Unclaimed property laws put cash in the right hands.
By G. Samuel Schaunaman II, JD and Christopher S. Jensen, CPA
According to The Wall Street Journal, Illinois collected approximately $226 million in unclaimed property in fiscal 2006, and held about $1.7 billion in unclaimed property as of June 2006. “The 50 states collectively held roughly $35 billion in unclaimed property as of June 2006,” the publication explained.
The Illinois State Treasurer defines unclaimed property as “money or assets that have been separated from their owner for at least 5 years.” Generally speaking, unclaimed property has four characteristics:
It is intangible personal property, such as uncashed checks, outstanding customer credit balances and unclaimed stock certificates. (Note, though, that many states claim a few limited types of tangible personal property, such as the contents of safe deposit boxes.)
The whereabouts of the apparent owner is unknown.
The property has remained unclaimed for a prescribed “dormancy” or “abandonment period.”
The holder owes a “fixed and certain obligation” to the owner.
If unclaimed property is indeed being held, determine which jurisdiction is entitled to receive the funds. Under the rules of jurisdiction (which were promulgated by the US Supreme Court in the seminal case Texas v. New Jersey), the state of the owner’s last-known address has the first right to claim the property. If the holder doesn’t have the last-known address, then the state of the holder’s “domicile” can claim the property. Under the 1995 Uniform Unclaimed Property Act, the holder’s domicile is defined as “the state of the holder’s incorporation for corporations, and principal place of business for holders other than corporations.” While seemingly straightforward, definitions of domicile vary according to jurisdiction.
Unclaimed property audits have increased significantly in recent years, due in part to low rates of compliance with the law, as well as state budget shortfalls. Triggers for audits may include mergers and acquisitions, increased publicity about a company, company size, involvement in a specific industry or possession of certain property types, filing reports without the requisite industry property types (for example, oil and gas companies failing to report uncashed royalty payments), and even the filing of zero (or negative) reports.
What sets unclaimed property compliance apart is the fact that, generally, there is no statute of limitations for potentially reportable unclaimed property. This means that, unlike a tax audit, unclaimed property audits in some states can reach back more than 20 years. Amounts deemed immaterial in any given year therefore can become material, given the cumulative effect of the unclaimed property audit liability (as well as penalty and interest assessments) over a 5-, 15-, or even 20-year period.
In terms of the Illinois Uniform Disposition of Unclaimed Property Act, CPAs need to be familiar with three areas: Key provisions, reporting and remittance requirements, and exempt property types.
The Illinois Uniform Disposition of Unclaimed Property Act is broad in scope, and several sections detail the types of property covered. For example, the Act defines “reportable property” as “property, tangible or intangible, presumed abandoned under the Act that must be appropriately and timely reported to the Office of the State Treasurer under this Act.” [765 ILCS 1025/1, Sec.1(l).]
The breadth of categories is expansive. In fact, the Instructions for Filing the Annual Report and Annual Remittance Detail of Unclaimed Property (Reporting Instructions) on the Illinois State Treasurer website lists approximately 100 unclaimed property categories (“reportable abandoned property”), including “inactive savings and checking accounts, unpaid wages or commissions, stocks, bonds and mutual funds, money orders and bill overpayments, paidup life insurance policies, and safe deposit box contents.”
Reporting & Remittance
Almost all holder types are covered under the Act’s reporting requirements. The Act contains a broad definition of the term “holder” as “any person in possession of property subject to this Act belonging to another, or who is trustee in case of a trust, or is indebted to another on an obligation subject to this Act.” [765 ILCS 1025/1, Sec.1(d).] “Person” is defined as “any individual, business association, financial organization, government or political subdivision or agency, public authority, estate, trust, or any other legal or commercial entity.”
The Reporting Instructions indicate that the annual report is due on May 1 for life insurance companies, business associations and utilities, and on November 1 for banking and financial organizations, insurance companies other than life insurance companies, and government entities.
