The Nonprofit Sector Need Not Apply: The Corporate Transparency Act and its Tax-Exempt Organization Exemptions

But for our clients in the nonprofit sector, these new requirements often will not apply.[1]

The CTA’s reporting obligations apply to “reporting companies,” which is broadly defined to include any corporation, limited liability company, limited partnership, or similar entities, with 23 statutory exemptions. However, the CTA explicitly excludes from this definition (1) most types of tax-exempt organizations and certain tax-exempt trusts, (2) certain entities owned or controlled by them, and (3) certain entities that exclusively provide financial assistance to, or hold governance rights over, them.

Although the definition for tax-exempt organizations and trusts is clear, there are significant ambiguities in the latter two exemption categories, and clients considering them should carefully evaluate whether those exceptions apply.

Exclusion for Tax-Exempt Organizations and Certain Trusts

The CTA excludes the following types of tax-exempt organizations and trusts from the definition of a “reporting company”:

• Organizations described in Section 501(c) and exempt from tax under Section 501(a). This includes Section 501(c)(3), (c)(4), (c)(5), and (c)(6) organizations, among others (regardless of whether they have applied for or received an IRS determination letter).
  An organization described in Section 501(c) that loses its tax-exempt status has 180 days to reinstate their tax-exempt status before triggering CTA reporting requirements. An organization that becomes subject to CTA reporting would need to report, among other items, information about its “beneficial owners,” which in the case of a nonprofit corporation, for instance, could include senior officers, individuals with the ability to appoint or remove a senior officer or a majority of the board of directors, and individuals who direct or otherwise have substantial influence over important company decisions, even though these individuals do not “own” any interest in the organization itself. Given the potentially burdensome nature of CTA reporting, Section 501(c) organizations that lose their tax-exempt status should act promptly to reinstate their status. The 180-day time frame is a relatively narrow window to reapply for and obtain reinstatement from the IRS given current IRS processing times.
• Political organizations defined in Section 527(e)(1) and exempt from tax under Section 527(a). This includes a party, committee, association, fund, or other organization that is organized and operated primarily for the purpose of accepting contributions or making expenditures, or both, for the function of influencing or attempting to influence a nomination or election for a public office or political organization.
• Charitable trusts or split-interest trusts described in Section 4947(a).

Exclusion for Owned or Controlled Entities

The CTA also excludes any corporation, limited liability company, or other similar entity “controlled or wholly owned,” directly or indirectly, by one or more of the tax-exempt organizations, political organizations or trusts described above (or certain other entities exempt from CTA reporting). A wholly owned corporate subsidiary or single-member LLC (whether owned directly or indirectly) would clearly fall within this definition, as would a subsidiary that is owned entirely by two or more tax-exempt organizations, political organizations or trusts.

The definition of “control” for this purpose, however, is not entirely clear. For example, “control” for certain purposes under the tax laws is defined as owning voting stock with the right to appoint more than 50% of the board of directors. In other circumstances, control may require the right to appoint more than 80% of the board. In yet other circumstances, control might be based on effective control regardless of actual stock ownership. This ambiguity calls for careful consideration if a company is considering using this exemption. In the context of a partnership or an entity taxed as a partnership (such as many multi-member LLCs), control may be based on the particular interests held by the partners or members.

Exclusion for Entities Providing Financial Assistance or Holding Governance Rights

In addition, the CTA excludes entities that operate exclusively to provide financial assistance to, or hold governance rights over, any of the tax-exempt organizations, political organizations or trusts exempt from CTA reporting requirements as described above, provided that the entity (1) is a US person as defined in Section 7701(a) (meaning generally an entity formed under US law), (2) is beneficially owned or controlled exclusively by US citizens or lawful permanent residents, and (3) derives at least a majority of its funding or revenue from one or more US citizens or lawful permanent residents.

The precise contours of what it means to operate exclusively to provide financial assistance to, or hold governance rights over, an organization or trust are not entirely clear—the CTA regulations released to date do not delve into detail on this point. More guidance is needed to clarify exactly which entities fit within this exclusion.

Takeaways

• Section 501(c) organizations that have not lost their tax-exempt status, Section 527(e)(1) political organizations, and Section 4947 charitable and split-interest trusts generally can feel confident that they are not subject to the beneficial ownership reporting requirements under the CTA.
• Entities wholly owned by any of the above organizations can also generally feel confident they are not subject to the beneficial ownership reporting requirements under the CTA.
• Section 501(c) organizations that lose their tax-exempt status should act promptly to reinstate their status within less than 180 days to avoid triggering the beneficial ownership reporting requirements under the CTA.
• Entities owned in part, but not entirely, by Section 501(c) organizations, Section 527(e)(1) political organizations, or Section 4947 charitable and split-interest trusts should not automatically assume that they are exempt from the CTA beneficial ownership reporting requirements. Instead, they should closely analyze in consultation with counsel their status and ownership information to determine whether they are exempt or need to register with FinCEN.
• Entities that operate exclusively to provide financial assistance to, or hold governance rights over, Section 501(c) organizations, Section 527(e)(1) political organizations, or Section 4947 charitable and split interest trusts should also not assume that they are automatically exempt from the beneficial ownership reporting requirements, even if they believe they meet the requirements for the exemption. Close scrutiny of their CTA status is warranted.

ArentFox Schiff is monitoring ongoing developments with the CTA. If you have questions about CTA reporting obligations or implications, please contact your relationship attorney or one of the authors of this alert.

[1] Entities formed before January 1, 2024, have until January 1, 2025, to file their initial report with FinCEN, whereas newly created entities have 90 or 30 days (depending on whether they were formed in 2024 or in a later year) to register; registered entities also have ongoing information reporting obligations.