Estimating unclaimed property liability: the wild west of accounting.

• Author: Hopkins, Chris

Complying with state abandoned and unclaimed property (AUP) reporting requirements has become a significant issue for many business organizations during the past 10 years. A handful of states have turned to their AUP statutes to generate growing amounts of revenue, sometimes catching companies off guard by imposing substantial assessments, which in some cases date back three decades. Delaware, the state of incorporation for thousands of U.S. companies, has been particularly aggressive in its pursuit of AUP assessments.

Companies do not need to take these assessments lying down. Such levies often are based on arbitrary and unpredictable estimates posited by contract audit firms working on a contingent fee basis. These auditors work without authoritative guidance on how estimated AUP liabilities should be determined. In fact, whether an estimated liability even is AUP might be open to debate. (1)

Case in Point: CA, Inc.

CA, Inc. (formerly known as Computer Associates) is just one company that has fallen victim to Delaware's AUP axe. In 2004, as part of a voluntary disclosure agreement (VDA) program that allowed holders of unreported AUP due to Delaware to come forward and report the property, CA informed Delaware that it had not filed AUP reports for 1991 through 2004. (Delaware conducts AUP audits going back to 1981, but its VDA program reached back only to 1991.)

In 2005, after working with consultants, CA reported its AUP liability as $684,000. Delaware rejected that amount and requested that CA recalculate its liability. After several rounds of negotiation, CA's offer had risen to $2.3 million in 2007. In 2008, after applying an estimation method developed by a contract audit firm, Delaware sent CA a report showing AUP liability of $7.6 million plus interest, totalling more than $8 million.

The parties sued each other in Delaware Chancery Court. (2) They ultimately settled in 2010, with CA agreeing to pay $17.6 million for the 1991 through 2010 period. (3)

Legal Authority for Estimating AUP Liability

AUP is property held or owing in the ordinary course of business that the owner has not claimed for a certain period of time (the dormancy period). All 50 states, the District of Columbia, Puerto Rico, the U.S. Virgin Islands, Guam, and a few foreign countries have AUP laws. AUP can include uncashed payroll and vendor checks, unapplied accounts receivable credit balances, dormant bank and brokerage accounts, life insurance policies, gift certificates and gift cards, customer refunds and rebates, publicly traded securities, benefit plan payments, and the contents of safe deposit boxes.

Notably, although AUP laws do not technically impose a tax, some states have applied their laws as such over the past 15 years. In these states, enforcement may be administered by state revenue departments, and property received may be treated as revenue in state budgets. AUP laws are not, however, subject to the same constitutional constraints as taxes. Without these constraints, the enforcement of AUP laws has mutated into a constitutionally questionable revenue collection exercise in certain states. (4) From 2001 to 2011, for example, Delaware collected almost $4 billion in AUP revenues. (5)

After a dormancy period expires, the holder of the AUP must turn it over to the state. But which state? The Supreme Court of the United has established jurisdictional rules for states' claims to AUP. Generally, AUP must be reported to the state of the rightful owner's last known address as reflected in the books and records of the holder. If the owner is unknown or the holder lacks the owner's address records ("no-address property"), the AUP must be remitted to the...