Unclaimed property: the nontax state revenue generator.

• Author: Gebert, Angela R.

Why should tax professionals care about unclaimed property? After all, unclaimed property is not a tax but a property right. However, unclaimed property looks and acts very much like a tax. In fact, similarities can cause compliance responsibilities and audit notices to drop squarely in the lap of a tax practitioner. To recognize the issues and potential risks, the fundamentals of unclaimed property need to be understood.

Background

Unclaimed property, also known as abandoned property, consists of 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, and Guam, as well as a handful of foreign countries, have enacted unclaimed property laws. Unclaimed property can include uncashed payroll and vendor checks, 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. While unclaimed property or escheat laws date back to the Middle Ages, aggressive compliance enforcement by states is a relatively recent phenomenon.

When dealing with the state taxes, tax practitioners think in terms of physical presence, nexus, and equitable apportionment. But since unclaimed property is technically not a tax, these concepts generally do not apply.

The Supreme Court established the jurisdictional rules for states claiming property in the 1965 case Texas v. New jersey, 379 U.S. 674 (1965). The priority rules are:

* The jurisdiction of the owner's last known address as reflected in the holder's records is entitled to custody of the unclaimed property; and

* If the owner's last address is unknown, the jurisdiction in which the holder is domiciled (incorporated) is entitled to claim the unclaimed property.

As discussed below, liberal interpretations of the second rule by some states create the biggest challenge--and potential liability--for many companies. A number of states have also adopted a third-priority or "throwback" rule. Under this rule, if there is no owner address and the holder's state of domicile does not have unclaimed property laws that apply to the property, the state in which the transaction giving rise to the property occurred may claim the property. The Supreme Court has not sanctioned the...