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Title: A look at Delaware’s statute recognizing first priority states’ exemptions under S.B. 13, part 2

Posted By Mark Watters, Thursday, June 29, 2017

Part 1 of this article provided an overview of Delaware’s prior application of the priority rules and an in-depth explanation of what constitutes an exemption under §1141(b).

 

How should holders manage these “exemptions” under §1141(b)?

Until holders gain greater clarity through statements of policy, regulations and common law, application to the previous examples will remain a business decision for holders seeking to balance aggressive and conservative practices. Too aggressive, and holders face potential audit exposure; too conservative, and holders may be remitting properties it need not immediately forfeit. 

 

Each holder needs to review its own practices under its unclaimed property policies, determine a logical and supportable position, and memorialize that position for support and reference years into the future. 

 

Delaware may—in the interest of clarity, certainty, better holder compliance and the resulting ease of auditing for holders and state agents—provide answers to these questions; in the previous examples there need not be any lack of clarity, at least in the general application. Such leadership would be welcomed by auditors and holders alike, and would create an open dialogue should disagreements arise. Such policy would allow holders greater ability to manage their risks and create an environment for better compliance.

 

Absent these answers, holders will need to take a common sense approach to these issues as they arise. Holders should have knowledge and understanding of its facts and the “exemption” it contemplates taking, record that for future reference, and review its policies periodically to determine if they are still valid. Failing to do so in the context of unclaimed property compliance compounds the issues and potential exposure or complexity of the holder’s redemption. 

 

Some considerations:

  • Risk/benefit. Holding properties under a dubious or questionable “exemption” or factual basis may not be worth any benefit over that of the risk involved. This risk is not only a financial one, but one which impacts good relations with customers, suppliers, and the public perception and image of the holder.
  • Costs of property maintenance and preservation. Some properties are just not worth the costs of maintenance and preservation. Escheatment provides an answer. By way of example, some states have a business-to-business exemption (b2b) that provides an exemption by deferral, whereby once the relationship between the holder and owner ends, the property must be escheated. Under such circumstances, the holder might do well to try settling the obligation with the owner, but thereafter, forego the deferral exemption and report the property at first opportunity. An “exemption” need not be taken and there are generally no penalties for early reporting of such properties. 
  • Costs of retaining records. Increasingly, states are reviewing records of unreported properties and documentation as to why they were not reported. This has created a greater burden on holders to maintain, preserve and index records for future reference and audit support. For exempt properties, holders have a greater burden to monitor laws to ascertain changes or eliminations of such “exemptions,” which need not be so closely reviewed if such properties are escheated. Many would agree that growing unclaimed property record maintenance has made the task more onerous and the costs of software and means for individual property record retrieval more costly and time-consumptive. Escheatment and passive record retention may be a better business decision than active maintenance of an extensive pool of active property records. 
  • The “sleep at night” test. Related to the risk/benefit analysis, does it make sense to create additional stress by holding properties at risk of audit? Escheating “at risk” properties helps to limit that stress and frees up company resources and personnel for value added pursuits.

Conclusion

The Delaware exemption and its application will be developed as time and opportunities allow. This recognition of other jurisdictions’ exemption is a welcome change to unclaimed property compliance. Let’s hope other states follow Delaware’s example as they review and enact their own updates from the current uniform act. 

 

There remain certain areas that would benefit from clarification and cleanup, some of which are discussed in this article. As compliance practitioners, we must carefully analyze each circumstance and determine whether we should apply the “exemption” to each factual pattern and each jurisdiction’s laws, regulations, and policies as we understand them. 

 

Remember that taking unclaimed property “exemptions” of any nature is not required; they are discretionary. Decisions about such require careful consideration of holder legal responsibility, and business purposes and goals.

 

About the Contributor

Mark Watters is technical director, unclaimed property, for DuCharme, McMillen & Associates Inc.

 

Disclaimer: Neither UPPO nor DMA, or any of their affiliated or related entities, by means of this summary, is rendering business, financial, legal, tax, reporting or compliance or other professional advice or services. This blog post is not a substitute for such professional advice.

Tags:  compliance  Delaware  priority rules  unclaimed property 

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