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Reproduced with permission from Tax Management Weekly State Tax Report, WSTR 07/01/16, 07/01/2016.

Unclaimed Property

Voluntary Disclosure Agreement programs, programs through which a holder can report

on a voluntary basis its overdue unclaimed property, are commonly offered by states to en-

courage holders to come into compliance. In this article, Morris, Nichols, Arsht & Tunnell

LLP’s Michael Houghton and Donna L. Culver and Ryan LLC’s Mark A. Paolillo and Susan

Han discuss the availability and speciﬁcs of these programs in seven states.

Unclaimed Property—Voluntary Disclosure Agreements

BY MICHAEL HOUGHTON,DONNA L. CULVER,MARK

A. PAOLILLO AND SUSAN HAN

I. Introduction to Voluntary

Disclosure Agreements

voluntary disclosure agreement program, also

known as a VDA, is a program through which a

holder can report on a voluntary basis its overdue

unclaimed property. Commonly offered by states to en-

courage holders to come into compliance with their un-

claimed property reporting obligations, most VDA pro-

grams offer valuable beneﬁts frequently unavailable to

holders undergoing the more traditional unclaimed

property audit, both in terms of time and expense.

Although their speciﬁc terms vary, VDA programs

generally enable companies to achieve compliance with

their unclaimed property reporting obligations while

avoiding the imposition of some or all of the interest

and penalties that might apply in an audit. In addition,

holders participating in a VDA program typically enjoy

more abbreviated look-back periods than those that ap-

ply in the audit context, which may signiﬁcantly reduce

the holder’s liability. Finally, participation in a volun-

tary disclosure agreement program may assist holders

in proactively managing and maintaining their un-

claimed property compliance on a going-forward basis.

VDA programs can be either formal or informal.

Both types of programs generally involve the execution

of a form voluntary disclosure agreement by the holder

and the state, through which the holder agrees to com-

plete a self-audit of its books and records and to ﬁle

Michael Houghton and Donna L. Culver are

partners at Morris, Nichols, Arsht & Tun-

nell LLP. Mark A. Paolillo and Susan Han are

principals at Ryan Abandoned and Unclaimed

Property.

Tax Management

Weekly State Tax Report

™

past due reports and remit amounts due in exchange for

a waiver—in full or in part—of penalties and interest.

Although the requirements of the informal VDA pro-

grams vary depending on the practices of the particular

state involved, most formal programs include written

guidelines or other requirements governing such mat-

ters as the length of the look back period, the statistical

methodologies to be applied in calculating the holder’s

liability and the deadline and format required for the

written submission by the holder. Upon completion of

the VDA, many states provide for the execution of a

written agreement between the holder and the state

which identiﬁes the holder’s liability and the legal enti-

ties, transaction years and property types discharged,

and addresses the holder’s ongoing reporting obliga-

tions and the state’s ability to audit the holder to verify

the accuracy of the VDA submission.

II. Analysis of VDA Programs

In Selected Key States

This article discusses the availability of VDA pro-

grams in seven key states: California, Delaware,

Florida, Illinois, Michigan, New York, and Texas.

California. At the present time, California does not of-

fer a VDA program under the California Unclaimed

Property Law (UPL).

However, experience with Cali-

fornia authorities has shown that holders who ﬁle past

due property with the state are almost never assessed

penalties, although interest is assessed by the State

Controller’s Ofﬁce (SCO) and is rarely waived. A sum-

mary of this practice appears in a recent publication of

the SCO’s Unclaimed Property Division, which states

that ‘‘[u]nder California law, the assessment of interest

is mandatory for failure to report, pay, or deliver un-

claimed property on time, unless there is a showing of

reasonable cause for the delay.

Thus, Section 1577 of

the UPL essentially provides that if a person fails to re-

port, pay, or deliver property within the time periods

prescribed by the UPL, interest is assessed at 12 percent

per annum from the date the property should have been

reported, paid, or delivered, unless the failure is due to

‘‘reasonable cause.’’

Although the term ‘‘reasonable

cause’’ is not deﬁned in the UPL, it is deﬁned in regula-

tions of the SCO. That regulation provides that reason-

able cause ‘‘. . .means the exercise of ordinary business

care and prudence,’’ and provides two examples as to

what would be viewed as reasonable: (i) in the absence

of willful neglect, failure was due to circumstances be-

yond the holder’s control, and (ii) the failure was due to

erroneous information given to the holder of unclaimed

property by an employee of the Controller’s Ofﬁce.

