Unclaimed Property: Mitigating Risks Arising From

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Presenting a live 110-minute teleconference with interactive Q&AUnclaimed Property: Mitigating RisksArising From Tougher State EnforcementIdentifying Unclaimed Property, Sharpening Compliance, and Tracking Latest DevelopmentsTUESDAY, APRIL 16, 20131pm Eastern 12pm Central 11am Mountain 10am PacificToday’s faculty features:Sonia M. Walwyn, Vice President, Unclaimed Property, Duff & Phelps, ChicagoJennifer A. Zimmerman, Horwood Marcus & Berk, ChicagoRobert S. Peters, Managing Director, Tax Services, Duff and Phelps, ChicagoWilliam J. Weigand, Senior Manager, True Partners Consulting, DenverFor this program, attendees must listen to the audio over the telephone.Please refer to the instructions emailed to the registrant for the dial-in information.Attendees can still view the presentation slides online. If you have any questions, pleasecontact Customer Service at 1-800-926-7926 ext. 10.

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Unclaimed Property: Mitigating RisksArising From Tougher StateEnforcement SeminarApril 16, 2013Sonia M. Walwyn, Duff & Phelps, LLCsonia.walwyn@duffandphelps.comWilliam J. Weigand, True Partners Consulting LLCWilliam.Weigand@TPCtax.comRobert S. Peters, Duff & Phelps, LLCrobert.peters@duffandphelps.comJennifer A. Zimmerman, Horwood Marcus & Berkjzimmerman@hmblaw.com5

Today’s ProgramFundamentals[Sonia M. Walwyn]Slide 8 – Slide 25Current Landscape[Robert S. Peters]Slide 26 – Slide 32Audit Environment And Risk Factors[William J. Weigand]Slide 33 – Slide 40Managing An Audit[Jennifer A. Zimmerman]Slide 41 – Slide 47Record Retention[William J. Weigand]Slide 48 – Slide 54New World Of Voluntary Disclosure Programs[Robert S. Peters]Slide 55 – Slide 64Shaping The Future[Jennifer Zimmerman]Slide 65 – Slide 806

NoticeANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BYTHE SPEAKERS’ FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANYOTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THATMAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING ORRECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.You (and your employees, representatives, or agents) may disclose to any and all persons,without limitation, the tax treatment or tax structure, or both, of any transactiondescribed in the associated materials we provide to you, including, but not limited to,any tax opinions, memoranda, or other tax analyses contained in those materials.The information contained herein is of a general nature and based on authorities that aresubject to change. Applicability of the information to specific situations should bedetermined through consultation with your tax adviser.7

Sonia M. Walwyn, Duff & Phelps, LLCFUNDAMENTALS

Introduction Unclaimed property has become a hot topic among manyindustries and companies.― State-initiated audits― External auditors (audited financial statements) Source of revenue for many states Affects all companies, regardless of:― Formation― Industry, or― Size9

What Is Unclaimed Property Or Escheat It is not a tax. Nexus standards -- are not applicable. With few exceptions, there is generally no statute oflimtiation (very extensive reach-back periods). It is rooted in the concept of derivative rights No traditional administrative remedies (most states)10

What Is Unclaimed PropertyOr Escheat (Cont.) Unclaimed property is a liability that is issued, held and owing inthe ordinary course of a company’s business. The liability must be fixed and certain. Must be both abandoned and unclaimed Burden of proof is on the company.― Accounting and reconciliation errors are not unclaimedproperty, but will be demanded by a state if the companycannot prove otherwise.― N.B. Use of third party administrators will not absolve acompany from its unclaimed property obligations to theapplicable state(s).11

Key Terms Escheat Holder Owner Custodian Aggregate Due diligence Dormancy periods12

Traditional Property Types Uncashed checks Unidentified deposits Unapplied cash Accounts receivable credit balances―Customer overpayment―Refunds―Duplicate payments Insurance proceeds Dormant deposit accounts Equity and debt-related property13

Newer Categories Of Property Unbilled inventory (GRIR) Rebates IRAs Self-insured plans Retirement benefits Third-party administered plans Life insurance proceeds (death index) Gift cards/stored value cards (open- and closed-loop cards)14

