Unclaimed Property Paradigm Shift — Is the Impending Result Better?

Summarized by Andrew LeDonne, Student Editor, The Temple 10-Q

Absent evidence of the property’s true owner, estimating liability for unclaimed property is a complicated undertaking. Tax professionals across the country are curious as to whether the current methods some states employ create the potential for double liability exposure. In her 2019 article “Unclaimed Property Paradigm Shift — Is the Impending Result Better?” (linked below) Temple Law alumna Sara Lima, along with her co-authors Joseph Carr and Michael Kenehan, explore the details of the gross method of estimating unclaimed property, and how it contrasts with other state-sanctioned methods.

The gross method of estimation uses the total unclaimed property a company holds to estimate liability. Traditionally, this method benefits the state in which the entity holding the unclaimed property is incorporated as it is that state to which the estimated unclaimed property must be reported. The net method of estimation calculates liability on a state-specific basis. Simply put, the net method calculates liability using only unclaimed property directly connected to that state.

But what happens when the state of incorporation requires estimates be reported to that state using the gross method and the state which has a direct connection to unclaimed property uses the net method? Think of it this way – Delaware uses the gross method, calculating liability for a company incorporated in Delaware by including all potential unclaimed property the company holds. Texas uses the net method, calculating liability only for unclaimed property directly connected to the state. A company incorporated in Delaware with outstanding payroll accounts for Texas-based employees is then forced to report that unclaimed property to both Texas and Delaware. This can result in double-counting, holding a company liable for the same unclaimed property twice. As the number of states that implement the net method grows, so too does uncertainty as to how holders of unclaimed property should act to avoid being subject to double liability.

How do we fix this problem? Well, some states that utilize the gross method claim to indemnify a holder for an estimate in another state that uses the net method. Delaware happens to be one of these states. However, at least one court has reviewed Delaware’s claim of indemnification and found it inadequate to protect against double liability. As such, some argue that the best solution would be for all states to adopt some version of the net method.

Regardless of where we actually end up, Sara Lima and her fellow tax professionals Joseph Carr and Michael Kenehan offer ten steps companies can take to mitigate the risk they face as a result of this problem. We encourage our interested subscribers to read their full article to learn more.

The full article can be found here: https://www.reedsmith.com/en/perspectives/2019/03/unclaimed-property-paradigm-shift–is-the-impending-result-better


Sara Lima (LAW ’02) is a partner in the Philadelphia office of Reed Smith LLP. Sara is co-chair of the Government Relations Advocacy Committee of the Unclaimed Property Professionals Organization and a recognized speaker on unclaimed property issues.

Joseph Carr is a partner in the Chicago office of BDO USA LLP. There, Joseph leads the national unclaimed property practice and national state and local tax business development and marketing function.

Michael Kenehan is a managing director in the Philadelphia office of BDO USA LLP and is the leader of the northeast unclaimed property practice.

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