Delaware. Holders of abandoned and unclaimed

property due to the State of Delaware can enroll in one

of two voluntary disclosure agreement programs oper-

ated under the auspices of the Delaware Department of

Finance and the Delaware Department of State, respec-

tively. Under the Department of Finance program, a

holder may come forward to report its past due un-

claimed property liability for transaction periods dating

back to 1991,

provided that a holder, which includes

any subsidiary and all related entities, which has re-

ceived an audit letter or which is already under audit, is

not eligible for participation in the program. Upon ac-

ceptance into the program following completion of the

required Form AP DE-1, the holder must complete a

self-review of its books and records, ﬁle reports and pay

all abandoned property due within six months. Upon

completion of the review, the holder and the state ex-

ecute a form AP DE-2, which identiﬁes the property re-

mitted, for which the holder receives a release for the

report years covered by the agreement and for all pre-

ceding report years, subject to the state’s ability to au-

dit for an 18 month period. In the event that such audit

discloses that the holder has failed to act in good faith

or has materially failed to disclose the full amount of its

abandoned and unclaimed property liability for the pe-

riods covered by the VDA, the AP DE-2 provides that it

shall be deemed null and void, and the state may in its

discretion, expand the scope of the audit to cover years

prior to those covered by the VDA, and assess interest

and penalties on all property found to be due and ow-

ing.

Since 2012, the Delaware Department of State has

also operated a voluntary disclosure agreement pro-

gram through which holders can report past due un-

claimed property, without threat of an audit, interest,

and penalties. As originally conceived, this program

was set to expire in June 2014, but was thereafter ex-

tended and made permanent by legislation enacted in

2015. Under this program, the Delaware Secretary of

State is authorized to resolve and compromise claims

for abandoned property otherwise owing to the State

Escheator under the Delaware escheat law. Pursuant to

that program, the Secretary of State may invite a

holder, not currently under audit by the State of Dela-

ware, to enter into a voluntary disclosure agreement

with the Secretary of State, failing which the statute

provides that the holder will be referred to the State Es-

In reviewing the UPL, as well as past experience of the au-

thors, California did offer an unclaimed property amnesty pro-

gram years ago. Thus, Sec. 1577.5(a) of the UPL, as reviewed

on LEXIS on May 10, 2016, stated that ‘‘Section 1577 does not

apply to, and interest may not be imposed upon, any escheated

property paid or delivered to the Controller at any time on or

before Dec. 31, 2002.’’ Furthermore, Sec. 1577.5(e) of the UPL

essentially states that the Controller was to provide a report to

the Legislature on the amnesty program, including, but not

limited to, the amount of property surrendered thereunder, as

well as identities of the holders participating in the amnesty

program.

See SCO’s 2015 Summer Holder Newsletter, which can be

accessed on the SCO website, which is available by accessing

www.unclaimed.org, the NAUPA website, or www.sco.ca.gov.

The website materials cite Calif. Code of Civil Procedure Sec.

1577 as authority for the statements.

See Calif. Code of Civil Procedure, Part 3, Title 10, Ch. 7,

Art. 6, Sec. 1577. Penalties for failure to ﬁle reports, or pay or

deliver property within the time periods prescribed by the

UPL, are delineated in Sec. 1576 of the UPL.

See Calif. Code of Regulations, T. 2, Div. 2, Ch. 2, Subch.

8, Art. 4.7, sec. 1172.90-Reasonable Cause-Deﬁned.

As a result of legislation enacted in 2015 requiring the

State Escheator to promulgate a manual related to the conduct

of voluntary disclosure agreements and escheat examinations

to ensure fair and uniform treatment of holders of unclaimed

property, the State Escheator has recently proposed a set of

new regulations which, if enacted, would, among other things,

establish a rolling 19-year look back period from the year of

enrollment beginning Jan. 1, 2017.

Form AP DE-2.

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cheator for audit.

Holders who enter the Secretary of

State’s program prior to Dec. 31, 2016, and enter into a

payment plan within two years of the state’s acceptance

of the holder into the program receive a shortened look-

back period to 1996, while holders that enroll on or af-

ter Jan. 1, 2017, and enter into a payment plan within

two years of acceptance receive a rolling 19-year look

back. Like the program operated by the Department of

Finance, the Secretary of State’s VDA program is not

open to any holder under audit by the State of Delaware

or to holders previously enrolled in a voluntary disclo-

sure agreement with the Secretary of State which previ-

ously withdrew from the program or which were re-

moved by the Secretary of State for failure to work in

good faith to complete the VDA program.

Holders enter into a VDA with the Secretary of State

by completing a Form VDA-1, which provides that the

holder will pay any abandoned or unclaimed property

due or enter into a plan for its payment within two years

of the date on which the VDA-1 is executed. Upon

completion of the VDA, the state and the holder execute

a Form VDA-2, which provides for a release of all past

due unclaimed property liability and a waiver by the

state of the right to audit for all prior report years for

property types reported, subject to the holder’s agree-

ment to ﬁle annual reports with the state listing its

abandoned and unclaimed property liability in each of

the three years succeeding the completion of the VDA.

Florida. Florida offers holders a formal VDA pro-

gram. To participate in that program, the holder must

not (i) be currently under examination or audit by the

Florida Department of Financial Services, Florida Bu-

reau of Unclaimed Property (the department), or by one

of the department’s contract auditors; (ii) have ﬁled an

annual report of unclaimed property with the depart-

ment; (iii) have agreed to a department-assisted or

contractor-assisted self-audit; (iv) have been requested

to conduct a department-assisted or contractor-assisted

self-audit; or (v) have been contacted by the department

or by one of the department’s contract auditors to

schedule or to conduct an examination or audit of the

holder.

