Acquisition of Company Assets

Unclaimed property is any amount held by a company that is owed to another, such as uncashed payroll or vender checks, gift certificates, unused deposits, credits, overpayments, etc. The company holding this asset and obligated to return it is called the “holder” under unclaimed property law. When such unclaimed property is still not returned to the true owner after a certain period of time, the holder is required to turn over such property to a state, and is subject to certain reporting and notice requirements as to the property. The state entitled to the property (e.g., the amount owed) depends on the U.S. Supreme Court's established priority rules, and the various state unclaimed property laws. Under these priority rules, the holder has to report and remit any unclaimed property first to the state of the last known address of the owner (e.g., customer, vender, etc that is entitled to the money). If the last known address is not in the holder's records, then the state where the holder (and not the owner) has its corporate domicile has the second priority, requiring the holder to then report and remit the money to that state. As a result, under these priority rules, many states could come into play depending on the type and amount of unclaimed property at issue, especially since every state has an unclaimed property law. All of this leads us to the fundamental issue of how this impacts an asset sale.

Asset Sales

Unlike a stock or equity acquisition, in a normal asset sale the purchasing company does not plan to acquire any debts of the selling company, except possibly certain explicitly detailed debts, such as unused deposits or future rents. Because it's an asset sale, the parties specifically exclude all other debts and liabilities of the selling company. This generally protects the purchasing company from demands of the seller's unsecured creditors. But, concealed in some of the assets purchased may be a liability that the purchasing company is either unconcerned with or totally oblivious to. As a result, if after the sale some hidden liabilities emerge within the assets, the purchasing company will face the prospect of having to repay this debt to the owners, or ultimately being forced to report and pay this debt to a number of states. Naturally, this is not something the purchasing company likely anticipated or desired.

Simply put, while the general unclaimed property liability of a selling company is not something that normally transfers from the selling company to the purchasing company in an asset acquisition, in some instances a selling company's debt or liability to another may be hidden within an asset that is purchased. Consequently, the transfer of the assets also transfers any unclaimed property contained within such assets to the purchasing company, hence creating the unclaimed property problem.

How It Happens

Unclaimed property can be hidden in an accounts-receivable account purchased in an asset sale. Therefore, if such an account is purchased, the purchasing company should carefully review and consider any individual credit balances in the overall accounts receivable. These credit balances (overpayments) should reduce the valuation of the accounts receivable because they will likely be deemed unclaimed property returnable to the customer or, as discussed above under the various states unclaimed property laws, reportable to a state. To quantify the issue, assuming the purchasing company plans to buy $10 million in accounts receivables of a company and in that total are $500,000 in individual overpayments or credits, this can result in serious unclaimed property issues after the closing. The $500,000 will likely have to be returned to the true owners or reported and sent to various states. If the $500,000 is a very old debt that was reportable years ago as unclaimed property, then in addition there could be interest and possibly penalty owed to the states along with the unclaimed property. Therefore, this $500,000 in unclaimed property can be a costly burden for the purchasing company.

How to Combat It

To combat the potential unclaimed property problem, a purchasing company should consider adding a provision to the acquisition agreement dealing with past or existing unclaimed property. This may include proof that past unclaimed property returns were filed by the selling company. It should further consider a provision that provides for offsetting the sales price by any possible unclaimed property that may arise. A detailed review of the individual asset accounts is also necessary to ensure there are no deposits, overpayments, unshipped inventory, etc. that may be deemed unclaimed property.

With a little knowledge and planning, a purchasing company may be able to avert the expensive surprise of acquiring thousands of dollars in hidden unclaimed property that it must subsequently report and remit to multiple states.

Stanley Kaminski is a partner in the Corporate Practice Group of Duane Morris in Chicago. He concentrates his practice in the areas of state and local taxation, including sales/use tax, franchise tax and multistate corporate and individual income tax issues. He can be reached at [email protected].

The acquisition of another company's assets is a great way for a company to expand with significant federal tax benefits. It also eliminates many of the headaches of dealing with the past debts of the selling company that a stock sale could entail. However, companies that acquire the assets of other companies still have a lot to worry about. Besides the financing issues and the various costs involved, purchasing companies continue to face concerns about any unpaid taxes that may transfer to them if tax bulk sale notices are not filed with the various taxing jurisdictions.

