The Corporate Transparency Act takes on Serious Tax Fraud: Say Goodbye to Not Disclosing Beneficial Owners of Entities by Sandra R. Brown and Michael Greenwade
Posted by Hochman Salkin Toscher Perez P.C. 
Posted on Monday, February 08, 2021
Historically, most—if not all—states in the U.S. have not required the disclosure of the beneficial owners of corporations, LLCs, or similar entities formed under the laws of the State.[i] However, with the enactment of the Corporate Transparency Act (CTA)[ii], as part of the 2021 National Defense Authorization Act, the non-disclosure approach has come to an end.
The CTA adds section 5336 to Title 31, which will require “a corporation, limited liability company or other similar entity” that are under the laws of any State or Indian Tribe or formed under the laws of a foreign country and registered to do business in the United States[iii] (Reporting Companies) to disclose to the Financial Crimes Enforcement Network (FinCEN)[iv] specific information on those Beneficial Owners from the company. The preamble to the CTA, states that the purpose and rationale for the CTA is to, among other things, better enable law enforcement to counter illegality, including “serious tax fraud.”[v] More specifically, the CTA is an effort to address foreign government concerns and join a growing international trend to require more disclosure of beneficial ownership. This effort seemingly targets the identity of “malign actors”[vi] who seek to conceal their ownership behind U.S. shell companies that try to hide illicit funds[vii] and facilitate illicit activity.
By January 1, 2022 (at the latest), the Secretary of the Treasury is required to promulgate regulations consistent with CTA and FinCEN will set up a registry to store information on Beneficial Owners of Reporting Companies.[viii]
CTA defines a Reporting Company as any corporation, limited liability company, or other similar entity that is created under the laws of any State or Indian Tribe or a foreign company that is registered to do business in the United States[ix] with the following exclusions: companies with more than 20 full-time employees, gross receipts or sales of more than $5 million and a physical presence in the United States (for example an office).[x] Various entities that are already subject to supervision or otherwise highly regulated by the Federal government are also excluded.[xi] These exclusions include: banks, credit unions, registered brokers or dealers, registered exchange or clearing agencies, registered investment companies, insurance companies, public accounting firms, public utility companies and Internal Revenue Code Section 501(c)(3) organizations.[xii]
The definition of Beneficial Owner of a Reporting Company, which is identified as someone who either (1) exercises substantial control over the company; or (2) owns or controls 25% or more of the ownership interest of the company,[xiii] is arguably imprecise as the CTA does not define “substantial control” or clarify how to measure “25% or more ownership.”[xiv] The CTA, however, is clear as to who is excluded: minor children, acting nominees, intermediaries, custodians, creditors, agents, those acting solely as an employee, and those whose interest in a “privately held company”[xv] is only through a right of inheritance.[xvi]
The Reporting Company must file an “acceptable identification document”[xvii] when it is formed or, for those formed prior to CTA, in a timely manner. A timely manner is within two years after the effective date of the Treasury Department’s final regulations on CTA.[xviii] An acceptable identification document must include the full legal name, date of birth, current residential or business address, and unique identifying number (such as driver’s license or passport number)[xix] of all Beneficial Owners. If there is any change with respect to the “Beneficial Owner”[xx] of the company an updated must be provided as to that change and identification information no later than one year after the change.
The information reported to FinCEN will be made available, under protocols prescribed by the Treasury, to financial institutions and regulatory agencies. The information is also to be accessible to Treasury employees under procedures and safeguards to be prescribed by Treasury and, of course, to the IRS “for tax administration purposes….”[xxi]
The CTA will also make it illegal for a Reporting Company formed under the laws of any State or Indian Tribe to issue a certificate in bearer form evidencing an interest in the entity.[xxii] And the CTA imposes civil and criminal penalties on any person who willfully files a false or fraudulent report or makes an unauthorized use or disclosure of information.[xxiii] With the rationale for the CTA being, in large part, to target “malign actors,” such as money launderers, narcotics traffickers, financers of terrorism and people engaged in “serious tax fraud,” to the extent that there is a lack of clarity or complete answers, such as exactly which Beneficial Owners must be disclosed to FinCEN, one can expect that as Treasury fills in the blanks through regulations and procedures, one message will remain clear: the Federal government wants information about beneficial ownership in the U.S., and it is on the path to ensuring that companies provide the information.
