By Richard S. Ekimoto, Esq.

A couple of days ago, on April 18, 2024, FinCen updated its FAQ to add two provisions about community associations. It states:

C.10. Are homeowners associations reporting companies?
It depends. Homeowners associations (HOAs) can take different corporate forms.
As with any entity, if an HOA was not created by the filing of a document with a
secretary of state or similar office, then it is not a domestic reporting company. An
incorporated HOA or other HOA that was created by such a filing also may qualify
for an exemption from the reporting requirements. For example, HOAs designated
as 501(c)(4) social welfare organizations may qualify for the tax-exempt entity
exemption. An incorporated HOA that is not designated as a 501(c)(4) organization,
however, may fall within the reporting company definition and therefore be required
to report BOI to FinCEN.
[Issued April 18, 2024]

Beneficial Ownership Information Frequently Asked Questions C.10.

The statement makes it clear that an incorporated community association can be a reporting company if it doesn’t fall under one of the exemptions. It is an indication that an unincorporated association is not a reporting company. We had questioned whether the recording of an association’s declaration with the Bureau of Conveyances constitutes a filing with an office similar to the Secretary of State. The FAQ doesn’t expressly address that issue, but it certainly provides some hope that an unincorporated association doesn’t have to file a BOI Report with FinCen. At this point, if you’re an unincorporated association, it may make sense to wait on filing a BOI Report.

The other addition to the FAQ by FinCen relating to community associations is about who is a beneficial owner for the association. It states:

D.13. Who is the beneficial owner of a homeowners association?
A homeowners association (HOA) that meets the reporting company definition and
does not qualify for any exemptions must report its beneficial owner(s). A beneficial
owner is any individual who, directly or indirectly, exercises substantial control
over a reporting company, or owns or controls at least 25 percent of the ownership
interests of a reporting company.
There may be instances in which no individuals own or control at least 25 percent of
the ownership interests of an HOA that is a reporting company. However, FinCEN
expects that at least one individual exercises substantial control over each reporting
company. Individuals who meet one of the following criteria are considered to
exercise substantial control over the HOA

• the individual is a senior officer;
• the individual has authority to appoint or remove certain officers or a
  majority of directors of the HOA;
• the individual is an important decision-maker; or
• the individual has any other form of substantial control over the HOA

[Issued April 18, 2024]

Beneficial Ownership Information Frequently Asked Questions D.13.

Unfortunately, this FAQ doesn’t add any information to what was known about Beneficial Owners for community associations that we didn’t already know.

By Richard S. Ekimoto, Esq.

Last week, I posted information about the Corporate Transparency Act. The Corporate Transparency Act (“CTA”)¹ is a federal law adopted in 2021 which requires Reporting Companies to file information with FinCen about its Beneficial Owners. In my post, I stated that most of the exemptions for Reporting Companies would probably not apply to community associations.

I wanted to provide you with a second take from a good friend of mine, Gary Porter. Gary is probably the most well-know and knowledgeable CPA on the taxation of community associations in the country. I’ve worked with Gary when he was President of CAI National and I was Chair of the Government and Public Affairs Council. Interestingly, we worked on issues involving Internal Revenue Code Section 528 which involves Gary’s second take of the CTA.

Gary points out that Internal Revenue Code Section 528 (“IRC 528”)² states:

A homeowners association (as defined in subsection (c)) shall be subject to taxation under this subtitle only to the extent provided in this section. A homeowners association shall be considered an organization exempt from income taxes for the purpose of any law which refers to organizations exempt from income taxes.

26 U.S.C. §528(a).

To explain this provision further, IRC 528 allows community associations that qualify to file an IRS Form 1120-H rather than IRS Form 1120. The practical differences between the two filings are that under IRS Form 1120-H, a community association can be exempt from income from most membership assessments, but pays income taxes on non-exempt income at the 30% tax rate. In contrast, community associations that file under IRS Form 1120, would pay a graduated income tax rate, but membership assessments would not be exempt. Community associations should consult with their own CPA about their tax filings because not all community associations qualify to file IRS Form 1120-H.

Gary has suggested that there is a possible argument that IRC 528(a) provides community associations an argument that it is not a Reporting Company under the nonprofit exemption. While that is a potential argument, I have a concern that many community associations may not qualify under the nonprofit exemption.

The relevant part of the nonprofit exemption exempts from a Reporting Company an:

organization that is described in section 501(c) of the Internal Revenue Code of 1986 (determined without regard to section 508(a) of such Code) and exempt from tax under section 501(a) of such Code, except that in the case of any such organization that loses an exemption from tax, such organization shall be considered to be continued to be described in this subclause for the 180-day period beginning on the date of the loss of such tax-exempt status [Emphasis added.]

