State and Local Tax Alert - August 2017

August 2017

Is Illinois The New Delaware After Adopting Revised Uniform Unclaimed Property Act?


Background

The Uniform Law Commission (“ULC”) finalized the Revised Uniform Unclaimed Property Act (“RUUPA”) on November 16, 2016.  The RUUPA serves as a model Act that states can either adopt in whole or in part within their statutes.  Accordingly, a handful of states have begun to enact statutes that adopt in whole or in part provisions contained in RUUPA (e.g., Delaware, Tennessee, and Utah).  While Illinois enacted SB 9, which adopts various major Illinois tax changes (See the BDO Alert), it also adopts the RUUPA for which funds exceeding $2.5M are generally required to be deposited into state pension fund on April 15 and October 15 each year.  Accordingly, SB 9 provides sweeping changes to Illinois unclaimed property reporting and administration, including: changes to record retention requirements, statute of limitations, anti-limitation provision, extrapolation, B2B exemption and other exemptions, dormancy periods, remediation guidelines, transitional provision, contingency fees, administration review and remedies, and penalties and interest. 
 
Records Retention

The Illinois RUUPA requires a holder that files an Illinois unclaimed property report to retain records pertaining to the presumed abandoned property reported for a period of 10 years after the later of the date the report was filed or the last date a timely report was due to be filed, unless a shorter period is provided by rule of the administrator. The RUUPA also sets forth the content requirements that the records must satisfy.
 
Statute of Limitations
 
The existing statute of limitations provisions bar the state from making assessments on holders more than five years after filing a report or nine years following the applicable dormancy period (e.g., generally five years for most property types equating to 14 years statute of limitations period).  While not exactly the same period as under the standard RUUPA (e.g., five-year statute of limitations after the holder filed a non-fraudulent report or otherwise a 10-year statute of limitations after the duty arose), it is close. 
 
Notwithstanding, the SB 9 in pertinent part here essentially enacts a phantom statute of limitations provision as follows:
 
“…(b) An action may not be enforced by the administrator more than 10 years after the holder specifically identified the property in a report filed or gave express notice to the administrator of a dispute regarding the property...” 
 
See generally Article 15, Sec. 15-610(b).  As written, the new statute of limitations provision applies only to property specifically identified by the holder in the report.  Thus, presumably there is no statute of limitation provision for (a) any undocumented property types in an annual report or (b) items that are determined later to have been reportable in a property type class but were not filed as part of that property type class on the original annual report.  Stated differently, filing a report does not start the statute of limitations period.  Given that the provision is limited to property reported, there is no statute of limitations protection for holders in Illinois prospectively. 
 
New Anti-Limitation Provisions
 
Under existing Illinois escheat law, there is no anti-limitation provision.  SB 9 adopts this provision in pertinent part as follows:
 
“…(a) Expiration, before, on, or after the effective date of this Act, of a period of limitation on an owner's right to receive or recover property, whether specified by contract, statute, or court order, does not prevent the property from being presumed abandoned or affect the duty of a holder under this Act to file a report or pay or deliver property to the Administrator…”
 
See generally Article 15, Sec. 15-610(a).  While these types of statutes are largely aimed at addressing cases where escheat laws are specifically circumvented as sole purpose, Illinois RUUPA doesn’t distinguish between cases of circumvention of escheat laws and normal business practice.  The interpretation of this distinction will be key for many holders who incorporate any type of “forfeiture clauses” in their customer contracts relating to accounts receivable credits or with vendors or other parties where their rights are cut off after certain time period (e.g., stale dated check 180 days).
 
Use of Estimation Methods
 
The Illinois RUUPA, like old law, allows for estimation if a holder fails to retain the records for the period or in the form and content required, then the State Treasurer in an audit examination is permitted to use a “reasonable method of estimation . . . including extrapolation and use of statistical sampling.”  What is new and important to note is that a payment of an Illinois unclaimed property liability based on an estimation is treated as a penalty for failure to maintain records (extrapolation penalty).  Further, as such, the payment does not relieve a holder from an obligation to report and deliver unclaimed property to the state of the holder’s domicile (i.e., state of incorporation or organization).[1]
 
However, if a holder has filed Illinois unclaimed property reports and has retained the records required to be retained, then an audit examination may not be based on the use of an estimate, unless the holder consents to the use of an estimate.  While comforting at first glance, this may only serve to create a multi-state exposure based on un-researchable periods using actual records (e.g., list of outstanding checks, voids, credits, etc.) held to satisfy Illinois record retention law.   Given that Illinois, like so many other states, use third-party auditors to conduct their audits, these firms have contracts with multiple states whom routinely join audits initiated by a demand state.[2]  Does the holder community find itself in another game of “gotcha” and if so, how can this stand?  Can Illinois impose a retroactive penalty on a holder even though the old law had a record retention and estimation statute on the books? [3]
 
