Startegic Considerations

Strategic Considerations

Introduction:

The variance in the state statutes, particularly in the area of exemptions, afford companies numerous planning opportunities. The two strategies discussed in this section involve corporate reorganization. Admittedly the escheat "tail" should not wag the corporate "dog." However, sometimes escheat considerations will coincide with a company's business plan.

Domicile is the state in which the company was incorporated. All fifty states and the District of Columbia have comprehensive legislation governing property presumed abandoned by virtue of its owner's inactivity. Seeking both to reunite the owner with his/her property and to avoid a "corporate windfall", the states (and their third party vendors) seek this property, with varying degrees of sophistication and aggressiveness.

What happens when a company reorganizes in a new domicile after some of the property has been unclaimed for several years-but still hasn't reached the dormancy period? If the property does remain unclaimed where is it due-old state or new? A New Jersey Supreme Court suggests that "unripened" property is due the new domicile. This presents a planning opportunity.

A significant number of retailers have avoided the escheat of unredeemed gift certificates/cards by the use of a subsidiary. The subsidiary's purpose is to assume the role of issuer and obligor of the card and thus become the "holder" who then assumes the responsibility to report and remit this owner-unknown property. Since most gift cards lack owner information, this property can not be reported to the first priority claimant (the state of last known address). Thus the property would default to the second priority claimant (the state of the retailer's domicile).

The new subsidiary, however, becomes domiciled in a different state than the parent. Instead the subsidiary is domiciled in one of the states which exempt this property from its escheat legislation. But where does the money go if the domiciliary state exempts the property? Perhaps nowhere!

GCMCs face a potential challenge from two different directions. First, a group of states may claim that in this situation a "place of sale" test should be used as the third priority claimant. Second, the parent's state of domicile may claim that the creation of a subsidiary is simply an attempt to avoid escheat.

The first potential state challenge is based on optimistic interpretation of the priority rules suggested by the drafters of the Uniform Act. However, the U. S. Supreme Court has twice refused to adopt a "place of transactions" test.

The second possible challenge - from the state of the parent's domicile - would be based on a "sham transaction" theory. Although no escheators have made this claim, state tax authorities have used this theory when subsidiaries are created to receive royalty payments for licensing the parent's trademarks. Two recent decisions of the Supreme Judicial Court of Massachusetts reached opposite results when the Tax Appeals Board alleged "sham transaction."

In the first case the court concluded that the transaction lacked economic substance and was therefore a "sham". The court noted the following factors in reaching its decision: (1) the parent paid all of the subsidiary's expenses; (2) the subsidiary quickly "washed" the royalty income through its books and sent it back to the parent; and (3) the parent's documents themselves trumpeted the tax avoidance motive.

However, the court reached the opposite decision regarding another intellectual property holding company. Here the transaction was structured so that the holding company was a viable business that stood on its own feet and was profitable.

When establishing a GCMC, a retailer must be careful not only to structure the several inter-company contracts appropriately, but also to maintain the GCMC with a stand-alone staffed office in the new domicile. Properly structured and implemented, a GCMC is a worthwhile investment for many retailers.