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JMS Advisory Group, LLC. Foundations of Unclaimed Property. James O. Santivañez. www.jmsadvisors.com. Origins from British Common Law/Feudal Times Escheat Traditional Custodial Bona Vacantia Unclaimed Property is not a “tax”. History. What is Unclaimed Property?.

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JMS Advisory Group, LLC


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    1. JMS Advisory Group, LLC Foundations of Unclaimed Property James O. Santivañez www.jmsadvisors.com

    2. Origins from British Common Law/Feudal Times Escheat Traditional Custodial Bona Vacantia Unclaimed Property is not a “tax” History

    3. What is Unclaimed Property? • Generally Consists of intangible personal property that has a business or organization has in its possession that has not been claimed by the true owner • Also referred to as “abandoned property” or “escheat” • Monetary & other assets such as bank accounts, refunds, uncashed checks, securities, and credit balances

    4. Activity Action taken by the owner of the property which may include making a deposit, a withdrawal, correspondence with the holder, or any other action that the statute deems adequate. Aggregate The threshold dollar amount of an individual owner’s account which would require detailed reporting and/or due diligence efforts. Custodian An individual or entity that holds property until it is delivered to the rightful owner (State). Terminology

    5. Dormancy Period Period of time the holder retains the property before reporting compliance is required. Due Diligence A series of efforts required by law that a holder must perform to find the rightful owner before remitting the property to the state. Holder The entity that is in possession of, or controls the property until it is transferred to the state on behalf of the lost owner Holder Domicile The holder’s state of incorporation or organization Terminology Continued

    6. Terminology Continued • Indemnification • An agreement that protects a party from loss by transferring the responsibilities to the third party. • Intangible Personal Property • A right or possession of a non physical or abstract nature that has value, such as a financial asset having no intrinsic value but representing value. • Last Known Address • The location of the owner of unclaimed property as reflected on the holder’s records; often meaning sufficient for the purposes of the delivery of mail.

    7. Terminology Continued • Rightful Owner • A person and/or entity who has the legal right to make a claim to the property (parens patriae) • State • Can mean any jurisdiction (Most often a state, U.S. District or Territory), that “steps into the shoes” of a holder after a statutorily defined dormancy period. • Uniform Unclaimed Property Acts • The Uniform Acts are the basis for states unclaimed property laws. Uniform Acts were promulgated in 1954, 1966, 1981 and 1995.

    8. Originating U.S. Case Law • Constitutionality of Escheat Statutes • Hamilton v. Brown (1896) • Cunnius v. Reading School District (1905) • United States v. Klein (1938) • Anderson National Bank v. Luckett (1944)

    9. Uniform Unclaimed Property Acts The Uniform Disposition of Unclaimed Property Act originated in 1954; with subsequent revisions occurring in 1966, 1981 and 1995. The acts were originally intended to guide states as they drafted and adopted their own unclaimed property laws. All states and U.S. Territories have unclaimed property laws of their own, but these laws vary in the degree of adherence to the Uniform Acts. The Uniform Acts were intended to promote uniformity. Does uniformity really exist? The Uniform Acts

    10. The Uniform Acts - Continued • Uniform Disposition of Unclaimed Property Act (1954) • Was adopted in 12 states • Revised Disposition of Unclaimed Property Act (1966) • Adopted with modifications by 13 states and the District of Columbia • Uniform Unclaimed Property Act (1981) • Adopted by 33 states and the Virgin Islands • Uniform Unclaimed Property Act (1995) • Adopted by 6 states

    11. Currently Applicable Case Law • U.S. Supreme Court Case Law • Texas vs. New Jersey, 379 U.S. 674 (1965) • Court concluded that unclaimed property goes to “state of last known address of the creditor, as shown on the debtor’s books and records” • Pennsylvania vs. New York, 407 U.S. 206 (1972) • Examined the transaction priority rule not as a default to the first and second priority rules established in Texas vs. New Jersey, but rather as a means for “allowing the State of the ‘place of purchase’ to escheat under the primary rule.” • Delaware vs. New York, 507 U.S. 490 (1993) • Court concluded that “no State my supersede [the Texas rule] by purporting to prescribe a different priority under State law”

    12. Reporting Basics • Where to Report? • Priority Rules/Texas v. New Jersey • What Property is Reportable? • Abandoned Intangible Property; the Presumption of Abandonment • When to Report? • Varies by State – Typically Fall & Spring • Why Report? • It’s the Law…Avoid Penalty and Interest • Pay for Louisiana to build roads…

