BEFORE THE Department of REVENUE

OF THE STATE OF MONTANA

 

In the matter of the adoption of New Rules I and II, amendment of ARM 42.38.102 and 42.38.103, transfer of ARM 42.38.104, 42.38.203, and 42.38.206, and repeal of ARM 42.38.204 pertaining to unclaimed property

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NOTICE OF ADOPTION, AMENDMENT, TRANSFER, AND REPEAL

 

TO: All Concerned Persons

 

1. On August 27, 2015, the Department of Revenue published MAR Notice No. 42-2-933 pertaining to the public hearing on the proposed adoption, amendment, transfer, and repeal of the above-stated rules at page 1249 of the 2015 Montana Administrative Register, Issue Number 16.

 

2. On September 21, 2015, a public hearing was held to consider the proposed adoption, amendment, transfer, and repeal. Gary Wiens of the Montana Electric Cooperatives' Association appeared and testified at the hearing. The department also received written comments from the Montana Telecommunications Association, Toni Cody, and Jinger Henke.

 

3. The department has amended ARM 42.38.102 and 42.38.103, transferred ARM 42.38.104 (42.38.220), 42.38.203 (42.38.305), and 42.38.206 (42.38.310), and repealed ARM 42.38.204 as proposed.

 

4. Based upon the comments received and after further review, the department has adopted New Rule I (42.38.208) and New Rule II (42.38.209) as proposed, but with the following changes from the original proposal, new matter underlined, deleted matter interlined:

NEW RULE I (42.38.208) RURAL ELECTRIC OR TELEPHONE COOPERATIVES - DETERMINATION OF UNCLAIMED PROPERTY EXEMPT FROM ESCHEATMENT (1) Unclaimed patronage refunds of a rural electric or telephone cooperative are not presumed abandoned under 70-9-803, MCA, if the cooperative, upon the action of the board of trustees:

(a) maintains the unclaimed patronage refunds in a separate general ledger account or fund, which can only be used for educational purposes in the cooperative's community;

(b) does not include the amount of the unclaimed patronage refunds in the cooperative's general fund ledger;

(c) through (3) remain as proposed.

 

NEW RULE II (42.38.209) NONUTILITY COOPERATIVES - DETERMINATION OF UNCLAIMED PROPERTY EXEMPT FROM ESCHEATMENT

(1) Unclaimed shares in a nonutility cooperative are not presumed abandoned under 70-9-803, MCA, if the cooperative, upon the action of the board of trustees:

(a) maintains the unclaimed shares in a separate general ledger account or fund, which can only be used for charitable or civic purposes in the cooperative's community;

(b) does not include the amount of the unclaimed shares in the cooperative's general fund ledger;

(c) through (2) remain as proposed.

 

5. The department has thoroughly considered the comments and testimony received. A summary of the comments received and the department's responses are as follows:

 

COMMENT NO. 1: Gary Wiens appeared and testified on behalf of the Montana Electric Cooperatives' Association. Mr. Wiens stated that the association supports proposed New Rule I and appreciates the further amendments the department offered at the hearing to improve the proposed rule.

Mr. Wiens commented that the proposal is similar to a model policy for unclaimed patronage refunds adopted by the association last year to guide electric cooperatives. He stated that the proposed new rule will adequately resolve a question about interpretation of two separate statutes, 70-9-803 and 35-18-316, MCA. He commented that, as they understand it, under this proposal electric cooperatives will be able to continue to retain unclaimed funds for educational purposes provided the steps outlined in rule as further amended are followed.

Mr. Wiens further commented that he believes the proposed new rule is consistent with general practices of electric cooperatives regarding unclaimed patronages refunds. Unclaimed patronage refunds are retained by the cooperative for five years during which the cooperative shall make reasonable attempts to locate the rightful owner of this property, and on an annual basis shall transfer the unclaimed refunds to a separate account or fund that is not in the cooperative's general fund to be used for educational purposes at the discretion of the cooperative board of directors or one or more individuals designated by the board.

 

RESPONSE NO. 1: The department appreciates Mr. Wiens' comments on behalf of the Montana Electric Cooperatives' Association. As presented at the hearing, the department is striking "in the cooperative's community" from New Rule I (1)(a) and further amending New Rules I and II to add the term "general ledger" in (1)(a), and to strike the term "ledger" from (1)(b) for clarity.

 

COMMENT NO. 2: Jason B. Williams, counsel on behalf of the Montana Telecommunications Association (MTA) general manager, Geoff Feiss, submitted written comments on the proposed rules and the additional amendments agreed to by the department.

