Under a new law signed by Governor Jack Markell on January 30, 2013, Delaware has again amended its voluntary disclosure agreement (VDA) program to provide additional incentives to holders to comply with its unclaimed property laws.1 The new VDA program provides that holders of unclaimed property that enter into a VDA before June 30, 2013 will now have until June 30, 2015 to make payment or enter into a payment plan (previously, the payment deadline was June 30, 2014).2 Further, companies that had entered into a VDA prior to June 30, 2012 are allowed to enter into a new VDA for any related parties, property types or periods that were not covered in a prior VDA.3
These amendments add benefits to the temporarily-expanded VDA program created in July 2012.4 Under the new VDA program, holders that enter into a VDA on or before June 30, 2013 and make payment, or enter into a payment plan, no later than June 30, 2015 will have their look-back period limited to 1996.5 Those that enter into a VDA between July 1, 2013 and June 30, 2014 and make payment, or enter into a payment plan, on or before June 30, 2015 will have their look-back period limited to 1993.6 Interest and penalties will continue to be waived.7
Background on Delaware Unclaimed Property
Generally under Delaware law, unclaimed property is tangible or intangible personal property in the possession, custody or control of any person ("holder") that is due and owing to another ("owner").8 After a period of inactivity during which the holder has no contact with an owner (the "dormancy period"), the holder must report and remit the unclaimed property. Generally, the property is reported to the state of last known address of the owner.9 If the address is unknown or in a state that does not provide for escheat of the property (or in a foreign country), the property is reported to the state of incorporation of the holder.10 The state takes custody of the property and holds it in trust for the owner. In Delaware, the dormancy period for most property types is five years.11 Holders with unclaimed property due to Delaware must report and remit the property annually.
Delaware's State Escheator is responsible for auditing non-compliant holders. Generally, the State Escheator will audit transactions originating from the later of January 1, 1981 or the inception of the holder's business.12 As part of a "larger revenue stabilization initiative," under a 2012 regulation the State Escheator temporarily limited the audit look-back period to transactions originating from January 1, 1986, but only for those holders that were under audit or became subject to an audit before December 1, 2012.13 If the holder is incorporated in Delaware and does not have complete books and records during this look-back period, Delaware will estimate a liability. The state has the right to impose interest and penalties that can reach 125 percent of the underlying liability.14 Further, the State Escheator has traditionally used third-party audit firms compensated on a contingent-fee basis.
As an alternative to audit, Delaware has historically offered a VDA program. Under the "standard" VDA program, the look-back period has been limited to transactions originating from January 1, 1991,15 but interest and penalties have been waived.16 Under the standard VDA program, however, the State Escheator has had the option to audit the VDA submission within 18 months after the holder remitted the property.17 In addition, under the standard VDA program a holder has been required to review all of its unclaimed property types (i.e., a holder could not report only selected property types).18
Delaware's New VDA Program
In July 2012, to encourage holders to enter into a VDA, Delaware temporarily expanded the benefits of entering into a VDA and expanded those benefits further in January 2013. Under this new, temporary program, a holder that enters into a VDA on or before June 30, 2013 and makes payment in full or enters into a payment plan on or before June 30, 2015 will only be required to review and report unclaimed property transactions originating from 1996.19 A holder that enters into a VDA after June 30, 2013 and on or before June 30, 2014 and makes payment in full or enters into a payment plan on or before June 30, 2015 will have to review and report unclaimed property originating from 1993.20 No holders may enroll in the new VDA program after June 30, 2014.21 Holders that receive an audit notice may not enter into a VDA.22
The Secretary of State, not the State Escheator, will oversee VDAs submitted under this temporary program.23 Interest and penalties will continue to be waived.24 VDAs submitted under this program will not be subject to audit unless there is evidence of fraud or willful misrepresentation.25
Holders that had already entered into a VDA under the standard VDA program may enter into a new VDA with respect to any property types, periods or any subsidiaries or related parties that were not covered in the prior VDA.26 Delaware has published a detailed Work Plan that provides estimated time frames to complete the VDA process from initial meetings through the remittance of property.27
Commentary
Because many companies are incorporated in Delaware, the collection of unclaimed property has become a major source of revenue for the state. In 2013, Delaware estimates that it will collect approximately $566.5 million in unclaimed property.28 This would make unclaimed property 16 percent of the state's total general fund revenue and the thirdlargest source of revenue after individual income and franchise taxes.29 The state uses contingent-fee audit firms, requires application of a look-back period that can extend to 1981, and can impose large interest and penalties. Further, Delaware audits can often last for several years. Delaware has notified certain holders that they should consider participating in the VDA program, and will continue to audit noncompliant holders that do not enter into a VDA. Importantly, if a holder is contacted for audit by the state, it can no longer participate in the VDA program. Consequently, all noncompliant holders are strongly encouraged to enter into a VDA during the temporary expansion of the program.
Footnotes
1 H.B. 2, Laws 2013, amending DEL. CODE ANN. tit. 12, § 1177.
2 DEL. CODE ANN. tit. 12, § 1177(b)(1).
3 DEL. CODE ANN. tit. 12, § 1177(d)(2).
4 S.B. 258, Laws 2012, amending DEL. CODE ANN. tit. 12, § 1177.
5 DEL. CODE ANN. tit. 12, § 1177(b)(1).
6 DEL. CODE ANN. tit. 12, § 1177(b)(2). The new amendments do not further extend the payment period for holders that enter into a VDA after June 30, 2013.
7 31-200-2000, CODE DEL. REGS. (CDR), § 1.
8 DEL. CODE ANN. tit. 12, § 1198(7), (8), (11).
9 Texas v. New Jersey, 379 U.S. 674, 682 (1965).
10 Id.
11 DEL. CODE ANN. tit. 12, § 1198(9).
12 31-200-2000, CODE DEL. REGS. (CDR), § 9.2.2.
13 31-200-2000, CODE DEL. REGS. (CDR), § 9.2.3.
14 DEL. CODE ANN. tit. 12, § 1159.
15 31-200-2000, CODE DEL. REGS. (CDR), § 1.
16 Id.
17 Delaware Voluntary Self Disclosure Agreement (Form AP DE-1) (May 1, 2006).
18 31-200-2000, CODE DEL. REGS. (CDR), § 3.
19 DEL. CODE ANN. tit. 12, § 1177(b)(1). For example, if a holder enters into and completed its VDA in 2013 and a five-year dormancy period applies to the property types reported, the holder would report transactions originating from January 1, 1996 through December 31, 2007 (report years 2001 through 2012).
20 DEL. CODE ANN. tit. 12, § 1177(b)(2).
21 DEL. CODE ANN. tit. 12, § 1177(c).
22 DEL. CODE ANN. tit. 12, § 1177(d)(3).
23 The law firm of Drinker Biddle & Reath LLP will administer the program on behalf of the Secretary of State.
24 31-200-2000, CODE DEL. REGS. (CDR), § 1.
25 DEL. CODE ANN. tit. 12, § 1177(f).
26 DEL. CODE ANN. tit. 12, § 1177(d)(2).
27 VDA Work Plan, available at http://delawarevda.businesscatalyst.com/forms-and-documents/VDA-Work-Plan-1-28.XLSX.
28 Delaware 2012 Fiscal Notebook, p. 29 available at http://finance.delaware.gov/publications/fiscal_notebook_12/front/greetings.shtml.
29 Id.
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