CORPORATE CLOSE-UP: IS DELAWARE PLAYING UNCONSTITUTIONAL ‘GAME OF GOTCHA’?

 

Delaware “engaged in a game of ‘gotcha’ that shocks the conscience,” stated the Delaware federal district court in June, ruling that Delaware violated the property holder’s substantive due process.

The court found that Delaware waited 22 years to audit Temple-Inland, a corrugated packaging manufacturer, exploited loopholes in the statute of limitations, and failed to properly notify holders regarding the need to maintain unclaimed property records longer than is standard.

In September, the same court stressed that a company was suffering real harm due to Delaware’s “potentially insatiable” audit of Marathon Petroleum that is going on its ninth year. The ruling has caused some to advise holders to not take action until a threat of enforcement or penalty has been made

The recent litigation points to upcoming changes in Delaware’s use of estimation, affecting pending Delaware audits and voluntary disclosure agreements. In the meantime, corporations should be aware that if they have failed to comply with Delaware’s unclaimed property laws, they may be eligible to enter into a voluntary disclosure agreement (VDA) with the Secretary of State.

“The ruling on estimation methodology in Temple-Inland generally favors noncompliant Delaware holders,” Peter Desmond Hopkins, CPA at Cover & Rossiter, P.A. in Wilmington, Delaware told Bloomberg BNA.  “It makes sense to review records that are available and determine the total liability for all open years with extrapolation to reachback years lacking complete documentation computed by ignoring property owed to persons in other states,” he said.

“If the total is palatable,” Hopkins said, “management should consider applying for a VDA, bearing in mind that that state may concoct new, less favorable estimation techniques resulting in a somewhat higher liability.”

In response to the Temple-Inland opinion, state officials just announced that Delaware plans to ignore the earliest years of the lookback statute. But it’s a small step. “The court’s thorough analysis identified several elements of Delaware’s approach that give rise to Due Process Clause issues, and the state may be cautious about litigating this again,” said Hopkins.

Under rules laid out by the U.S. Supreme Court, unclaimed property often finds its way to the state in which a business entity is incorporated. For over 680,000 corporations, including half of Fortune 500 companies, that state is Delaware.

Income from unclaimed property is a "vital element" in the state’s operating budget. For example, Delaware added a whopping $364.9 million in unclaimed property to its coffers in 2007, and only returned $20 million to rightful owners.

There is likely much more unclaimed property owed to Delaware. Businesses incorporated in Delaware with unclaimed property are expected to voluntarily hand over the property, but “lack an awareness of reporting obligations,” the court found.

Unclaimed or abandoned property is the collective “lost and found” of corporate America and may consist of funds from bank accounts, stocks, uncashed dividends or payroll checks, traveler’s checks, unredeemed money orders or gift certificates, insurance policies that are unclaimed by their owners.

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: What is the best way for Delaware to inform companies of its unclaimed property requirements?

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