The Florida Bar

Florida Bar Journal

Corporate Transparency Act to Have Major Impact on Clients and Attorneys

Tax

On January 1, 2021, Congress passed (over veto) the National Defense Authorization Act of 2021 (NDAA),[1] including the Corporate Transparency Act (CTA).[2] The CTA creates an important new reporting requirement and a federal database of beneficial ownership of U.S. corporations, limited liability companies, and certain other entities. The CTA could have a major impact on U.S. and non-U.S. clients as well as attorneys when implementing regulations, expected by December 31, 2021, become effective.

Most of the voluminous NDAA relates to national defense, but Division F of the act includes the CTA as well as the Anti-Money Laundering Act of 2020 (AMLA),[3] with provisions intended to strengthen anti-money laundering laws and countering terrorism financing. Section 6502 of the AMLA requires the comptroller general to conduct a study of the effectiveness of the CTA, including a review of certain forms of entities not specifically covered by the CTA, to be completed in two years.

Other than the conference report,[4] there is little meaningful legislative history for the CTA. But the gist of the CTA has been proposed in one form or another since at least 2008, following the 2006 report by the Financial Action Task Force (FATF)[5] criticizing the United States for not collecting beneficial ownership information in accordance with FATF standards.[6] Despite a number of legislative proposals, congressional inaction continued, leading to a second FATF critical report in 2016.[7]

The Corporate Transparency Act of 2019[8] may be seen as the precursor of the 2021 CTA, departing from previous versions by proposing a federal database with direct applicant filing (rather than requiring the states to begin collecting such information at the time of entity formation and through annual reports) and placing the burden directly on the entity rather than attorneys and other “gatekeepers” involved in the incorporation or equivalent process, as was the case in prior versions. The 2019 version may be of some interpretive value as to the CTA,[9] along with several other bills then pending in the Senate.[10]

On April 5, 2021, the Financial Crimes Enforcement Network of the U.S. Department of the Treasury (FinCEN) released an advance notice of proposed rulemaking,[11] requesting comments by May 5, 2021, about regulations to be issued to implement the CTA (the CTA regulations).[12] The notice included a lengthy list of well thought out questions about various aspects of the CTA, some of which are addressed below; 241 comments were submitted, including comments by The Florida Bar Tax Section.[13] Some of the questions and issues discussed below derive from the Tax Section’s comments and others.

This article is not intended as a comprehensive explanation of the CTA, rather a brief and somewhat informal discussion of important questions to be addressed in the pending regulations. Views expressed in this article are strictly those of the author.

Brief Overview of the Corporate Transparency Act[14]

1) New Reporting Requirement: Section 6403(a)(b) of the CTA requires that, starting in 2022, newly formed U.S. corporations, limited liability companies, and certain other entities classified as a “reporting company” must report their beneficial ownership to FinCEN at the time of formation or registration. Pre-existing reporting companies (those formed before the effective date of the CTA regulations), likely will start reporting in 2024, two years after the effective date of the CTA regulations. Changes in reported information will also be subject to the reporting requirement.[15] Comments to FinCEN have suggested that the rather simple form “certification regarding beneficial owners of legal entity customers”[16] used by U.S. banks for compliance with the Know Your Customer Rules[17] be used for CTA reporting, with appropriate modification.

2) Purpose: Citing the formation of over 2 million U.S. corporations and limited liability companies each year, CTA §6402 (Sense of Congress) ties the lack of beneficial owner information to malign actors utilizing such entities to facilitate illicit activity such as money laundering, financing of terrorism, serious tax fraud, human and drug trafficking, securities and financial fraud, and foreign corruption.[18] No information is provided as to the extent of the problem nor the effectiveness of other measures, such as the geographic targeting orders[19] issued by FinCEN in recent years affecting certain potentially suspicious real estate purchases in South Florida and other specific areas.[20] The conference report mentions national security concerns as well as law enforcement/investigations as reasons for enactment.[21]

