November 22, 2017 / North America
“The Delaware Secretary of State (SOS) announced on September 29, 2017, that the Department of State will begin mailing notices to holders who have been identified as potentially non-compliant with Delaware unclaimed property laws. The notice requires holders to enter into the SOS’s Voluntary Disclosure Agreement (VDA) program within 60 days of the mailing of such notice or be referred to the State Escheator at the Department of Finance (DOF) for examination. Subsequently, on October 1, 2017, the DOF issued the anticipated finalized new unclaimed property examination regulations, which took effect on October 11, 2017, triggering a 60-day deadline for a qualified holder, currently under audit, to convert from an audit to either an expedited audit or a VDA.
Holders (including those qualified and currently under audit by the DOF or likely to be in receipt of the SOS’s forthcoming notice) have a relatively short timeframe to determine their procedural route for handling any potential historical unclaimed property risks. Accordingly, holders must be informed of the new legislation and should consult with unclaimed property advisors regarding their options for historical risks. This edition of Tax Advisor Weekly highlights (i) what led to the reform, (ii) key changes to Delaware’s unclaimed property laws and examination regulations, (iii) controversial examination policies and procedures that still exist despite new legislation and (iv) pros and cons of entering into a VDA or expedited audit.
Leading Up to Reform
“Priority rules” established by the U.S. Supreme Court provide that where the residence of the rightful owner of unclaimed property cannot be determined, the holder must remit such property to the holder’s state of incorporation. Because many companies are formed or incorporated in Delaware, unclaimed property has been a large revenue source for the state. Thus, Delaware has been one of the more aggressive states in the application and administration of its unclaimed property laws.
In 2016, Delaware came under fire for its aggressive unclaimed property audit practices in Temple-Inland Inc. v. Cook (192 F.Supp.3d 527 (D. Del. 2016)). The court primarily took issue with the state (i) waiting 22 years to audit the company and issuing an assessment for a 17-year lookback period, (ii) failing to provide a reasonable explanation for applying the state’s estimation methodologies retroactively, (iii) calculating an estimate on a 50-state basis and claiming the full amount for Delaware for periods where records did not exist (instead of limiting the extrapolation to only Delaware property), (iv) failing to give notice of its record retention requirements and (v) subjecting the company to potential multiple liability. The court determined that Delaware’s practices in Temple-Inland were so unconscionable that it raised a substantive due process violation.
Also in 2016, the Uniform Law Commission, an organization responsible for drafting and approving model legislation for uniformity purposes among the states, approved a new version of the Revised Uniform Unclaimed Property Act (RUUPA). As a result of both the Temple-Inland decision and the approval of RUUPA, Delaware began drafting its comprehensive legislative unclaimed property reform.
What Are the Significant Changes to Delaware’s Unclaimed Property Laws?