As part of the series of unclaimed property reforms over the past several years, Delaware Department of Finance was required to issue an audit manual by December 31, 2015. The audit manual, required by SB 11, is to be a "detailed manual containing procedural guidelines for the conduct of Delaware unclaimed property examinations." The audit manual was the first listed recommendation from the Unclaimed Property Task Force created by SCR 59.
On February 1, 2016, the Department of Finance finally released proposed regulations that would satisfy the statutory requirement for an audit manual. As stated in the purpose of the proposed regulations, the "purpose of this notice is to advise the public that the Delaware Department of Finance’s Office of Unclaimed Property, State Escheator, proposes to promulgate a manual to create a framework to ensure greater transparency and predictability in the process. The goal is for holders of unclaimed property to have a basic understanding of the processes available to them as well as the State’s expectations. The standards contained in this “Voluntary Disclosure Agreement and Escheat Examination Manual” are to be implemented consistently, so as to ensure fair and uniform treatment of holders of unclaimed property." The newly proposed regulations would replace 102 and 103, last updated in 2012.
The proposed regulations are split into two sections, one for voluntary disclosures and one for audits. The bulk of the proposed regulations focus on audit activity. The regulations would apply to any new audits after their enactment date, and as much as practical for ongoing audits. The regulations provide several criteria for selection of an audit; however, it also says "[a]t no time is the State required to justify its selection of a Holder for examination." Plains All America has filed litigation challenging the state's selection of the company for audit and the use of outside auditors. They estimate that audits should take 24 months and that if it takes longer, the audit manager shall meet with the holder to facilitate completion of the audit. The holder would also have express permission to contact the state during the course of the audit to address concerns or issues directly.
The regulations would clearly state that the state has jurisdiction over three classes of property: 1) addressable property in Delaware; 2) for Delaware incorporated entities, unknown property; and 3) for Delaware incorporated entities, foreign property. The third class, foreign property, is currently the topic of litigation in JLI Invest SA v. Cook. During the course of the audit, the regulations specifically would permit the current practice of splitting the audit by property types and allowing for separate assessments and demands for payment.
When records are incomplete, the auditor would be able to perform an estimation of liability. Of concern is the language that disregards name and address detail in performing the estimation for periods without records, thus allowing the state to assess based on estimate that includes property it would not otherwise be entitled to. This issue is being litigated in several cases, including Temple Inland and National Freight (in a New Jersey audit). Further, the techniques or methodology chosen for the by the state is final and may not be challenged until the close of the audit. The regulations would also permit the estimation to be based on entity sampling, whereby the results of one entity's unclaimed property liability would be extrapolated to other entities within the organization.
Interest and penalties may be assessed under the appropriate statutory authority (reinstated under SB 141)but they may be abated at the discretion of the State Escheator.
Interested parties may submit comments on the proposed regulations until April 1, 2016.