31 USC §5336(a)(11)(B)(xix)(I).

Since the statute expressly requires that the organization be exempt from tax under IRC 501(a), FinCen could argue that a community association that is tax exempt under another section of the Internal Revenue Code does not qualify under the exemption. For that reason, we continue to take the position that community associations should err on the side of caution when determining whether they are a Reporting Company. Still, for those community associations that do qualify as tax exempt under IRC 501(a), will be exempt from the Beneficial Ownership Information Reporting requirements. However, as I noted previously, very few community associations are exempt under that statute.

It does make sense, however, to wait until much later in the year to file a Beneficial Ownership Information Report if you can do so legally. Those community associations that were in existence before January 1, 2024 do not have a legal requirement to file the report until December 31, 2024. It’s likely that throughout the year, FinCen will provide further guidance about the filing requirements. Moreover, there is legislation being considered in congress to amend the law.

1. 31 U.S.C. 5336. ↩︎
2. 26 U.S.C. § 528. ↩︎

By Richard S. Ekimoto, Esq.

Background about the CTA

The Corporate Transparency Act (“CTA”)¹ is a federal law that adopted in 2021. The Financial Crimes Enforcement Network (“FinCen”) in the U.S. Department of the Treasury promulgated regulations implementing the Beneficial Ownership Information (“BOI”) Reporting requirements for all covered entities.² The regulations are codified as 31 CFR 1010.380 (“BOI Reporting Regulation”).

The CTA and the BOI Reporting Regulation were adopted because:

Illicit actors frequently use corporate structures such as shell and front companies to obfuscate their identities and launder their ill-gotten gains through the U.S. financial system.

87 FR 59498, 59498.

As a result, the law requires that all Reporting Companies must file a BOI Report online with FinCen that contains the following information:

• The full entity name of the Reporting Company
• Any Alternate Names of the Reporting Company (also referred to as an “assumed name”)
• The address for the Reporting Company’s principal place of business
• The state in which the Reporting Company was registered
• The Reporting Company’s IRS taxpayer identification number
• For each Beneficial Owner (see below for information about who is a Beneficial Owner):
  • Name
  • Date of birth
  • Residential address
  • Unique identifying number from one of the following unexpired identification documents:
    • United States Passport
    • State, local, or tribal ID
    • State driver’s license
  • An image of the identification document

Who is a Reporting Company?

There are two types of Reporting Companies — Domestic Reporting Companies and Foreign Reporting Companies. Community associations would likely be a Domestic Reporting Company. A Domestic Reporting Company means any entity that is:

(A) A corporation;

(B) A limited liability company; or

(C) Created by the filing of a document with a secretary of state or any similar office under the law of a State or Indian tribe.

31 CFR 1010.380(c)(1).

In Hawaii, many community associations are incorporated as a nonprofit corporation and would therefore be covered by the BOI Reporting Regulation. While there is an issue whether an unincorporated community association qualifies under the definition of Reporting Company, it would be safer to file a BOI Report. FinCen could take the position that the filing of a community association’s Declaration creates the unincorporated association and the Bureau of Conveyances is a similar office in Hawaii. As you may know, Hawaii does not have a Secretary of State and the Department of Commerce and Consumer Affairs Business Registration Division fulfills that function in Hawaii. Given the purpose of the CTA and the BOI Reporting Regulation, FinCen could argue that an unincorporated association poses the same risk of illicit actors using the association’s structure as Reporting Companies. Since the potential penalties for failing to file can be substantial, it is best to err on reporting if there is a question.

There are a number of exemptions in the BOI Reporting Regulation that takes what would otherwise be a Reporting Company outside of the BOI Reporting Requirements.³ Most of the exemptions involve different types of financial institutions because they are already heavily regulated and provide detailed information to the federal government. The only exemption that is likely to apply to a community association is the exception for tax exempt organizations under Section 501(c) of the Internal Revenue Code of 1986. However, very few community associations are tax exempt organizations.

Who is a Beneficial Owner?

A Beneficial Owner means:

any individual who, directly or indirectly, either exercises substantial control over such reporting company or owns or controls at least 25 percent of the ownership interests of such reporting company.

