Unclaimed Bank Account Nj

Estimating unclaimed property liability: the wild west of accounting.

Complying with state abandoned and unclaimed property (
AUP

)
reporting requirements has become a significant issue for many business
organizations during the past 10 years. A handful of states have turned
to their AUP statutes to generate growing amounts of revenue, sometimes
catching companies off guard by imposing substantial assessments, which
in some cases date back three decades. Delaware, the state of
incorporation for thousands of U.S. companies, has been particularly
aggressive in its pursuit of AUP assessments.

Companies do not need to take these assessments lying down. Such
levies often are based on arbitrary and unpredictable estimates posited
by contract audit firms working on a
contingent fee

 basis. These
auditors work without authoritative guidance on how estimated AUP
liabilities should be determined. In fact, whether an estimated
liability even is AUP might be open to debate. (1)

Case in Point: CA, Inc.

CA, Inc. (formerly known as Computer Associates) is just one
company that has fallen victim to Delaware’s AUP axe. In 2004, as
part of a voluntary disclosure agreement (VDA) program that allowed
holders of unreported AUP due to Delaware to come forward and report the
property, CA informed Delaware that it had not filed AUP reports for
1991 through 2004. (Delaware conducts AUP audits going back to 1981, but
its VDA program reached back only to 1991.)

In 2005, after working with consultants, CA reported its AUP
liability as $684,000. Delaware rejected that amount and requested that
CA
recalculate
  
tr.v. re·cal·cu·lat·ed, re·cal·cu·lat·ing, re·cal·cu·lates
To calculate again, especially in order to eliminate errors or to incorporate additional factors or data.
 its liability. After several rounds of negotiation,
CA’s offer had risen to $2.3 million in 2007. In 2008, after
applying an estimation method developed by a contract audit firm,
Delaware sent CA a report showing AUP liability of $7.6 million plus
interest, totalling more than $8 million.

The parties sued each other in Delaware
Chancery Court

. (2) They
ultimately settled in 2010, with CA agreeing to pay $17.6 million for
the 1991 through 2010 period. (3)

Legal Authority for Estimating AUP Liability

AUP is property held or owing in the ordinary course of business
that the owner has not claimed for a certain period of time (the
dormancy period). All 50 states, the
District of Columbia
 federal district (2000 pop. 572,059, a 5.7% decrease in population since the 1990 census), 69 sq mi (179 sq km), on the east bank of the Potomac River, coextensive with the city of Washington, D.C. (the capital of the United States).
,
Puerto Rico
 , island (2005 est. pop. 3,917,000), 3,508 sq mi (9,086 sq km), West Indies, c.1,000 mi (1,610 km) SE of Miami, Fla.
,
the U.S. Virgin Islands, Guam, and a few foreign countries have AUP
laws. AUP can include uncashed payroll and vendor checks, unapplied

accounts receivable
 n. the amounts of money due or owed to a business or professional by customers or clients. Generally, accounts receivable refers to the total amount due and is considered in calculating the value of a business or the business’ problems in paying
 credit balances, dormant bank and brokerage
accounts, life insurance policies, gift certificates and gift cards,
customer refunds and rebates, publicly traded securities, benefit plan
payments, and the contents of safe deposit boxes.

Notably, although AUP laws do not technically impose a tax, some
states have applied their laws as such over the past 15 years. In these
states, enforcement may be administered by state revenue departments,
and property received may be treated as revenue in state budgets. AUP
laws are not, however, subject to the same constitutional constraints as
taxes. Without these constraints, the enforcement of AUP laws has
mutated into a constitutionally questionable revenue collection exercise
in certain states. (4) From 2001 to 2011, for example, Delaware
collected almost $4 billion in AUP revenues. (5)

After a dormancy period expires, the holder of the AUP must turn it
over to the state. But which state? The Supreme Court of the United has
established jurisdictional rules for states’ claims to AUP.
Generally, AUP must be reported to the state of the rightful
owner’s last known address as reflected in the books and records of
the holder. If the owner is unknown or the holder lacks the owner’s
address records (“no-address property”), the AUP must be
remitted to the state of the holder’s legal
domicile
 , one’s legal residence. This may or may not be the place where one actually resides at any one time. The domicile is the permanent home to which one is presumed to have the intention of returning whenever the purpose
 (state of
incorporation). (6) The Court also has established that the state of
incorporation can claim property that is held by entities legally
domiciled in the state if the owner’s last known address is in a
state whose laws do not provide for
escheat

.