3) Reporting Company: CTA §6503(a)(11) defines a “reporting company” as a corporation, limited liability company,[22] or “other similar entity” that is created by the filing of a document with a secretary of state or similar office under the law of a U.S. State (including any U.S. commonwealth, territory or possession of the U.S.) or Indian Tribe or formed under the law of a foreign country and registered to do business in the U.S. by the filing of a document with such office. Extensive exceptions are provided, including publicly traded companies, nonprofits, governmental entities and regulated companies (such as banks) where beneficial ownership information is already provided. An exception is also provided for an entity that employs more than 20 persons on a full-time basis in the U.S., filed a federal income tax return in the previous year reflecting more than $5 million in gross receipts or sales in the aggregate, and has an operating presence at a physical office in the U.S. Another exception is provided for an inactive company not owned by any foreign person, and subsidiaries of exempted companies are exempt while the parent exemption is effective.

4) Beneficial Owner: For CTA purposes, a beneficial owner of an entity is defined in §6403(a)(a)(3) as any individual who, directly or indirectly (including through contract, arrangement, understanding, relationship, or otherwise) exercises “substantial control” over the entity or owns or controls not less than 25% of the ownership interests in the entity. The term “substantial control” is not defined in the CTA, but hopefully will be addressed in the CTA regulations.[23] The reporting company must provide to FinCEN each beneficial owner’s name, date of birth, current residential or business address, and a unique identifying number from an acceptable, nonexpired identification document (such as a U.S. state driver’s license or a U.S. or foreign passport). FinCEN is authorized to provide an exclusive identifying number to individuals and entities to be used instead of the specified identifying information if the beneficial owner so chooses.[24]

The beneficial owner definition excludes a minor child (as long as the information of the child’s parent or guardian is reported); an individual acting as a nominee, intermediary, custodian, or agent on behalf of another individual; an individual whose control over or economic benefit from a reporting company derives solely from their employment status; an individual whose only interest in a reporting company is through a right of inheritance; and a creditor of a reporting company, unless the creditor exercises substantial control over the entity or owns or controls 25% or more of the ownership interests.

5) Protection Against Disclosure: CTA §6403(a)(c) provides that beneficial owner information reported to FinCEN is not to be public information,[25] and is to be kept confidential in a secure, private database. But the information may be disclosed to federal national security, intelligence or law enforcement agencies;[26] state, local, or Tribal law enforcement agencies if authorized by a court to seek such information in a criminal or civil investigation; and pursuant to a request from a federal agency, a foreign law enforcement agency, prosecutor, or judge of another country, including a foreign central authority or competent authority (or like designation), under an international treaty, agreement, convention, or official request made by law enforcement, judicial, or prosecutorial authorities in trusted foreign countries when no treaty, agreement, or convention is available.

With the consent of the reporting company, FinCEN may also disclose the information to a financial institution, subject to customer due diligence requirements, to facilitate the compliance of the financial institution with such requirements under applicable law. It is expected that banks routinely will request such information to verify “know your customer” data provided by the customer, with corresponding changes expected in the CDD rules to reflect this aspect of the CTA.

6) Penalties: Section 6403(a)(h) of the CTA provides significant penalties for failing to file a report or providing false information. These penalties include monetary fines up to $10,000, two years in prison, or both. A limited safe harbor is provided for correcting inaccurate information within 90 days of submission.

Important Questions for the Pending Regulations

1) Will a General Partnership be Classified as a Reporting Company? In addition to corporations and limited liability companies, the CTA defines as a reporting company any “other similar entity that is created by the filing of a document with a secretary of state or a similar office under the law of a state or Indian tribe.”[27] It is likely that U.S. limited partnerships, limited liability partnerships, limited liability limited partnerships and certain types of trusts (discussed below) will be classified as an “other similar entity” and, thus, a reporting company under this definition.

