Unclaimed property reporting for LLCs under Texas v. New Jersey.

• Author: Boucher, Karen J.
• Position: Limited liability companies; 1965 U.S. Supreme Court case

The rapid emergence of limited liability companies (LLCs) has indelibly changed the landscape of business organizations in the U.S. In 1991, only eight states had enacted LLC legislation. By 1996, all of the states and the District of Columbia had enacted such legislation. Due in large part to the allure of partnership or branch treatment for Federal income tax purposes, coupled with limited liability under state law, the number of LLCs in the U.S. has grown exponentially in the past several years. Moreover, LLCs are being put to increasingly diverse uses (e.g., joint ventures between corporations) in an expanding number of industries.

Coincident with the emergence of LLCs, unclaimed property (escheat) has risen to prominence in the field of state and local taxation. As state unclaimed property administrators continue to broaden their audit efforts to target more and more holders (or potential holders) of unclaimed property, LLCs and other noncorporate holders (such as limited partnerships) are beginning to discover that they are not immune from compliance requirements imposed by the escheat laws of 53 different jurisdictions (50 states, the District of Columbia, Guam and Puerto Rico).

While due process prevents more than one jurisdiction from escheating a given property item (Western Union Tel. Co. v. Pennsylvania, 368 US 71 (1961)), determining which jurisdiction should have the right to escheat is not a simple question when intangible property rights are involved. In Texas v. New Jersey, 379 US 674 (1965), the Supreme Court established two well-known priority rules for resolving conflicting state claims to unclaimed intangible property. Under the primary rule, property is subject to escheat by the state of the owner's last known address, as shown by the holder's books and records. Under the secondary rule, property for which there is no owner's last known address escheats to the holder's state of "corporate domicile" (state of incorporation). The secondary rule also applies when the state of the owner's last known address does not provide for escheat of the subject property.

In Pennsylvania v. New York, 407 US 206 (1972), and Delaware v. New York, 507 US 490 (1993), the Supreme Court reaffirmed Texas v. New Jersey's escheat priority rules in the face of vigorous state challenges. Delaware v. New York involved $360 million in unclaimed, owner-unknown securities distributions held by financial intermediaries incorporated mainly in...