘waiting for an opportunity to take this to court’).

*Full survey downloadable here: http://www.cost.org/WorkArea/DownloadAsset.aspx?id=88319

Lately in the News – COST Survey

6

“My company has had an unclaimed property policy in place for decades, and we have reported to all states for decades. . . But from the beginning of this exam, the approach is that we don’t comply and we’re hiding that non-compliance somehow. We may not comply 100%, but we should be close. It still won’t matter – we don’t have returns that go back to 1986 and we won’t receive any credit for those filings,

not really . . . Having NO IDEA of what our assessment may be hangs over my area - it won’t be pretty when it arrives, and it won’t result in many, if any, owners receiving their funds.

*Full survey downloadable here: http://www.cost.org/WorkArea/DownloadAsset.aspx?id=88319

Lately in the News – COST Survey

7

In 2012, International Paper, Inc. acquired Temple-Inland, Inc., a company headquartered in TN but incorporated in DE – it

faced an AUP audit going back to 1981

Its only reported error was failing to report a single uncashed payroll check worth $147.30

Third-party auditor Kelmar Associates LLC has assessed the company’s “extrapolated” liability at nearly $1.4 million

Company has been forced into litigation despite a strong history of compliance

*Temple-Inland, Inc. v. Cook, No. 1:L14-CV-00654-SLR (D. Del. 5/21/2014), complaint filed.

Temple-Inland Case*

8

AUP: Generally “intangible” property that has not been claimed by its rightful owners after a certain period of time has lapsed

Holder: Person or business in possession of property belonging to another (or obligated to pay/deliver)

Owner: Person or business with legal right to property held by another

Dormancy Period: State-by-state defined period of time for each property type during which there has been no owner directed activity

Due Diligence: State-by-state defined efforts required from Holders to locate owners and reunite them with held AUP before turning over to the state

Common Terms and Definitions

9

Snapshot of the AUP Reporting/Remediation Process

HOLDER OF AUP uncashed payroll customer credits/rebates gift cards (unredeemed portion)

AUP OWNERS former employees customers vendors shareholders

STATE CUSTODIAN Holds collected AUP with

intent to reunite with owner.

-Annual compliance -Audit assessment

-VDA reporting

$

$ $

www.naupa.org >> reporting www.missingmoney.com *Be sure you are compliant FIRST!

10

STATE CONTINGENT FEE AUDITOR

Other State Other State Other State

Assess AUP/penalties/interest

Estimate AUP for years with no data

Perform remediation (maybe)

Match to last known address/confirm no address

Identify potential AUP

Review available data (3-5 years)

Engage

Solicit

Engage

Snapshot of Contingent Fee Audits

11

1st Priority Rule

– State of owner’s last known address

2nd Priority Rule

– If identified property cannot be matched with a last known address

– State of incorporation

Priority Rules – To Which State is AUP Reported?

12

Uniform Unclaimed Property Act (1995), Section 4. Rules For Taking

Custody, Paragraph (6) the transaction out of which the property arose occurred in this State, the holder is domiciled

in a State that does not provide for the escheat or custodial taking of the property, and the last known address of the apparent owner or other person entitled to the property is unknown or is in a State that does not provide for the escheat or custodial taking of the property;

What About the 3rd Priority Rule?

13

Taxpayer is incorporated in Delaware, has its headquarters in Kansas and does business in approximately 25 states.