But general partnerships are not created by filing a document with the secretary of state.[28] Under the Revised Uniform Partnership Act (RUPA), effective in 26 states, and to similar effect under the preceding Uniform Partnership Act, general partnerships are created by contract and not by the filing of an organizational document, although a general partnership may voluntarily file a registration statement for business purposes. Comments to RUPA §106, the governing law provision, note that the “(s)tate of organization” was rejected as the source of the governing law for a partnership because “no filing is necessary to form a general partnership, and thus the situs of its organization is not always clear….” Under RUPA, the governing law may be that stated in the partnership agreement’s choice of law provision (unless the partnership has no substantial relationship to the chosen state or other reasonable basis for the choice, or in certain cases of state fundamental policy issues), or that of the state in which the partnership has its chief executive office. Other examples may be cited to distinguish general partnerships from a “corporation, limited liability company, or other similar entity that is…created by the filing of a document.” It would seem difficult to argue that a general partnership would be a “similar entity” under the CTA’s definition of a reporting company.

Although general partnerships are specifically included in the CDD rules, the FBAR rules and GTOs,[29] Title LXIV, §6502(d) of the AMLA clearly acknowledges that the CTA does not include a general partnership as a reporting company. It directs the comptroller general to conduct a study and report to Congress within two years on the consequences of the lack of beneficial owner information about partnerships, trusts, and other legal entities not included in the CTA. Interestingly, the study is to identify states that have procedures that enable persons to form or register under the laws of the state partnerships, trusts, or other legal entities, and the nature of those procedures, when it seems common knowledge that no state has such procedures for formation and that optional registration provisions are not equivalent to formation.[30]

Excluding general partnerships should not hamper the enforcement objectives of the CTA, since any domestic direct partner (or indirect partner in a tiered partnership) that is not an individual or an exempt entity likely would be a reporting company irrespective of the partnership interest. For a foreign entity partner, if a general partnership is engaged in meaningful business in state “X,” then under generally applicable state law concepts, a non-U.S. entity partner would have to register or qualify to do business in state “X” and, thus, itself be a reporting company.[31] And, at least in Florida, the name of individual partners may be revealed either in the partnership name itself, in a required fictitious name filing or in a registration statement filed with the secretary of state, or be in the possession of an agent designated in a registration statement.[32]

What about a foreign eligible entity that elects to be treated as a disregarded entity or as a partnership for federal tax purposes? In the author’s opinion, FinCEN will likely hold that federal tax status is irrelevant to status as a reporting company, even if the owner(s) of the electing entity would not be themselves reporting entities. To do otherwise would treat foreign electing entities differently than domestic LLCs, for which disregarded entity or partnership tax status seems irrelevant under the CTA and FinCEN’s request for comments.

2) Statutory Trusts: It seems likely that the CTA regulations will include as reporting companies business trusts, statutory trusts, common law business trusts, general cooperative associations, limited cooperative associations, real estate investment trusts, and any other form of current or future form of entity that the law of a relevant state or Indian tribe requires to file, with the secretary of state or similar office or tribal government, articles of incorporation, a statement of qualification, a certificate, a declaration of trust or another form of public organic record the filing of which by a governmental body is required to form such entity. The case may be made that liquidating trusts and environmental remediation trusts should be exempted.

One issue that should be addressed in the CTA regulations is whether all states require all particular forms of statutory trusts to file formation documentation. For example, while Massachusetts requires a business trust to file a copy of its declaration of trust with the secretary of state, the trust’s legal existence apparently is not affected by failure to file.[33]

3) Common Law Trusts: As noted above for general partnerships, Title LXIV, §6502(d) of the NDAA clearly acknowledges that the CTA does not include a nonstatutory trust as a reporting company. Such trusts are to be included in the study required by §6502(d).[34]

Common law trusts are also exempted from the CDD rules, FinCEN concluding in its commentary to the CDD rules that “identifying a ‘beneficial owner’ from among these [foregoing] parties, based on the definition in the proposed or final [CDD] rule, would not be possible,” because:

unlike the legal entities that are subject to the [CDD] rule, a trust is a contractual arrangement between the person who provides the funds or other assets and specifies the terms (i.e., the grantor or settlor) and the person with control over the assets (i.e., the trustee), for the benefit of those named in the trust deed (i.e., the beneficiaries). Formation of a trust does not generally require any action by the state.[35]