Who Are The Players?Owner: ― Customer, vendor, shareholder, employeeHolder: ― Company that owes the liabilityState and other jurisdictions ―Custodial possession on behalf of the owner― 55 reporting jurisdictions and three Canadian provinces(N.B. property does not belong to the state -- derivativerights)15

Who Are the Players? (Cont.)Third-party auditors ― Contingent fee firms that audit on behalf of the stateso Kelmar Associates, LLCo Specialty Audit Services (SAS)16

Compliance Requirements Due diligence requirements (most states) Annual filing requirement― Spring (March through May)― Fall (Oct. 31 and Nov. 1st)(N.B. banks, life insurance companies have differentreporting cycles based on the states)― July (Michigan and Texas) Negative reports ACH payments California (two-step process)17

Reporting Rules Governed by a trilogy of U.S Supreme Court decisions resultingin the following two rules:― First priority ruleo State of the owner’s last known address (no nexus)― Second priority ruleo If the last known address is unknown, the holder’s stateof legal incorporation18

Challenges To Compliance Lack of uniformity among jurisdictional rules― 55 reporting jurisdictions― Administered by varied state agencies Legislative changes― Shortening dormancy periods― Changing filing requirements (even less uniformity) New and emerging property types and areas of focus Increased audit activity Enforcement of interest and penalties19

Practices That Give Rise ToUnclaimed Property Liability Write-offs to income Failure to reconcile books and records No written polices and procedures Destruction/lack of retention of supporting records Compliance with respect to some, but not all, applicableproperty types Mergers and acquisitions20

Ways To Mitigate UnclaimedProperty Liability Exemptions― Business-to-business― Gift certificate― Rebates― De minimis (KY, OH, MI, CO and FL)― Industry specific Deductions Federal preemption Formation of a gift card company Voluntary compliance programs21

What Triggers An UnclaimedProperty Audit? Failure to report Filing zero reports Company in the news Merger or acquisition Incorporated in Delaware or other aggresive state Industry Recovering/claiming unclaimed property First-time filer22

Notable Dichotomy States understand the the majority of companies are not incompliance. Most companies believe that they are in compliance. Take the time― Understand the rules (nexus not applicable)― Review your companies practices, including filing historyand the impact of merger and acquisitions― Quantify your exposure, if any― COMMENCE THE PROCESS TO GAIN COMPLIANCE IN THEAPPLICABLE AREAS AND FOR ALL APPLICABLE ENTITIES23

Why Comply? IT’S THE LAW! States are using unclaimed property as a means of generatingrevenue without raising taxes.― Significant assessments Third-party auditors― Audit on behalf of numerous states at once― Contingent fee― Significantly expanded the states’ ability to audit manymore companies and industries than before Sarbanes-Oxley Financial statement impact24

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Robert S. Peters, Duff & Phelps, LLCCURRENT LANDSCAPE

Overview Although ”not a tax,” unclaimed property continues to beenforced as such and a major source of revenues for the states. Audit activities have increased over past year, includingaddition of several new contingent fee third-party entrants. Virtually all states (except those prohited by law) utilize thirdparty contingent fee firms. Changes in state provisions have not kept pace with businessexpansion and e-commerce enviorment. Examples include: Uncertainty regarding treatment of certain stored valuecards/rewards products Impact of cloud computing on record retentionrequirements27

Current Landscape Frustration voiced by corporate lobbists have resonated withstate legislatures. Mixed reaction by state legislatures― Legislation passed to encourage self audits throughvoluntary submissions (DE, MI)― While at same time shortning dormancy periods andincreasing audit activity to maintain revenue stream28

Current Landscape: Targeted Industries Virtually all industries are prone to audits by the states, mostnotably those with large volume of transactions with thirdparties (customers, vendors, employees) Some specifically targeted over past year include: Financial services and insurance industries Energy companies Manufacturing Consumer products29

Difference In Views Re: Compliance States believe the majority of corporations are not incompliance with unclaimed property rules. Record settlements in last several years January 2012: Prudential Insurance Company reached asettlement with 19 states. April 2012: MetLife agreed to a 500 million multi-statesettlement. October 2012: Nationwide Insurance Company, AmericanGeneral and Forethought Group entered into multi-statesettlements.30