There are a number of general requirements a holder

must satisfy as part of the VDA. First, a holder must

complete and execute a voluntary disclosure agreement

and provide the department the following information

in connection therewith: (a) name of entity, mailing ad-

dress, contact person, telephone number, facsimile

number and email address of the contact person, fed-

eral employer identiﬁcation number, and standard in-

dustrial code classiﬁcation; (b) the holder’s state of in-

corporation; (c) the holder’s principal place of business

(city and state); (d) if the holder’s state of incorporation

and principal place of business is outside of Florida, the

holder must provide a list detailing the cities in Florida

where the holder conducts business with the number of

locations in each city; and (e) if the holder has no loca-

tions within Florida, the holder must so state.

The holder must likewise submit a detailed plan out-

lining the disclosure process to be completed, which in-

cludes, at a minimum, a description of the procedures

to be followed during the self-audit, the property types

to be reviewed or audited, and the sampling and/or es-

timation techniques employed. If estimations are in-

volved in determining the amounts to be reported, the

calculations for the estimations must be reviewed and

approved by the department prior to the acceptance of

the property by the department and waiver of penalties.

In the event that sampling and/or estimating are re-

quired due to inadequate records, the holder must sub-

mit an afﬁdavit, signed by an ofﬁcer of the holder, so

stating. Upon completion of the VDA, the holder must

ﬁle annual unclaimed property reports required by the

Florida Unclaimed Property Act (UP Act). If the holder

makes any false or misleading representations to the

department, fees and penalties will be assessed as al-

lowed by law, and the department may commence any

other actions permitted by law.

The Florida VDA insulates holders from any penalty

or interest against the holder for the reported property.

The holder is also relieved of liability upon payment

and delivery of the unclaimed property as provided in

Section 717.1201 of the Act; however, this release of li-

ability applies only to the type of property reported and

remitted and is not a general waiver of all liability for

all types of property. Upon receipt of the report and re-

mittance, the department may still assert its right to

conduct an examination of the holder’s records pursu-

ant to Section 717.1301 of the UP Act.

Upon receipt of the signed VDA and required infor-

mation, the department will review and make a deter-

mination as to whether the holder’s participation in the

program will be approved. If approved, the department

will sign the VDA, and a ﬁnal order will be entered,

binding the department and the holder to the terms and

conditions of the VDA. Within three months thereafter,

the holder must submit a detailed plan to the depart-

ment consisting of the following information: (a) an

outline of the disclosure process to be completed by the

holder; (b) estimation calculations; and (c) an un-

claimed property report (submitted on the required

forms) consisting of the required reporting periods

identifying the unclaimed property due to the depart-

ment, including the funds for the prior ten report years.

As part of the ﬁnal order, the holder must waive any

right to (i) separately stated ﬁndings of fact and conclu-

sions of law; (ii) receipt of a notice of rights; (iii) an ad-

ministrative hearing or issuance of a recommended or-

der; (iv) contest in any judicial or administrative forum

the validity of any term, condition, obligation, or duty

expressly created by the ﬁnal order; and (v) object to or

challenge in any judicial proceeding any express provi-

sion or requirement of the ﬁnal order. In exchange, the

department agrees that it will not use the VDA or ﬁnal

order against the holder as the sole basis for any future

action, although, the department reserves the right to

pursue any administrative or judicial action or remedy

if there is any misrepresentation or fraud involved in

the reporting of unclaimed property for any of the re-

port years.

Illinois. Illinois also offers holders a formal VDA pro-

gram. To participate in the program, the holder must (i)

not be under examination by the Ofﬁcer of the Illinois

State Treasurer, Unclaimed Property Division (the

Treasurer) or an agent of the Treasurer; (ii) conduct a

self-audit of its books and records and ﬁle a report of

ﬁndings within six months of the execution of the VDA

12 Del. C. §1177(b).

The program is likewise unavailable to any holder that en-

tered into a voluntary disclosure agreement with State Es-

cheator on or before Jan. 30, 2012, except as to property types

or periods not included in such agreement.

TAX MANAGEMENT WEEKLY STATE TAX REPORT ISSN 1534-1550 BNA TAX 7-1-16

for the period required for the presumptive abandon-

ment plus the nine years immediately preceding the be-

ginning of the period; (iii) ﬁle a report for the current

reporting period in a timely manner; (iv) be able to pro-

vide supporting documentation for any estimation tech-

niques used—the Treasurer must approve the estima-

tion techniques before any estimated remittance is

made and penalties are waived;—(v) be able to accept

the VDA without modiﬁcation.

The holder is required to submit its remittance on

form UPD601 and include owner details in an electronic

format approved by the Treasurer.

The report and

subsequent monetary ﬁndings are due to the Treasurer

no later than six months from the date the VDA is

signed by the Treasurer,

and 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 the longer of 14 years or from

the holder’s date of incorporation, whichever is older

(the examination period).

