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Unclaimed Property Focus
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UNCLAIMED PROPERTY FOCUS is a blog written by and for UPPO members, featuring diverse perspectives and insights from unclaimed property practitioners across the U.S. and Canada. We welcome your submissions to Unclaimed Property Focus. Please contact Tim Dressen via with any questions about submitting a blog post for consideration and refer to our editorial guidelines when writing your blog post. Disclaimer: Information and/or comments to this blog is not intended as a substitute for legal advice on compliance or reporting requirements.


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IRS Ruling Clarifies Reported Unclaimed IRAs are Taxable

Posted By Administration, Monday, June 18, 2018


On May 29, 2018, the Internal Revenue Service issued Revenue Ruling 2018-17, clarifying the agency’s position on traditional individual retirement account escheatment. Specifically, the ruling states that IRA holders – or trustees – must withhold 10 percent federal income tax and issue form 1099Rs when reporting unclaimed IRAs to the states. Holders are expected to comply by Jan. 1, 2019, or as soon as it becomes “reasonably practicable” to do so.


“Before this ruling, the obligations regarding tax withholding for reported IRAs were unclear,” said Freda Pepper, counsel with Reed Smith’s State Tax Group. “Often, when reporting an IRA to the state, holders don’t liquidate it but rather transfer custodianship of the IRA to the state. There has been confusion among holders and the states whether that was a taxable event.”


The ruling clarifies that Section 3405 of the Internal Revenue Code considers “any distribution or payment from or under an IRA… as includible in gross income,” and thus subject to tax withholding by the holder/trustee. 


Some holders already have held this position and routinely withhold tax and issue 1099Rs for escheated IRAs. Others do not. 


“From a banking perspective, some are already doing this and others will need to come into line with it,” said Tom Powers, business operations analyst at U.S. Bank. “Holders in the securities industry will definitely be affected by this ruling. Their distributions aren’t as clean cut as traditional banking products because they’re dealing with full shares and fractional shares. The way states want shares reported to them makes it more cumbersome for them. The ruling also covers individual retirement annuities, which are often offered by insurance holders, so they will be affected as well.”


Although the IRS ruling provides clarity and paves the way for consistent practices, it creates challenges for securities holders.


“With securities, there has to be some sort of liquidation of the property before it is reported to the state in order to withhold the 10 percent federal income tax,” Pepper said. “This could be logistically difficult. Should they try to determine the value equal to 10 percent of the IRA’s funds and liquidate just that? Or should they liquidate the entire value, which could have other tax implications for the owner?”


States also face some issues resulting from the IRS revenue ruling. Some have taken conflicting positions on whether reported unclaimed IRAs require withholding. For example, Pennsylvania changed its law in 2016, making unclaimed IRAs reportable after three years of inactivity regardless of the owner’s age. Generally, an early distribution would carry a tax penalty. However, the state took the position that transfer of custodianship would not result in a taxable event. The state will need to revisit this position in light of the conflicting ruling from the IRS. 


Because IRS revenue rulings typically address a very specific scenario presented to them for clarification, this specific ruling covers only traditional IRAs. However, there may be implications for other retirement products as well, according to Powers.


“With a Roth, you can take out your principal whenever you want because you’ve already paid taxes on that, but you haven’t been taxed on the earnings,” he said. “Dividends and interest become taxable when you retire. When transferring a Roth to the state, that taxable amount gets transferred. If there are tax implications for traditional IRAs, there almost have to be tax implications for Roth IRAs as well.” 


While holders and states have some issues to grapple with as a result of the IRS ruling, it should help owners. 


“Ultimately, this should get the property to the rightful owner quicker,” Pepper said. “Once a 1099 is issued, they will become aware the IRA has been escheated, allowing them to question the transaction and claim their property.”   


Tags:  1099  IRS 

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UPPO Advocacy Update: May 2018

Posted By Administration, Thursday, June 7, 2018


To help members remain aware of UPPO’s advocacy activities, the Unclaimed Property Focus blog recently began including a monthly Advocacy Update when state legislatures are active. Following are May 2018 activities and trends from UPPO’s Government Relations and Advocacy Committee (GRAC).