Most modern AUP laws–including the AUP laws based on the Uniform
Unclaimed Property Act of 1981 or the Uniform Unclaimed Property Act of
19957–have provisions that allow a state to estimate a holder’s
liability for AUP that the holder failed to report if the holder has not
complied with recordkeeping requirements. (8) No state has issued
guidance, however, on how to formulate a liability estimate. Moreover,
no federal court ever has ruled on acceptable estimation techniques for
determining AUP liability. In fact, no federal court has concluded that
estimating a liability is even permissible. (9)

In recent years, some states, including Delaware, have seemingly
applied a broad interpretation of the common law jurisdictional rules,
relying on auditors’ estimates rather than actual records to
determine the amount of AUP that holders should submit to the state.
These states assume that any estimated AUP liability represents
no-address property, meaning the holder’s state of incorporation is
entitled to the entire amount. (10) Statutory, regulatory, and judicial
authority for this interpretation seem to be
nonexistent
  
n.
1. The condition of not existing.

2. Something that does not exist.


non
.

Only one state court ever has addressed the use of estimation in
the context of an AUP reporting obligation. In State of New Jersey v.
Chubb, (11) the New Jersey Superior Court considered the state’s
estimation methodology to compute uncashed checks. Additionally, it
ruled that the state could estimate an AUP liability for a holder that
was not incorporated in the state.

Commentators sometimes refer to Chubb to support the notion that
states generally have the authority to impose an AUP assessment based on
an estimate, but several factors make this contention dubious:

* Chubb was decided by the Superior Court of New Jersey, the lowest
court in the state. A New Jersey trial court decision clearly has no
precedential authority in other states.

*
According to

prep.
1. As stated or indicated by; on the authority of:

2. In keeping with:

3.
 the decision, the defendant-holder in the case had
“apparently … transferred these items into income” on its
books. In many instances when states estimate a holder’s AUP
liability, the holder has not taken unclaimed items into income.

* The liability proposed by New Jersey was based on the lowest of
four statistical estimates. Although states’ preliminary estimated
assessments usually employ some type of numerical measurement, amounts
ultimately paid often have little or no statistical or other
quantitative support.

* The state’s estimate of liability was based on the number of
office locations of the holder in New Jersey, not on the holder’s
state of incorporation. This treatment runs counter to some states’
view that estimated AUP should be remitted only to the holder’s
state of incorporation.

* The New Jersey AUP law expressly permits the state to base an
assessment on “reasonable estimates,” but only when a holder
does not maintain owner records for the requisite statutory period of
five years from the date the holder files an AUP report. (12) Delaware
does not require holders to–or even suggest that holders should–retain
owner records for any period of time. The AUP laws of virtually every
other state, however, do have specific holder record-retention
requirements. (13)

The Typical Contract Auditor Approach to Estimation

Many states rely on contract auditors who usually are compensated
on a contingent-fee basis to perform AUP examinations. This compensation
model provides a built-in incentive to apply the estimation techniques
that generate the largest–some might say extreme–estimated
assessments. A white paper on AUP laws issued by the Council on State
Taxation summarizes this problem well:

   Contingent-fee arrangements encourage auditors to be overly
   aggressive, to interpret State laws to their own advantage rather
   than in society's best interest, to "cherry pick" audit targets,
   and to ignore holder errors that would result in lower assessments.
   The risk of abuse creates a perception of unfairness that colors
   holders' relationships with administrators and creates an
   atmosphere of mistrust that hinders compliance. Equally important,
   excessive payments to contingent fee auditors significantly reduce
   funds that would otherwise be available for the owners of the
   property or for the general revenue of the state. (14)

A quick review of the typical contract auditor approach to
estimation illustrates the subjective nature of most estimated
liabilities:

1. The contract auditor identifies a base period–a multi-year
period starting with the earliest year for which complete books and
records are available.

