And… As If Those Poor T-As Don’t Have Troubles Enough, How About State-Mandated Backup Withholding From Dividend And Interest Checks?

Thanks to reader Tom Montrone, the President of Registrar & Transfer Company, for reminding us of yet another issue that’s flown beneath the usual radar screens but which, we predict, may well burst from the blue to harass T-As and their clients.

So far, only two states – California, and more recently Maine - require the paying agent to withhold and remit a percentage of the payments if (i) federal backup withholding is in effect and (ii) the holder is a resident of the state or (iii) if the payments to any holder with federal backup withholding are generated or “sourced” by companies within the state.

And, unfortunately, as Montrone notes in his quarterly newsletter to clients, while the number of shareholders meet- ing [these] criteria is small, the programming and operational processes required to comply…are not.” In the 1 million+ shareholder database maintained at R&T, there are only 24 Californians and 10 Maine-Staters (a surprisingly high percentage, relatively, we’d say) who qualify at present.

Do WE think this is likely to spread, in light of the whop- ping shortfalls in State budgets we’re seeing? Indeed we do. In fact, we think a literal feeding frenzy might take place here - exactly like the way states have been going after abandoned property – with shortened holding periods and stepped-up enforcement actions, including audits and penalties. And, to top it all off, some holders seem to LIKE backup withholding, since it’s basically akin to the withholding most people are used to with wages and salaries.