Business-to-Business Exemption Eliminated
 
Under prior law that, but for the “transitional provision” that is technically in effect through December 31, 2017, property in the custody of a holder that arose from a business transaction that the holder had with another business was not subject to escheat to Illinois.  The Illinois RUUPA eliminates the “B2B exemption.”  This generally means that all transactions between the holder (a business association) and its vendor or customer that are also business associations are subject to escheatment unless the transactions are remediated in accordance with Illinois statutes, regulations and any administrative guidance or otherwise preempted by law.[4]
 
This provision is problematic once coupled with the transitional provision discussed below, as it could create an avenue to audit previously filed Illinois reports and/or voluntary disclosure agreements that took B2B positions under the old law.[5]
 
Other Exemptions - Gift Cards, Stored Value Cards, Loyalty Cards, and Merchandise Credits
 
The Illinois RUUPA specifically exempts from escheatment (a) game-related digital content, (b) loyalty cards and (c) gift cards.[6]  Gift cards are defined to include “store value card” that is (i) issued on a prepaid basis in a specified amount, (ii) does not expire, (iii) is not subject to dormancy, inactivity, or service fee, (iv) is decreased in value only by redemption merchandise, goods or services, and (v) cannot be redeemed for money.  Thus the exemption for gift cards appears to include “closed loop” gift cards but not “open loop” gift cards.  It should also be noted that holders are required to honor stored-value cards indefinitely upon escheatment and to seek reimbursement from the state following redemption.  Gift cards are also defined to include “prepaid commercial mobile radio service” as defined in 47 C.F.R.  20.3 as amended. 
 
In store merchandise credits, generally meaning money or a credit owed to a customer as a result of a retail business transaction are also exempt under the Illinois RUUPA.[7]
 
Dormancy Periods
 
Generally, the Illinois RUUPA changes the dormancy periods from five years to three years for most property types.  The most common property type dormancy periods are summarized below:
 
Property Type Dormancy Period
 
 
Comments
A/R Credit 3  
Payroll 1  
A/P 3  
Securities - See below for further discussion
Traveler’s Check 15  
Money Order 7  
State or municipal, bearer or original issue discount bond 3 Years after the earliest date of maturity or is called or the obligation to pay the principal arises
Debt of a business association 3 Years after obligation to pay arises
Demand, savings or time deposit 3 Years after the later of maturity or the date of last indication of interest in property by the apparent owner, except for a deposit that is automatically renewable, or after initial date of maturity unless apparent owner consented in a record on file with the holder to renewal at or about the time of renewal
Safe Deposit Box 5 Years after the expiration of the lease or rental period of the box
Deposit or refund owed by a utility 1 Year after the deposit or refund becomes payable
All other property 3 After the owner first has a right to demand the property or the obligation to pay or distribute the property arises
 
Securities under the new law generally will incorporate an RPO and inactivity standard.  Securities are now presumed abandoned at the earliest of  three years after the first RPO (i.e., returned mail undelivered) or five years after the owner’s last indication of interest in the security (i.e., inactivity).  There are two general exceptions to this rule as follows: 
 
  • First, if holder does not send annual communications to apparent owner by mail to confirm his or her interest in security, then holder must send e-mail within three years after last indication of interest in property.  If holder doesn’t have apparent owner email, receives notification that e-mail not received by apparent owner or no response to e-mail within 30 days after it was sent, then security is presumed abandoned five years after the owner’s last indication of interest in the security (i.e., inactivity). 
  • Second, a holder that receives notification that the owner of a security has died is required to attempt to confirm whether the owner is in fact deceased.  If death is confirmed, the security is presumed abandoned two years after the date of the owner’s death.
 
Indication of an apparent owner interest can generally include: (a) written record by apparent owner to holder or its agent, (b) verbal record contemporaneously memorialized by holder or agent, (c) check presentment, dividend, interest payment or other distribution, (d) account activity, (e) deposit or withdrawal, and (f) premium payment on insurance policy. 
 
