Model Act Committee Working Towards First Reading Before Commission

BoardroomThe battle lines were clear in Washington, DC this past Friday and Saturday. On one side you had the state unclaimed property administrators represented by NAUPA and on the other side you had the holders represented by the American Bar Association. In the middle was the Committee charged with drafting a new unclaimed property model act for the Uniform Law Commission. Observing and commenting when necessary were additional representatives from the the holder community, states, claimant representatives and third party auditors. Barganier and Associates has two official observers to the committee.

The Committee is working to revise the 1995 Uniform Unclaimed Property Act to reflect changes in law and modern business practices. This meeting was using a draft version that is the working basis for a revised uniform act. The Committee wants a workable draft by this summer's ULC annual meeting. The draft will be presented for a first reading to all of the commissioners which will provide input and make suggestions on how to improve the model act.

General reporting issues

Addresses

The owner's address is important for unclaimed property compliance, as it triggers the priority rules that govern where a property is reported. The new draft adds the definition of an address to include not only the full address needed for US Mail, but also any "description, code or indication of the location of the apparent owner." This would permit those properties without a full address to be reportable under the first priority rule. Holder representatives expressed concerns that a partial address definition could be used as a means to circumvent gift card exemptions where both name and address information is unavailable. Holders pointed to the now amended New Jersey law which attempted to require holders to gather name and address information, or at a minimum the zip code, of the purchaser.

Meanwhile, the holder's address is important as it triggers the second reporting priority rule. "Domicile" is updated to include not only the state of incorporation, but also the state of formation for entities that are not incorporated. For many holders, this clarifies that a limited liability company can in fact be a reporting entity and defines the second priority state. This clarification is very important for multiple entity businesses that do not file consolidated reports, as it removes the uncertainty that the reports would be rejected or disregarded.

Gift Cards

Holders have been concerned from the beginning about how the model act will treat gift cards. Some thirty plus states have exemptions, while many of the remaining states have provisions allowing for the issuer to keep a percentage of the breakage before reporting. Gift cards have also been a target from state legislators in the past decade, as they look for additional revenue. The revised model act draft has several definitions, including gift card, gift obligation, and payroll cards, that all interact to determine how gift cards are treated as unclaimed property. As currently drafted, there is no exemption for gift cards, but there is a provision that only 60% of the value remaining is presumed abandoned. After discussion between the Committee, the advisors and interested parties, the Committee is going to consider adding language that would give uniformity to the states that wish to exempt gift cards. The Committee took into consideration that the majority of states do have exemptions for gift cards, so this should be considered for the model act. The result will be bracketed language that the states will be able to choose from when they enact the model act. If gift cards are not exempted, the draft act makes them reportable after five years, in accordance with the CARD Act provisions relating to expiration dates.

Anti-Assignment Provision

Upon request by NAUPA, the draft model act contains a provision that would prevent a holder from assigning its obligations under the Act, except to a parent, subsidiary or affiliate, or to the holder's successor by merger or consolidation, or to another entity that acquires all or substantially all of the holder's capital stock or assets. This provision was recommended by NAUPA to prohibit actions similar to the gift card assignments in the Delaware whistleblower case or certain offshoring of liabilities. This provision presumes that any assignment is done with fraudulent intent to avoid unclaimed property obligations and could not be done with any other legitimate purpose in mind. Moreover, as holder representatives pointed out, this could trample on provisions of other substantive laws. If in fact that a transaction is done with a fraudulent purpose in mind, the states can use fraudulent transfer provisions to require the holder to remit the property despite the assignment; there is not a substantial need for this provision. Several members of the committee, advisory panels, and other interested parties were directly involved in ongoing litigation on this issue. The Committee as a whole requested that they be kept informed of the current litigation.

De Minimis Exemption

As currently written, the model act provides for aggregate reporting for properties under $50 and a de minimis exemption. The states have little hope of returning the property to owners when it is reported in the aggregate and the result was a de minimis exemption. The Committee voted to remove the exemption from the draft model act, upon recommendation from NAUPA.

General B2B Exemption

Going into the meeting, the model act draft had a B2B exemption for checks and credits so long as there was an ongoing relationship between the owner and the holder. In addition to the requirement that the businesses maintain an ongoing relationship, the draft contained an optional requirement that the relationship be substantial, meaning a relationship in excess of $100,000 per year. NAUPA advisors want no exemptions in the unclaimed property act while the ABA advisors wanted generous exemptions. After much discussion between Committee members, advisors and other interested parties, a motion to unbracket substantial failed (meaning that it remains optional language for the states to consider) while a motion to bracket the entire section containing the exemption passed.