For a holder participating in the VDA, all fees, penal-

ties, and interest otherwise attributable to holder’s un-

claimed property obligation for the examination period

will be waived by the Treasurer if the holder is in com-

pliance with the Illinois Uniform Disposition of Un-

claimed Property Act, 765 ILCS 1025 (Illinois UP Act).

Upon completion of the VDA, the holder will need to

maintain records enabling it to annually report the

names and addresses of individuals for whom it is re-

quired to report unclaimed property, as failure to main-

tain such records following the execution of the VDA

renders the VDA null and void. Furthermore, if any of

the representations made by the holder in the VDA are

false or misleading, the VDA will become null and void,

and the Treasurer may assess any fees or penalties al-

lowed by the Illinois UP Act and commence any other

action permitted by law.

Michigan. Michigan offers holders a formal VDA pro-

gram. As indicated on the Michigan State Treasurer’s

website, under the heading ‘‘Reporting Unclaimed

Property,’’ the VDA program is open to holders who (i)

have not previously reported unclaimed property to

Michigan, or (ii) have underreported unclaimed prop-

erty in the past.

The Michigan VDA is a particularly

attractive one to holders, in that it only requires a look-

back period of four reporting years, and states that

holders who utilize the VDA will not be assessed penal-

ties or interest.

Holders enter into a VDA by review-

ing and completing Form 4689 (Rev. 09-14), titled

‘‘Michigan Unclaimed Property Voluntary Disclosure

Agreement,’’ which is available for downloading on the

Michigan State Treasurer’s website. In reviewing Form

4689, the holder entering into the VDA agrees to ﬁve

conditions prescribed by the state Treasurer’s Ofﬁce as

follows:

(i) to accurately and timely ﬁle unclaimed property

reports and remit payments for the current reporting

year and the previous four reporting years;

(ii) to perform due diligence (i.e., notiﬁcation to

missing owners) valued at $50 and greater as required

by law;

(iii) to disclose all subsidiaries or entities that are

part of the VDA;

(iv) to be fully compliant with the Michigan Uniform

Unclaimed Property Act (Act) on a go-forward basis;

and

(v) to ﬁle the reports using electronic reporting soft-

ware in the nationally recognized NAUPA format.

In return, the state agrees to certain key conditions.

First, the state agrees that holders will not be assessed

penalties or interest for property that is remitted volun-

tarily in accordance with the VDA and the Act.

Sec-

ond, as indicated above, the ‘‘look-back’’ period for re-

porting is the previous four reporting years, plus the ap-

plicable dormancy period for the particular property

type. When contrasted with the ten reportable years’

‘‘look-back’’ period Michigan delineates as applicable

to unclaimed property audits, this is a signiﬁcant con-

cession. Finally, Form 4689 states that the Michigan

Treasurer’s Ofﬁce agrees to exclude the holder from au-

dit during the six-month period after the ﬁling of such

form.

As is the case with most states, a holder is not eli-

gible for a Michigan VDA if (i) it is currently under au-

dit, or (ii) it has been notiﬁed by the Michigan State

Treasurer’s Ofﬁce or one of its contract auditors of

Michigan’s intention to conduct an unclaimed property

audit.

As part of the required certiﬁcations under Part

4 of the VDA form, the authorized holder representative

signing Form 4689 must conﬁrm he/she is not under au-

dit and has not been notiﬁed of an audit. In making a

strategic business decision as to whether entering into

a Michigan VDA makes sense, the above-mentioned

factors should be taken into account. Signiﬁcantly, the

self-review done as part of the VDA process should

thoroughly vet all possible property types that need to

be reported. If the Treasury is not convinced that a thor-

ough effort was made, it reserves the right, as provided

in the VDA itself, to conduct a UP examination that

‘‘. . .may cover up to the last ten reportable years and

result in an assessment of penalty and interest.’’

In summary, the Michigan VDA program has several

key provisions that make it very attractive to the holder

community [i.e., (i) a look-back period of only four re-

porting years, plus applicable dormancy period, as com-

See VDA, Sections 1 -10. Forms and formats for the Illi-

nois VDA can be obtained at www.treasurer.il.gov.

See VDA, Section 4.

See VDA, Section 5.

See VDA, Section 6.

See VDA, Section 8.

This website can be accessed via either www.unclaime-

d.org , which is the website for the National Association of Un-

claimed Property Administrators (‘‘NAUPA’’), or http://

www.michigan.gov/treasury.

Note: When one adds the prescribed dormancy period,

such as a three-year dormancy period for accounts payable or

accounts receivable, to the prescribed reporting years, the

look-back period becomes, for example, seven years for those

property types.

See Michigan Department of Treasury Form 4689 (Rev.

09-14), Part 2: Agreement Information. Form last reviewed on

website on May 10, 2016.

See Form 4689, Part 3: Treasury Agreement. Note: Michi-

gan had a prior practice of assessing interest on past due prop-

erty. However, in an email from the Michigan Unclaimed Prop-

erty Administrator to Ryan AUP personnel on Jan. 20, 2015, it

was indicated that the state would no longer be assessing in-

terest on past due property submitted as part of a VDA.

