"Delaware Abandoned Property Law: What Every Company Should Know About an Emerging Area of State Law"
Corporations are obligated by law to file yearly abandoned property reports and to pay appropriate amounts to applicable states. The Delaware abandoned property law requires corporations to file abandoned property reports and remit payments on or before March 1 of each year. Corporations that do not fully comply may face audits, interest payments, and very substantial penalties. Indeed, failure to comply or inadequate compliance with abandoned property laws may lead to an unclaimed property audit that yields million of dollars of abandoned property liability exposure.
Abandoned Property Defined
Unclaimed property is generally defined as tangible or intangible property that has gone unclaimed by its rightful owner for a specified period of time. There are two large categories of abandoned property, general ledger and equity. The most common general ledger abandoned property includes, among other things, accounts-receivable customer credits or refunds, accounts payable uncashed vendor checks, and payroll uncashed wage checks. The state also has recently expanded its view to include inventory as a potential item of property subject to escheat. General ledger property becomes dormant, and thus, reportable to Delaware after it has remained unclaimed for a period of five years. Equity abandoned property comprises of such things as unclaimed shares of stock and uncashed dividends. Delaware recently changed the dormancy period for unclaimed equity type properties from five years to three years. Moreover, the state has taken the position that a statute of limitations defense is not applicable to the reporting and paying of abandoned property liability.
- In addition, it is important to keep in mind that corporations also may be required to report any and all abandoned property, general ledger and equity, held by wholly owned acquired companies. Thus, a company that has acquired a number of companies may have exposure to a significant amount of abandoned property liability associated with those acquisitions.
- Further, if a corporation does not retain the necessary accounting records to support its abandoned property liability, the state may use estimation techniques to fill in the gaps of the missing information.
Unclaimed property is reportable to Delaware pursuant to its abandoned property law, as well as U.S. Supreme Court precedent, including Texas v. New Jersey, 379 U.S. 674 (1965) and Delaware v. New York, 507 U.S. 490 (U.S. 1993). Specifically, in both Texas v. New Jersey and Delaware v. New York, the U.S. Supreme Court held that unclaimed property should be reported to the state of the lost owner’s last known address. If the owner’s address is unknown, the unclaimed property is reported to the state of incorporation of the holder of the unclaimed property, which often is Delaware.
Interest and Penalties
It is important that corporations comply with their abadoned property responsibilities on an annual basis, because failure to do so may lead to an unexpected audit, and potentially, interest and penalties. The state, pursuant to the abandoned property statute, may conduct an audit and examine the books and records of a corporation for abandoned property purposes. Moreover, if a holder fails to file abandoned property reports on or before the due date (determined with regard to any extension of time for filing), the state may assess interest for the years of noncompliance, which can consist of an amount as high as half the principal amount required to be paid. The state may also in its discretion assess penalties.
Delaware’s Voluntary Disclosure Agreement Program (VDA)
The state’s VDA program encourages holders of abandoned property that are presently in violation of the abandoned property law to voluntarily come forward and attempt to reach agreement with the state in order to remedy any past noncompliance. The VDA program is available to any holder who desires to comply with the abandoned property law and either has not been sent an audit letter from the state or is currently under audit by the state. Pursuant to applicable regulations, the holder will have to disclose as part of the VDA process whether it has filed abandoned property reports and made applicable payments to the state for years going back as early as 1991 to the present. The holder also will need to perform a comprehensive self-audit and report the amount owed for the entire “look back” period and provide supporting accounting documentation. If the parties are able to timely come to a resolution over the amount owed, the parties will enter into a voluntary self disclosure agreement, which resolves the holder’s past violations. By proceeding in this manner, the holder may potentially limit the scope of its liability both in terms of reducing the number of years for which the state will demand payment, as well as the amount of interest and penalties.
- However, if a holder unreasonably delays in complying with the VDA program, refuses to provide the necessary supporting documentation that the state needs to verify the holder’s liability, and/or materially underreports the amount of liability it owes, the state may seek to terminate the VDA process, assess interest and penalties against the holder, and request a full audit, including for prior periods as early as 1981 not covered in the VDA process.
This memorandum is provided by Skadden, Arps, Slate, Meagher & Flom LLP and its affiliates for educational and informational purposes only and is not intended and should not be construed as legal advice. This memorandum is considered advertising under applicable state laws.