During the week of March 25, 2019, hundreds of unclaimed property professionals attended the 2019 Unclaimed Property Professionals Organization Annual Conference held in New Orleans, Louisiana. The conference was rich in content, exploring significant trends such as uniform law provisions, IRA reporting, estimation, and the treatment of gift cards and cryptocurrencies. Several trending topics are highlighted below.
Uniform model unclaimed property laws are trending
About a dozen states have either adopted, or introduced legislation to adopt, significant unclaimed property law reform as a result of the two competing uniform unclaimed property acts developed over the past few years:
- Revised Uniform Unclaimed Property Act (RUUPA) finalized in 2016
- American Bar Association (ABA) Model Unclaimed Property Act finalized in 2018
Although the acts have encouraged states to revise their unclaimed property laws, most states do not adopt the provisions in their entirety. This issue was highlighted by the recent adoption of RUUPA in Illinois. The state’s version eliminated the Business-to-Business (B2B) exemption, and by the nature of the state’s “transition period,” resulted in retroactive enforcement of the repeal.
The variation of state unclaimed property laws causes difficulties to both holders and to the states. On the reporting side, it is administratively and financially burdensome because holders must review historic liabilities and prepare to satisfy any exposure. On the audit side, contact auditors are having a difficult time interpreting new legislation and thus are applying aggressive lookback periods and audit tactics.
Notably, recent unclaimed property reform has generally not included a prohibition on the use of third-party auditors and estimation techniques.
IRS Revenue Ruling 2018-17 brings individual reporting account (IRA) reporting to the forefront
On May 30, 2018, the IRS issued Rev. Rul. 2018-17, providing guidance on the federal tax treatment of certain Individual Retirement Accounts (IRA) distributions escheated under state unclaimed property law. The ruling addresses a common scenario involving traditional IRAs where the distribution from the account becomes unclaimed property and no withholding election was made by the owner of the account. For purposes of the revenue ruling, it is important to remember that a traditional IRA is a tax-deferred account, meaning that earnings and gains in the account are not subject to state or federal taxation until distributed. A traditional IRA receives different tax treatment than a Roth IRA, simplified employee pension, a SIMPLE IRA, or a deemed IRA. If the owner did not make a withholding election, holders must withhold the 10 percent tax on non-periodic designated distributions that have become unclaimed subject to escheatment using IRS Form 1099-R prior to remittance to the state. Since the ruling has been issued, the unclaimed property community has voiced concerns regarding the impact to holders and IRA owners.
To provide taxpayers with some relief, the IRS is allowing holders with withholding and reporting requirements to make withholding payments prior to Jan. 1, 2020.
Estimation methodologies: gross, net, and beyond
Most states allow the use of estimation techniques when business records are not available. Historically, the holder’s state of incorporation would most often use the gross method (i.e., estimating the total liability for all jurisdictions), while a select few states would use the net method (i.e., estimating the liability for a specific jurisdiction). Due to recent litigation and uniform acts, estimation techniques are becoming more relevant to the unclaimed property community. States revising their unclaimed property laws are adding language to permit alternative estimation methodologies if agreed upon between the auditor and the holder.
Theoretically, the holder would have the same total liability under both the gross and net methods. The difference between the two methods is the sourcing of the liability. However, there is speculation that states are using conflicting estimation methodologies to calculate the holder’s liability. If an alternative method is used, it could increase the holder’s risk of duplicating liabilities if the methodology is not uniformly applied to all jurisdictions.
Gift cards and Giftco inquiries are on the rise
The escheatment of gift cards among the states varies significantly. The states have either exempted gift card reporting all together, require escheatment of gifts, or exempt gift cards under specific criteria.
Historically, businesses selling gift cards did not retain owner address information. However, as online sales of gift cards have become more prevalent, it has become more likely that an owner and/or purchaser information was provided at the time of purchase. As a result, states are inquiring about the holder’s ability to query owner address information in hopes to recover additional unclaimed property that could be sourced to their jurisdiction.
In addition to address inquiry, states are also reviewing special purpose entity (SPE) relationships. Many companies that sell gift cards have set up SPE’s to administer their gift cards. Typically the SPE, also commonly known as a Giftco or Cardco, incorporates in a state where gift cards are exempt from escheatment. States that require the escheatment of gift cards are reviewing the Giftco relationship to ensure the formation is valid and sufficient. If the state deems the Giftco to be a sham or fraudulent, they may have grounds to challenge the formation as was the case in The State of Delaware ex. rel. William Sean French v. Overstock.com, Inc.
Virtual currency landscape
As virtual currency becomes more mainstream, many are wondering whether and how unclaimed property laws apply to such currencies. Most states have not addressed virtual currency in their unclaimed property statutes, and the states that have provide little guidance on the subject leaving holders with numerous questions.
For example, cryptocurrency, or virtual currency, has the potential of being classified as different property types depending on where it is in its lifecycle. The cryptocurrency could be classified as a security property type when offered in an initial coin offering. Later in its the lifecycle, a cryptocurrency used to purchase goods or services could be classified as cash or a similar property type. Both cash and securities are generally escheatable, however the dormancy period and escheat requirements differ.
It remains unclear if and how a virtual currency should be escheated. Liquidation of virtual currency could result in liability to the owner for any loss of investment. Proper escheatment methodology will need to be addressed by the states.
The unclaimed property landscape is constantly changing. Holders should review their unclaimed property procedures to ensure all escheatable property types are captured and state unclaimed property laws are followed. In addition to unclaimed property laws, holders need to consider the impact other federal and state law has on the property being escheated.