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A recent Trusts & Estates webinar sponsored by the American Cancer Society focused on the requirements of the Corporate Transparency Act (CTA). The two speakers were Stephen Liss, a partner at Dungey Dougherty PLLC, and Kevin L. Shepard, a partner at Venable LLP. The speakers presented an overview of the CTA’s reporting requirements, touching on the entities covered under the CTA, who’s required to file a report with the CTA, which companies are exempt from filing and the information to report. Here are some questions and answers that came up during the webinar.
The speakers note that the responses below aren’t intended to provide legal advice or opinion. Such advice may only be given when related to specific fact situations that the responder has accepted an engagement as counsel to address.
Enforcement
Q. How will the Financial Crimes Enforcement Network (FinCEN) enforce the law against those who don’t comply? Will they cross reference Internal Revenue Service data to see who hasn’t reported and sent noncompliance letters?
A. FinCEN presently indicates that it seeks to educate the public about the reporting requirements under the CTA rather than pursue enforcement actions for those not complying with the CTA. It isn’t clear when FinCEN will change that approach and initiate such enforcement actions. The access regulations issued by FinCEN in late December 2023 set forth who has access to the beneficial ownership database maintained by FinCEN. FinCEN’s FAQ (Q.2) states in part: “FinCEN is authorized to disclose beneficial ownership information to Federal agencies engaged in national security, intelligence, or law enforcement activities as well as Federal regulatory agencies that supervise financial institutions for compliance with customer due diligence requirements. To request beneficial ownership information from FinCEN, such Federal agencies will first need to enter into a memorandum of understanding with FinCEN describing how the agency will protect the security and confidentiality of the information.” It’s unclear whether such an agreement currently exists concerning the IRS, another branch within the U.S. Treasury.
Trustee Reporting Requirements
Q. If a trustee is determined to be a beneficial owner, who has to report? An individual owner of the trust company or the trust company as an entity?
A. The reporting company is responsible for: (1) identifying its beneficial owners, (2) obtaining the required information from each beneficial owner, and (3) reporting that beneficial owner information to FinCEN. Trusts complicate the process of identifying beneficial owners, but they don’t shift the reporting burden away from the reporting company.
Corporate Trustee Requirements
Q. If you’re a corporate trustee of a trust owning a reporting company, does the trust have to report?
A. It’s always the reporting company that must report under the CTA, and common law trusts aren’t reporting companies. As a corporate trustee, you may need to help the reporting company identify those with the power to “dispose of” interests in the reporting company owned by the trust. For example, is there a trust officer who could decide to sell or distribute that equity interest? Is there an investment committee or distribution committee that would make that decision? In addition, recently issued FAQ D16 indicates the owners of the corporate trustee will be treated as owning a pro-rata share of any reporting company the corporate trustee is administering. That ownership may need to be disclosed to the reporting company so it can fulfill its reporting obligations.
Law Firm Responsibility
Q. If your law firm forms a limited liability company or a corporation for a client, does the law firm have a duty to file on behalf of that entity?
A. Under the CTA, the reporting company always has the reporting obligation. In this scenario, an attorney or staff member at the law firm may be a company applicant. They would be obligated to provide their personally identifiable information or FinCEN Identifier number to the reporting company so it can fulfill its obligations under the CTA, but the law firm itself has no filing obligations.
Notice of Changes
Q. Who’s liable for failing to notify changes in the beneficial owner information (BOI)?
A. The reporting company may be liable along with its senior officers. An individual who willfully files a false or fraudulent beneficial ownership information report on a company’s behalf may be subject to the same civil and criminal penalties as the reporting company and its senior officers (as well as a beneficial owner or company applicant who refuses to provide the required information to the reporting company. If an individual obtains a FinCEN Identifier, that individual will be subject to civil and criminal penalties if they don’t notify FinCEN of any changes to the reported BOI within 30 calendar days.
Status of Lawsuits
Q. What’s the status of lawsuits and predictions that the reporting will be overturned?
A. The federal case that’s advanced the furthest at this point is the Alabama district court case, National Small Business United v. Yellen, No. 5:22-cv-01448 (N.D. Ala.) It’s now on appeal to the U.S. Court of Appeals for the Eleventh Circuit. Briefs are being filed in that appeal, and oral argument is scheduled for the week of Sept. 16, 2024. Other federal cases in Ohio, Maine and Michigan are still in their preliminary stages. Predicting how the federal courts will decide these cases would be pure conjecture.
EIN Number
Q. Must we apply for an employer identification number (EIN) for every reporting company?
A. The BOI report form requires that the EIN be provided for the reporting company.
CPAs
Q. Are CPAs prohibited from filing this report?
A. Any individual may submit a BOI report on behalf of the reporting company but must certify that the information in the report is true, correct and complete. Advising a reporting company on who the beneficial owners are may be considered the practice of law. As a result, while filing the report may be appropriate for a CPA, it may not be advisable for the CPA to determine who the beneficial owners are except in the simplest of cases.
Financial Advisors
Q. As a financial advisor, do I have an obligation to notify clients of the CTA requirements?
A. Financial advisors are highly regulated by various agencies, and each advisor should check the policies of their own institution concerning providing advice on the CTA. That said, notifying your clients about the CTA represents an opportunity to benefit them and help demonstrate the value you add as a holistic advisor who thinks about your clients’ needs beyond your investment expertise.
Attribution Rules
Q. Do any attribution rules apply? For example, is the ownership combined if an individual is a beneficiary of multiple trusts that own an LLC?
A. There are no “attribution rules” in the traditional sense, meaning assets owned by one party are deemed owned by another. For example, stock owned by one spouse generally isn’t deemed owned by the other spouse. Ownership is aggregated, however, so if you directly own an interest in a reporting company and are the sole beneficiary of a trust that owns a portion of that same reporting company, you will need to aggregate that ownership to determine what percentage of the reporting company you beneficially own. In addition, when a reporting company is owned through a trust multiple, people can be treated as owning that same interest. For example, if a trust has a single beneficiary and single trustee, both the beneficiary and the trustee will be treated as owning any reporting company interests held by the trust.
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