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Double-Dipping in Delaware: Delaware Assesses Unclaimed Property Liability for Years Covered by Voluntary Disclosure Agreement

By Kathryn Pittman and Jack Trachtenberg

On April 17, 2013, Select Medical Corporation (Select Medical) filed suit in federal dist

April 30, 2013

By Kathryn Pittman and Jack Trachtenberg

On April 17, 2013, Select Medical Corporation (Select Medical) filed suit in federal district court seeking to enjoin Delaware from enforcing an unclaimed property assessment issued for years that had been resolved already through the state’s voluntary disclosure program. In 2006, Select Medical entered into Delaware’s voluntary disclosure program for the years 1997-2001. As part of the voluntary disclosure process, Select Medical escheated approximately $17,000 to Delaware and paid approximately $300,000 in unclaimed property to states other than Delaware. On the same day that Delaware cashed Select Medical’s escheatment check, it notified the company that it was being placed under audit. Using a third-party auditor, Delaware demanded payment of $297,436 for the period 1997-2001 based on an estimate that looked to the amount of property owed to other states from 2002-2008. Unable to resolve the matter with the state, Select Medical commenced a lawsuit and sought injunctive relief against the demand for payment, alleging that Delaware exceeded its authority under state law by estimating an unclaimed property liability through extrapolation of amounts paid to other states for a different period, even though Select Medical had actual records from which any liability could be determined and the owners of any unclaimed property identified. Select Medical also alleged a variety of federal common law and constitutional violations. Given Delaware’s position as one of the most aggressive states in enforcing unclaimed property law, the trajectory of this litigation will be important, especially given the recent trend toward more aggressive unclaimed property enforcement in all states. Taxpayers who have previously entered into voluntary disclosure agreements or who are contemplating doing so should pay close attention to this case as it may frame new powers for the states with respect to escheatment. Select Medical Corp. v. Del. Sec’y of Finance, Del. Dir. Of Rev., & Del. State Escheator, Case No. 1:13-cv-00694-UNA (D. Del. Apr. 17, 2013).

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