Multistate Unclaimed Property Audit Case Study March 3, 2016

Case Study Amalgamated Services, LLC has received an audit notice from DE and 6 other states DC, MA, NJ, NC, TN, WI, IL), indicating that a contract audit firm is conducting a G/L and securities audit of Amalgamated and its subs, affiliates and “related entities.” The audit lookback period is 1986 for DE. Audit firm asks for org chart and informs Amalgamated that all service-industry property types are in-scope, including vendor payments, gift cards, customer credits and third party providers. Amalgamated anticipates a number of controversial issues cropping up, but also thinks some defenses may be available to it. March 3,

Case Study (cont’d) M&A History: Amalgamated acquired several entities through stock purchases; it has also acquired proprietary customer credit factoring portfolios through asset purchase agreements. There was a major system conversion impacting prior years data in 2006: Amalgamated has outsourced its gift card issuance to CardCompliant LLC, a third party service provider One entity is an LLC formed under DE law but with PPB in NJ March 3,

Unclaimed Property Overview Intangible Property Types Vendor credits Customer credits Uncashed payroll checks Uncashed payable/vendor checks TPP’s including Employee Benefits and fulfillment companies (rebates) Unresolved suspense account items Unused/outstanding benefits (non- ERISA) Gift cards/stored value cards Stock/dividends Uncashed rebates Types of Property of Amalgamated that or likely to be scrutinized: March 3, UNCASHED

Audit Issues of Particular Concern to Amalgamated March 3,

Audit Issues of Particular Concern to Amalgamated Use of third party contingent fee audit firm-can this be challenged? Application of exceptionally long lookback periods on audits or voluntary disclosures, especially for “owner unknown” property Use of extrapolation to estimate liability for remote years Absence of statute of limitations Absence of administrative appeals process Absence of appeals to independent hearing officer/ de novo appeals to court March 3,

Audit Issues of Particular Concern to Amalgamated Application of unclaimed property laws to business-to- business transactions Application of “anti-limitations” provisions to non-abusive commercial relationships and promotional consumer transactions. Examples: –Audit provisions in contracts between holder and business partners/TPA’s –Statutes of limitations on commercial claims / UCC –Expirations periods for use of promotional offers (“daily deal” offers, loyalty rewards, etc.) March 3,

Audit Issues of Particular Concern to Amalgamated Attempts to apply unclaimed property laws to obligations that are not “fixed and certain” –Booking of “estimates” of liabilities subject to receipt of invoice and documentation »Estimated payables that are based on reservations/orders that have not yet been fulfilled »Estimated rebates to bulk purchasers based on anticipated volume of sales –Contested vendor invoices –Unresolved customer credits March 3,

Audit Issues of Particular Concern to Amalgamated Audit practices that shift burden of proof and apply inappropriately high remediation standards –Requiring documentation that rebuts liability “beyond a reasonable doubt” What about contemporaneous notation on holder’s records that a credit has been researched and is not due, without further documentation? Standard exceeds that applicable in civil court actions March 3,

Audit Issues of Particular Concern to Amalgamated Legal Issues Mergers, acquisitions and dispositions: Impact on in-scope entities, ability of auditor to estimate liability Relevance of Derivative Rights Doctrine? Impact of Bankruptcy filings on UP exposure (pre-petition liabilities) Industry-specific legal issues: Who is holder of rebates? Are promotional instruments subject to escheat? Is estimation constitutional? Statutorily “reasonable”? March 3,

Estimation Example: Issues Lookback to 1986 Systems Conversion 2006 Unresolved issue of historical revenue due to acquisitions/mergers Revenues (arguably used as base for ALL estimates) Reduction for prior years amounts reported Exclusion or inclusion of B2B and foreign property ILLUSTRATION OF IMPACT on LIABILITY March 3,

Kendall Houghton Partner (202) Bob Peters Managing Director – Tax Services (312) March 3,