    13. Louisiana Approves Funding to Finish I-49 • “HB370 allows the Department of Transportation and Development to use bonds secured by unclaimed property funds to help complete the extension that will stretch from Interstate 220 north of Shreveport to the Arkansas line.” • “The unclaimed property funds will account for $7.5 million.” • Article published July 8, 2011 by LandLinemag.com

    14. Questions & Answers

    15. JMS Advisory Group, LLC Break Next Session Starts at 10:00 AM www.jmsadvisors.com

    16. JMS Advisory Group, LLC Compliance and State Reporting Requirements Timothy Goodyear & Jay Starr www.jmsadvisors.com

    17. Compliance Reporting Requirements • Property Subject to Custody • The 1954, 1966 and 1981 Uniform Acts did not specify the property that was subject to the state’s custody • In these Acts, the property was identified by the type of holder • The 1995 Uniform Act addresses both the specific types of property and the type of holder • Periods for Presumption of Abandonment • Varies under the Uniform Acts for different types of property • Have been shortened with each succeeding Act • Varies even under specific state laws, with an overall trend towards shortening dormancy periods all property types

    18. Compliance Reporting Requirements – Where? • Where to Report • State of owner’s last known address • State of holder’s incorporation or domicile if not known • All states and the District of Columbia, Virgin Islands, Guam and Puerto Rico have Unclaimed Property Laws • Several Provinces in Canada Now Mandate Unclaimed Property Compliance • Foreign Address Property

    19. Compliance Reporting Requirements – What? • Types of Unclaimed Property Associated with Banks: • Checking and Savings Accounts • Matured CDs • Security Deposits • Trust Accounts • Unidentified Deposits • Safety Deposit Box Contents

    20. Compliance Reporting Requirements – What? • Types of Unclaimed Property Associated with Insurance Companies: • Individual and Group Policies • Proceeds Due Beneficiaries • Matured Policies • Premium Refunds • Unidentified Premium Payments • Aged Credit Balances • Drafts Not Presented

    21. Compliance Reporting Requirements – What? • Types of Unclaimed Property Associated with Retail, Manufacturing, and Other Types of Companies: • Uncashed Vendor/Payables Checks • Uncashed Payroll Checks • Unredeemed Gift Certificates • Accounts Receivable Credit Balances • Benefits Payments • Commission Payments • Unused Groupons?

    22. Compliance Reporting Requirements – What? • Types of Unclaimed Property Associated with Utilities: • Customer Deposits • Refunds and Rebates • Membership Fees • Utility Refunds • Court Ordered Refunds • Special Assessment Fees

    23. Compliance Reporting Requirements – What? • Types of Unclaimed Property associated with Health Care Organizations: • Patient Credit Balances • Salary/Wages • Accounts Payable • Unidentified Remittances • Self-insurance Payments • Stocks/Dividends Checks • Debt/Interest Checks

    24. Compliance Reporting Requirements – What? • Types of Unclaimed Property Associated with Oil and Gas Companies: • Royalties • Production Payments • Net Revenue Interest • Salary/Wages • Payment to Participants • Bonuses • Delay Rentals • Surface and Subsurface minerals

    25. Standard Dormancy Periods • Depends on the Property Type and the State • Typical Dormancy Periods: • Payroll/Commissions MS01 1 Year • Accounts Payable MS08 3-5 Years • Accounts Receivable MS09 3-5 Years • Other Outstanding Checks MS16 3-5 Years • Gift Certificates/Cards MS12 3-5 Years • Recent Activity Includes Numerous States Reducing Dormancy Periods In Order To Close Budget Gaps

    26. Examples of State Specific Requirements • California • Requires both a “notice” and “remit” report • Indiana • Requires filing electronically on state website • New York • Requires sending additional due diligence letters for amounts greater than $1,000 • North Carolina • Recently passed legislation requiring SSN, DOB, DL# and additional information • Tennessee • Requires electronic NAUPA format with paper coversheet for all reports and must be encrypted

    27. Quantification of Reporting Responsibilities • Determining Your Liability: Documents • Know the law: how far are we to look back? • Corporate Structure • Chart of Accounts & Trial Balances • Systems/ERP History • Prior UP Report/Audit Activity • O/S Check Listings from all disbursement Accounts • Accounts receivable aging reports • Journal Entries of amounts written-off • Description of third party administered programs • Mergers/Acquisitions