Holders Believe OtherwiseSurvey conducted in February revealed the following:* ― Majority of companies believe they are in compliance withunclaimed property requirements (55% of companiessurveyed).― Some companies participating in voluntary disclosureprograms have thus far, not met expectations (MI, DE).― Fewer than 1/3 surveyed believe they will join in on newDelaware program.― General unfamiliarity with unclaimed reporting rules*Financial Executives Research Foundation/Duff & Phelpssurvey of Fortune 1000 public and private entities(02/18/2013)31

What To Expect In Near Future Expanded outreach program by states Increased audit activity Expanding definition of property types Increasing focus on electronic reporting and securities Another attempt to unify unclaimed property rules amongstates32

William J. Weigand, True Partners Consulting LLCAUDIT ENVIRONMENT ANDRISK FACTORS

Audit Environment An increasing number of states are beginning to participate in multistate audits being conducted by third-party contingent fee audit firms(e.g., SAS, Kelmar, ACS). Following the adoption of the new Delaware voluntary disclosureagreement (VDA) program on July11, 2012, the Delaware Departmentof Finance temporarily suspended commencing new audits. However, beginning in February 2013, the Delaware Departmentof Finance began issuing audit notices to companies that had notentered into the new VDA program. 2013 True Partners Consulting LLC. All rights reserved. Printed in the U.S.A.34

Audit Environment: Risk FactorsUnclaimed property reporting history No reporting history in the company’s state ofincorporation/formation, or where the company has significantpresence or operations Filing state income tax returns, but not reporting and remittingunclaimed property Many states are actively comparing state tax databases withunclaimed property reports submitted Non-reporters are receiving unclaimed property questionnairesand, in some cases, audit notices. As part of recent VDA initiatives, states have reached out tocompanies registered in the state for filing tax returns, but that arenot submitting unclaimed property reports. 2013 True Partners Consulting LLC. All rights reserved. Printed in the U.S.A.35

Audit Environment: Risk Factors (Cont.)Unclaimed property reporting history (Cont.) Few, incomplete or no unclaimed property reports submitted Non-filing in years subsequent to a voluntary disclosure Companies sometimes fail to report unclaimed reports afterparticipating in a voluntary disclosure with a state. As ongoing filing is a key provision of most voluntary disclosureprograms, companies that fail to do so may find that theirvoluntary disclosure agreement is void and may be at risk for anaudit.Omission of property types on unclaimed property reports Companies with otherwise good reporting histories may beselected for an audit, when an expected property type was notincluded in their reports. 2013 True Partners Consulting LLC. All rights reserved. Printed in the U.S.A.36

Audit Environment: Risk Factors (Cont.)Unclaimed property reporting history (Cont.) Skipping years when reporting States notice when companies fail to file unclaimed propertyreports every year and often subject these companies to additionalscrutiny. Unusually large or small remittance relative to company size Older companies filing for the first time 2013 True Partners Consulting LLC. All rights reserved. Printed in the U.S.A.37

Audit Environment: Risk Factors (Cont.)Headline news Companies in the news for reasons unrelated to unclaimed property,including earning reports, and merger and acquisition announcementsTargeted industries Unclaimed property audits have historically followed industry-relatedtrends, whereby states have focused on the key members of a specificindustry (e.g., healthcare, transportation). One industry recently targeted for unclaimed property audits, and thathas subsequently received a lot of media attention, is life insurancecompanies. 2013 True Partners Consulting LLC. All rights reserved. Printed in the U.S.A.38

2013 True Partners Consulting LLC. All rights reserved. Printed in the U.S.A.

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Jennifer Zimmerman, Horwood Marcus & BerkMANAGING AN AUDIT

Horwood Marcus & Berk CharteredPreparing For The Audit Perform internal audit to determine potential exposure and possible weaknessesand strengths of any audit positions that the state may assert Discuss lack of records before commencement of the audit Determine and pin down audit period- may range anywhere from a few years tomore than 20 years Even if limited audit period, auditor may require records going back beforethe audit period May be able to negotiate reduced audit period or elimination of certainstates depending on previous audits Set up a pre-audit interview between the auditor and the person responsible forthe audit Get a confidentiality agreement Assess impact of systems conversions, acquisitions, availability to adequatelyresearch prior years42