Priority Issue Workgroups

After establishing its top five priority issues this spring, GRAC formed workgroups to establish goals for each priority issue. All of the workgroups have discussed the need for focused outreach to educate key audiences – specifically legislators and unclaimed property administrators – about these issues and UPPO’s position on them. As their work continues, they will identify the messages and methods for most effectively discussing these issues, as well as materials the UPPO staff can develop to support these efforts. 


Individual workgroups have also begun developing strategies. For example, the workgroup for record retention, statutes of limitations and use of estimation is identifying states with the most troublesome statute language related to these areas. This step will help ensure a focused approach where change have the greatest impact.


Noteworthy Legislation

Although most state legislators are not currently in session, there have been a couple recent noteworthy developments:

  • In Pennsylvania, H.B. 2167 and companion bill S.B. 1058 provide that securities, such as cash dividend accounts, dividend investment plan accounts and non-dividend paying accounts, would not be reportable as unclaimed property unless first class mail to the owner has been returned as undeliverable and there has been no account activity for three years after the holder has been unable to reach the owner. UPPO supports this shift to an RPO requirement. The bills are currently moving through the Pennsylvania legislature’s committees and appear to have a strong chance of passage.  
  • Colorado S.B. 240, the state’s bill based on the Revised Uniform Unclaimed Property Act, has been indefinitely postponed. 


UPPO members can track the progress of these bills and all active unclaimed property legislation nationwide via our govWATCH service.



As more and more legislatures and regulatory agencies take on issues affecting unclaimed property compliance, advocacy has become an increasingly important role for UPPO.

Please take a few minutes to complete our Government Relations and Advocacy Survey to help us build our grassroots network. Responses will give us the ability to mobilize UPPO members when we are faced with legislative and regulatory challenges and opportunities.



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Thinking Outside the Unclaimed Property Box: Other Implications Affecting Unclaimed Property

Posted By Contribution from Jennifer Waryjas, 2018/19 UPPO secretary, Thursday, May 31, 2018

As unclaimed property holders become more knowledgeable about their compliance responsibilities, they may risk exposure in tangentially related areas if their focus is too narrow. Holders may be completely compliant with unclaimed property requirements and get blindsided by a legal violation in another area related to their unclaimed property practices. For this reason, a well-rounded approach to unclaimed property compliance that goes beyond just state unclaimed property statutes is important. Following are several risk areas worth considering. 


Mergers and Acquisitions

There’s a common misconception with mergers and acquisitions that all unclaimed property obligations flow through to the purchaser if it’s a stock deal, and none of it flows through if it’s an asset deal. However, that is way too broad of a generalization. 


When a holder has become aware that a merger or acquisition has occurred, the holder must analyze the specific terms of the agreement to know what’s being purchased and what’s being retained – and whether there’s a provision addressing unclaimed property – is essential. 


There’s another misconception that unclaimed property is covered under the tax provisions in an M&A document. Unclaimed property is not a tax and is not included in the definition of tax in the standard definition of tax in most M&A agreements. Unless the deal team knows what unclaimed property is and why it matters, they’re not likely to include provisions responsive to potential unclaimed property obligations in the agreement. Likewise, unless the unclaimed property team understands the deal itself, it may make false generalizations and improperly take into account the effect of that a merger or acquisition has on your unclaimed property reporting obligations. 


Health Insurance Portability and Accountability Act

HIPAA is not typically associated with unclaimed property. However, for holders in the medical field or that work with the medical field, it’s important to understand HIPAA implications. HIPAA rules define what information can and cannot be released. Companies in the healthcare market deal with sensitive information. Patients often don’t want information about their health conditions shared without their consent. Unclaimed property holders need to take this into consideration. For example, when escheating uncashed checks to the state, question whether the information is revealing something that the property owner wouldn’t want made public. 