On the other hand, the definitions in the FBAR rules treat as a U.S. person required to file FBAR reports a trust or estate “formed under the laws of the United States.” Although superficially applicable, it is arguable that the reference to “formed under the laws of the United States” is meaningless when applied to a common law trust (or to a general partnership) since neither are in any sense “formed under state law.”[36] Trusts are formed by contract and are essentially stateless, other than perhaps merely referring to the laws of a particular state as the governing law or for purposes of dispute resolution. For a general partnership, the location of the chief executive office is as relevant as a choice of law clause; for a trust, the grantor’s residence, the location of the trustee and trust assets and other factors are more relevant.

The Tax Section’s comments made excellent points that including common law trusts as reporting companies would add immeasurably to the FinCEN administrative burden due to the large number of such trusts, and that individuals would be discouraged from serving as trustees by exposure to CTA penalties or litigation from disclosed beneficial owners.[37]

4) Will a Foreign Entity Merely Owning U.S. Real Estate Have to File? CTA §6043(a)(11)(ii) defines as a reporting company an entity “formed under the law of a foreign country that registers to do business or applies for a certificate of authority to transact business in a state or for a similar business license from an Indian Tribe.” FinCEN’s request for comments used slightly different language: “registered to do business in the United States by the filing of a document with a secretary of state or a similar office under the laws of a state or Indian Tribe.”[38]

But what if a foreign entity simply fails to register or apply for a certificate of authority when required? The CTA’s definition of a reporting company does not seem to cover that circumstance.

And applicable state law may not require a foreign entity to register to acquire and own real property in the jurisdiction or to own only financial instruments or other passive investments for its own account.[39] It seems odd that the CTA and FinCEN’s request for comments did not explicitly cover these issues. Perhaps the drafters believed that the GTOs are the preferred method of monitoring real estate activity in select markets. If not, the CTA may need amendment.

5) Who Is the Applicant? Section 6403(a)(a)(2) of the CTA defines “applicant” as any individual who files an application to form a U.S. entity or registers or files an application to register a foreign entity to do business in the United States. A reporting company is required to identify an Applicant along with its beneficial owners, but it is not clear why, although the 2019 version of the CTA imposed the reporting duty on the applicant, rather than on the reporting company.

Imagine in January 2024, a law firm with an active business practice that has formed many thousands of corporations or LLCs over the decades prior to 2022. Having advised its clients of the reporting obligation, it is now getting calls from a client who is a Florida corporation formed in 1991, for which the identified incorporator was a former associate, no longer a member of The Florida Bar, and who no one has heard of in years, if still alive. Or perhaps the incorporator was a paralegal or secretary, who may be even harder to trace. Or, if located, perhaps the person advises that they do not intend to provide their personal data for this or any of the hundreds of other corporations for which they were told to “sign this.” The firm might find information about the person through other means, but cannot be sure it meets the accuracy or diligence standard required to avoid a penalty for providing false information on a CTA report.[40]

A concern here is that FinCEN might actually mean to treat attorneys as some form of gatekeeper, as did prior versions of the CTA. And the impetus for the CTA at least partially originated with the FATF, which some believe to be hostile towards attorneys.[41] The American Bar Association has argued that earlier versions of the CTA (and other anti-money laundering legislation) impose gatekeeper requirements on attorneys, contrary to the attorney-client privilege, the confidential attorney-client relationship and the right to effective counsel.[42] Hopefully the CTA regulations will obviate these issues, perhaps by dropping the applicant requirement entirely or at least exempting attorneys, law firm staff, and corporate service companies from the definition of applicant.

6) Beneficial Owner Issues: CTA §6403(a)(a)(3) defines the beneficial owner of an entity, subject to certain exceptions, as “an individual who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise” either “exercises substantial control over the entity” or “owns or controls not less than 25 percent of the ownership interests of the entity.” The terms “substantial control” and “owns or controls” are not defined. This definition likely will be the source of most problems with CTA compliance.