Horwood Marcus & Berk CharteredDocuments To Be Reviewed By Auditor What can auditors review? Only abandoned property compliance Only years within statute Only what they haven’t looked at previously Only what exists in your records Only what the auditors request specifically What must auditors review? Addresses Any documents that establish defenses Demonstration of compliance and effective policies and procedures43

Horwood Marcus & Berk CharteredAudit Mitigation StrategiesAudit controversy can be minimized by: Clarifying lookback period as affected by past M&A activities and priorVDAs Agreeing on a “base period” for each of the property types Agreeing to a sampling methodology by property type Agreeing on adequate remediation for potential items of reportableproperty, including:Voided checksStale, dated tax payments or utility paymentsUnapplied customer creditsCustomer depositsConsumer rebates44

Horwood Marcus & Berk CharteredAudit Sampling Estimation technique used must at least be a “reasonable” and valid method fordetermining the amount of unclaimed property not reported for an audit period. When holder believes that the estimation technique is not reasonable, the holderhas certain options available.– Discuss the estimation technique with the auditor to suggest modificationsbefore the estimation takes place– If the auditor is unwilling to modify his estimation technique, contact theauditor’s supervisor or the administrator with alternative estimationtechnique– If an administrative review of the estimation technique is provided, a formalprotest to the estimation technique used can be made to the unclaimedproperty administrator of the state.– If the state refuses to modify the estimation technique and no provision forthe filing of an administrative protest, the matter must be decided in court.45

Horwood Marcus & Berk CharteredWrapping Up the Audit Be prepared to negotiate Conduct an exit interview; obtain copies of all audit workpapers Insist on a closing agreement; know what is and isn’t covered by theagreement, and save the document. You may need it again in thefuture. Most importantly, learn from the audit46

Horwood Marcus & Berk CharteredPost-Audit Considerations Voluntary disclosure and amnesty programs With VDA, the benefits include:o Limited lookback periodso Limited audit scopeo Waiver of penalty in most caseso Waiver of interest in some caseso Closing letter security Get policies in place Assign leaders in A/R, A/P and credit departments Tax function vs. bookkeeping47

William J. Weigand, True Partners Consulting LLCRECORD RETENTION

Record Retention In A CloudEnvironmentCorporate duties include: Identify and track sources of unclaimed property Protect and implement internal controls over unclaimed property untilreported and remitted to the relevant jurisdiction Perform due diligence Timely file reports and remit funds Maintain supporting documentation and records 2013 True Partners Consulting LLC. All rights reserved. Printed in the U.S.A.49

Record Retention In A CloudEnvironment (Cont.)What types of records should be retained? Records used for purposes of identifying and remediating potentialunclaimed property, which may include: Organizational chartsMerger and acquisition history(including related agreements)Chart of accountsTrial balance reportsBank statements and reconciliationsfor open and closed accountsPolicies and procedures related touncashed checks and aged creditbalances 2013 True Partners Consulting LLC. All rights reserved. Printed in the U.S.A. Unclaimed property reporting/audithistoryAccounts receivable aging reportsUnredeemed stored value cardsreportsSummary plan documents forbenefit plansContracts with TPA(s) for selfinsured indemnity plansContracts with TPA(s) utilized toadminister rebate program50

Record Retention In A CloudEnvironment (Cont.)How long does a company need to retain records? Most states do not adhere to IRS record-retention requirements. Under audit, scope period may include property generated Jan. 1,1981 and forward. Through a voluntary disclosure program, scope period may includeproperty generated Jan. 1, 1991 and forward.Often, the scope of an unclaimed property audit or voluntarydisclosure extends beyond the period for which records are available. In those cases, available data are extrapolated to estimate thepresumed exposure for those periods. Often, a surrogate is utilized as a benchmark to estimate acompany’s exposure for periods where records are unavailable. 2013 True Partners Consulting LLC. All rights reserved. Printed in the U.S.A.51

