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CBIZ & MHM Executive Education Series™

Unclaimed, Unidentified but Undeniable: A Primer on Managing Your Abandoned Property Marshal Kline May 11 and June 1, 2016

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About Us

• Together, CBIZ & MHM are a Top Ten accounting provider • Offices in most major markets • Tax, audit and attest* and advisory services • Over 2,900 professionals nationwide

A member of Kreston International A global network of independent accounting firms

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Before We Get Started…

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CPE Credit

This webinar is eligible for CPE credit. To receive credit, you will need to answer periodic participation markers throughout the webinar. External participants will receive their CPE certificate via email immediately following the webinar.

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Disclaimer

The information in this Executive Education Series course is a brief summary and may not include all

the details relevant to your situation.

Please contact your service provider to further discuss the impact on your business.

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Presenters

Marshal Kline is a Managing Director in the National State and Local Tax

Practice group at CBIZ MHM, LLC. Mr. Kline’s practice primarily consists

of successful resolution of our clients’ state and local tax controversy

issues including examinations, voluntary disclosures, and affirmative

claims across the country. These controversy issues encompass a broad

range of practice areas including unclaimed property, unitary/non-

unitary, business/nonbusiness, nexus, apportionment, intercompany

expenses and add backs, filing positions, and matters involving U.S.

Constitutional rights and limitations. He is also involved with federal tax

legislation, Internal Revenue Service controversies, transaction taxes,

sales and use taxes, and other tax planning matters.

864.241.0455 • mkline@cbiz.com

Marshal T. Kline, CPA Managing Director

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Agenda

Abandoned/Unclaimed Property (AUP) Basics

02

01

03

04

Priority Rules & Other Technical Issues

Liability Mitigation

Questions

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Introduction to AUP: Why It Matters

• 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 (20+ years in Delaware and New York)

• It’s easy/common 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 an increasingly aggressive audit area

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

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Summary of the Problem: Add It Up

15+ Years

2nd Priority Rule

Contingent Fee Auditors

MATERIAL EXPOSURE (often unidentified)

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SOME BASICS

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AUP: Generally “intangible” property that has not been claimed by its rightful owners after a certain period of time has lapsed (123 property codes)

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

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Common Property Types

• Uncashed vendor checks • Uncashed payroll checks • Accounts receivable credits on account • Deposits on account • Customer rebate/discount/incentive programs • Gift cards • Dividend payments • Securities • Safe deposit box contents • Inactive bank accounts • Unclaimed insurance proceeds

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Common Indicators of Risk

• 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)

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Return of AUP

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!

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Priority Rules – To Which State is AUP Reported?

• 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

*Texas v. New Jersey, 379 U.S. 674 (1965).

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What About the 3rd Priority Rule?

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;

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EXPOSURE EVALUATION & MANAGEMENT

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Summary of the Problem: Add It Up

15+ Years

2nd Priority Rule

Contingent Fee Auditors

MATERIAL EXPOSURE (often unidentified)

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Temple-Inland Case

• 2012 acquired subsidiary of International Paper, Inc. (Temple-Inland, Inc.)* – headquartered in Memphis, TN, but incorporated in Delaware, faced an audit going back to 1981

• Its only identified error was failing to report to DE a single uncashed payroll check worth $147.30

• Third-party auditor Kelmar Associates LLC assessed the company’s “extrapolated” liability at over $2 million, and though reduced at the administrative level, it remained 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.

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

company changed accounting systems in 2006 and, as a result, performed various “clean-up” entries that year.

Year Sales AUP with

DE Address Total Delaware

Assessment

2010 94,217,000 1,850 1,850

2009 95,663,000 1,250 1,250

2008 95,649,000 1,000 1,000

2007 91,970,000 2,250 2,250

2006 88,433,000 1,150 1,150

Actual 465,932,000 7,500 7,500

Error Rate Calculation: 0.0016096769%

Example of the Impact of Extrapolation

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Year Sales AUP in

All States AUP with

DE Address Total Delaware

Assessment

2010 94,217,000 65,000 1,850 1,850

2009 95,663,000 58,000 1,250 1,250

2008 95,649,000 46,000 1,000 1,000

2007 91,970,000 43,000 2,250 2,250

2006 88,433,000 235,000 1,150 1,150

Actual 465,932,000 447,000 7,500 7,500

Error Rate Calculation: 0.095936746% 0.0016096769%

Example of the Impact of Extrapolation (cont’d)

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Year Sales AUP in

All States AUP with

DE Address Total Delaware

Assessment 2010 94,217,000 65,000 1,850 1,850 2009 95,663,000 58,000 1,250 1,250 2008 95,649,000 46,000 1,000 1,000 2007 91,970,000 43,000 2,250 2,250 2006 88,433,000 235,000 1,150 1,150

Actual 465,932,000 447,000 7,500 7,500

Error Rate Calculation: 0.095936746% 0.0016096769%

Extrapolated AUP to DE 2005 85,032,000 81,577

Docu

men

ts U

nava

ilabl

e

81,577 2004 81,762,000 78,440 78,440 2003 78,617,000 75,423 75,423 2002 78,213,000 75,035 75,035 2001 78,014,000 74,844 74,844 2000 77,688,000 74,531 74,531 1999 76,191,000 73,095 73,095 1998 74,965,000 71,919 71,919 1997 72,132,000 69,201 69,201 1996 69,741,000 66,907 66,907 1995 63,444,000 60,866 60,866 1994 58,235,000 55,869 55,869 1993 53,111,000 50,953 50,953 1992 51,068,000 48,993 48,993 1991 49,104,000 47,109 47,109