31 CFR 1010.380(d).

For most Hawaii community associations, every member of the Board of Directors would probably be a Beneficial Owner. In addition, non-director owners who hold 25 percent or more of the project would be a Beneficial Owner. Even non-owners can be a Beneficial Owner if they exercise substantial control over the Reporting Company. In the FinCen issued FAQ on BOI, FinCen identifies senior officers of a Reporting Company like the CEO, CFO, COO or President as individuals with substantial control over the Reporting Company even if they are not owners or shareholders of the company. That means that associations will need to evaluate whether a general manager of an association would be a Beneficial Owner under the BOI Reporting requirements. Some general managers for community associations serve functions similar to a COO or CEO of the Association.

When must the BOI Report be filed?

For Reporting Companies in existence before January 1, 2024, you need to file by December 31, 2024.⁴ Reporting Companies formed in 2024 must file within 90 calendar days of being created.⁵ After 2024, new Reporting Companies must file within 30 calendar days of being created.⁶

In addition, updated reports must be filed if there is a change in the required information within 30 calendar days of the change. For example, the election of new directors, removal or resignation of a director, other changes for the Beneficial Owners including changes to the Beneficial Owners address, or expiration of a submitted driver’s license would require an updated BOI Report. This is just a summary of the changes that can trigger a requirement to update the BOI Report.

How do I file a BOI Report?

BOI Reports are filed online at the FinCen website. The individual that completes the form will also have to provide information including a picture of the individual’s identification document. It makes sense to have the information collected prior to filling out the online form. The pictures of the identification document of the Beneficial Owners and the person submitting the form should be on the computer that you use to complete the form.

What are the penalties for violations?

The violations of the BOI Reporting Regulation can be significant. The CTA allows for civil penalties of up to $500 a day.⁷ In addition, criminal penalties include fines of up to $10,000, imprisonment for up to two years, or both.⁸ Potential violations include willfully failing to file a BOI Report, willfully filing false BOI, or willfully failing to correct or update previously reported BOI.⁹ Both individuals and Reporting Companies can be liable for wilful violations. There are also penalties if someone who unlawfully discloses or knowingly uses the BOI.¹⁰

If incorrect information is provided, the law provides a safe harbor if a corrected report is filed within 30 days of becoming aware of, or having reason to know of, the inaccuracy. However, there is no safe harbor for corrections made more than 90 days after the filing of an inaccurate report, even if you file the correction promptly after becoming aware of the inaccuracy. There is also no safe harbor available for corrections where the inaccurate information was reported for the purpose of evading the reporting requirements, or where the inaccuracy was known to the person who submitted the report at the time it was submitted.¹¹

Conclusion

Existing community associations should makes plans to file their BOI Report before the end of the year. If your managing agent does not provide that service, you should arrange to have someone else provide the service. You should also calendar dates that identification documents expire and plan on updating records whenever there are changes in Beneficial Owners.

1. 31 U.S.C. 5336. ↩︎
2. 87 FR 59498. ↩︎
3. 31 CFR 1010.380(c)(2). ↩︎
4. 31 CFR 1010.380(a)(1)(iii). ↩︎
5. 31 CFR 1010.380(a)(1)(i)(A). ↩︎
6. 31 CFR 1010.380(a)(1)(i)(B). ↩︎
7. 31 U.S.C. §5336(h)(3)(A)(i). ↩︎
8. 31 U.S.C. §5336(h)(3)(A)(ii) ↩︎
9. 31 U.S.C. §5336(h)(1). ↩︎
10. 31 U.S.C. §5336(h)(3)(B). ↩︎
11. 31 U.S.C. §5336(h)(3)(C)(i)(II). ↩︎

I am honored to be presenting at the 2023 Community Association Law Seminar in New Orleans. This is the premier conference for community association attorneys, and insurance and risk management professionals. I invite you to register for the Law Practice Management Program, a pre-Law Seminar workshop on Jan. 11. If your firm is navigating attorney and staff recruitment and retention, technology challenges, or seeking new strategies to manage client harassment, me and my fellow attorneys will help you discover solutions. I hope you’ll join me at the 2023 Law Seminar. Register here: https://events.rdmobile.com/Events/Info/1453144.

Community Associations refers to the organizations that manage and operate common property for the owners of a condominium, planned community and residential cooperative. In Hawaii, condominiums are governed by Hawaii Revised Statutes Chapter 514B. Condominiums are the most common for of community association in Hawaii. In a condominium, all the members own the common areas jointly while each member owns their own apartment.

Planned Communities are governed by Hawaii Revised Statutes Chapter 421J. In Planned Communities, the association is normally a Nonprofit Corporation and the corporation owns the common property. Each of the members own their lots.

Residential cooperatives are normally governed by Hawaii Revised Statutes Chapter 421I. In a residential cooperative, the cooperative is normally a corporation that owns or leases the Project. Each shareholder has the right to lease or sublease an apartment from the cooperative.