In contrast, the CDD rules define beneficial owner as:

(1) Each individual, if any, who, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, owns 25 percent or more of the equity interests of a legal entity customer; and (2) [a] single individual with significant responsibility to control, manage, or direct a legal entity customer, including (i) an executive officer or senior manager (e.g., a Chief Executive Officer, Chief Financial Officer, a Chief Operating Officer, Managing Member, General Partner, President, Vice President or Treasurer); or (ii) any other individual who regularly performs similar functions.

By articulating a “substantial control” test that applies to control as well as ownership, and by ignoring the “single individual with significant responsibility” limitation of the CDD rules, the CTA’s disjunctive definition poses several problems that could make it potentially unworkable.[43]

By not limiting the number of persons who could be viewed as exercising substantial control over the reporting company “through any contract, arrangement, understanding, relationship or otherwise,” the CTA definition exposes a reporting company to liability for misinterpreting who may be a person in substantial control and how many such persons there might be. The CDD rules definition is much clearer and simpler to apply with certainty.[44] And the text of the substantial control test seems inconsistent with the exception to beneficial owner status provided in CTA §6403(a)(a)(3)(B)(iii) for “an individual acting solely as an employee of (a reporting company) and whose control over or economic benefits from such entity is derived solely from the employment status of the person.”

Further, the substantial control test in the CTA definition raises the ghost of the debate over the concept of “effective control” when the CDD rules were developed, a concept that FinCEN acknowledged would be “difficult to determine.”[45] FinCEN further noted that:

because legal entity customers are required to provide information on only one control person who satisfies the definition, legal entities should be able to readily identify at least one natural person within their management structure who has significant management responsibility, consistent with the multiple examples of positions provided.[46]

The CTA also fails to define the term “indirectly” as it applies to either the ownership test or the substantial control test. FinCEN asked for comments on the definitions of “own” and “control” but did not specifically refer to the term “indirectly.” Tax lawyers are familiar with the concept of “indirect ownership” in its myriad contexts under the Internal Revenue Code and Treasury Regulations.[47] Other than for ownership by trusts, the Tax Section comments proposed adopting the common linear/proportionate ownership approach of the code and regulations, on a “top-down” basis, without complex constructive ownership rules.

For reporting companies with ownership by a nonstatutory trust, the Tax Section’s comments focused on the difficulty of determining a trust beneficiary’s “present beneficial interest” under the FBAR rules or “actuarial interest” under Code §318, particularly in the case of a discretionary trust. The comments also noted the conclusion in the CDD rules that identifying a beneficial owner from among the grantor, beneficiary, and trustee would not be possible.[48]

Instead, the section’s comments recommended treating the trustee of a nonstatutory trust as the beneficial owner, with a possible exception for a revocable trust where the grantor should be the identified beneficial owner. Alternative approaches suggested by the section included the FATCA approach, treating beneficiaries as beneficial owners to the extent that they actually receive a substantial distribution or loan from the trust, or the Uniform Trust Code definition of a qualified beneficiary as one who would be entitled to receive principal or income from the trust if it were to terminate on a particular date.

7) Will the Beneficial Owner Information be Safe? While the CTA appears to go to great lengths to protect beneficial owner information, the sharing of such information under the exceptions provided in §6403(a)(c)(2)(B) could cause greater vulnerability to cybersecurity attacks as well as potential misuse and unauthorized disclosure, particularly by non-U.S. recipients.

Concluding Observations

Attorneys whose practice areas involve clients with business or personal entities should begin to familiarize themselves with the CTA and be alert for the pending regulations, to prepare for reporting the beneficial ownership of newly formed entities beginning in 2022 and for previously formed entities in 2024, as well as identifying the applicant for each entity. Clients should be advised soon of the new reporting requirement, particularly those whose beneficial ownership and control may be complex or who might have business or personal needs for confidentiality.

