Legislation proposed in California, AB 2773, if enacted, would establish a voluntary disclosure program (VDP) to resolve unclaimed property (UP) claims. In exchange for participating in the VDP, the California State Controller (Controller) would waive otherwise applicable interest and penalties imposed on UP holders (holders). The VDP would end January 1, 2024.

Background

Many states' UP administrations offer voluntary reporting and amnesty programs to assist holders in complying with historic and past due UP potential liabilities. Typically, the look-back period utilized in an UP review either under a voluntary disclosure or an audit examination could span 10-15 years of transactional records.

US Supreme Court case law — the Texas cases¹ — sets forth priority rules for determining which state has priority to escheat UP. Under the primary rule, the state of the owner's last known address as shown by the books and records of the UP holder has the first opportunity to escheat the unclaimed property, for years in which underlying accounting records exist to support that liability. If the holder's records do not include an address for the owner, the secondary rule applies and gives the holder's state of incorporation the right to escheat the property. In practice, this secondary rule can also apply to foreign addressable property or estimated exposure.

Without the existence of a VDP, holders have the option of either reporting past-due UP amounts on their annual California compliance reports, which would invariably result in an interest assessment of 12% per annum; or wait for an audit examination to remit past-due UP amounts, along with interest and potential penalties. The introduction of a VDP provides a channel for holders to comply with California UP reporting obligations without incurring interest and penalties.

Proposed voluntary disclosure provisions

The proposal, if enacted, would allow holders to enroll in the VDP and report this "late" property without interest and penalty, provided they identify property exceeding its dormancy period (generally three years for most property types in California) and did not previously report the UP to the state by the applicable deadlines. In order to do so, the holder would: (1) execute a participation agreement with the Controller; (2) accurately review its books and records (see later discussion of significance) and report all UP to the Controller for the past 10 years; and (3) make full payment of the property or enter into a payment plan.

The notion in Item Number 2, "accurately review its books and records," carries significant consideration as to how such an exposure would be quantified. Most commonly, a review of a holders' books and records to identify UP exposure includes an extensive review of various general ledger accounts and related transactions (which may or may not currently be on the balance sheet).

The Controller would determine VDP eligibility. Certain holders would not be eligible to participate in the VDP, including holders subject to an audit or UP compliance investigation; holders with a filing footprint in California, however, are eligible. In other words, the VDP does not need to represent a "first-time filing" for the holder in California. If accepted into the VDP, the Controller would not audit the holder for the periods that the program covers unless the Controller reasonably determines that the holder made a fraudulent or willful misrepresentation as to the voluntary disclosure.

The Controller would be authorized to adopt regulations to implement and enforce the provisions of the proposed legislation if enacted.

Implications

Whether AB 2773 will be enacted is not yet known, but the bill has gained support from UP advocacy groups like the Unclaimed Property Professionals Organization (UPPO).² If it is approved by the Legislature and signed into law as currently drafted, holders currently not subject to an audit or UP compliance investigation should consider their UP footprint and potential exposure in California to determine if participating in the VDP would be beneficial. This program would be most beneficial to holders with significant UP exposure in the state. Holders incorporated in the state should also consider the impact of the second priority rule when contemplating the benefits of VDP participation.

Ernst and Young LLP's unclaimed property group is tracking this development and will issue additional Tax Alerts as warranted.

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ENDNOTES

¹ See Texas v. New Jersey, 379 U.S. 674 (1965); Delaware v. New York, 507 U.S. 490 (1993).

² Unclaimed Property Professionals Organization, UPPO Sponsors California Unclaimed Property Voluntary Disclosure Program Bill, (AB 2773) (March 22, 2018), (last visited April 4, 2018).