Year Sales AUP with

DE Address Extrapolated AUP

Sourced to Delaware Total Delaware

Assessment

2012 75,000,000 1,850

Use Actual Data

1,850

2011 70,000,000 1,250 1,250

2010 68,000,000 1,000 1,000

2009 67,500,000 2,250 2,250

2008 66,500,000 1,150 1,150

Actual 347,000,000 7,500 7,500

Error Rate Calculation: 0.0021613833%

Example of the Impact of Extrapolation

14

Year Sales AUP in

All States AUP with

DE Address Extrapolated AUP

Sourced to Delaware Total Delaware

Assessment

2012 75,000,000 46,250 1,850

Use Actual Data

1,850

2011 70,000,000 31,250 1,250 1,250

2010 68,000,000 25,000 1,000 1,000

2009 67,500,000 56,250 2,250 2,250

2008 66,500,000 28,750 1,150 1,150

Actual 347,000,000 187,500 7,500 7,500

Error Rate Calculation: 0.054034582% 0.0021613833%

Example of the Impact of Extrapolation Continued

15

Year Sales

AUP in

All States

AUP with

DE Address

Extrapolated

AUP Sourced

to Delaware

Total

Delaware

Assessment2012 75,000,000 46,250 1,850 1,850

2011 70,000,000 31,250 1,250 1,250

2010 68,000,000 25,000 1,000 1,000

2009 67,500,000 56,250 2,250 2,250

2008 66,500,000 28,750 1,150 1,150

Actual 347,000,000 187,500 7,500 7,500

Error Rate Calculation: 0.054034582% 0.0021613833%

2007 73,500,000 39,715 39,715

2006 68,000,000 36,744 36,744

2005 66,000,000 35,663 35,663

2004 64,500,000 34,852 34,852

2003 63,000,000 34,042 34,042

2002 61,500,000 33,231 33,231

2001 64,000,000 34,582 34,582

2000 63,500,000 34,312 34,312

1999 60,500,000 32,691 32,691

1998 57,000,000 30,800 30,800

1997 55,000,000 29,719 29,719

1996 51,000,000 27,558 27,558

1995 50,500,000 27,287 27,287

1994 52,000,000 28,098 28,098

1993 49,500,000 26,747 26,747

1992 47,500,000 25,666 25,666

1991 46,000,000 24,856 24,856

1990 42,500,000 22,965 22,965

1989 40,000,000 21,614 21,614

1988 39,000,000 21,073 21,073

1987 38,500,000 20,803 20,803

1986 38,500,000 20,803 20,803

1985 36,000,000 19,452 19,452

1984 34,500,000 18,642 18,642

1983 34,000,000 18,372 18,372

1982 28,500,000 15,400 15,400

1981 26,500,000 14,319 14,319

Estimated 1,351,000,000 730,007 730,007

Application of Penalties and Interest 921,884

Total Delaware Assessment 1,659,391

Use

Actual

Data

Docu

ment

s Una

vaila

ble

Docu

ment

s Una

vaila

ble

Example of the Impact of Extrapolation Continued

16

2008 – 2012 (actual DE property – 1st Priority) $ 7,500

1981 – 2007 (estimated liability – 2nd Priority) 730,007

Penalties & Interest 921,884

Proposed Audit Assessment 1,659,391

Summary of Example Assessment

17

$

AUP OWNERS

% Contingent Fee Auditors

STATE CUSTODIAN Holds collected AUP

with intent to reunite with owner.

$ Many owners are never found and amounts assessed based on estimates or “extrapolations” can never be matched to an owner. Therefore, these amounts remain with the state (reported to be over 90% in DE).

Results of a Contingent Fee Audit

18

15+ Years

2nd Priority Rule

Contingent Fee Auditors

MATERIAL EXPOSURE (often unidentified)

(i.e., extrapolation)

Summary of the Problem: Add It Up

19

Uncashed vendor checks

Uncashed payroll checks

Accounts receivable credits on account

Deposits on account

Customer rebate programs

Gift cards Dividend payments

Securities Safe deposit box contents

Inactive bank accounts

Unclaimed insurance proceeds

Common Property Types

20

Construing the State Contractual “Anti-Limitations” Provisions . . .

*State Tax Notes, 66 STN 417 (11/5/12).

Contractual Anti-Limitations

State contractual anti-limitations provisions first arose in connection with the drafting of the Uniform Unclaimed Property Act of 1981 (the 1981 Act). In particular, Section 29(a) of the 1981 Act provides that:

The expiration, before or after the effective date of this Act, of any period of time specified by contract, statute, or court order, during which a claim for money or property can be made or during which an action or proceeding may be commenced or

enforced to obtain payment of a claim for money or to recover property, does not prevent the money or property from being presumed abandoned or affect any duty to file a report or to pay or deliver abandoned property to the administrator as required by this Act.

The comment to section 29(a) of the 1981 Act further states that the contractual anti-limitations provision was designed so that “the expiration of time periods set forth in contracts will not prevent the property from becoming reportable.”

21

Recent mergers/acquisitions

Changes in accounting systems

Less than 15 years record retention policy

Possible P&L clean-ups (e.g., miscellaneous income write-offs)

Business model not conducive to maintaining owner addresses (e.g., gift cards)

Large credit balances in “target” accounts (e.g., A/R, customer deposits, accrued rebates, etc.)

Not filing with your state of incorporation, or anywhere else

Disgruntled employees (potential whistleblowers)

Common Indicators of Risk

22

Don’t let an audit happen

– Get compliant

– Prepare “Audit Defense” book

– Consider VDA

Reduce risk/exposure

– Enhance record retention

– Evaluate/modify accounting policies and procedures

– Reduce/eliminate the extrapolation numerator (self remediate)

Keys to Exposure Mitigation

23

You may also be interested in

Risk Management and Risk Transfer by

Remonde Brangman Risk Advisory Services Practice Leader – Mid-Atlantic

and

Anthony Consoli President, CBIZ Insurance Services, Mid-Atlantic