No doubt some will question the necessity of imposing a new reporting requirement and compliance costs on millions of existing and all future U.S. entities. Witnesses at the hearing for the 2019 version of the CTA questioned whether the CDD rules produce meaningful results, and noted the rise of cryptocurrency and alternative financial systems that could thwart traditional money-laundering investigative techniques as well as the CTA.[49] Given the publicity surrounding GTOs for high-value real estate purchases through entities in certain markets, the obvious loophole for foreign corporations merely owning U.S. real estate is rather curious.[50]

To the extent that the CTA is premised upon criticism from the FATF or the international community regarding the unavailability of beneficial owner information for U.S. entities, some might suggest that FinCEN ought to conduct an independent evaluation of the robustness and real-world effectiveness of the public corporate registries maintained by the United Kingdom and European Union countries. The CTA might result in a more onerous or intrusive system than those of our critics. Some might question whether the CTA may be a prelude to full disclosure, as argued for by several organizations who testified at the 2019 hearing or have made comments on the CTA.[51]

[1] The William M. (Mac) Thornberry National Defense Authorization Act for Fiscal Year 2021, Pub. L. No. 116-283 (H.R. 6395), 134 Stat. 338, 116th Cong. 2d Sess.

[2] NDAA Tit. LXIV, §§6401-6403. The CTA incorporates §6403 (the CTA’s only substantive section) into 31 U.S.C. Ch. 53, II, §5336, but all references herein are to the section numbers of the NDAA.

[3] NDAA §§6001-6511.

[4] Conf. Rep. 116-617 at 4454-4459. See also Congressional Research Service, Beneficial Ownership Transparency in Corporate Formation, Shell Companies, Real Estate, and Financial Transactions (Jul. 8, 2019), available at https://crsreports.congress.gov/product/pdf/R/R45798.

[5] Established in 1989, the FATF is a global inter-governmental body (of which the U.S. is a founding member) that sets international standards to combat money laundering and terrorist financing.

[6] FATF, Third Mutual Evaluation Report on Anti-Money Laundering and Combating the Financing of Terrorism, United States of America (2006), available at www.fatf-gafi.org/media/fatf/documents/reports/mer/MER%20US%20full.pdf.

[7] FATF, Anti-Money Laundering and Counter Terrorist Financing Measures, United States, Fourth Round Mutual Evaluation Report 4 (2016), available at www.fatf-gafi.org/publications/mutualevaluations/documents/mer-united-states-2016.html (“Lack of timely access to adequate, accurate and current beneficial ownership (BO) information remains one of the fundamental gaps in the U.S. context. The NMLRA (National Money Laundering Rick Assessment) identifies examples of legal persons being abused for ML (money-laundering), in particular, through the use of complex structures to hide ownership. While authorities did provide case examples of successful investigations in these areas, challenges in ensuring timely access to and availability of BO information more generally raises significant concerns, bearing in mind risk and context.”). See also FATF, The FATF Recommendations (Oct. 2018).

[8] H.R. 2513, 116th Congress, 1st Sess. See also House Subcommittee on National Security, International Development and Monetary Policy, Hearing 116-9 (Mar. 13, 2019).

[9] Id.

[10] See Conf. Rep. 116-617 at 4455.

[11] 81 Fed. Reg. 17557 et seq. (Apr. 5, 2021).

[12] Hopefully, the regulations will be issued early enough in 2021 to allow advance time for study.

[13] The Tax Section’s comments can be found at Comment on FR Doc #2021-06922, https://www.regulations.gov/comment/FINCEN-2021-0005-0189.

