Foreign Property and U.S. States' Unclaimed ... - Ryan LLC

1 Journal of Multistate Taxation and Incentives Volume 23, Number 7, October 2013. Department: PROCEDURE. Foreign Property and States' Unclaimed Property Laws Foreign Property is one area of escheat that generally presents more questions than answers, due to the complexities of international law, the myriad of factual situations that can arise, and the paucity of case law in this area. By: MARK A. PAOLILLO AND SAMUEL SCHAUNAMAN. MARK A. PAOLILLO, CPA, is a Principal and Practice Leader with the Abandoned and Unclaimed Property Practice at Ryan LLC, a global tax services firm in Boston, Massachusetts. SAMUEL SCHAUNAMAN, , is a Senior Manager with the same practice group, in Tulsa, Oklahoma.

2 Both authors have previously written for The Journal. (Note: Ryan LLC is not a CPA/accounting firm.) This article appears in and is reproduced with the permission of the Journal of Multistate Taxation and Incentives, Vol. 23, No. 7, October 2013. Published by Warren, Gorham & Lamont, an imprint of Thomson Reuters. Copyright (c) 2013 Thomson Reuters/Tax & Accounting. All rights reserved. As companies continue to expand their operations overseas, an increasingly important issue in their Unclaimed Property compliance program is the extent to which Foreign Property may be subject to Unclaimed Property laws. In this regard, it is useful, first, to consider what we believe are the main types of transactions that give rise to Foreign Unclaimed Property .

3 A general examination of state legislation in this area is also helpful, as well as an analysis of pertinent case law. And, of course, a look at relevant laws of other countries. We begin, however, with a brief introduction regarding Foreign Unclaimed Property generally. Introduction While not a "tax," Unclaimed Property nevertheless has become a significant source of funds for many states. The field of Unclaimed Property (also referred to as "abandoned Property ". or "escheat") concerns the requirement that businesses holding such Property (the "holders") report the Property to state governments. Unclaimed Property can include various intangible Property , including stocks, bonds, and other securities, and funds represented by uncashed checks; and also tangible personal Property , including the contents of safe deposit boxes.

4 Generally, after a period of time established by statute (the "dormancy period"), a state will have the right to acquire an interest in the Unclaimed Property , subject to the actual owner's right to reclaim the Property in the future. Two of the seminal rules in this area emanate from the Uniform Unclaimed Property Act of 1981 (the "1981 Act"); they are found also in the Uniform Unclaimed Property Act of 1995. (the "1995 Act").1 First, 3(5) of the 1981 Act provides in pertinent part that "intangible Property is subject to the custody of this State as Unclaimed Property if .. the last known address, as shown on the records of the holder, of the apparent owner is in a Foreign nation and the holder is a domiciliary.

5 Of this " "Domicile" is defined in 1(6) of that Act as "..the state of incorporation of a corporation and the state of the principal place of business of an unincorporated person.". What is the pertinent authority for this rule? Interestingly, the Commentary of the Uniform Law Commissioners to 3 states, in part: "Paragraph (5) provides that, when the last known address of the apparent owner is in a Foreign nation the state in which the holder is domiciled may claim the Property . This issue was not dealt with by the Supreme Court in Texas v. New Jersey, but is a rational extension of that ruling." In Texas v. New Jersey,2 the Supreme Court set forth priority rules pursuant to which Unclaimed Property is returned to (1) the state of the Property owner's last known address, or, (2) if no address is known, the state in which the business holding the funds is incorporated (or, in the case of unincorporated entities, the state in which the business maintains its principal place of business).

6 Second, 36 of the 1981 Act provides that "[t]his Act does not apply to any Property held, due and owing in a Foreign country and arising out of a Foreign transaction." Authors of a leading treatise in this area state that "[t]he 1995 and 1981 Uniform Unclaimed Property Acts have similar provisions and commentary relating to the escheat of Foreign accounts."3. More than 40 states have enacted a version of the Uniform Unclaimed Property Acts, and presumably, many have enacted, as part of their respective Unclaimed Property laws, provisions similar to those delineated above. Principal Types of Foreign Unclaimed Property Transactions Based on our experience in this area, we have found that three principal types of Foreign Unclaimed Property transactions tend to arise.

7 Foreign to Foreign . The first type is the " Foreign to Foreign " transaction. For example, consider a company, organized under the laws of France, that sends a vendor check from its office in France to a business in Germany that was organized under German law. The check is returned as undeliverable. There is no involvement in the transaction. Accordingly, this type of transaction should not be subject to the reach of most state Unclaimed Property laws because it falls under the " Foreign to Foreign " exemption delineated in 36 of the 1981 Act, quoted above, as well as in 26 of the 1995 Act. Domestic to Foreign . The second type is the "domestic to Foreign " transaction.

8 For example, "Company X," domiciled within the , mails a vendor check from its offices in the to a vendor located overseas. The check is returned as undeliverable. What result? Company X's state of domicile likely would claim any Unclaimed funds emanating from that transaction as subject to its laws, based upon the first seminal rule, in 3(5) of the 1981. Act, as discussed above, as well as in 4(5) of the 1995 Act. But consider the views of Unclaimed Property analysts who have stated: "However rational this provision appears to be, the question is whether or not any extension of a Supreme Court ruling, no matter how logical, is binding on Property due and owing to a resident of a Foreign country?

9 " 4 These analysts note that the Texas v. New Jersey ruling did not deal with "jurisdiction over an individual who is not a citizen" and note further that the key issue is "[c]an a state legislate beyond or outside of the Texas v. New Jersey guidelines?" 5. Foreign to domestic. The third type is referred to as the " Foreign to domestic". transaction. For example, an entity organized under Foreign law and operating overseas discovers that it owes funds to an individual whose last known address was within the It cannot locate that individual, however. Is there a duty to report and remit such funds to the applicable state? Although the issue may not be entirely clear, one leading treatise in this area states: "A.

10 Foreign nation corporation does have a duty to report and deliver Unclaimed Property held by it to the state where the last known address of the person owed the Property is located because a state has the power to legislate regarding the disposition of Property presumed abandoned and due to its resident, and exercising that power, state Unclaimed Property law imposes upon a holder a duty to report and deliver Unclaimed Property into the protective custody of the state. In a suit brought by a state to enforce this duty, a court would have personal jurisdiction over the Foreign nation corporation only if that corporation has certain minimum contacts with the state such that the maintenance of the suit would not offend traditional notions of fair play and substantial justice.