In the State of Delaware, the Department of Revenue is responsible for overseeing unclaimed property audits. The Delaware Secretary of State’s office is responsible for overseeing unclaimed property Voluntary Disclosure Agreements (VDAs).
This split of unclaimed property duties in Delaware and a “softening” of statutory requirements came about in the last few years as an effort on the part of the state to encourage holders to participate in the VDA program. The changes may have indicated a willingness of the state to acknowledge holder complaints that unclaimed property audits sponsored by Delaware, sometimes through aggressive third-party auditors, had been too rigorous and even unfair.
In June, those complaints seem to have been upheld by a federal court opinion in the case of Temple-Inland, Inc. v. Cook, in which US. District Court Judge Gregory Sleet ruled that Delaware violated due process and exploited loopholes in the state’s statute of limitations during its audit dealings with Temple-Inland. Within his 39-page opinion, Judge Sleet wrote, “To put the matter gently, defendants have engaged in a game of ‘gotcha’ that shocks the conscience.”
The court opinion recently prompted Delaware’s Secretary of State Jeffrey W. Bullock to write a letter seemingly distancing his office from the state’s Department of Revenue, which presided over the Temple-Inland audit — as well as every other unclaimed property audit conducted by Delaware.
Bullock said the intention of the letter was to address questions from current VDA enrollees regarding the impact of the court’s opinion on the VDA program. However, he points out that, “The actions taken by the state’s escheator in the Temple-Inland audit bear little, if any, resemblance to the administration of the VDA program.” This seems to indicate that an indirect goal of the letter may have been to set apart the SOS VDA program from the court-chastised Department of Revenue audit program.
The letter recalls actions of the Delaware General Assembly in recent years addressing holder concerns, including creating the Secretary of State VDA program in 2012, shortening look-back period for audits, and issuing draft regulations guiding the conduct of unclaimed property audits. In the letter, Bullock states his intention to propose additional changes in favor of holders when the Delaware General Assembly returns in January 2017.
Until then, and perhaps most notably, his letter states that VDAs, “from this point forward be settled based on the look-back period of 10 years plus dormancy from the date the holder enrolled.” This constitutes a shortening of the look-back period by at least a few years for many holders. On the other hand, Bullock’s letter emphasizes that holders must still provide a reasonable estimate for periods when records are unavailable or insufficient. It remains to be seen whether the Delaware State Assembly will change the method of estimation in audits.
In light of the fact that unclaimed property escheatment comprises the state’s third largest source of income, we believe it may have taken some courage for the Secretary of State to write the letter. Reduction of the VDA look-back period is good news for holders and likely to reduce amounts of past unclaimed property due. However, this also would represent a reduction in Delaware’s revenue, because many US. corporations are required to report unclaimed property to Delaware as their state of incorporation when no owner address can be found.
Impact of the Delaware Secretary of State’s Actions on Unclaimed Property Holders
At this time, it appears Delaware’s Secretary of State wants to work with holders in a more agreeable fashion. Shortened look-back periods for holders are a huge bonus in the form of reduced VDA estimations. It remains to be seen whether similar actions will be taken in the Delaware audit program. Conversely, it’s possible the Delaware General Assembly could reverse the Secretary of State’s actions.
We are encouraging MarketSphere clients who have hesitated to join the Delaware VDA program to recognize this as a best opportunity to come into compliance. In our opinion, there will most likely never be a better opportunity in Delaware. In fact, we urge holders not to delay in participating.
Due to the changing unclaimed property landscape in Delaware, we recommend holders consult with a professional unclaimed property audit and VDA advocate to ensure they are compliant with all aspects of the Delaware VDA program, both old and new. It’s important to understand the options and be mindful that there may be further changes to the program.