Mr. Williams explained that the MTA represents several rural telephone cooperatives operating in Montana that are subject to the statutory restrictions in 35-18-316, MCA, regarding the treatment of unclaimed patronage and that the department's proposed changes directly affect rural telephone cooperatives doing business in Montana. Mr. Williams further commented that the MTA supports the proposed rules if they are amended to include the MTA's recommendations.

Mr. Williams commented that the MTA has a concern with the portion of proposed New Rule I (1)(a) which reads, "maintains the unclaimed patronage refunds in a separate account or fund." Member cooperatives track unclaimed patronage as a separate line item on their balance sheets and carefully account for these funds to ensure they are used only for educational purposes as authorized by 35-18-316, MCA. The proposed requirement to keep these funds "in a separate account or fund" is unnecessary and, because of its ambiguity, creates confusion as to the treatment of unclaimed patronage refunds.

The MTA recommends the proposed rule be changed to state, "accounts for unclaimed patronage as a separate account on its balance sheet" to clarify that there is no requirement to maintain a separate cash or other account for the sole purpose of unclaimed patronage.

Mr. Williams commented that the MTA is also concerned that the language in proposed New Rule I (1)(a), which reads, "maintains the unclaimed patronage refunds in a separate account or fund, which can only be used for educational purposes in the cooperative's community," is unlawful. Section 35-18-316(3), MCA, states that "refunds retained by the cooperative must be used for educational purposes." Adding "in the cooperative's community" qualifier narrows the scope for how rural telephone cooperatives may use unclaimed patronage credits to only the cooperative's community.

Mr. Williams further commented that the language is vague and raises questions. Imposition of this language in the new rule would nullify the primary purpose for which many MTA members use unclaimed member patronage refunds, college scholarships. Each year, telephone cooperatives across Montana give thousands of dollars to various colleges all over the country on behalf of deserving students in the form of scholarships. He commented that the proposed language could be interpreted to prohibit these companies from providing scholarships.

Mr. Williams stated that the MTA recommends the department strike "in the cooperative's community" from proposed New Rule I.

Mr. Williams commented that the proposed language in New Rule I (1)(b) that states, "does not include the amount of the unclaimed patronage refunds in the cooperative's general ledger" is ambiguous and an argument could be made that this language would prohibit cooperatives from recording unclaimed patronage refunds on their balance sheets, which would result in a material misstatement of financial statements. Instead, the MTA recommends deleting the word "ledger" to encapsulate the apparent intent to ensure that a cooperative's unclaimed patronage amounts are not comingled with its general funds, but rather as a separate amount on its balance sheet.

 

RESPONSE NO. 2: The department appreciates the comments from Mr. Williams on behalf of Mr. Feiss and the Montana Telecommunications Association, and agrees with their concerns. As presented at the hearing, the department is striking "in the cooperative's community" from New Rule I (1)(a) and further amending New Rules I and II to add the term "general ledger" in (1)(a), and to strike the term "ledger" from (1)(b) for clarity.

 

COMMENT NO. 3: Jinger Henke e-mailed the department to ask if a "separate account or fund" refers to an actual bank account or just an accounting separation in a general ledger account, and if there is an official definition of "education purposes."

 

RESPONSE NO. 3: The department appreciates Ms. Henke's comments. The department does not intend for a separate account to be established and has further amended the new rules to add this clarity. The department does not define "education purposes" as the term is used in 70-9-803(6)(a) and 35-18-316(3), MCA, to allow the cooperative the discretion to use the funds for any education purpose designated by the board.

 

COMMENT NO. 4: Toni Cody e-mailed the department regarding the timeframe for determining when unclaimed patronage becomes abandoned as found in statute. Ms. Cody asked if there is a time limit in which the funds must be used for education purposes or if the proposed rule means they do not need to use the funds within five years before presumed abandoned.

 

RESPONSE NO. 4: The department appreciates Ms. Cody's comments. Unclaimed patronage refunds do not become unclaimed until five years after they are issued. New Rule I further aligns the 5-year period as the last day of the calendar year in which the patronage refund is issued. It is at this time the patronage refund becomes unclaimed and 70-9-803(6)(a) and 35-18-316(3), MCA, apply, which requires these refunds to be placed into a separate general ledger account to be used for educational purposes. These funds are not required to be used before this 5-year period in order to be exempt from escheatment under the Uniform Unclaimed Property Act.

 

 

 

/s/ Laurie Logan                                    /s/ Mike Kadas

Laurie Logan                                         Mike Kadas

Rule Reviewer                                       Director of Revenue

 

         

Certified to the Secretary of State November 2, 2015