2. A sample is drawn from a population of potential unclaimed
items, such as uncashed checks, from the base period.

3. The holder attempts to remediate identified exception items to
prove they are not AUP, a challenging proposition in the absence of

contemporaneous
  
adj.
Originating, existing, or happening during the same period of time:  See Synonyms at contemporary.
 transaction-level detail.

4. All items that cannot be remediated to the satisfaction of the
auditor are included in the
numerator
 Epidemiology The upper part of a fraction
 of an error rate (adjusted for any
sampling techniques applied), regardless of the addresses associated
with the unreconciled items. The denominator of the error rate typically
is total sales during the base period.

5. The error rate is applied to annual sales for years prior to the
base period to determine the total amount of AUP
due and owing
 adj. (See: due).
 to the
state of incorporation.

What Is “Reasonable”?

In the absence of formal guidance and appropriate holder records,
AUP laws typically provide that the state can use a
“reasonable” method to estimate liability. (15) The Delaware
statute, for example, provides:

   Where the records of the holder available for the periods subject
   to this chapter are insufficient to permit the preparation of
   a report, the State Escheator may require the holder to report
   and pay to the State the amount of abandoned or unclaimed
   property that should have been but was not reported that the State
   Escheator reasonably estimates to be due and owing on the basis
   of any available records of the holder or by any other reasonable
   method of estimation. (16)

Significantly, the Delaware AUP statutes made no reference to
estimating liability until July 2010. Prior to this time, there was no
statutory provision that sanctioned the use of estimates. Additionally,
Delaware does not have–

(1) recordkeeping requirements for unclaimed property;

(2) holder
due diligence

 rules; or

(3) negative reporting requirement (except for banking
organizations) that would require a company to file a report if it had
no AUP to report.

Thus, for many holders, the amount that “should have been …
reported” to Delaware would be zero, or close to zero. Would not
such holders have substantially complied with the state’s reporting
requirements, such that it is not reasonable to assess an estimated
liability?

Consider this example: Company ABC is chartered in Delaware but
conducts all of its business activity in Florida. Because it had no AUP
in Delaware, it has not filed AUP reports. Delaware audits the company
back to 1981 and finds that it does not have owner or address records
dating that far back. Delaware then uses existing records for more
recent years to
deduce
  
tr.v. de·duced, de·duc·ing, de·duc·es
1. To reach (a conclusion) by reasoning.

2. To infer from a general principle; reason deductively:
 that X percent of Company ABC’s payroll
checks go uncashed and claims X percent of the company’s payroll
expense back to 1981, the entire estimated liability–even though the
company’s employees, and therefore the owners of any uncashed
payroll checks, have always been Florida residents working in Florida.
Is that “reasonable”?

Moreover, is it reasonable to estimate a liability going back 25 to
30 years? (17) To estimate a liability when a holder has a documented
history of compliance in states with a higher-priority jurisdictional
claim on the AUP? To conclude that all estimated liability is owed to
the state of incorporation when data obtained by the state’s
auditors suggest that it should be sourced to a different state?

It could be argued that if it is reasonable to use estimation
techniques purportedly grounded in unbiased statistical sampling theory
to produce an estimate of liability, the same techniques can be applied
to determine the no-address AUP liability allocable among various
jurisdictions.

Companies should bear in mind that states other than the
holder’s state of incorporation are not necessarily precluded from
applying estimation techniques (as demonstrated in Chubb). In the
previous example, Florida could decide to audit Company ABC and assert
that because all of the employees lived and worked there, the company
owes Florida’s estimate to the state.

Some states do take a more rational approach, estimating liability
based only on AUP with addresses in the state. These states determine
how many state-addressed items are AUP for the sample period and apply
the resulting ratio to the years for which a company doesn’t have
sufficient records. They take this more narrow approach even for

domiciliary

 companies (with the inclusion of actual sample period
no-address property in the numerator of the ratio).

Challenging Times

Companies facing a significant AUP assessment need to realize that
these assessments often are based on subjective and arbitrary
estimates–and that no rules exist for formulating such estimates. The
clear statutory requirement that an estimate be “reasonable,”
along with the dearth of any guidelines, provides ripe grounds for
challenging unreasonable liability estimates, particularly those
originating with incentivized contract auditors.

