This article was originally published in State Tax Notes, as part of Alston & Bird’s regular column “Audit & Beyond.” See 66 State Tax Notes 417 (November 5, 2012).
This advisory discusses how, in unclaimed property audits and in voluntary disclosures, states commonly take the position that time-based contractual limitations on an owner’s right to claim unclaimed property may be disregarded by the state and how that allows states to seize unclaimed property even if the owner no longer has a right to claim the property. States justify that position based on so-called anti-limitations provisions that provide that the expiration of a contractual period of limitation on the owner’s right to claim property does not prevent the property from being presumed abandoned. However, despite the seemingly broad language of these contractual anti-limitations provisions, such provisions were never intended to apply to contractual limitations agreed to by sophisticated businesses acting at arm’s length. In those contracts, the inclusion of a contractual limitation period is typically driven by legitimate business considerations that in no way violate public policy, rather than by escheat avoidance, which was the characteristic focused on by the courts in the private escheat cases out of which the anti-limitations provisions arose. Those legitimate business considerations would be defeated if the limitations provisions were overridden by a state anti-limitations provision. Moreover, the anti-limitations provisions would also violate the derivative rights doctrine and good public policy, by allowing the state (and, indirectly, the business on whose behalf the state is acting) to claim property that could not be claimed under the negotiated terms of the contract. Finally, if the anti-limitations provisions are construed broadly to apply to contracts negotiated at arm’s length, those provisions may well be preempted by federal law. Accordingly, state contractual anti-limitations provisions should be construed narrowly to apply only when the holder has engaged in unilateral action designed specifically to circumvent state unclaimed property laws.
The advisory is provided in PDF on the Alston & Bird website: