Corporate Close-Up: Inconvenient Truth? Delaware Proposed Unclaimed Property Estimation Rules Ignore, Contravene Court Ruling, Practitioner Says

Delaware’s unclaimed property laws remain in a state of flux. The state’s estimation method was struck down last June in Temple-Inland, in which a federal court characterized it as “a game of ‘gotcha’ that shocks the conscience.” Delaware repealed its unclaimed property law with the enactment of 2017 Del. S.B. 13 and replaced it with new provisions in February. But the new statutes left an important item still up in the air: the methods of statistical estimation that had been one of the major points of contention in the Temple-Inland case. In absence of statutory guidance on the issue, two Delaware agencies have attempted to fill the void by proposing rules that appear to ignore or contravene the federal court’s edict.

The new statute, Del. Code Ann. tit. 12, § 1172(e), requires Delaware to promulgate rules for use of statistical sampling in estimation of unclaimed property by July 1, 2017. Both the Delaware Department of Finance and the Department of State have proposed regulations on unclaimed property that would repeal and replace the state’s current regulations.

The proposed new regulations from the Department of State refer specifically to the estimation method to be used in Voluntary Disclosure Agreements, while the proposed regulations from the Department of Finance refer to the audit process for unclaimed property holders. The rules, if adopted, would provide guidance to holders for how the state would calculate unreported unclaimed property in cases where the holder did not have records of unclaimed property to examine. Presumably, these rules are intended to improve upon the method of estimation that was found to violate substantive due process in Temple-Inland.

However, these proposed rules are not without some significant issues. Ethan Millar, a partner with Alston & Bird LLP and co-author of both Bloomberg BNA Portfolio 1600-3rd: Unclaimed Property and the Unclaimed Property content in the Corporate Income Tax Navigator, sums up his objection to the proposed rules, saying, “I think the most important point to note is that both proposed regulations still utilize Delaware’s historical method of estimation, under which Delaware estimates unclaimed property owed to Delaware in years for which the holder lacks complete records based on unclaimed property owed by the holder to persons in all states in the base years (i.e., the years for which the holder does have complete records).”

This failure to take into account the fact that property is owed by the holder to owners in other states is in direct contradiction to the court’s ruling, Millar said.  He added that “Delaware ignores the federal court’s edict in Temple-Inland that such estimation methodology ‘is contrary to the fundamental principle of estimation,’ ‘created significantly misleading results’ and that ‘[i]f the property in base years shows an address in another state, then the characteristic of that property has to be extrapolated into the reach back years.’ (emphasis added)”

These proposed rules may seem as though they are ill-advised on the part of the state. However, Delaware has a strong financial incentive in maintaining the previous method of estimation in its unclaimed property examinations. “It is very disappointing that Delaware ignored the one federal court decision that has ruled on this issue.  At the same time, it is hardly surprising given the substantial revenue implications to Delaware, as the Temple-Inland method would wipe out almost all escheat revenues to Delaware from the use of estimation (which are hundreds of millions of dollars per year),” notes Millar.

Problems with the new proposed rules are likely to lead to more controversy on the subject in the future, and their adoption and subsequent enforcement remains an issue to watch.

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: How should Delaware estimate unclaimed property during audits of holders?

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