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Unclaimed Property

As American businesses know, all states have “unclaimed” property laws, and almost every business has liabilities for unclaimed property. Under the states’ laws, businesses holding unclaimed property are required to surrender custody of the property to a state. The state holds the property for the true owner until he or she files a claim with the state and proves ownership of the property. Because the states use unclaimed property as a source of funds, and because unclaimed property remittances involve many millions of dollars per year, the states are very protective of their right to take custody of unclaimed property.

  Unclaimed property laws apply to all types of property, but the large dollar issues involve intangible property – unclaimed payroll checks, customer overpayments, unreturned deposits, uncashed refund checks, unused gift certificates, etc. In all cases, ownership of the property always remains with the true owner, and no holder can take ownership of the property by its unilateral actions. Attempts by holders to use accounting entries to claim these unclaimed amounts as “miscellaneous income” are improper and leave holders exposed to substantial liabilities.

While unclaimed property laws apply to all types of property, and while most issues involve intangible property, the principle that the passage of time does not alter ownership is best demonstrated by an example involving tangible personal property:

Mrs. B (“Owner”) asks Mr. X (“Holder”) to store her dining room furniture for two months. Holder agrees to do so at a rate of $10 per month. Three years later, Owner still has not claimed her furniture. While Holder may charge Owner for the extra storage time, Owner at all times retains ownership of the furniture. Holder does not own the property and cannot legally claim it as his own. He cannot legally use the furniture. Of course, over time Holder might receive permission to sell the property to pay for the costs of storage. However, any excess amounts must be sent to the state for safekeeping until Owner claims her money.

State enforcement of this area has become aggressive. It is not uncommon for a business to be audited by 10 or 20 states at a single time, typically through “bounty hunters” hired by the state who are paid a percentage of the unclaimed property they collect. Further, because ownership of the property remains with the true owner and because the states’ rights derive from the true owners, many states treat their ability to take custody of unclaimed property as not being subject to any statute of limitations.

Fortunately, experience has shown that there are many ways to reduce exposure for the liabilities. Obviously, complying with remittance requirements for future periods is essential. In addition, liabilities from back periods may not be as great as they initially appear once transactions are properly classified and analyzed, in part because many states exempt selected transactions from their remittance requirements. For example, some states exclude from their unclaimed property laws any unclaimed property originating in transactions between businesses. Finally, businesses that come forward voluntarily, on an anonymous basis through their attorney, often receive favorable terms from the states. These terms can include the waiver of interest and penalties.

This Alert provides an introduction to American unclaimed property laws. For further information and assistance with state and local tax issues anywhere in the United States, please contact David A. Fruchtman at 04-629-0520 or 312-281-1111.

*Adapted from the author’s annual lecture on the subject to New York University’s Summer State and Local Tax Institute.


Previous issues of the State Tax Alert Newsletter are available at: www.statetaxalert.us/archive


*David A. Fruchtman is an attorney in the United States. He is not admitted to the Israeli Bar. He is Of Counsel to Horwood Marcus & Berk Chartered, located at 180 N. LaSalle Street, Suite 3700, Chicago, Illinois 60601. He is a Harvard Law School graduate and is chairman of the American Bar Association’s Income and Franchise Taxes subcommittee. He has been named by his peers as one of Chicago’s Leading Tax Lawyers. Horwood Marcus & Berk Chartered has one of the largest state and local tax law practices in the United States. The firm provides tax planning advice to clients of all sizes and has successfully represented clients before courts and administrative tribunals throughout the country, including at the United States Supreme Court.

  This Alert is for discussion purposes only and does not constitute tax advice; consequently, it is not subject to the attorney-client privilege and does not constitute attorney work product. This Alert may be disclosed to any and all persons, without limitation of any kind, including any potential tax treatment or tax structure of any transaction described hereon. This Alert does not provide federal tax advice and was not prepared in a form to comply with the requirements of an opinion upon which a taxpayer can rely to avoid certain penalties under the Internal Revenue Code of 1986, as amended. No fee was received in connection with producing this Alert. © 2006 David A. Fruchtman