In terms of the reporting process itself, the Act allows amounts due to owners that individually amount to less than $25 to be reported in the aggregate. According to the Reporting Instructions, Illinois requires holders to file a negative or zero report, and, like most other states, requires missing owners to be notified before their property is reported to the State Treasurer.
The Reporting Instructions also indicate that, “If the holder has not communicated with the owner at his last-known address at least 120 days before the deadline for filing the annual report, the holder shall mail, at least 60 days before that deadline, a letter by first-class mail to the owner at his last-known address if any address not shown to be inaccurate is known to the holder.” The instructions further state that, “No contact (is) required on accounts less than $10.”
There are, however, several property types that are exempt. A “limited exemption,” for example, exists for certain gift certificates and gift cards. According to the Illinois State Treasurer, “Gift certificates and gift cards are required to be turned over as unclaimed property if they have expiration dates or service fees. If an expiration date is specified, the balance is presumed abandoned 5 years from the date of purchase. If they are rechargeable, they are considered abandoned 5 years from the date of the last owner-initiated transaction.”
Furthermore, gift certificates or cards that were issued prior to “the effective date of this amendatory Act of the 93rd General Assembly” generally will qualify for exemption if “it is the policy and practice of the issuer of the gift certificate or gift card to honor the gift certificate or gift card after its expiration date” and “it is the policy and practice of the issuer of the gift certificate or gift card to eliminate all post-sale charges and fees, and the issuer posts written notice of the policy and practice at locations where the issuer sells gift certificates or gift cards.” [765 ILCS 1025/10.6; see also P.A. 93-945, Sec. 5, eff. Jan. 1, 2005.]
Illinois also has enacted a statutory business-to-business exemption effective March 23, 2000, whereby amounts held for missing business associations are exempt from being reported and remitted as unclaimed property. Specifically, the provision states that, “any property due or owed by a business association to or for the benefit of another business association resulting from a transaction occurring in the normal and ordinary course of business shall be exempt from the provisions of the Act.” [765 ILCS 1025/2a(b).] The term “business association” is defined as “any corporation, joint stock company, business trust, partnership, or any association, limited liability company, or other business entity consisting of one or more persons, whether for profit or not for profit.” [765 ILCS 1025/1(b).]
What’s more, a leading Illinois Federal court case, Commonwealth Edison Co. v. Vega, ruled that unclaimed amounts emanating from an ERISA-covered pension plan need not be turned over to the State Treasurer as unclaimed property, due to federal pension law (ERISA) preemption.
So how can you minimize risk and ensure compliance with the law? The easy answer is to establish an unclaimed property program, the vital elements of which include:
Identifying Unclaimed Property Exposure. Conducting a thorough review of a company’s books and records will help to identify and perform any required due diligence. If left unresolved, report any outstanding unclaimed property liability to the proper jurisdiction.
Understanding State Voluntary Compliance Initiatives. Become familiar with state unclaimed property voluntary disclosure programs or amnesty initiatives.
Setting the Tone at the Top. Integrate unclaimed property policies into the corporate culture. The policy should be rolled out by an appropriate management representative and disseminated throughout the organization.
Developing and Implementing Detailed Procedures. Also retain records in accordance with state law provisions and educate staff in unclaimed property procedures.
Conducting Regular Internal Audits. This will confirm that the policy and procedures are effective.
Forming an Unclaimed Property Committee. Creating this committee is integral to the success of any compliance initiative. It should consist of various c-suite leaders and management executives.
Unclaimed property is a key revenue source for the states, and, understandably, enforcement efforts continue. For CPAs this means an opportunity to enhance a company’s compliance and ensure the proper procedures are in place for identifying and reporting unclaimed property. It also means the opportunity to assess whether a company’s financial statements accurately reflect its potential unclaimed property exposure.
G. Samuel Schaunaman II, JD is a senior manager of Unclaimed Property at Thomson Reuters. Christopher S. Jensen, CPA is a senior consultant of Unclaimed Property at Thomson Reuters.