See Handbook for Reporters of Unclaimed Funds, ‘‘Vol-

untary Compliance.’’

See Form 4689, Part 2: Agreement Information.

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pared to a ten reporting year look-back period for an

audit, plus applicable dormancy period, and (ii) waiver

of penalties and interest]. As is the case with many

states, the beneﬁts of entering into a VDA should be

balanced against the possibility that the holder could be

subject to a subsequent audit after conclusion of the

VDA. Thus, holders contemplating entering into the

VDA should thoroughly review their books and records,

and report all past due unclaimed property for the ap-

propriate periods covered by the VDA.

New York. New York offers holders a formal VDA

program. As indicated in the June 2015 Handbook for

Reporters of Unclaimed Funds published by the New

York State Comptroller’s Ofﬁce of Unclaimed Funds

(OUF), the VDA program applies to ﬁrst-time reporting

organizations and, in some instances, to those who

have ﬁled in the past but who recognize that they have

failed to report a particular type of property and have

come forward voluntarily to correct the error.

other state VDAs, holders are ineligible for the VDA af-

ter being contacted by the OUF or its agent regarding

an audit.

Holders initiate the VDA by either (i) ﬁling the ap-

propriate Abandoned Property Report directly with the

OUF along with a cover letter indicating that the report

is being ﬁled under voluntary compliance, or (ii) ﬁling a

voluntary compliance agreement, which provides the

holder with additional time to review its records and en-

sures that the holder is not contacted for audit in the in-

terim.

The OUF determines whether an examination

of the holder’s books and records can be completed by

self-audit or CPA ﬁrm-assisted examinations, or

whether the OUF will conduct the examination.

This

provides the holder with an opportunity to review its re-

cords and correct any issues of omission with respect to

its reporting obligations to New York, as well as various

other states. The holder will need to submit a voluntary

disclosure proposal describing the methodology used in

determining the amount due to the OUF within six

months from the date of the executed VDA.

No remit-

tance will be accepted by the OUF until the OUF pro-

vides the holder with its written agreement as to the

methodology used in determining the amount due. If

the holder desires to make an estimated payment and

ﬁle an abandoned property report prior to ﬁnalization

of any pending or new VDAs, it may submit a written

request to the OUF. The OUF’s acceptance of such re-

quest is predicated upon the understanding that the

VDA process will not be considered ﬁnalized until the

methodology used to determine the amount due has

been accepted in writing by the OUF.

According to the 2016 VDA, the examination and any

resulting settlement agreement will cover the report-

able periods from 1996 through 2016.

This includes

unclaimed wages, accounts payable checks, refund

checks, rebate checks issued and/or payable from 1992

to 2012 as well as other general ledger items issued

and/or payable from 1992 to 2012 and gift certiﬁcates

sold between 1992 and 2010.

Speciﬁcally, the ‘‘reach-

back’’ is as follows: (i) for all property other than gen-

eral ledger items (e.g., debt, equity, reorganization, etc.)

the applicable statutory ﬂoor date for the speciﬁc prop-

erty type applies; and (ii) for general ledger items, in-

cluding unclaimed payroll, vendor payments and

checks, accounts payable and receivable credits, gift

certiﬁcates, etc., where there has not been a willful at-

tempt on the part of current management to conceal the

abandoned property in question, a reach-back to Jan. 1,

1992, applies.

In the event a settlement agreement is reached based

upon the company’s own review, the OUF reserves the

right to conduct an examination of relevant books and

records within two years from the later of the settle-

ment agreement date or the date of payment to the OUF

by the company.

In the event a settlement agreement

cannot be reached, the negotiations conducted will not

be treated in any respect as an admission of reporting

liability by the company. No interest or penalties will be

imposed on the company with respect to the unclaimed

property payable to the OUF under the terms of any re-

sulting settlement agreement.

An erroneous or misrepresentation of facts or failure

to make full disclosure by the holder during the VDA

process shall provide the OUF with a basis for nulliﬁca-

tion of the VDA in whole or in part.

Furthermore, the

holder will need to agree to notify the OUF regarding

any property reportable to New York or identiﬁable to a

New York resident that has been reported to or claimed

by any other state. The holder must also agree to main-

tain and retain accurate books and records on an ongo-

ing basis, which will enable it to identify all unclaimed

property subject to the New York State Abandoned

Property Law (APL) (including but not limited to owner

name, address, origination date, and amount) and ﬁle

complete and accurate Abandoned Property Reports

annually in the future, as required under the APL.

Prior to remitting property to the OUF, the holder will

conduct all required due diligence as set forth in Sec-

tion 1422 of the APL. For example, at least 90 days prior

to the ﬁnal report/remittance, all holders are required to

send a ﬁrst class mailing to each person whose name is

expected to appear on the report unless the address is

unknown, or the address on record is demonstrably un-

deliverable.

