Eschew escheat: unclaimed property--or the "hidden tax"--is an old topic with a renewed interest.

• Author: Hall, Noel E., Jr.
• Position: PROFESSIONALISSUES

Though escheat, also known as abandoned/unclaimed property (AUP) or sometimes the "hidden tax," has been around since this country's inception, many practitioners and business executives have never heard of this oft-considered contentious state law.

Escheat is a process wherein the state takes possessory interest in an owner or apparent owner's property and holds the property into perpetuity on behalf of the owner or apparent owner until it is claimed by the owner or the owner's heirs. In essence, the state is only a custodian on behalf of the rightful owner and generally takes no ownership interest in the property.

For example, the escheat process from a Holder's perspective can be either annual compliance (for Holders that have previously filed and continue to file annually); a Voluntary Disclosure Agreement (VDA) or a Voluntary Remittance Letter (VRL), depending on the jurisdiction (whereby a Holder has never filed in the past and wants to be in compliance); or a formal audit initiated by a jurisdiction.

If a Holder's records go back seven years and the terms of the VDA, VRL or audit period is 20 years, the calculated amount of property for the difference of 13 years will arguably be "revenue" to the Holder's state of incorporation, as there is no Owner-specific identification for that property.

"Holders" are legal entities or individuals who hold property in their possession for another party and "Owners" are the parties with an ownership right in the property in question.

For example, a Holder would be XYZ Inc., a company incorporated in California, and an Owner, for abandoned payroll property, would be Jane Smith, a current or former employee of XYZ Inc.

MEET THE ISSUE

AUP has become a windfall for many jurisdictions and a nightmare for CEOs and CFOs.

With the passage of Sarbanes-Oxley, an increase in the sensitivity of all aspects of corporate reporting and governance has forced companies to meet head-on the many years of non-compliance in the escheat area. Many public companies and SEC registrants are faced with the challenge of having to identify and, in some cases, quantify decades of non-reporting of AUP.

The issue of noncompliance is continuing to surface through the external auditor's identification of this area as a material internal control weakness, which fails to adequately address a company's procedures for identifying, capturing and reporting AUP. The external auditors are uncovering these weaknesses while performing a financial statement audit or through a SOX...