Thursday, July 28, 2016

Andrea Lea, Auditor of State Josh Wood, Compliance Officer Office of Auditor of State 1401 W. Capitol Ave., Suite 325 Little Rock, Arkansas 72201

RE: Clarifications regarding correspondence sent to holders of abandoned mineral proceeds

Dear Auditor of State Lea and Compliance Officer Wood,

The Unclaimed Property Professionals Organization (UPPO) is the national trade association of unclaimed property holders and service providers. We represent over 350 unclaimed property holders and service providers and 1,000 unclaimed property professionals of diverse industries and employer size.

UPPO is seeking clarification regarding a recent communication sent to various holders of abandoned mineral proceeds in mid-May, which was signed by Compliance Officer Josh Wood of the Arkansas State Auditor’s Office. In particular, we are concerned by the guidance presented in the sixth bulleted provision of the letter, which states that, “[i]f a mineral interest was derived from a well physically located in Arkansas (as evidenced by the legal description of the well) and the owner’s last known mailing address is UNKNOWN, the abandoned mineral interest should be reported to the Arkansas Auditor of State Unclaimed Property Division.”1

This position toward “address unknown” mineral interest property appears to run contrary to the body of federal common law allocating jurisdictional priorities between the states for the reporting and remitting of unclaimed property.

1 We note that guidance available on the Auditor of State’s website regarding reporting specific property types reinforces the position espoused in the letter. Specifically, under the section titled “Mineral Proceeds”, the Auditor of State contends, … [M]ineral proceeds should be reported to one of the following, depending on what information is available: 1) To the state named on the last known mailing address of the purchaser, or if this information is not available 2) To the state in which the minerals were severed or produced, or if this information is not available 3) To the state in which the holder has its principal place of business. See http://auditor.ar.gov/images/uploads/ReportingSpecificProperty.pdf. As such, UPPO respectfully submits that the property at issue in the aforementioned bullet is properly reportable to the holder’s state of incorporation or domicile. In furtherance of this position, please note the following:

• In the leading case of Texas v. New Jersey (379 U.S. 674 (1965)), the U.S. Supreme Court established what are commonly referred to as the “priority rules.” The second priority rule set forth in Texas v. New Jersey states that if a holder does not have an address for the apparent owner on its books and records, which would be the case if the address is unknown, then the state of the holder’s incorporation or domicile has priority to receive the unclaimed funds attributable to the owner with the unknown address.

• Specifically, in Texas v. New Jersey, the State of Texas asked the U.S. Supreme Court to rule that mineral proceeds derived from land located in Texas should be escheatable only by that state. However, the U.S. Supreme Court observed in Footnote 9 of the Texas opinion that,

“Texas argues in particular that at least the part of the intangible obligations here which are royalties, rents, and mineral proceeds derived from land located only in Texas should be escheatable only by that State. We do not believe that the fact that an intangible is income from real property with a fixed situs is significant enough to justify treating it as an exception to a general rule concerning escheat of intangibles.”

• In the leading mineral proceeds case of American Petrofina v. Nance (859 F. 2d 840 (10th Cir. 1988)), Oklahoma enacted a law providing that proceeds attributable to unlocated owners’ mineral interests located in Oklahoma should be escheated to the Oklahoma Tax Commission. The Tenth Circuit Court of Appeals affirmed the judgment of the U.S. District Court, which ruled that the 1984 Oklahoma law violated the U.S. Constitution’s supremacy clause (U.S. Const., Art. VI, Cl. 2). It further affirmed the lower court’s ruling that the federal common law established in Texas v. New Jersey preempted the Oklahoma amendatory scheme for the custodial taking of unclaimed intangible property.

As a result of the authorities discussed above, holders of mineral interests have routinely structured their systems and procedures related to the reporting of unclaimed mineral interest property to follow the federal common law set forth in Texas v. New Jersey and its progeny, with regard to which state has priority to receive address-unknown unclaimed funds.

In summary, it is respectfully submitted that the guidance provided by the Arkansas Auditor of State related to address unknown mineral interest owners is contrary to the priority rules and federal common law set forth in Texas v. New Jersey and creates a conflict with claims by a holder’s state of incorporation or domicile, unless of course the legal entity which holds the funds in question is incorporated or domiciled under the laws of the State of Arkansas. Thus,

UPPO kindly requests that you provide further details regarding the state’s understanding of the reporting of “address unknown” mineral interests produced from wells that are physically located in Arkansas.

Please do not hesitate to contact me with any questions.

Sincerely,

Toni J. Nuernberg, CAE, CBA, CGA Executive Director Unclaimed Property Professionals Organization 763-253-4344, [email protected]