(1.) States’ claims to AUP are based on state succession laws
related to property rights. States hold property in a custodial capacity
until the rightful owner or the owner’s heirs claim the property.
If a liability is estimated, there can be no identifiable–or for that
matter actual–owner; therefore, is there any basis for the custodial
taking and holding of property?

(2.) CA, Inc. v. Cordrey, Del. Ch. C.A. No. 4111-CC.

(3.) Pfeiffer v. CA, Inc., Case Nos. 4111-CC, 4195-CC (Del. Ch.
2010).

(4.) See
Chris Hopkins

 and Matthew Hedstrom, Unclaimed Property
Laws: Custodial Sail, keeping or Disguised Tax, Journal of MultiState
Taxation and Incentives 22-35 (January 2012).

(5.) State of Delaware Department of Finance, Delaware Fiscal
Notebook, 2011 Edition,
http://finance.delaware.gov/publications/fiscai_notebook_11/fiscal_notebook_11.pdf.

(6.) Texas v. New Jersey, 379 U.S. 674 (1965); Delaware v.
New
York

 Middle Atlantic state of the United States. It is bordered by Vermont, Massachusetts, Connecticut, and the Atlantic Ocean (E), New Jersey and Pennsylvania (S), Lakes Erie and Ontario and the Canadian province of
, 507 U.S. 490 (1993).

(7.) National Conference of Commissioners on Uniform State Laws
(
NCCUSL

) Model Act of 1981 and NCCUSL Model Act of 1995.

(8.) See, e.g., the New Jersey AUP law, N.J. Rev. Stat. [section]
46:30B-94, which states that “If … a holder does not maintain the
records required … and the records of the holder available … are
insufficient … , the administrator may require the holder to report
and pay … the amount the administrator reasonably estimates, on the
basis of any available records of the holder, or by any other reasonable
methods of estimation acceptable to the administrator, that should have
been but was not reported.” Notably, however, New York does not
appear to have a statute permitting the estimation of an AUP liability.

(9.) In Delaware v. New York, 507 U.S. 490 (1993), the Supreme
Court rejected New York’s proposal to use “statistical
sampling” to demonstrate that “virtually all” the

financial intermediaries

 had addresses in New York.

(10.) In circumstances where the audit sample data used for
estimation includes owner name and address information, this approach
appears to violate the common law concept of “mobilia sequuntur
personam” (intangible personal property is found at the domicile of
its owner) on which the primary jurisdictional rule as elucidated in
Texas v. New Jersey is based.

(11.) 570 A.2d 1313 (N.J. Super. Ct. Ch. Div. 1989).

(12.) N.J. Rev. Stat. [section][section] 46:30B-94, 46:30B-95. See
also NCCUSL Model Act of 1981, [section] 30(e); NCCUSL Model Act of
1995, [section] 20(f).

(13.) See also NCCUSL Model Act of 1995, [section] 21.

(14.) Jana S. Leslie, The Best and Worst of State Unclaimed
Property Laws–Scorecard on State Unclaimed Property Statutes: The
Holders” Perspective, Council on State Taxation (January 2009).

(15.) NCCUSL Model Act of 1981, [section] 30(e); NCCUSL Model Act
of 1995, [section] 20(f).

(16.) 12 Del. C. [section] 1155 (2010) (emphasis added).

(17.) A new Delaware regulation, effective December 1, 2012, limits
the look-back period for audits to 25 years–transactions beginning in
1986–as long as the audit is completed by June 30, 2015. PRACTICES AND
PROCEDURES FOR RECORDS EXAMINATIONS, Section 2.3.1, Uncodified.

Chris Hopkins is a partner with Crowe Horwath
LLP

 in the New York
office. A
certified public accountant

, he received his B.B.A. degree in
accounting from the
University of Cincinnati

 College of Business. He
formerly worked for Deloitte Tax LLP and
Grant Thornton LLP

. Mr. Hopkins
can be reached at chris.hopkins@crowehorwath.com.