Remediation Guidelines & 90 Day Void Waiver
 
The new law provides guidance with respect to remediation that could resolve items included in populations used in a voluntary disclosure, audit or annual compliance filings.  The holder must establish by a preponderance of the evidence that a check, draft, or similar instrument was:
 
  • issued as an unaccepted offer in settlement of an unliquidated amount;
  • issued but later was replaced with another instrument because the earlier instrument was lost or contained an error that was corrected;
  • issued to a party affiliated with the issuer;
  • paid, satisfied, or discharged;
  • issued in error;
  • issued without consideration;
  • issued but there was a failure of consideration;
  • voided not later than 90 days after issuance for a valid business reason set forth in a contemporaneous record; or
  • issued but not delivered to the third-party payee.
 
Moreover, a holder may present evidence of a course of dealing between the holder and apparent owner as a defense against an assertion that a particular item is abandoned property. 
 
The “Transitional Provision”
 
While the Illinois RUUPA is effective January 1, 2018, a “transitional provision” effectively makes the new property reporting requirements enacted as part of the RUUPA retroactive for a five-year period.  Section 15-1503(a) of the Illinois RUUPA provides, as follows:
 
An initial report filed under this Act for property that was not required to be reported before the effective date of this Act, but that is required to be reported under this Act, must include all items of property that would have been presumed abandoned during the 5-year period preceding the effective date of this Act as if this Act had been in effect during that period.
 
As a result, for their first Illinois unclaimed property report due after the January 1, 2018, effective date, it appears that holders may have to apply the transitional provision to a look back period at least eight to ten years given general three-year and five-year dormancy periods coupled with the five-year transition period.  This is very important for holders to monitor as could have significant impact on their compliance responsibilities.
 
Use of Third Party Auditors and Contingent Fees
 
The Illinois RUUPA expressly authorizes the State Treasurer to contact with third parties to perform audit examinations.  The auditor may be paid on fixed fee, hourly fee or contingent fee basis.  If a contingent fee arrangement is agreed to, the maximum contingent fee charged by the third party cannot exceed 15 percent “of the amount or value of property paid or delivered as a result of the examination.”
 
Administrative Procedures
 
The Illinois RUUPA enacts administrative appeals procedures for challenging unclaimed property assessments.  First, a holder is provided 30 days after the holder’s receipt of a notice of determination of a liability to pay to request an informal conference with the State Treasurer.  Interest and penalties continue to accrue during the pendency of the informal conference.  If the holder wants to appeal an informal conference decision (or does not request an informal conference), the holder has 90 days after receiving notice of the State Treasurer’s notice of decision (if an informal conference was requested and decided) or notice of determination of liability to pay (if the holder did not request an informal conference) to appeal the determination.  The appeal is treated as a “contested case” under the Illinois Administrative Procedure Act.  A final decision in an administrative appeal proceeding is subject to judicial review.   

Penalties and Interest
 
IL RUUPA enacts various penalties and interest for failure to file, pay, deliver; evasion; and fraud as summarized below:

 
Type of Interest/Penalty Details Discretionary Waiver Citation
Failure to report, pay or deliver property interest 1% per month on the amount or value of the property – calculated from the date the property should have been reported Yes – if holder acted in good faith and without negligence Section 15-1204 (a) (interest)
Section 15-1206 (a) waive
Failure to report, pay or deliver property penalty $200 per day for each day the failure occurred, maximum of $5,000 Yes – if holder acted in good faith and without negligence Section 15-1204 (b) (interest)
Section 15-1206 (a) waive
Failure to retain required records penalty State is permitted to use “reasonable method of estimation” as penalty No Section 15-1006 (penalty)
Evasion of unclaimed property law penalty $1,000 per day obligation is evaded or duty not performed, maximum of $25,000 plus 25% of property that should have been reported No Section 15-1205 (a) (penalty)
Fraudulent filing penalty $1,000 per day from date of original report until corrected, maximum of $25,000 plus 25% of property that should have been reported or was under reported No Section 15-1205 (b) (penalty)

































Given the summary above, and that the extrapolation penalty is for failure to hold records, it is unclear if such penalty would be waived in a voluntary disclosure setting.  This could be a huge benefit of the voluntary disclosure program if it does in fact waive this penalty for holders. 


BDO Insights

 
  • Holders of unclaimed property should make note of the Illinois RUUPA and prepare for its January 1, 2018, effective date.  The Act’s “transitional provision,” however, effectively gives the RUUPA a five-year period of retroactivity.  This will have an impact on previously filed returns, and IL voluntary disclosure agreements that most likely will not protect holders in this context as the agreements specifically allow the state to audit the holder post VDA payment. 
 
