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Frequently Asked Questions about the Corporate Transparency Act

Frequently Asked Questions about the Corporate Transparency Act

I recently presented an overview of the Corporate Transparency Act (CTA) to a room full of nearly 100 lawyers.  Here are a few questions I received and the answers I gave:

QuestionUnderstanding that in some cases there is a substantive reason for not disclosing certain owners, in many, if not most, circumstances, rather than engaging in all of these calculations, why isn’t it just a better course of action to simply overreport – e.g., just report all owners, directors, officers, etc.?

Answer:  While we should apply the calculation rules specified in FinCEN’s Reporting Rule, I think that borderline cases should go in favor of reporting.  Since there is no safe harbor to exclude anyone, the prudent choice would be to include any potential beneficial owner as one.

Question: If a non-profit, such as an incorporated church, requires a majority vote of members to convey any interest in property, must all members (potentially many hundreds of members) be included on the report? What if the members refuse to provide the information?

Answer:  This question has several parts.

First, it is not clear if an “incorporated church” will need to file a BOI report.  Most churches are tax exempt under IRC Section 501(c), which means they are exempt from CTA report by virtue of exemption (xix).

But, if the entity is not exempt (whether under the tax-exempt entity exemption or another exemption) the question is whether participation in a vote on the sale of an asset would convert an individual into a beneficial owner through the substantial control test.  Subsection (C)(1) of the definition of “substantial control” in the Reporting Rule sales that an individual has substantial control if they have “substantial influence over important decisions” including the “sale . . . of any principal assets of the reporting company.”  Depending on the facts, an organization could determine that its members are beneficial owners if their ability to vote on the sale of a property gives them substantial influence over such a decision to sell.

Your last question is what the reporting company should do if some members refuse to provide their information?  The confidential data management system we have through FinCEN Report Company might be part of a solution.  Until FinCEN provides the final template for its BOI report, however, we won’t know what FinCEN wants from a reporting company that simply cannot obtain all the required PII from its beneficial owners.

Question: In the example of a Condo Association with hundreds of members, since they need to vote on matters annually, would they each be considered to exert substantial control?

Answer:  Congratulations for noting that most homeowner and community associations will not be exempt by virtue of the tax-exempt exemption (subsection (xix)).  The tax-exempt entity exemption applies to entities that are tax-exempt under IRC Section 501(c) (and some other sections) but not those associations that are exempt under IRC Section 528 (which applies to most community associations).

Refer to the question about the church, discussed earlier, for the analysis of when a vote over the sale of an asset might convert a member of an organization into a beneficial owner.

Question: If we extend the logic of saying “substantial control” covers any member of an LLC with a right to vote on major decisions, wouldn’t that also mean that all stockholders of a corporation have substantial control if the statute gives the stockholders voting rights with regard to certain decisions?

Answer:  Yes, I think so.  Because the Reporting Rule does not contain a safe harbor to exclude anyone, a prudent response is to include as a beneficial owner anyone who might have “substantial influence over important decisions” of a reporting company (include a sale of assets).

Perhaps, in the future, FinCEN will modify the Reporting Rule so that an individual whose voting power is less than 25% of the entire voting power can be excluded.

QuestionWhat if the Trustee is Big Bank, N.A. and the Trustee is considered the BO?

Answer:  This question relates to one of my hypotheticals where all the beneficial owners of a reporting company pledge their stock to Big Bank, N.A. and Big Bank, N.A. later forecloses on that stock, becoming the sole owner of the stock.  (I cannot help but notice – and chuckle – that the attorney asking this question is in-house with a large U.S. bank.)

The answer is that Big Bank, N.A. becomes a beneficial owner when it forecloses.  If it forecloses on all of the stock, then the reporting company becomes exempt (as a wholly-owned subsidiary of an exempt entity; since nationally-chartered banks are exempt).  In that case, the reporting company would need to amend any previously-filed BOI report to indicate that its former owners are no longer beneficial owners and that the entity has become exempt.

But if the bank foreclosed on only a portion of the stock, the reporting company would not be exempt.  The reporting company would need to amend any previously -filed BOI report to indicate that some of its former beneficial owners are no more.  With respect to the bank’s status as a beneficial owner, since the bank would be exempt, the reporting company would only need to report the bank’s name.  (31 CFR 1010.380(b)(2)(i)).

Question:   Where a trust owns an interest in a reporting company, can both the trustee and the settlor can be beneficial owners, if the trustee can dispose of all assets and if the settlor can revoke the trust?

Answer:  Yes (although I expect that such a situation will be rare).

Question:   Imagine that counsel to a reporting company contacts trustee (or trustee counsel), asking for information about the trust’s constituent documents.  The trustee says “Gosh, I’d like to help, but I have a duty to keep the terms of the trust private.”  What should be the outcome?”

Answer:  Until FinCEN finalizes its form of BOI report, we don’t know.  The Reporting Rule doesn’t contain a rule for how a reporting company should report if a beneficial owner refuses to provide applicable information.  You can find some of the background on this controversy in this blog post on the controversy surrounding FinCEN’s initial form of BOI report.

Question: Does any trust beneficiary who has HEMS (health, education, maintenance and support) rights a listed party?

Answer:  No.  FinCEN’s reporting rule requires a reporting company to determine which individual is a beneficial owner when an ownership interest in the reporting company is owned by a trust.  (31 CFR 1010.380(d)(2)(ii)).  A beneficiary is a beneficial owner of the trust’s interest only if that individual is either (i) the sole permissible recipient of income and principal from the trust, or (ii) has the right to demand a distribution of or withdraw substantially all of the assets from the trust.”

A beneficiary with HEMS might have one of these two rights, but does not necessarily have either of these rights.

Question: In example 11a, if Investment Advisor LLC is initially exempt because it is registered, if it later ceases to be registered, must an amendment be filed to the initial filing?

Answer:  Yes.  In the hypothetical, a reporting company was exempt because it was wholly owned by an exempt registered investment advisor.  If the investment advisor ceases to be exempt, then the exempt subsidiary rule would no longer apply and the subsidiary reporting company would need to file an initial BOI report within thirty calendar days after the loss of the exemption.

Question: If the parent company of a US entity is listed on a foreign stock exchange, would the parent company and/or US entity be exempt from the reporting requirements?

Answer:  This is a great question that looks at the details of the “public issuer” exemption in 31 CFR 1010.380(c)(2)(i).  That exemption applies only to an issuer of securities (a) that are registered under Section 12 of the Securities Exchange Act, or (b) that is required to file supplementary and periodic information under Section 15(d) of the Securities Exchange Act.  If the foreign parent listed on a foreign exchange is outside of both categories, it would not be exempt.

Question: Once a company reports, how often will follow-up reports by due?

Answer:  The CTA does not contemplate annual or periodic reports.  Instead, after a reporting company files, it never needs to file again unless (a) there is any change in beneficial ownership, or (b) any item or previously-reporting data concerning a beneficial owner changes (such as a beneficial owner with a change in residence).  In that circumstance, the reporting company must amend its prior BOI report with correct updated information within 30 calendar days after the change occurs.