When dealing with an audit or a VDA, handling sensitive information can be even more complex. Auditors or VDA administrators may ask for information that, when shared, could violate HIPAA provisions. For example, a medical device provider specializing in an area that would be easy to associate with a specific medical condition could inadvertently release medical information when sharing requested information. Great care needs to be taken to ensure compliance not only with unclaimed property statutes, but also with HIPAA. 


Probate Law

When managing the unclaimed property treatment of securities, does the holder or third party administrator understand the implications of probate law?  Relatives of deceased property owners may contact transfer agents to let them know of the death and to inquire about transfer of the shares. Auditors may require that property be escheated, without delving into the legal implications of the contact with a related party under the general presumption that the owner has not made sufficient contact. However, under the relevant probate law, that person may in fact be the heir. Therefore, the holder or third party administrator should identify the relevant probate law to determine if the auditor’s request is proper, or if they should request to provide adequate time for resolution of the probate process before escheating those shares. 


False Claims Act

Under the False Claims Act, whistleblowers report a finding to the state and are rewarded for raising an issue about which the state was otherwise unaware. In the unclaimed property arena, False Claims Act cases take what could be a normal audit and transcend it into treble damages and attorney fees. 


When hit with a False Claims Act case, information not under privilege becomes public. Every email is traceable, every document becomes potentially discoverable. While a holder is unlikely to anticipate litigation, they can decrease risk of disclosing information if they have taken the proper steps to ensure an internal or third-party unclaimed property analysis is done under privilege. 


Nondisclosure Agreements

Information shared with an auditor during an unclaimed property audit could become discoverable in an unrelated lawsuit filed after the audit has been completed. This occurred in the case of City of Sterling Heights General Employees Retirement System vs. Prudential Financial, in which plaintiff shareholders subpoenaed the auditor for audit documentation. 


It’s important to make sure when signing nondisclosure agreements with an auditor conducting an examination that they include provisions outlining how long the auditor keeps nonpublic information and work papers, in what form and what they are doing with them when the audit is complete.


Taking a comprehensive view of unclaimed property compliance beyond only state unclaimed property statutes reduces risk and helps avoid costly surprises. Awareness of these areas that are especially prone to cause potential headaches is a significant step toward creating a truly well-rounded compliance program. 

Tags:  False Claims Act  HIPAA  mergers  probate law 

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When Unclaimed Property Gets Political

Posted By Administration, Thursday, May 24, 2018

Where large sums of money and government meet, things are bound to turn political. Increasingly, this is the case with unclaimed property. 


Many states’ unclaimed property responsibilities fall under the office of the treasurer, which is an elected position in more than 30 states. It is little surprise then that treasurer candidates – particularly incumbents who can boast about returning tens of thousands of dollars to constituents – often make unclaimed property a central part of their campaigns.


Treasurers seeking reelection or pursuing a higher office often tout their successes returning large sums of money to citizens or making the process to claim unclaimed funds quicker and easier. 


For many people, unclaimed property programs may be the only exposure they have to the state treasurer. States often market their outreach programs as “great paybacks” or “treasure hunts,” and treasurers typically act as the spokespeople encouraging citizens to claim their cash. 


In at least one state, unclaimed property promotion by the state treasurer has attracted scrutiny from legislators. On May 5, 2018, an amendment to an Iowa House of Representatives appropriations bill included an amendment that would, in part, prohibit elected officials from closely attaching themselves to the promotion of government programs. 


The amendment bans the use of public funds controlled by elected officials or members of the general assembly for any paid advertisement or promotion bearing their name, likeness or voice. Such promotion specifically includes paid direct mass mailings; newspaper, radio, television and internet ads or promotions; and displays at the Iowa state fair. Officials violating the amendment would be required to reimburse the state for the cost of such promotion using campaign funds. 


Among the affected programs is the state’s highly visible unclaimed property program. Currently, the state’s unclaimed property outreach is prominently branded as “State Treasurer Michael L. Fitzgerald’s Great Iowa Treasure Hunt.” 