Yet assuming all normal due diligence is properly done, the tax releases received and the other closing problems resolved, there is another issue that may be lurking in the background that is not so obvious. This hidden threat comes from the little understood but ubiquitous presence of unclaimed property laws across the country that can result in the transfer of a substantial debt of the selling company, of which the purchasing company may not be aware.

Background

Unclaimed property is any amount held by a company that is owed to another, such as uncashed payroll or vender checks, gift certificates, unused deposits, credits, overpayments, etc. The company holding this asset and obligated to return it is called the “holder” under unclaimed property law. When such unclaimed property is still not returned to the true owner after a certain period of time, the holder is required to turn over such property to a state, and is subject to certain reporting and notice requirements as to the property. The state entitled to the property (e.g., the amount owed) depends on the U.S. Supreme Court's established priority rules, and the various state unclaimed property laws. Under these priority rules, the holder has to report and remit any unclaimed property first to the state of the last known address of the owner (e.g., customer, vender, etc that is entitled to the money). If the last known address is not in the holder's records, then the state where the holder (and not the owner) has its corporate domicile has the second priority, requiring the holder to then report and remit the money to that state. As a result, under these priority rules, many states could come into play depending on the type and amount of unclaimed property at issue, especially since every state has an unclaimed property law. All of this leads us to the fundamental issue of how this impacts an asset sale.

Asset Sales

Unlike a stock or equity acquisition, in a normal asset sale the purchasing company does not plan to acquire any debts of the selling company, except possibly certain explicitly detailed debts, such as unused deposits or future rents. Because it's an asset sale, the parties specifically exclude all other debts and liabilities of the selling company. This generally protects the purchasing company from demands of the seller's unsecured creditors. But, concealed in some of the assets purchased may be a liability that the purchasing company is either unconcerned with or totally oblivious to. As a result, if after the sale some hidden liabilities emerge within the assets, the purchasing company will face the prospect of having to repay this debt to the owners, or ultimately being forced to report and pay this debt to a number of states. Naturally, this is not something the purchasing company likely anticipated or desired.

Simply put, while the general unclaimed property liability of a selling company is not something that normally transfers from the selling company to the purchasing company in an asset acquisition, in some instances a selling company's debt or liability to another may be hidden within an asset that is purchased. Consequently, the transfer of the assets also transfers any unclaimed property contained within such assets to the purchasing company, hence creating the unclaimed property problem.

How It Happens

Unclaimed property can be hidden in an accounts-receivable account purchased in an asset sale. Therefore, if such an account is purchased, the purchasing company should carefully review and consider any individual credit balances in the overall accounts receivable. These credit balances (overpayments) should reduce the valuation of the accounts receivable because they will likely be deemed unclaimed property returnable to the customer or, as discussed above under the various states unclaimed property laws, reportable to a state. To quantify the issue, assuming the purchasing company plans to buy $10 million in accounts receivables of a company and in that total are $500,000 in individual overpayments or credits, this can result in serious unclaimed property issues after the closing. The $500,000 will likely have to be returned to the true owners or reported and sent to various states. If the $500,000 is a very old debt that was reportable years ago as unclaimed property, then in addition there could be interest and possibly penalty owed to the states along with the unclaimed property. Therefore, this $500,000 in unclaimed property can be a costly burden for the purchasing company.

How to Combat It

To combat the potential unclaimed property problem, a purchasing company should consider adding a provision to the acquisition agreement dealing with past or existing unclaimed property. This may include proof that past unclaimed property returns were filed by the selling company. It should further consider a provision that provides for offsetting the sales price by any possible unclaimed property that may arise. A detailed review of the individual asset accounts is also necessary to ensure there are no deposits, overpayments, unshipped inventory, etc. that may be deemed unclaimed property.

With a little knowledge and planning, a purchasing company may be able to avert the expensive surprise of acquiring thousands of dollars in hidden unclaimed property that it must subsequently report and remit to multiple states.

Stanley Kaminski is a partner in the Corporate Practice Group of Duane Morris in Chicago. He concentrates his practice in the areas of state and local taxation, including sales/use tax, franchise tax and multistate corporate and individual income tax issues. He can be reached at [email protected].