In addition, at least 60 days prior to the

ﬁnal report/remittance, a certiﬁed mailing, return re-

ceipt requested, should be made to each person ex-

pected to appear on the report whose abandoned prop-

erty is valued in excess of $1,000.00, unless a claim has

been initiated since the ﬁrst class mailing was sent, or

the ﬁrst class mailing was returned as undeliverable.

It should be noted that the OUF will not accept any re-

port or check until the statutory due diligence require-

ments have been completed.

All pending or open VDA proposals should be up-

dated to include property due up to the ﬁling year. All

applicable due diligence must be performed in a timely

The Handbook for Reporters of Unclaimed Funds (NY

Handbook) can be accessed at www.osc.state.ny.us/ouf/

oufhandbook/ﬁles/oufhandbook.pdf.

See NY Handbook.

See VDA, Section 1.

See VDA, Section 3.

Id.

This is based on the 2016 VDA. See VDA, Section 4.

Id.

See the NY Handbook.

See VDA, Section 6.

See VDA, Section 7.

N.Y. Aband. Prop. §§101 – 1502.

See Section 1422(1) of the APL.

See Section 1422(2) of the APL.

TAX MANAGEMENT WEEKLY STATE TAX REPORT ISSN 1534-1550 BNA TAX 7-1-16

manner. If the holder’s current-year abandoned prop-

erty report is not due at the time the VDA is ﬁnalized,

the holder is required to ﬁle the report in a complete

and timely manner.

The VDA expires six months from the date it is

signed by a duly authorized representative of the OUF;

however, an extension request may be submitted in

writing prior to the expiration date.

Such extension

request must provide speciﬁc details of the work per-

formed, the estimated completion date, and an explana-

tion as to why additional time is required. An extension

request is only valid with the written consent of the

OUF, and the failure to obtain such written consent may

result in nulliﬁcation of the extension.

Texas. Texas offers holders a formal VDA program.

However, before analyzing the details of the VDA pro-

gram offered by the Texas State Comptroller’s Ofﬁce,

an important caveat must be made. Perhaps unlike any

other state, Texas requires that, as a condition prec-

edent to completion of a successful unclaimed property

VDA, a holder must be in compliance with all Texas

state taxes.

This is perhaps explained by the fact that

the Texas State Comptroller’s Ofﬁce is responsible for

compliance with unclaimed property, as well as with

other Texas state taxes. Thus, before a particular holder

seeks to enter into a Texas VDA, individuals respon-

sible for unclaimed property compliance should care-

fully check with their tax department personnel to en-

sure they have been complying with Texas state tax

laws. If the holder is not in compliance with Texas state

tax laws, it may not be advisable to ﬁle a VDA with the

Texas Comptroller’s Ofﬁce.

Per recent discussions with representatives of the

Texas Comptroller’s Ofﬁce, a VDA request may be ini-

tiated in one of two ways: (i) a holder may contact the

Holder Reporting section of the Unclaimed Property Di-

vision of the Texas Comptroller’s Ofﬁce, or (ii) an email

can be sent to [email protected]. Once the

request is received, the Texas Comptroller’s Ofﬁce will

review the initial request and, absent a reason not to do

so, will send a VDA form to the applying entity, along

with a Texas Nexus Questionnaire to be completed by

each of the afﬁliates sought to be included in the VDA.

The questionnaire is designed to provide the Comptrol-

ler’s Ofﬁce with more information on the applicant and

afﬁliates, types of activities they’ve been conducting in

Texas, types of tax permits or licenses issued to the en-

tity by the Texas Comptroller, etc. Other requirements,

such as compliance with due diligence requirements,

should also be observed.

Upon receipt of the com-

pleted VDA and Texas Nexus Questionnaire, the Texas

Comptroller’s Ofﬁce conducts a review process to verify

that the holder and the afﬁliates mentioned in the VDA

are indeed eligible to enter into a VDA. If so, a VDA is

executed by the Texas Comptroller’s Ofﬁce and re-

turned to the holder with applicable information neces-

sary to report the unclaimed property for the appropri-

ate disclosure period.

Highlights of the VDA form are as follows. First,

based on both recent dealings with representatives of

the Texas Comptroller’s Ofﬁce, as well as prior VDAs,

reports must be made for the current report year, and

for a look-back period of ten prior report years, plus ap-

plicable dormancy years for each property type. Sec-

ond, the holder is expected to ‘‘fully report and remit all

unclaimed property data and funds’’ within 180 days of

the effective date of the VDA.

Third, if the Comptrol-

ler discovers that within 180 days following the effective

date of the VDA, the holder had either (i) been informed

prior to the effective date of the VDA of the Comptrol-

ler’s intent to conduct an audit or investigation of the

holder, or (ii) not been in compliance with reporting or

remitting requirements for other state taxes, then the

Comptroller is entitled to rescind the agreement for the

VDA.

Fourth, the Comptroller generally agrees to

waive both penalties and interest with respect to prop-

erty timely paid in full; provided, however, the VDA

states that if a previous State Treasurer or Comptroller

audit or investigation reﬂected a history of similar omis-

sions or errors by the holder in reporting and/or remit-

ting unclaimed property, then only penalties may be

waived.