SANDRA R. BROWN – Ms. Brown has been a principal at Hochman Salkin Toscher Perez P.C. since March 2018. Prior to joining the firm, Ms. Brown spent more than 26 years as a federal trial attorney, including serving as the Acting United States Attorney, the First Assistant United States Attorney, and the Chief of the Tax Division of the Office of the U.S. Attorney (C.D. Cal). Ms. Brown’s broad range of experience in complex civil tax controversies and criminal tax investigations and litigation includes having handled over 2,000 cases on behalf of the United States before the United States District Court, the Ninth Circuit Court of Appeals, the United States Bankruptcy Appellate Panel, and the California Superior Court. Ms. Brown represents individuals and entities on a national and local level in complex federal criminal investigations and litigation as well as sensitive civil tax controversy examinations and litigation matters. Ms. Brown obtained her LL.M. in Taxation from the University of Denver, is a fellow of the American College of Tax Counsel, co-chair of the NYU Tax Controversy Section, and a member of the Women’s White Collar Defense Association. Ms. Brown may be reached at brown@taxlitigator.com or 310.281.3217.
MICHAEL GREENWADE – Mr. Greenwade is an Associate at Hochman Salkin Toscher Perez P.C. Mr. Greenwade concentrates his practice in tax audits and examinations, deductibility of business expenses, and substantiation of cost basis. Mr. Greenwade is a former law clerk in the Major Crimes Division at the L.A. County District Attorney’s Office, a former tax policy Research Assistant at USC Gould School of Law, where he earned his J.D., and was a Teacher’s Assistant at USC Leventhal School of Accounting. He graduated Cum Laude from USC Marshall School of Business, earning his Bachelor of Science. Contact Michael Greenwade at mg@taxlitigator.com
[i] WILLIAM M. (MAC) THORNBERRY NATIONAL DEFENSE AUTHORIZATION ACT FOR FISCAL YEAR 2021, PL 116-283, 134 Stat 3388 (2021).
[ii] Sec. 6401.
[iii] 31 U.S.C. § 5336(a)(11); Senate and House Override Veto and Pass 2021 National Defense Authorization Act With Significant AML Updates, Practical Law Legal Update w-028-9579.
[iv] The FinCEN is a bureau of the U.S. Department of the Treasury that uses strategic efforts to collect and analyze information about financial transactions to combat money laundering, terrorist financing and other financial crimes. https://www.fincen.gov/about/mission.
[v] Sec. 6402(3) of the WILLIAM M. (MAC) THORNBERRY NATIONAL DEFENSE AUTHORIZATION ACT FOR FISCAL YEAR 2021, PL 116-283, 134 Stat 3388 (2021).
[vi] Id.
[vii] https://www.wealthmanagement.com/high-net-worth/new-law-requires-disclosure-beneficial-owners-companies.
[viii] Senate and House Override Veto and Pass 2021 National Defense Authorization Act With Significant AML Updates, Practical Law Legal Update w-028-9579.
[ix] Id.
[x] https://www.wealthmanagement.com/high-net-worth/new-law-requires-disclosure-beneficial-owners-companies.
[xi] Senate and House Override Veto and Pass 2021 National Defense Authorization Act With Significant AML Updates, Practical Law Legal Update w-028-9579.
[xii] https://www.wealthmanagement.com/high-net-worth/new-law-requires-disclosure-beneficial-owners-companies.
[xiii] 31 U.S.C. § 5336(a)(3).
[xiv] https://www.wealthmanagement.com/high-net-worth/new-law-requires-disclosure-beneficial-owners-companies.
[xv] Id.
[xvi] Senate and House Override Veto and Pass 2021 National Defense Authorization Act With Significant AML Updates, Practical Law Legal Update w-028-9579.
[xvii] 31 U.S.C. § 5336(a)(1).
[xviii] https://www.wealthmanagement.com/high-net-worth/new-law-requires-disclosure-beneficial-owners-companies.
[xix] Id.
[xx] Id.
[xxi] 31 U.S.C. § 5336(c)(5)(B).
[xxii] 31 U.S.C. § 5336(f).
[xxiii] 31 U.S.C. § 5336(h).