Record Retention In A CloudEnvironment (Cont.)Other considerations Changes in ERP system or other system(s) of record For acquisitions, predecessor system(s) should remain “accessible”until any past due exposure is addressed. For system changes or upgrades, access to historical recordsshould not be lost.System archive processes Archive procedures should allow for the restoration of historicalrecords to enable the company to research a specific transaction(e.g., uncashed check, aged credit balance, etc.).Documentation received in hard-copy form should be converted intoand retained in an electronic format (e.g., bank statements). 2013 True Partners Consulting LLC. All rights reserved. Printed in the U.S.A.52

2013 True Partners Consulting LLC. All rights reserved. Printed in the U.S.A.

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Robert S. Peters, Duff & Phelps, LLCNEW WORLD OF VOLUNTARYDISCLOSURE PROGRAMS

Overview States are actively encouraging companies to come forward andvoluntarily agree to come into compliance. Correspondingly, enforcement for non-participating includesimposing interest and penalties for late reporting of property(can equal or exceed amount of underlying liability). Stepped-up audits, both for companies selectively identified bystates and those who initially indicate intention to participateand fail to complete submission Common for companies to be subject to multiple contingent feeaudits representing different states56

Benefits Of ParticipatingIn VDA Program Elimination of interest and penalties for prior years Reduction of lookback or reporting period; generally, no morethan 10 reporting periods, to 1996 for Delaware Elimination of audit risk Resolution of ”uncertain” positions Holder vs state/auditors controls the methodology andapproach.57

Who Should Participate? Every Delaware business entity (estimated over 800,000 areeligible) Those eligible include:― Entities that never have filed in past― Entities that have previously been subject to audit― Entities that particapted in prior VDAs and have newproperty to report― Entities that wish to avoid audit and confirm reportingEXCLUDES ENTITIES THAT ARE CURRENTLY UNDER AUDIT58

What’s So Different? Secretary of State vs. Division of Finance runs program No risk of audit, if compliant for successive three years and nofraud or willful misrepresentation Truly self initiated and collaborative Streamlined process: Nine-month average period Adminstrator compensated on hourly basis, no contingent fee59

Critical Dates Must indicate intent to participate in program by June 30,2013 to achieve maximum savings (lookback to 1996), or byJune 30, 2014 for 1993 lookback After the initial application, state and holder will agree ontimetable that can be modified throughout the process. May submit all at once, by property type or on legal entitybasis Must complete submission (in its entirety) no later than June30, 201560

What Is The Current Status? Despite outreach program, response rate has beendisappointing in first nine months. Suspension of audit notices has been lifted. Over 1,000 letters mailed to date; approximate 10 %enrollment New outreach program, letter campaign and state Webcastscheduled over next month61

Uncertain About Signing On? Consider performing ”honest” internal assessment ofcompliance, including impact of estimation impact overlookback period Carefully consider impact of an audit vs. VDA includingresource committment and burden of proof Determine accuracy of previously submitted unclaimedproperty reports, if any including zero or nominal reportingVDA is a one-time opportunity to avoid audit62

Uncertain About Signing On? (Cont.)Review business practices to determine past history includingtreatment and support for: -Voided, stale, dated checks-Customer credits-Third-party providers (rebates, payroll providers, transferagents) Secure senior management buy-in Understand rules and timeline requirements63

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Jennifer Zimmerman, Horwood Marcus & BerkSHAPING THE FUTURE

Horwood Marcus & Berk CharteredEmerging Trends New property typesShortening dormancy periodsReporting deadlines becoming less uniformEarning interest on dollars in their custody, but not paying itwithout putting up a fightIncreasing legislative activityIncreasing audit activity, especially in certain industriesIncreases in number and scopeWith belt-tightening, states that have been historically lenient arenow pursuing interest and penalties for non-compliance.66

Horwood Marcus & Berk CharteredN.J. Retail Merchants Association v. Sidamon-EristoffU.S. Court of Appeals, 3rd Cir.Jan. 5, 2012 Case involving the constitutionality of New Jersey’s unclaimed property legislationaffecting the treatment of stored value cards (SVCs)– No stored value card activity for two years presumed abandoned– Issuers of SVCs are required to obtain the name and address of the purchaser orowner of each stored value card issued or sold, and at a minimum to maintain arecord of the ZIP code of the owner or purchaser.– If the issuer “does not have that info, it is assumed that the SVC is reported to NewJersey if the place of business where the stored value card was sold or issued islocated in New Jersey (referred to as the ‘place-of-purchase presumption’).”In Treasury Announcement 2011-03 (TA 2011-03), the state treasurer explained theplace-of-purchase presumption also applies when issuer is not domiciled in New Jersey,and the state of the issuer’s domicile exempts SVCs from its unclaimed property statute(third priority rule).67