At the time the holder is considering the execution of

the prescribed VDA form, it also must be considering

the Texas Nexus Questionnaire form furnished by the

Comptroller. The form generally is designed to familiar-

ize the Comptroller with the VDA applicant’s activities

in Texas over the past seven years. For example, Ques-

tion 12 of the form asks the ‘‘start date’’ for various ac-

tivities in Texas over the past seven years, such as per-

formance of any contracts, whether items were sold and

delivered in Texas in company vehicles, any warranty

work done in Texas, any real property acquired in

See VDA, Section 14.

See, e.g., Section 2(b) of Voluntary Disclosure Agree-

ment furnished by Texas State Comptroller personnel to Ryan

AUP personnel recently, in which it is stated: ‘‘If, within 180

days following the effective date of this Agreement, Comptrol-

ler discovers that. . .Holder is not in compliance with reporting

or remitting requirements for other state taxes, not disclosed

pursuant to this Agreement, then this Agreement may be re-

scinded at the Comptroller’s election upon 10 days written no-

tice to the Holder.’’ Note: Unlike a number of states, Texas

does not maintain a sample or template VDA on its unclaimed

property website. Rather, the form of agreement to be used in

a VDA for a speciﬁc client may be requested from the Texas

Comptroller’s Ofﬁce.

See Texas Nexus Questionnaire, Form AP-114 (Rev. 5-12/

16); such Form last reviewed on website on May 10, 2016. In

addition, recent correspondence between the Texas Comptrol-

ler’s Ofﬁce and Ryan AUP indicates that if the VDA is meant to

cover more than one legal entity, then one is to include a ‘‘list

of afﬁliates that will be included in the VDA and their Federal

EINs.’’ Note: Based on recent discussions between representa-

tives of the Holder Reporting Section, Unclaimed Property,

Texas Comptroller’s Ofﬁce, and Ryan AUP, responsibility for

issuance of VDAs has recently been transferred from the

Texas Business Activity Research Team (BART) group in the

Comptroller’s Ofﬁce to the Holder Reporting Section, Un-

claimed Property, in the Comptroller’s Ofﬁce. However, our

understanding is that the Holder Reporting Section coordi-

nates with BART with respect to review of ‘‘other state taxes,’’

which, as indicated above, is an area closely reviewed by Texas

authorities.

Based on recent correspondence between the Texas

Comptroller’s Ofﬁce and Ryan AUP, the holder is asked to con-

ﬁrm: (i) that all due diligence requirements have been met

prior to remitting the unclaimed property, and (ii) that remit-

tances of unclaimed property have not been reduced by any

service or maintenance fees.

See VDA, Section 1.

See VDA, Section 2.

See VDA, Section 8.

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Texas, any personal property used or located in Texas,

etc. A full description of the entity’s activities in Texas

is requested. In summary, utilization of the Texas

Comptroller’s VDA can be very beneﬁcial for holders.

However, the key caveat is that a holder needs to en-

sure it is in compliance with Texas state taxes before

commencing the VDA process. Thus, for many entities

seeking a Texas VDA, holders are well advised to check

with their tax, legal, purchasing, and possibly other de-

partments or units of the company before applying for

the VDA.

III. Conclusion and Recommendations

In summary, it appears, as indicated by the recent

Delaware VDA legislation, that VDAs are likely to be-

come an increasingly important part of the holders’ un-

claimed property compliance toolkit. The advantages of

the VDA, as indicated above, can be signiﬁcant, if uti-

lized properly. The authors suggest the following rec-

ommendations to assist in the proper utilization of

VDAs by the holder community.

s Use Only After Thorough Review. Holders should only

consider entering into a VDA after a thorough vetting of

their books and records, preferably with assistance

from a consulting ﬁrm and law ﬁrm that have substan-

tial experience in the area. Given that the results of the

VDA may be tested, so to speak, by a subsequent state

audit, it behooves holders to get it right the ﬁrst time,

and make a detailed, thorough review of their books

and records. For example, in one case a holder, believ-

ing it only had about $3.6 million in unclaimed prop-

erty, made an offer of the same to Delaware to settle a

Delaware VDA. When the matter was unable to be

settled via the VDA, years of litigation ensued, with the

holder ﬁnally agreeing to a settlement of $17.65 mil-

lion.

s Know Each State’s Eligibility Rules. Each state has dif-

ferent rules governing eligibility for its VDA program.

As a general rule, if a holder is either under audit or has

been notiﬁed by the state or its contract auditor agent

that its being placed under audit, the holder is ineligible

to participate in the VDA. Some states, like Delaware,

may not allow a holder to enter into a VDA if it has pre-

viously entered into an unclaimed property VDA with

the state.

