Unclaimed Federal Tax Refunds & What Happens When Sovereigns Collide

 According to The Asbury Park Press, the federal government is holding more than $917 million in unclaimed tax refunds from 2009 and the deadline for requesting a refund -- April 15 -- is fast approaching.  According to the article the number of taxpayers affected is significant:  more than 30,000 in New Jersey, over 86,000 people in Texas, and more than 100,000 in California. 

This begs the question:  what happens to these tax refunds if they remain unclaimed, do they get turned over to the states as unclaimed property?  Consider the following:

Unclaimed property practitioners are familiar with the seemingly continued and unrelenting expansion of state unclaimed property laws.  Where, historically, those laws were used to provided rules for the disposition of the estates of those who died without heirs, they now touch upon nearly every party of modern economic life:  bank accounts, brokerage accounts, checks, gift cards, benefits, rebates, insurance proceeds . . . . the list is nearly endless.  However, as state governments become increasingly reliant upon using unclaimed funds to balance state budgets and provide a source for state revenue, pressure increases on state legislatures and/or unclaimed property administrators to expand the laws even further, or to audit even more aggressively, to continue to be able to feed the beast.  As states recognize that they can only squeeze so much revenue from corporations and financial institutions, they will start to look elsewhere.  One such place that they may look is to federal government programs.  

After all (the argument would go), one of the rationales for state unclaimed property laws is that the state "steps into the shoes" of the rightful owner and takes custody of the property in that owner's name.  See Great Iowa Treasure Hunt FAQs (explaining that "The courts have long maintained the states' rights are derivative of the missing owner. In other words, the state stands in the shoes of the missing owner.")  Under this theory, there would seem to be no reason why property held by the federal government is any different.

The "steps into the shoes" theory, however, is not the only policy supporting unclaimed property laws.  Another is the "common benefit" theory, which generally provides that when property is abandoned or unclaimed, the property is better used for the benefit of all citizens (i.e., by escheating the money to the state) rather than having the holder (who, in most cases, has no entitlement to the funds) receive a windfall because of the owner's failure to take the property.  Under this theory, the property arguably should remain with the federal government, where it can be used for the common benefit of all citizens.  Similarly (the argument would go) there is no reason why the state should be deemed a better custodian of unclaimed funds than the federal government.  Indeed, the federal government has its own site providing links to searchable databases of unclaimed funds relating to government programs.

So, what happens when sovereigns collide?  A relatively recent case out of New Jersey suggests one possible answer.  Last year, the states of New Jersey, Montana, Oklahoma, Missouri, Pennsylvania, Kentucky and North Carolina filed an action in federal court seeking to require the federal treasury to turn over unclaimed savings bonds that the states alleged had become abandoned pursuant to their state unclaimed property laws.  The amounts at issue were significant.  The states sought turnover of some $1.6 billion in matured bonds and some estimate that the amount of matured but unredeemed bonds held by the Treasury Department is about $16 billion. 

Ultimately, the federal district court dismissed the case, raising the doctrines of federal preemption (i.e., that federal law is superior to, and cannot be trumped by, a conflicting state law) and intergovernmental immunity (i.e., that one government cannot threaten civil or criminal penalties to another government for acts carried out in an official capacity).  This decision was affirmed by the United States Court of Appeals  in Philadelphia, which held that "federal statutes and regulations pertaining to United States savings bonds preempt the States' unclaimed property acts insofar as the State seek to apply their acts to take custody of the proceeds of the matured but unredeemed savings bonds."  The Court also agreed with the district court that the states' claim was barred by the doctrine of intergovermental immunity, reasoning that allowing application of state unclaimed property laws to the federal government "would result in a direct regulation of the Federal Government [by a state] in contravention of the Supremacy Clause."

Apparently reluctant to give up on this pot of funds, the objecting states filed a Petition for Certiorari with the Supreme Court of the United States, asking the high court to review and reverse the appellate court's decision.  That petition is currently under review.

Unless and until the Supreme Court reverses the decision of the Court of Appeals in the savings bond case, it is unlikely that the states will see be able to take custody of property held by the federal government under state unclaimed property laws.  However, with both the state and federal governments scrambling to raise revenue, cut expenses, and balance budgets, these inter-government fights over other people's money are sure to continue.

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