Horwood Marcus & Berk CharteredN.J. Retail Merchants Association v. Sidamon-EristoffU.S. Court of Appeals, 3rd Cir.Jan. 5, 2012 (Cont.) Holding for plaintiff: Enjoined enforcement of the place-of-purchase presumption and thethird-priority rule, as articulated in TA 2011-03 Holding for state– Denied the plaintiffs’ motion for a preliminary injunction of the datacollection requirement– Rejected plaintiffs’ commerce clause claim, substantive due processand federal preemption claims68

Horwood Marcus & Berk CharteredNew Jersey Legislative UpdateNew Jersey SB 1928 (effective on June 29, 2012) Represents a practical, compromise approach to resolving a number of the issuessurrounding treatment of SVCs under the act (does not address travelers checks ormoney orders) Repeals the “place of purchase” presumption Delays implementation of the purchase or owner ZIP code collection requirement forfour years No expirationFunds associated with a SVC sold on or after Dec. 1, 2012 shall be valid untilredemption and shall not expire. Cash refunds for small balancesBeginning Sept. 1, 2012, if less than 5 remains on the SVC after redemption, anowner may request the remaining balance be paid in cash, and the entity mustcomply. However, there are a few exceptions to this rule’s implementation.69

Horwood Marcus & Berk CharteredNew Jersey Legislative Update (Cont.)New Jersey SB 1928 (Cont.) SVCs generally escheatable No activity for five years is presumed abandoned (only applies to cards issued on orafter July 1, 2010). Bill provides for four exceptions, pursuant to which SVCs would not be treated asunclaimed property. SVC distributed by an issuer to a person under promotional, rewards or loyaltyprograms for which no consideration is paid SVC donated or sold below face value to nonprofit or charitable organization SVC that is redeemable for admission to events or venues at a particular location SVC issued by an issuer that in the past year sold SVCs with a face value of 250,000 or less70

Horwood Marcus & Berk CharteredDelaware CasesStaples Inc. v. Cook, 35 A.3d 421 (Del. Ch. 2012) Issue: Whether certain “rebates” issued by Staples, Inc. to business customerswere escheatable to the state of Delaware. Facts: Staples challenges Delaware’s estimation techniques. It presumes anycheck outstanding for greater than 90 days to be unclaimed. Analysis: Staples argued that the rebates were not unclaimed property underDelaware’s escheat statute because the UCC statute of limitations as to therebates had run against the rightful owners. Holding: The statute of limitations was not relevant, and unclaimed rebatesissued by office supply store as rebate checks to business customers weresubject to escheatment as abandoned property.71

Horwood Marcus & Berk CharteredDelaware Cases (Cont.)McKesson Corp. v. Cook, C.A. No. 4920-CC (Del. Ch. 2009) Facts: McKesson challenged GRIR as unclaimed property. Holding: Dismissed in August 201072

Horwood Marcus & Berk CharteredDelaware Legislative Update Delaware SB 272 (signed into Law in July 2010)– Eliminates “GR/IR,” or goods received not invoiced, from the definitionunclaimed property– Statutorily authorizes Delaware’s use of estimation techniques– Establishes an administrative appeal process Delaware SB 258 (signed into law in July 2012)– Statute of limitations for VDAs to be moved from 1991 to 1993 or 1996,depending on date of administration– VDA program is administered by SOS, not state escheator, until 2014.73

Horwood Marcus & Berk CharteredDelaware Legislative Update (Cont.) Delaware HB 2 (signed into Law in January 2013)– Clarifies the existing duty of the sta

Apr 16, 2013 · unclaimed property reports submitted Non-reporters are receiving unclaimed property questionnaires and, in some cases, audit notices. As part of recent VDA initiatives, states have reached out to companies registered in the state for filing tax returns, but that are not submitting unclaimed property reports. 35

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