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Delaware’s proposed audit regulations raise many questions

Posted By Administration, Thursday, May 4, 2017

Earlier this spring, the Delaware secretary of finance, in consultation with the secretary of state, published a proposed Department of Finance Abandoned or Unclaimed Property Reporting Examination Manual, as required by S.B. 13. The proposed regulations provide some clarity regarding the finance department’s approach to administration and enforcement of the law. However, they also raise noteworthy questions regarding language that may contradict S.B. 13, exceed the department’s authority and fail to clarify murky language in the statute.


Noteworthy issues include:


Foreign property: S.B. 13 indicates that Delaware has jurisdiction over unclaimed property if the jurisdiction with primary authority has no unclaimed property law. The proposed regulations, however, addresses only states, but not other countries that have the authority to escheat.


Stored value and gift card maximum cost: The proposed regulation would dramatically increase the amount reportable with respect to unredeemed gift cards and other stored value cards to the issuer’s “cost of goods sold [reflected on its federal income tax return for the year] plus total deductions less charitable contributions, depreciation and depletion.” This interpretation expands the amount reportable by an issuer far beyond the cost to the issuer of the merchandise, goods or services represented by the card, in violation of the statutory language.


Record retention: Language in the proposed regulations requires holders to retain records not only for property reported to Delaware, but also for property not reported. This requirement exceeds the record retention requirements set forth in the Delaware Code.


Examination scope: The scope of examination in the proposed regulations allows the state to begin an examination without having identified the specific entities under audit and provided notice to those entities. The Fourth Amendment prohibits such “fishing expeditions” for the purpose of identifying whether or not a company may be a proper target for audit.


In addition, Delaware law allows the state to examine the records of a purported holder “upon reasonable notice.” Once notice is given, the statute authorizes examination of the holder’s own records, and may even extend to certain records in the possession of a third party or an affiliate. However, the proposed regulations attempt to expand that authority by deeming all entities “related” to the holder as under examination themselves, without the required, reasonable notice.


Certification/record availability: The proposed regulation assumes fraudulent intent on behalf of holders and fails to account for the realities of corporate life. The proposed requirement that holders “certify” to the “availability” of “records,” on a strict liability standard of fraud appears to be based on the inaccurate assumption that companies operate through a single software system, which houses all information for all years and all operating divisions. As a result, failure to provide information must be based on malicious intent. This is simply not accurate for most holders.


Without any limitation on the terms “availability” and “records,” personnel involved with the audit will have difficulty convincing any officer to certify to such a vague and ambiguous statement under the threat of strict liability for fraud, creating unnecessary conflicts within the audit process. In addition, deeming even inadvertent errors to be “willful misrepresentation” on the part of the holder undermines any purported desire of the State to work collaboratively with holders.


Sampling: The Temple-Inland decision and order specifically required that, in the department’s estimates, the sample must be a surrogate of the property that was being estimated. To that end, if Delaware intends to estimate what was due to the state for years in which records are not complete, the sample must include only property that would be due to Delaware. Unfortunately, the proposed regulations simply memorialize the process the judge rejected in Temple-Inland.


Complete and researchable records: The proposed minimum standard for what constitutes “complete and researchable” records is unclear. It suggests that a complete and researchable record shall include items that contain a last known address of the property owner. However, this standard has not always been an accurate test to determine researchability. An address alone does not make a transaction researchable.


Remediation: The proposed regulations dictating the terms of what can be considered remediated extend far beyond any authority granted to the department or its auditors by S.B. 13. While it may be appropriate to indicate certain elements that are required or desirable in correspondence to Delaware owners, it is beyond the department’s jurisdiction to require the language proposed in the proposed regulations.


Omitted issues: The proposed regulations fail to clarify or include issues including the expedited audit examination created under § 1172 (c); the 10-year statute of limitations set forth in § 1156 (b); and interest and penalty provisions in § 1183 and § 1184.


On behalf of its members, UPPO has raised questions related to these and other sections of Delaware’s proposed regulations via a letter to State Escheator David Gregor , submitted this week. UPPO will continue to monitor implementation of S.B. 13 and Delaware’s proposed regulations, and will report on additional developments.



Tags:  audits  compliance  Delaware  examinations  S.B. 13  unclaimed property 

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