Texas, as was indicated earlier, reserves the

right to rescind the VDA if it discovers within 180 days

following the effective date of the agreement that the

holder was informed prior to entering into the VDA of

the Comptroller’s intent to conduct an audit of holder.

s Understand Time Period to Conduct VDA. Each state has

expectations surrounding when it expects holders to

ﬁnish their reviews and report and remit property to the

state. In states that have an ‘‘informal VDA’’ process, it

is critical that this point be negotiated as early as pos-

sible because the state is likely not to have written guid-

ance delineating what that expectation may be. For ex-

ample, many states provide a six-month deadline to

complete the VDA process but are generally liberal

about granting extensions, based on the facts and cir-

cumstances. With respect to ‘‘formal VDA’’ states, our

experience has been that most states are receptive to

consideration of extensions of their stated time periods

in which they expect the work to be completed. How-

ever, if longer periods are needed, our experience is

that it is important to communicate the request for a

longer period ‘‘sooner than later.’’

s M&A Considerations. In some situations, a holder

may have undertaken a major acquisition and, after the

‘‘dust has settled,’’ come to realize that the acquired en-

tity did not report unclaimed property in a satisfactory

manner. This can be a good situation to utilize a VDA.

For example, the recent Delaware legislation states that

even if a holder had entered into a prior VDA with Dela-

ware such that the holder was not eligible to enter into

another VDA, if the holder had ‘‘subsidiaries or related

entities’’ that were not part of the prior VDA, those en-

tities would be eligible to essentially enter into a new

VDA.

s Be Cognizant of Possible Federal Preemption Defenses. It

is important to have access to legal advice with regard

to areas where federal law or regulations may provide

an afﬁrmative defense such that the funds in question

are not escheatable by the states. Examples of laws that

should be considered include, but are not limited to,

federal pension law (ERISA), federal bankruptcy law,

and federal transportation and telecommunications

laws.

s Consider Contracts With TPAs, Claims Administrators, and

Transfer Agents. It is important to carefully review con-

tracts a holder has with third-party administrators

(TPAs), claims administrators, and transfer and divi-

dend paying agents. For example, some companies out-

source the payroll function to a third party. By way of

further example, many publicly held companies utilize

transfer and dividend paying agents, while other com-

panies utilize TPAs or claims administrators to handle

payment under some of their beneﬁt plans. The au-

thors’ experience has been that many contracts with

TPAs or claims administrators for handling of certain

beneﬁts property do not delineate who has responsibil-

ity for compliance with unclaimed property laws. As

such, the attendant result is that no one is monitoring

such compliance, and it ‘‘falls through the cracks.’’

Once the responsibilities are spelled out in the contract,

holders should take steps to periodically monitor the

activities of these entities with regard to unclaimed

property compliance.

s Retention of Proper Records. Whether preparing a

VDA or defending a state unclaimed property audit, re-

tention of proper records can provide the best defense

for presenting and defending one’s case in this area.

Most states have unclaimed property record retention

requirements that are longer than those required in

other areas.

In addition, many states require that a

holder agrees in the VDA to keep and preserve records.

For example, Texas requires as part of its VDA that a

holder ‘‘. . .keep and preserve suitable records of un-

claimed property for ten years from the due date of the

return....’’

See Michael Houghton, et al.,Unclaimed Property, 74-3d

Corporate Practice Series (BNA-Rev. 2014), at pp. A-15-16 for

a more detailed discussion of the Computer Associates Inc.

case.

See earlier discussion for analysis of new rules governing

eligibility for a Delaware VDA with the Delaware Secretary of

State’s Ofﬁce.

See VDA, Section 2.

See the above-mentioned BNA treatise, at pp. A-57-59 for

a more detailed discussion of these requirements.

See Texas State Comptroller VDA, Section 5.

TAX MANAGEMENT WEEKLY STATE TAX REPORT ISSN 1534-1550 BNA TAX 7-1-16

s Releases. Understand exactly what type of release

the state is granting in the VDA. For example, Texas

states in its VDA that ‘‘[c]ontingent upon holder’s good

faith compliance with this agreement, Comptroller re-

leases holder from all actual or potential liability for all

unclaimed property reported under this agreement.’’

s De Minimis Rule. If the thorough review step men-

tioned above indicates that only a de minimis amount of

past due property is owed to a particular state that is

past due, it may make sense to forego a VDA for that

particular state and include that amount with a current

report for such state. If that is done, an explanation

should be provided with the report explaining the situ-

ation involving the past due property. There is no

‘‘bright line’’ test for the exact amount that qualiﬁes as

‘‘de minimis’’ for purposes of this rule. Rather, a num-

ber of facts and circumstances need to be evaluated on

a case-by-case basis, including, but not limited to, the

amount of past due property involved, the particular

property type involved, the length of time for which it

may be considered delinquent, the underlying reason

associated with why it was not reported in a timely fash-

ion, and the particular state involved.

In conclusion, VDAs are becoming an increasingly

important part of holders’ unclaimed property compli-

ance options. If used properly, they can assist in seeing

that penalty and interest payments are minimized and

that property that may have previously been inadver-

tently overlooked gets reported in a proper fashion.

See Texas State Comptroller VDA, Section 3.

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