Advanced Issues in Unclaimed Property

1
Advanced Issues in Unclaimed Property
TEI Advanced State Local Tax Seminar
December 7, 2007

• Mr. James Santivañez, President
• JMS Advisory Group, LLC

2
Unclaimed Property In The News

• California debacle
• Delaware fraud
• FTC gift cards
• IRS gift card companies
• Audits on the rise

3
California Dreamin

• State Comptroller sued on Constitutional grounds
  taking of private property w/o proper notice
• State ordered to stop accepting payments
• New notice requirements
• Practical effects in California
• Broader effect possible?

4
Delaware Fraud

• Abandoned Property Bureau employee accused of
  stealing more than 1 million over two year
  period
• Clear lack of internal controls
• Whos involved?
• Practical effects in Delaware
• Not to worryUP collections for FY 2008 projected
  to be 370 million

5
Gift Cards In The News

• K-Mart FTC settlement
• Consumer Federation of America, Consumers Union
  and US PIRG dissent
• Darden Restaurants FTC settlement
• Office of Thrift Supervision offers guidance
• Simon Property case in Georgia
• Simon settles in New Hampshire
• Consumer Reports goes on the offensive

6
The IRS Gift Card Companies

• IDD LMSB-04- 0507-039
• Clarifies tax accounting rules for gift card
  income
• Deferral of income under 451
• Taxpayer must have sufficient inventory
• Estimates no longer acceptable
• Second category of issues separate gift card
  companies

7
Positive Trends Exemptions

• Expansion of reporting exemptions for gift cards
• Business to business exemptions
• Definition of business association
• Sources beyond the statute
• Payroll property exemptions
• Industry-specific exemptions

8
Trends The Focus on Exemptions

• Biogen IDEC case Massachusetts
• Treasurer tried to enact emergency regulations
  to curtail application of exemption
• Holder challenged effective dates on audit
• Continued relationship defense advanced current
  AP AR liabilities are by definition not
  abandoned property under the law and do not need
  the exemption because they automatically fall
  outside of the Act.

9
Trends Emphasis on Due Diligence

• States more focused on pre-filing due diligence
• States willing to grant exemptions for good
  internal processes (early due diligence)
• Reported property claims matching
• Greater report scrutiny in general

10
Trends Annual Compliance

• Outsourcing achieving optimum operational
  efficiency focus on core competencies
• Software options increase
• Internal Management Reporting FIN 48
• Unclaimed property is not a tax

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Other Litigation

• Metromedia Restaurant Group - Texas
• Rebates
• Young America litigation
• Office Depot litigation

12
Delaware Audit Activity

• Over 200 active audits
• Kelmar Associates 150 audits
• State auditors actively reviewing VDA filings
• Minimum audit VDA thresholds
• Personnel changes what the future may hold

13
Unclaimed Property Audits

• Finalization of Delaware regulations
• VDA audit period is now 18 months vs. 3 years
• Stringent remediation standards
• Almost complete disregard without substantial
  documentation
• Focus on quality records
• Number of audits on the rise in DE and elsewhere
• Waste Management, Inc.

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Audit Case Study

• Review of 2000 bank reconciliations
• 3 months where outstanding checks were found on
  audit
• Total of 2,400 in these 3 months
• Average of 800 estimated over the other 9 months
  of the year
• Even though no other o/s checks were found in
  other months

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Audit Case Study

• Auditors logic
• 2,400 / 3 800 monthly average
• 800 x 9 (other months) 7,200
• Total annual liability 9,600
• Extrapolated over audit period

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Thank You!

• It is always a pleasure to present to TEI
• James Santivanez
• President
• JMS Advisory Group, LLC
• 404.474.7733
• www.jmsadvisors.com