Unclaimed property: Think that money is yours? March 27, 2014

Baker Tilly refers to Baker Tilly Virchow Krause, LLP, an independently owned and managed member of Baker Tilly International.

Agenda

> Unclaimed property basics > Determining your liability > Voluntary disclosure agreements > Recordkeeping issues > Mergers and acquisitions > Audits and Delaware’s VDA program

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What is unclaimed property?

> Definition: Any intangible personal property that is held, issued, or owed in the ordinary course of business and has remained unclaimed by the apparent owner for a specified period of time after it became payable or distributable is presumed abandoned.

Note: defined by each state statue, variations exist

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Who gets the money?

Which state gets the money? > In 1965, the US Supreme Court (Texas v. New Jersey) decided

that unclaimed property obligations must be reported and remitted to the state of the last known address of the owner (the entity to which the check/property/credit is owed) in your records.

> This means due diligence and reporting obligations are NOT dependent upon whether your company does business or is licensed to do business in a particular state.

> The last known address of your customer (the owner) controls where and how unclaimed property is reported and remitted.

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File your unclaimed property reports

> File with all applicable jurisdictions > ALL states have unclaimed property laws: 54 different

jurisdictions have enacted unclaimed property laws – Unclaimed property reporting is mandatory – States have the ability to charge penalty and interest for

noncompliance … some states charge officers – Extensive lookback period for nonfilers – States currently are making wide use of contingent auditors and more

aggressive auditing/estimation – Whistleblower laws apply – Company will have to pay for the third-party audits – Limited appeal rights

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Holder responsibilities

> Holder responsibilities under unclaimed property laws include: – File a report timely – Perform due diligence timely – Remit the property timely – Maintain copies of the records and reports – Maintain supporting documentation – Protect the funds until reported

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Recommended first steps

> If you’ve never reported in any state, what should you do? – Verify that all unclaimed property is captured – Importance of a cohesive approach – Need for policies/procedures/support – Consideration of prior M&A activities – Interface with other company departments – Thoroughness is important and required by state law

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Determine your liability

> Determining your liability: Documents to gather/review – Corporate structure – Annual reports – Current and previous charts of accounts – General ledger trial balances – Prior unclaimed property report/audit activity – O/S check listings of all disbursement accounts – Accounts receivable aging report – Journal entries related to write-offs (and associated detail) – Descriptions and contracts related to programs administered by third party – Merger and acquisition documents

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Determine your liability

> Property types to consider (not an all-inclusive list) – Accounts receivable credit balances – Accounts payable – Payroll – Commissions – Refund accounts – Gift certificates – Security deposits

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– Insurance claim payment – Dividends – Shares of stock – Safety deposit box – Utility deposits – Savings accounts – Workers compensation

Determine your liability

> Review applicable state statutes to determine exemptions, deductions, property types, and unclaimed property definitions.

> Common examples: – Business to business (B2B) – Payroll exemptions (Kentucky, Michigan, and Ohio) – Administrative exemptions (Texas) – Shorter lookback period

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Remediate your liability

> You may not need to escheat – Take the money into income – Owner’s confirmation that the property is theirs (Reunite) – Current, ongoing business relationship between owners and holders

(Resolve, potentially income) – Duplicate property issued in owner’s name in error (Income) – Owner’s confirmation that property satisfied by other means (Income)

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Voluntary disclosure agreements

What is a voluntary disclosure agreement (VDA)? > Agreement to perform some of the following: perform due diligence,

file promptly going forward, apply state laws ... generally allows for penalties and interest to be abated and in some cases the lookback period is reduced

> Formal vs. informal - Most states have adopted some type of voluntary disclosure program

> Amnesty programs - Much more formal and offered by some states on an occasional basis

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Voluntary disclosure agreements

Why seek a VDA for each state? > If accepted, the benefits include:

– Limited lookback periods – Limited audit scope – Self-review – Waiver of penalty in most cases – Waiver of interest in most cases – Closing letter security – Sending all property to one state is not encouraged

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Voluntary disclosure agreements

VDA: How do we get started? > Request/petition for admittance into the program

– Contact the states – Make sure you qualify

o Not currently under audit in that state o No filing history

> Examine the need for additional help – Get other department personnel involved – Need to hire outside counsel/consultants?

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Be proactive > Potential risks of VDA (if not performed properly)

– Timing constraints as determined by VDA – Due diligence requirements in some jurisdictions – Full disclosure of all areas – Affidavit of available information required in some jurisdictions

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Voluntary disclosure agreements

Preparing the reports

Preparing all the reports: Basic checklist > Have you performed due diligence? > Does the report need to be filed electronically? > Does the payment need to be made electronically? > Who can sign the report? > Are negative reports required? > When is the report due? > Postmark vs. Received by > Prepare Delaware (state of incorporation) last

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Incomplete records: Recordkeeping issues

> Estimation process – Base period (generally 2005 and forward)

o What is included? B2B? Exemptions? – Compute error rate

o Unclaimed property/revenue, payroll, etc.) o Important figure – determines liability

> Stat sampling – not all records tested > Erroneous data? Missing owner data?

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Incomplete records: Mergers and acquisitions

Considerations upon exam > Record retention issues from M&A transactions > Asset purchase versus stock purchase Best practices during merger > Appropriate indemnifications are included within the agreements > Review acquisition documentation > Review the records of the target company to assess any

potential liability > Confirm target company’s compliance/audit history > Record availability and review of third-party contracts, i.e.,

payroll processing, stock transfer agents, benefit plan administrators

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Audits

Two basic audit types > State Audit Department

– Department of Revenue, Secretary of State, Department of Unclaimed Property

– On occasion will perform a “joint audit” in conjunction with another state

> Third-Party Audit – Third-party vendor who audits on behalf of many states – Typically work on a contingent fee arrangement – Increased activity – new audit firms have formed

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Audits

> Random (or more likely) audit triggers – Registering in a state to do business or pay tax, but not filing

unclaimed property reports – Industry type – oil and gas, financial services, and health care – State of incorporation – History of mergers and acquisitions – Period of rapid growth – Claiming property from a particular state with no reporting history – The “drive-by audit”

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Delaware VDA program

> Why this program? – Holders that enter before June 30, 2014, lock in a lookback period

dating back to 1993 o Without VDA, lookback is 1981

– Audit protection – Penalty waiver – 50% of unclaimed property liability

> No VDA after June 30, 2014 > Administered by a law firm – representation is advisable > States will find ways to audit in future – easy money

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Unclaimed property summary

> Determine areas which contain unclaimed property liability. > Determine the states where an unclaimed property report should

be filed. > Comply with states’ unclaimed property laws. > Take advantage of voluntary disclosure programs where

applicable. > Get ready for next year!

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