Yes, you read that correctly. Delaware is attempting to collect $1,388,573.97 from a Tennessee company that failed to escheat one $147 unclaimed paycheck to it. The company is asking a federal court to throw out the results of Delaware’s unclaimed property audit, and with it, that whopping bill.
While it’s way too early to guess how this case will be resolved, it serves as a cautionary tale to all companies that incorporate in Delaware, which most do. (Temple-Inland, Inc. v. Cook, No. 1:13-cv-00654-SLR, D.C. Del., 2014)
Abandoned property law. Escheat is a legal process requiring you to remit unclaimed property to a state treasurer. Paychecks become unclaimed after they’re outstanding for a statutory holding period; the customary period is one year.
All state laws require you to perform a due diligence by attempting to contact payees at their last known addresses. Once the statutory holding period is met, and your contacts have been unsuccessful, you must remit unclaimed property to the state. If you have payees’ last known addresses, you remit to that state. If you don’t have payees’ last known addresses, you remit to the state in which you are incorporated. Most state escheat laws require you to keep records for up to 10 years. Delaware enacted its record-retention law in 2010.
However, regardless of the length of a record-retention law, there is no statute of limitations on unclaimed property, which means that audits are open-ended. Worse: States can estimate the amount of your unclaimed property.
Company’s allegations. Delaware began its audit of the company, which is located in Tennessee, but incorporated in Delaware, in 2008. The company’s accounts payable records were audited for the period 2003-2007; no unclaimed property was found payable to Delaware. The company’s payroll records for the period 2004-2009 showed one $147.30 paycheck that was unclaimed and payable to Delaware. The check was remitted to Delaware on May 22, 2013.
Delaware then dropped the bomb, and asserted that even though there was no evidence that the company underreported, because it didn’t have detailed records for periods prior to 2003 for accounts payable, and prior to 2004 for payroll, the amount of the company’s unclaimed property would be estimated back to 1986. Ultimate estimate: $1,388,573.97 for the period 1986-2003.
The company cried foul and took Delaware to court. The company has made these allegations:
- Delaware can’t use estimates of unclaimed property, since the company wasn’t required to retain records forever
- Delaware must specify the unclaimed property by each payee’s Delaware address
- Delaware’s estimation methodology was flawed because it was based, in part, on amounts the company already remitted to other states and amounts the company paid to owners before the dormancy period expired.
PAYROLL PRACTICE TIP: Regardless of how this case shakes out, it’s a good reminder to ensure that your disbursement accounts are in order, and that your records clearly reflect when and to which state you escheat abandoned property.