    28. Exposure & Quantification • Determining Your Liability: Exemptions & Deductions • Review applicable state statutes to determine exemptions and deductions • Common examples: • Business to Business (B2B) • Gift Certificates • Payroll Exemptions

    29. Exposure & Quantification • Preparing the Report: 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

    30. Exposure & Quantification Test Case Total Population of Outstanding Checks

    31. Exposure & Quantification Test Case Is Due Diligence Required?

    32. Exposure & Quantification Test Case Exemptions & Deductions

    33. Questions & Answers www.jmsadvisors.com

    34. JMS Advisory Group, LLC Seeking Amnesty & Voluntary Settlements James O. Santivañez & Timothy Goodyear www.jmsadvisors.com

    35. Why Comply and File? • State Unclaimed Property Laws • All States have enacted unclaimed property laws • Unclaimed property reporting is mandatory, not voluntary • States have the ability to charge penalty and interest for non- compliance

    36. If You’ve Never Reported – What Should You Do? • Verify that all unclaimed property is captured • Thoroughness is important • Consideration of prior M&A activities • Interface with other company departments • Importance of a cohesive approach • Developing Policies/Procedures

    37. Voluntary Disclosure Agreements • What is a Voluntary Disclosure Agreement • Most states have adopted some type of voluntary disclosure program • Amnesty Programs • Much more formal and offered by some states on an occasional basis • FL, IL, TX as examples

    38. Why seek a Voluntary Disclosure Agreement? • If Accepted, the Benefits Include: • Limited Look Back Periods • Waiver of Interest in Most Cases • Waiver of Penalty in Most Cases • Limitations on Future Audits • Written Closure = Security

    39. VDAs: Getting Started • Request / Petition for Admittance into the Program • Make sure you qualify • Not Currently Under Audit in that State • No Filing History • Contact the state(s) • In Louisiana: Mr. Benny Spann • Examine the Need for Additional Help • Get Other Department Personnel Involved • Need to Hire Outside Counsel / Consultants?

    40. Questions & Answers www.jmsadvisors.com

    41. JMS Advisory Group, LLC State Audits James O. Santivañez www.jmsadvisors.com

    42. Audits – Types • State Audit Department • Typically conduct an audit of property owed just to that individual State • On occasion they will perform a “Joint Audit” meaning they will cooperate or act on behalf of another state in the audit • Third Party Audit • A firm that typically audits on behalf of many states at one time • Typically work on a contingent fee arrangement • Increased activity as of late; new audit firms have formed

    43. Audits – Increased Activity • Preparing the Report: Basic Checklist • Where most of the new property types are coming from • “Uninvoiced Payable” • With belt-tightening, states that have historically been lenient are now pursuing interest/penalties for non-compliance • Industry-specific audit focus is back in certain states

    44. Audit Triggers • Registering in a state to do business or pay tax, but not filing unclaimed property reports • Industry type – oil & gas, financial services, and healthcare are traditionally most attractive • State of Incorporation • History of mergers & acquisitions • Period(s) of rapid growth • Claiming property from the state with no reporting history • Drive-by audit

    45. Audits – We Got the Notice… Now What? • Take the audit notice seriously • The auditors represent the states and have the authority to assess interest and penalties • Assess your potential liability • Have an idea of what the potential assessment may be. Virtually every company has some degree of liability • Determine how you will handle the audit • Internally or outside consultation • Make sure the scope of the audit is clearly defined • Do not give the auditors unsupervised access to your records, assign one point of contact to assist

    46. Audit Elements • Notice and request for information • Opening conference • Identification of key audit elements • Detail review/sampling • Extrapolation/estimation • Closing conference

    47. Audits – Holder’s Rights • Due Process • Adherence to Statutes & Regulations • Adherence to State-specific Written Audit Procedures • Claiming/Application of Exemptions and Deductions • FOIA Request • Confidentiality • Object to Audit Results

    48. Audits – State Rights • To audit your books and records specific to unclaimed property for participating states • To expect a reasonable response time • To assess interest and penalty • To litigate

    49. Audits – Initial Reaction & Response • Assess Your Liability Realistically Through: • Internal investigation with general counsel’s involvement • Engage outside consultant – accountant and/or attorney • Implement Your Strategy By: • Identifying your team • Involving in-house counsel sooner rather than later • Ensure counsel is in agreement with the audit-defense approach

    50. Audits – Dealing with the Auditor • Respond Quickly & Professionally • Have Defenses in Mind • Know the Auditor (or Auditing Firm) and/or the State(s) involved • Know the law • Be prepared to take control • Be prepared to take off the gloves