Those who support the amendment consider such branding as self-promotion and, thus, not an appropriate use of public funds. Opponents, however, argue that the amendment will lead to unnecessary expense caused by recreating promotional materials that could be otherwise reused or will provide an unexpected burden for officials who couldn’t have anticipated having to use campaign funds when the materials were created. 


Both the House and Senate passed the bill with the amendment included. It currently awaits Gov. Kim Reynolds’s signature or revision via the line-item veto. 


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Litigation Update: Court Denies Motion for Summary Judgment in Card Compliant Whistleblower Case

Posted By Administration, Wednesday, May 16, 2018

Delaware ex rel. French v. Card Compliant LLC et al. is a qui tam case – a suit brought when a whistleblower exposes alleged fraud against the government with the incentive of receiving a portion of the recovery as a reward. The defendants include Card Compliant LLC, a third-party company that some defendants used to issue gift cards and assume certain gift card responsibilities, and numerous other defendants. 


Among the various allegations, the plaintiffs claim that some defendants didn’t account for the transfer of liability in the manner its contracts specified. According to the state’s allegations, the liability wasn’t truly transferred and, thus, defendants had the obligation to remit unclaimed property to Delaware but didn’t do so. 


On April 30, 2018, Judge Paul Wallace denied defendants’ Motion for Summary Judgment seeking the dismissal of all claims.


The defendants argued that the plaintiffs cannot legally establish a Delaware False Claims and Reporting Act fraud claim because “the undisputed facts demonstrate the retailers had no legal obligation to pay the unredeemed balances on gift cards issued by and assigned to the card companies.” 


The court, however, said the defendants’ subjective beliefs regarding the validity of the giftco structure remain unresolved, and several disputed issues preclude resolution of whether the defendants knowingly acted in bad faith to avoid monetary obligations to the government. 


“The plaintiffs must be given the opportunity to present to a jury evidence of defendants’ actual knowledge, subjective belief, and purported bad faith,” the judge wrote.


The defendants also argued that a ruling by a previous judge in the case should be struck down. The ruling held that the relationship between the creditor/customer and the retailers (rather than the relationship between the card company and the retailers) is the relevant relationship for the purposes of escheat. 


The defendants suggested that the judge made this ruling without the benefit of reviewing documents and testimonial evidence from Delaware audits and VDAs in which the state took the position that when a gift card is assigned before dormancy, the card company is the relevant debtor for escheat purposes. 


Judge Wallace ruled that the defendants failed to establish that the prior ruling was clearly wrong and that extraordinary circumstances exist, thus preventing him from second-guessing the previous judge’s decision. 


Finally, the judge pointed to the U.S. Court of Appeals for the Third Circuit’s decision in the Marathon Petroleumcase. In that case, the court stated that the federal priority rules do not prevent the state from examining books and records to determine the unclaimed property holder.


The defendants had sought refuge through application of the DFCRA’s Administrative Proceedings Bar and took the position that if Delaware had previously engaged in the type of statutory audits (and VDA procedures) the Third Circuit spoke on to examine their giftco activities and escheat obligations, then the defendants had been subject to administrative proceedings that would preclude the court from exercising jurisdiction over the state’s case. 


The judge wrote, “To act as a bar, those prior administrative proceedings must have been ‘substantially based upon allegations or transactions which are subject of a civil suit or an administrative proceeding in which the Government is already a party.’ It would be indeed incongruous if the administrative proceeding meant to discover and enforce a Defendant’s true escheat obligation could cover more ground than a qui tam suit claiming fraud in the same allegations or transactions.”


Noteworthy issues that remain to be determined in the case include:

  • When are cards escheatable to Delaware?
  • Who is the true holder of the cards – the retailers or the third party?
  • Can cards that have already been issued be assigned to another affiliate or third party?
  • Was the giftco structure a reasonable effort to comply with the law or did the companies act with fraudulent intent?

This case is scheduled to go to trial in September. UPPO will continue to monitor and report on developments in this case.

Tags:  Card Compliant  Delaware  gift cards  litigation  qui tam  unclaimed property  whistleblower 

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