[14] To better understand the CTA and the questions raised by FinCEN relating to the forthcoming regulations, it is helpful to be aware of certain other laws and regulations, including 1) the FinCEN Rules and Regulations on the Customer Due Diligence Requirements for Financial Institutions (CDD rules or the “know your customer rules”), 91 Fed. Reg. 29398 (May 11, 2016), available at https://www.govinfo‌.gov/content/pkg/FR-2016-05-11/pdf/2016-10567.pdf. The CDD rules are issued under the Bank Secrecy Act (Bank Secrecy Act, as amended, 12 U.S.C. §§1829b, 1951-1959 and 31 U.S.C. §§5311-5314,5316-5336, and implementing regulations, 31 C.F.R. Ch. X); 2) the Foreign Bank and Financial Accounts Report (FBAR) regulations, 31 C.F.R. part 1010, 76 Fed. Reg. 10234 et seq., see also https://www.fincen.gov/report-foreign-bank-and-financial-accounts; 3) FinCEN Geographic Targeting Orders (GTO); 31 U.S.C. §5326(a); 31 C.F.R. §1010.370; and Treasury Order 180-01; 4) The Foreign Account Tax Compliance Act (FATCA), I.R.C. §§1471-1475 and §6038D, Treas. Regs. §§1.1471-1.1474; and 5) FATF, All Publications, https://www.fatf-gafi.org/publications‌/?hf=10&b=0&s=desc(fatf_releasedate).

[15] Coincidentally, an Internal Revenue Service News Release (IR 2021-161) announced a project to require taxpayers to update responsible party and address information submitted with applications for employer identification numbers. Such changes are required to be reported within 60 days on Form 8822-B, Change of Address or Responsible Party-Business.

[16] FinCEN, Certification Regarding Beneficial Owners of Legal Entity Customers (a copy of the form), available at https://www.fincen.gov/sites/default/files/shared/‌CDD_APPENDIX_A_R6.7_Sept%2014_2017.docx.

[17] See note 14.

[18] This section of the CTA even makes reference to layered corporate structures as akin to Russian nesting Matryoshka dolls, a somewhat unsubtle reference.

[19] For the most recent version, see FinCEN, Geographic Targeting Order, available at https://www.fincen.gov/sites/default/files/shared/Real%20‌Estate%20GTO%20Order%20April%202021_508%20FINAL.pdf. See note 14. For the most recent version, see https://www.fincen.gov/sites/default/files/shared/Real%20Estate%20GTO%20Order%20April%202021_508%20FINAL.pdf.

[20] Disclosure proposals can raise concern about the true motivation of the proponents. Some years ago, the Miami-Dade County Commission adopted a “disclosure of interest” form for zoning applications that required all applicants to disclose ultimate beneficial owner information. A prominent supporter of the proposal admitted in private that the real purpose was to identify the individuals owning zoning applicants so that political contributions might be sought. This is not to suggest that the CTA is unfounded or has improper or hidden purposes, but providing better evidence of the need for the legislation might generate more support for a controversial measure.

[21] See Conf. Rep. 116-617 at 4456.

[22] The federal tax status of a limited liability company as a partnership or a disregarded entity (owned by an individual) seems irrelevant to its status as a reporting company, even though partnerships are not reporting companies under the CTA (see discussion on new reporting requirement in this article) and individuals are not included in the ambit of reporting other than being named as a beneficial owner of a reporting company. The request for comments does not address reporting issues relevant to series or cell limited liability companies, certain statutory trusts, or others that may be treated as separate companies for federal tax purposes.

[23] See discussion on protection against disclosure in this article.

[24] Note that the same information is required for the person identified as the “applicant.”

[25] The CTA chose not to make such information public, unlike the U.K. beneficial owner registry.

[26] Probably including the IRS Criminal Investigation Division, if not the IRS in general.

[27] The 2019 version of the CTA would have applied only to corporations and limited liability companies.

[28] Comments herein are limited to Florida law unless the context otherwise requires.

[29] See note 14.

[30] The study also is to evaluate whether the failure of the U.S. to require beneficial ownership information for partnerships and trusts formed or registered in the United States has elicited international criticism.

[31] See discussion in this article regarding registration and real estate issues for foreign entities.

[32] Fla. Stat. §620.8105 (2020).

[33] Robert W. Downes, Scott E. Ludwig, Thomas E. Rutledge & Laurie A. Smiley, The Corporate Transparency Act — Preparing tor The Federal Database of Beneficial Ownership Information, Business Law Today (Apr. 16, 2021), available at https://businesslawtoday.org/2021/04/corporate-transparency-act-preparing-federal-database-beneficial-ownership-information/.

