Main Menuby Richard S. Ekimoto, Esq.
I recently included a short post about the Federal District Court order halting enforcement of the CTA. The Federal District Court Order granted a Nationwide injunction blocked the enforcement of the CTA reporting requirement stating that “reporting companies need not comply with the CTA’s January 1, 2025, BOI reporting deadline pending further order of the Court.”
Since my post, FinCen filed a notice of appeal to the Fifth Circuit Court of Appeals. In addition, FinCen finally posted a notice on its website addressing the injunction. FinCen stated:
While this litigation is ongoing, FinCEN will comply with the order issued by the U.S. District Court for the Eastern District of Texas for as long as it remains in effect. Therefore, reporting companies are not currently required to file their beneficial ownership information with FinCEN and will not be subject to liability if they fail to do so while the preliminary injunction remains in effect. Nevertheless, reporting companies may continue to voluntarily submit beneficial ownership information reports.
The website did not address whether FinCen will be seeking an order from the 5th Circuit Court of Appeals to stay the Federal District Court Order. If a stay of the Federal District Court Order is granted, reporting companies could again be required to file their BOI Report. As a result, incorporated associations should have the information for their BOI Reporting available so it can file if necessary. While FinCen will accept voluntary BOI Reports at this time, it probably doesn’t make sense to file unless the Federal District Court Order is stayed or overturned.
By Richard S. Ekimoto, Esq
Bloomberg Law has reported a few hours ago that a federal District Court judge in Texas issued a nationwide injunction on the Corporate Transparency Act (“CTA”). The injunction means that the CTA is blocked from being enforced. Judge Amos Mazzant III issued the injunction stating:
The CTA is likely unconstitutional as outside of Congress’s power. Because the Reporting Rule implements the CTA, it is likely unconstitutional for the same reasons.
The Judge’s order blocked the enforcement of the reporting requirement and “reporting companies need not comply with the CTA’s January 1, 2025, BOI reporting deadline pending further order of the Court.” As a result, community associations that have not filed their BOI Report should not do so at this time. There is no word currently whether FinCen will appeal the decision.
By Richard S. Ekimoto, Esq
Community Associations Institute filed a lawsuit against the U.S. Department of Treasury challenging the Corporate Transparency Act and its application to community associations. The law suit challenges the law on the grounds that community associations are exempt under Section 528 of the Internal Revenue Code and several constitutional grounds. A hearing on a motion for preliminary injunction is scheduled for October 11, 2024. The motion seeks to prevent the U.S. Treasury Department from enforcing the CTA against community associations.
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?
Beneficial Ownership Information Frequently Asked Questions C.10.
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]
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:
31 USC §5336(a)(11)(B)(xix)(I).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.]
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.