Going into the summer meeting, it is expected that the draft will make B2B transactions reportable with optional language for an ongoing relationship exemption. The ABA and others expressed interest in drafting optional language for states to consider that would make B2B transactions exempt. If the Committee adopts this approach, it would give states three options for B2B checks and credits - (1) reportable, (2) exempt so long as the business maintain an ongoing relationship, and (3) exempt. Holders and other business interests will need to work diligently to make this option available in the model act as NAUPA is clearly against any B2B exemptions.

Securities Industry Issues

Securities, including stocks and dividends, have become the most recent hot button issue for holders and their agents as states have begun to aggressively audit this property category. Of particular issue is which entity is responsible for reporting securities as unclaimed property. Over the two day meeting, there was much discussion on the mechanics of the broker-dealer relationship with issuers and owners. Other issues include what constitutes owner-generated activity and whether automatic deposits are included. There were also broader policy discussions about retirement and other tax advantaged accounts, dividend reinvestment plans, and long term holdings where owners have been encouraged to "set and forget" and hold investments for long periods of time. There is concern that these accounts, if turned over to state unclaimed property departments, will frustrate the intent of the owners.

There was also much discussion about how securities are to be treated by the states once turned over. If securities are quickly liquidated, the owner will not receive any appreciation on the value of the property. On the other hand, NAUPA notes that there is significant cost that the states must pay a custodian to hold the properties in a security form. NAUPA argues that this cost is burdensome on the taxpayers for property that may never be reunited with the owner.

Audit Issues

Statute of Limitations

Section 19 has both the derivative rights doctrine and the statute of limitations. Going into the meetings, the draft had a 3 year statute of limitation for actions or proceedings on property reported, a 6 year statute for value reported was substantially underreported and a 10 year absolute bar on actions, proceedings or examinations. After opposition to such a short audit and enforcement window by NAUPA, the Committee extended the statute of limitations to a 5 year statute for property reported and a 10 year absolute statute of limitation. NAUPA argued that they did not have the resources to audit all holders in the shorter time frames and that would be a windfall to the companies.

The Committee did remove the middle statute for substantially underreported property, as those that were involved in audits found that the audits would always involve the longer periods from the beginning of the audit. This simplified statute of limitation does provide easier administration for both the states and the holders, although it is a longer time period. However, there is some question about the effectiveness of the five year statute, as discussed by the Committee, as it only applies to "property reported." If the bar only applies to property reported and not the report as a whole, a holder still has great uncertainty as to potential liability even though it has complied or attempted to comply with the unclaimed property reporting requirements.

Record Retention

The record retention requirement was set to mirror the statute of limitations period at ten years. There was additional discussion as to what records and documentation would satisfy the record retention requirement and to what extent it should be defined in the statutory language. Currently, the language will require information about the transaction and the address of the owner. Holders are encouraged to retain additional records in order to defend their compliance reporting in case of an audit.

Appeals and Enforcement

The Committee used a Tennessee tax appeals procedure for informal conferences in the case a holder was dissatisfied with the audit findings. In the case that the state administrator and the holder were unable to reach an agreement, there would be an avenue to court, with or without prior payment before suit. The Committee did remove the application of both a lien on the holder for amounts not paid and an automatic stay for enforcement of assessments during a lawsuit. Upon further discussion by the Committee, they decided to make optional language regarding attorneys' fees for the prevailing party.

Third Party Audit Contracts

Third party audit contracts have become another source of much debate for unclaimed property practitioners. States argue that they are not given the budget or staff necessary to conduct large audits and that by cooperating with other states, they are able to obtain economies of scale. Out of necessity, the states argue, they must use third party auditors, and further, they need the flexibility to use contingency fee models. The draft model act provides states with the ability to use third party auditors under a variety of payment arrangements, including contingency fee. However, the act would also require specific findings by the state administrator that it is needed in order to justify the third party auditors and would also require additional disclosure of the contract, fees, amounts recovered and amounts claimed by owners.

In addition to other contract concerns, the model act would also contain a provision that would prevent state unclaimed property employees from working for contract auditors for a specified amount of time. This was modeled after the new Delaware provision created in response to the recent departure of its State Escheator for the primary state auditor after assigning numerous potentially profitable audits to the auditor.

More Work To Be Done

It was clear throughout the two day working session that the model act is only a draft and is in constant flux. On most issues, the reporter was instructed to make changes, sometimes the language left completely in his hands. There will not be another meeting of the entire committee before the annual meeting this summer when the draft will be presented to the entire ULC. Instead, changes that are made as a result of this meeting will be made available via electronic means. Additionally, all interested parties have been encouraged to continue to provide comments and proposed language via written submissions.

Barganier will continue to advocate for changes beneficial to our clients and keep you informed as the model act proceeds. If you have any questions about the current progress of the Uniformed Unclaimed Property Act or how provisions would affect your company, please contact us for further discussions.