[34] Trusts were not included in the unenacted 2019 version of the CTA.

[35] 81 Fed. Reg. 29412 (May 11, 2016).

[36] See discussion of RUPA in this article.

[37] See note 13.

[38] 81 Fed. Reg. 17561 (Apr. 5, 2021) (definitions question 2).

[39] Fla. Stat. §607.1501(2)(m) (2020) provides that owning, protecting, and maintaining, without more, real or personal property does not constitute transacting business in Florida and thus do not require a foreign corporation to obtain a Florida certificate of authority. Similarly, §605.0905 for foreign limited liability companies and §620.1903 for foreign limited partnerships. Note that Fla. Stat. §607.0505 (2020) provides that a foreign corporation or an “alien business organization” that owns real property located in Florida or a mortgage on real property located in Florida must appoint a registered agent who may be served with a subpoena to produce information about the beneficial ownership of the foreign entity. But this provision does not itself require registration to do business in Florida, nor does the mere appointment of a registered agent under the statute approximate registration. This particular Florida requirement and any similar provision in another state should be excluded by the proposed CTA rules from the ambit of “registered to do business.”

[40] Not all law firms should be presumed efficient at corporate record keeping, compounding the problem of identifying older entities required to report. Searching the Florida Secretary of State’s online database works only if enough information is available to enable a search parameter. Other states, like Delaware, intentionally provide even less information online.

[41] Laurel S. Terry & José Carlos Llerena Robles, The Relevance of FATF’s Recommendations and 4th Round of Mutual Evaluations to the Legal Profession, 42 Fordham J. Int’l L. 627 (2018).

[42] American Bar Association, Gatekeeper Regulation and the Legal Profession (Oct. 2020), available at https://www.americanbar.org/content/dam/aba/administrative/government_affairs‌_office/gatekeeper-factsheet-july-2020.pdf?logActivity=true.

[43] FinCEN’s request for comments asked whether the single individual standard should be utilized in the substantial control test. FinCEN also asked for comments about using the beneficial ownership definition provided in the Securities and Exchange Commission regulations, 26 C.F.R. §1010.230(d).

[44] Adopting the single-person limitation would be helpful, and the CDD rules’ “significant responsibility” standard would be preferred to the CTA’s open-ended “substantial control through any contract” language.

[45] 81 Fed. Reg. 29412 (May 11, 2016).

[46] 81 Fed. Reg. 29411-12.

[47] Internal Revenue Code of 1986, as amended and the regulations promulgated thereunder.

[48] 81 Fed. Reg. 29412 (May 11, 2016).

[49] See note 7.

[50] See discussion on common law trusts in this article.

[51] Global Witness, Poverty, Corruption and Anonymous Companies — How Hidden Company Ownership Fuels Corruption and Hinders the Fight Against Poverty (Mar. 2014), available at https://www.globalwitness.org/en/campaigns/corruption-and-money-laundering/anonymous-company-owners/poverty-corruption-and-anonymous-companies/.

 

Jonathan H. (Jason) WarnerJonathan H. (Jason) Warner concentrates his practice on international tax matters. He is a past chair of The Florida Bar Tax Section and was named the section’s Tax Attorney of the Year in 2008. He was a principal participant in the section’s FIRPTA withholding tax project that resulted in enactment of a new model federal tax withholding system. He is a past chair of the Committee on International Tax of the ABA Section of International Law and Practice, and has authored several comments to Congress and the Treasury on pending federal legislation or regulations. He has been a frequent speaker and writer on international and other tax topics. He received his J.D. in 1971 from Columbia University School of Law, where he was managing editor of the Columbia Journal of Transnational Law. Prior to opening his own practice in 1999, he was a partner in the law firms Greenberg, Traurig; Fowler, White (Miami); and Baker & McKenzie. An early adaptor to telecommuting, he now works primarily from the North Carolina mountains.

This column is submitted on behalf of the Tax Section, Harris L. Bonnette, chair, and Taso Milonas, Charlotte A. Erdmann, Daniel W. Hudson, and Angie Miller, editors.


Tax