Estimated 1,047,317,000 1,004,762 1,004,762

Application of Penalties and Interest 602,381 *

Total Delaware Assessment 1,614,643

Example of the Impact of Extrapolation (cont’d)

*Estimate based on Sec. 1159 penalty and interest provisions

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2006 – 2010 (actual DE property – 1st Priority) $ 7,500

1991 – 2005 (estimated liability – 2nd Priority) $ 1,004,762

Penalties & Interest $ 602,381

Proposed Audit Assessment $ 1,614,643

Summary of Example Assessment

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Results of a Contingent Fee Audit

$

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).

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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

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Construing the State Contractual “Anti-Limitations” Provisions…

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. • 35 states (plus D.C.) have adopted this or a nearly identical version. • 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.”

Contractual Anti-Limitations

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

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• 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 • Formulate arguments against standard extrapolation • Reduce/eliminate the extrapolation numerator (self-

remediate) • Evaluate business models and/or contractual arrangements

Keys to Exposure Mitigation

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OTHER TOOLS & RESOURCES

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AUP TOOLBOX

Locate the right person • If considered at all, responsibility for AUP often gets

tossed around like the proverbial “hot potato” • Slightly more often than not, it will fall to the person

in charge of tax. Occasionally, it will reside with someone in accounting (Treasurer, Controller)

• The responsible party must have insight and/or open lines of communication with many different functions/departments

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IT’S A

TOPIC

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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

AUP TOOLBOX» Lately in the News . . . COST Survey

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• “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’).”

• “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

AUP TOOLBOX» COST Survey Comments

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AUP TOOLBOX» It’s on the States’ Agenda (as of Nov. 2014)

Committees/Task Forces • Delaware Unclaimed Property Task Force • Michigan Chamber Tax & Regulatory Reform • Michigan Chamber Tax Policy Committee • U.S. Chamber Institute for Legal Reform • 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 and 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 and Senate Bill 2308 enacted • Tennessee Senate Bill 2516 enacted

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• Moreover, these contract examiners are not compensated at all for the significant amount of unclaimed property that is identified through the audit process and is returned to the owner through due diligence before being reported to the state.

• However, accusations that contract examiners are “unethical” or “overly-aggressive” simply don’t bear scrutiny. Rather, the states believe that contract examiners are controversial primarily because of the nature of their work, and the level of success that they have achieved.

AUP TOOLBOX» NAUPA: The States’ Perspective

*National Association of Unclaimed Property Administrators (NAUPA) memorandum “The States’ Effective Utilization of Private Auditors for the Identification of Unclaimed Property,” 5/9/14

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Contract Examiners and Public Policy Considerations… • Many states lack sufficient resources and cannot conduct audits of large,

complex, multi-state companies on their own. • Due to budget constraints, many states cannot hire, train and retain

auditors for unclaimed property nor can the state afford the associated costs necessary to conduct an effective and efficient unclaimed property examination.

• With unclaimed property, contract examiners are usually paid a percentage of the unclaimed property recovered for the state because of state budget constraints.

• Small states, which do not have the funding for internal auditors, could never enforce their statute if they were required to pay on an hourly basis.

AUP TOOLBOX» NAUPA: The States’ Perspective

*National Association of Unclaimed Property Administrators (NAUPA) memorandum “The States’ Effective Utilization of Private Auditors for the Identification of Unclaimed Property,” 5/9/14

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Contract Examiners and Public Policy Considerations… • It is important to note that the audit firm is not paid any fee

whatsoever on property that is identified by the examination but is returned to the rightful owner during the course of the examination or soon thereafter.

• Regardless of what a state pays as a contingency fee, the state pays 100 percent of the claim to the rightful owner as there is no deduction based on the fee paid to recover the property.

• Throughout the audit process, the state administrators are engaged.

AUP TOOLBOX» NAUPA: The States’ Perspective

*National Association of Unclaimed Property Administrators (NAUPA) memorandum “The States’ Effective Utilization of Private Auditors for the Identification of Unclaimed Property,” 5/9/14

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Conclusion… • If contingent fee examinations are eliminated, it would be

detrimental to many state unclaimed property programs and their ability to most effectively enforce the very laws that they are charged with administering. States that have discontinued their audit programs have seen a drop in holder reporting and in the value of property being reported which is harmful to the rightful owners and allows holders to retain funds which do not belong to them..

AUP TOOLBOX» NAUPA: The States’ Perspective

*National Association of Unclaimed Property Administrators (NAUPA) memorandum “The States’ Effective Utilization of Private Auditors for the Identification of Unclaimed Property,” 5/9/14

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Kellie A. Lanford Senior Manager

CBIZ MHM, LLC W: 864-241-2135

M: 864-906-6200

F: 864-241-2002

klanford@cbiz.com

www.cbiz.com

Marshal T. Kline Managing Director

CBIZ MHM, LLC W: 864-241-0455

M: 864-569-4471

F: 864-241-2002

mkline@cbiz.com

www.cbiz.com

CBIZ Unclaimed Property practice >> visit us at www.cbiz.com/salt/aup

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? QUESTIONS

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