  • The Illinois RUUPA’s “Transitional provision” could have significant consequences, especially for holders who previously relied on the business-to-business exemption or that have not retained the records in the form and content required by the RUUPA for the entire five-year period of retroactivity. 
 
  • Holders should evaluate their records and record retention policies in light of the new Illinois RUUPA record retention and statute of limitation provisions and prepare accordingly.  Holders that maintain records for the full Illinois look-back period may avoid the extrapolation penalty only to be whipsawed by reporting un-researchable items to other states represented by the third-party auditing firm.  Holders should evaluate if they maintain complete and researchable records as part of their overall compliance with Illinois and other states.
 
  • Holders should adopt policies and procedures around unclaimed property that tie into new annual compliance requirements including change in dormancy periods, records to be included in reports, accounting for voids appropriately, etc. 
 
  • Holders that are currently under unclaimed property audit by Illinois should evaluate what these provisions mean to the audit and evaluate settling the audit with the state prior to the January 1, 2018, effective date of the Act.  Any settlement should include a legal agreement through legal counsel that would provide the holder with appropriate protection for all historical periods so that the new law would not impact their filing if possible.
 
  • Illinois is expected to adopt regulations regarding the examination process, etc.  Holders should comment on these regulations when provided the opportunity in order to help drive clarity and transparency on audit expectation and general compliance process.  This at a minimum should include requests for how the extrapolation penalty will be calculated among other matters.
 

For more information, please contact one of the following practice leaders: 
 
West:     Southeast:
Rocky Cummings
Tax Partner
 
    Scott Smith
Tax Managing Director
 
Paul McGovern
Tax Managing Director
 
    Tony Manners
Tax Managing Director
 

   
Northeast:     Southwest:

Janet Bernier
Tax Principal

   

Tom Smith
Tax Partner

Matthew Dyment
Tax Principal

   

Gene Heatly
Tax Managing Director


   
Central:     Atlantic:

Nick Boegel
Tax Managing Director

   

Jonathan Liss
Tax Managing Director

Joe Carr
Tax Partner

   

Jeremy Migliara
Tax Managing Director

Mariano Sori
Tax Partner

   

Angela Acosta
Tax Managing Director

Richard Spengler
Tax Managing Director

     
 
 
[1] See generally, Temple-Inland, Inc. v. Cook, Civ. No. 14-654-GMS (D. Del. June 28, 2016) (summary judgment rulings where state of Delaware was held to have violated plaintiff’s due process rights for various reasons, estimation for liability of estimated property owed (not a penalty) discussed, etc.). 
[2] See generally Article 15, Sec. 15-1004(3),(4) (providing generally records used in Illinois examination may be shared with other states, federal government and foreign country on joint exams or to other states unclaimed property administrators for “…circumstances equivalent to circumstances described in this Article…”)
[3] See generally, 765 ILCS 1025/11.5 (Section scheduled to be repealed on January 1, 2018) Sec. 11.5. Estimation techniques and record retention. (a) If a holder has failed to retain records as required by this Act or if the records retained are shown to be insufficient to conduct and conclude an examination, the Office of the State Treasurer may use estimation techniques that conform to either Generally Accepted Auditing Standards or Generally Accepted Accounting Principles to determine the amount of unclaimed property.  In the conduct of an examination, the State shall not request of a holder any records that relate only to property that under subsection (a) or (b) of Section 10.5 is not subject to this Act. 
 
See generally also, 765 ILCS 1025 /11(h)(2) ((Section scheduled to be repealed on January 1, 2018)  (generally providing “…In the case of all other holders commencing on the effective date of this amendatory Act of 1993, property records for the period required for presumptive abandonment plus the 9 years immediately preceding the beginning of that period shall be retained for 5 years after the property was reportable.”)
 
[4] See generally, Sec 15-102(4) definition of “business association.”
[5] See generally, Illinois Unclaimed Property Voluntary Disclosure Agreement (2017) provision #5 providing (“…The Holder and the Treasurer agree that the Treasurer maintains the right to perform an examination of the Holder’s books and records to determine the Holder’s unclaimed property obligations for fourteen (14) years to present (the “Examination Period”), or date of incorporation, whichever is older…”)
[6] See generally, Article 15, Sec. 15-102 (14) “Loyalty Card” (means a record given without direct monetary consideration under an award, reward, benefit, loyalty, incentive, rebate, or promotional program which may be used or redeemed only to obtain goods or services or a discount on goods or services.  The term does not include a record that may be redeemed for money or otherwise monetized by the issuer.)
[7] See generally, Article 15 Sec. 15-201(7).