The Corporate Transparency Act presents unique challenges to condo associations in Massachusetts. Following a recent court decision, many people are wondering whether the law applies to condo trusts and incorporated associations. Understanding the nuances of the legislation is crucial for compliance, as violations can result in significant sanctions or penalties. This guide explores the key considerations for condo associations in adapting to the requirements of the Corporate Transparency Act.
What Is the Corporate Transparency Act?
The Corporate Transparency Act is federal legislation enacted on January 1, 2021, as part of the National Defense Authorization Act. It aims to combat crimes like money laundering and terrorism financing and introduces new requirements for legal entities to report beneficial ownership information (BOI) to the Financial Crimes Enforcement Network (FinCEN), a bureau within the United States Department of Treasury. Enforcement of this act is paused under an injunction until further notice, but organizations should prepare to follow its requirements in case enforcement resumes.
The legal entities covered under the Corporate Transparency Act, also known as reporting companies, include corporations, limited liability companies, and other similar entities formed or registered to do business in the country. These entities could be domestic or foreign. Domestic reporting companies are formed by filing a document with a secretary of state or any similar office under state law. Foreign reporting companies are formed outside the jurisdiction but registered to do business in the U.S. by submitting relevant documents to a secretary of state or any similar office under state law.
A beneficial owner is an individual owning or controlling 25% or more of the entity or exercising substantial control over the entity. The report filed with FinCEN must contain vital information, such as the beneficial owner’s:
- Full legal name
- Date of birth
- Residential address
- Unique identifying number from an acceptable identification document like a driver’s license or a foreign passport for non-U.S. citizens
The reporting company must also provide specified information, which includes the following:
- The legal name of the entity
- The trade name or doing business as (DBA) used by the entity
- The address of the entity’s principal place of business or the address of the place where it conducts business if the principal place of business is outside of the United States
- The jurisdiction of formation
- Taxpayer identification number, most commonly an Employer Identification Number (EIN)
Certain entities are exempt from the reporting requirements under the Corporate Transparency Act. The exemption generally applies to entities in highly regulated industries, such as:
- Banks
- Credit unions
- Publicly traded companies
- Tax-exempt entities
The reporting company applicant may also be required to provide some additional information. Noncompliance may result in significant fines or imprisonment, so it’s crucial to learn your obligations and comply accordingly.
Condo Associations and the Corporate Transparency Act
Generally, condos are operated and managed by the condo association, the members of which are the individual unit owners. The condo association maintains the common areas, enforces the rules and bylaws, and collects operational funds from the members. The members delegate powers to a board of directors who may be elected from the membership, but others are professionally managed.
Most condo associations do not earn profits or distribute income, but that does not automatically qualify them as tax-exempt entities under the Internal Revenue Code (IRC) to exempt them from the reporting requirements under the Corporate Transparency Act. Under section 528 of the IRC, condo associations may elect to receive certain tax benefits but will usually not be considered a tax-exempt social welfare or civil league organization under section 501(c)(4) of the IRC if:
- The common areas are not open to the general public but to the members only.
- The condo association maintains the exterior areas of private residences.
State laws may also determine whether condo associations are exempt from the filing requirements under the Corporate Transparency Act. Some allow the association to be either unincorporated or incorporated with corporate-like powers, but others require them to be incorporated. Other states demand associations to file bylaws with the state, even if unincorporated. These filing and registration requirements could be sufficient to trigger the application of the Corporate Transparency Act.
In Massachusetts, condo associations can be trusts, corporations, or unincorporated entities. Condo associations created as trusts record a declaration of trust with the registry of deeds. Unincorporated condo associations may or may not be recorded with the registry. Thus, if a trust or unincorporated condo association records its bylaws, does the registry of deeds constitute a similar office as the secretary of state? Must they comply with the BOI reporting requirements under the Corporate Transparency Act? That question was considered in the case of Trustees of the Lewis Wharf Condominium Trust v. Janet Yellen et al., discussed below.
Are Condo Associations Exempt From the Corporate Transparency Act in Massachusetts?
FinCEN states that the law does not apply to HOAs if the HOA was not created by filing a document with a secretary of state or similar office. This raised the question of whether condo associations created as trusts or unincorporated associations without governing documents filed with the secretary of state may be exempt from the Corporate Transparency Act. However, it is important to tread carefully and consult Calabrese Law Associates for tailored advice.
In Trustees of the Lewis Wharf Condominium Trust v. Janet Yellen et al., the plaintiff brought an action to the U.S. District Court for the District of Massachusetts, asking the court to declare that the Corporate Transparency Act does not apply to Lewis Wharf Condominium Trust, an unincorporated condominium owners association, and other similarly created entities that are governed by Massachusetts General Laws, Chapter 183A. It also sought an injunction enjoining the defendant, the federal government, from enforcing the law against the Lewis Wharf Condominium Trust.
The federal government filed a motion to dismiss on the basis that it had not sought to enforce the Corporate Transparency Act against the Lewis Wharf Condominium Trust, and therefore, the plaintiff lacked standing. The court issued an order dismissing the plaintiff’s complaint but did not provide a final judgment declaring that the Corporate Transparency Act does not apply to condominium trusts or unincorporated associations. Thus, the question is not definitively answered.
Best Practices for Condominium Trusts and Unincorporated Associations in Massachusetts
As things stand, Massachusetts condo trusts and unincorporated associations may not be subject to the Corporate Transparency Trust. However, the federal government or courts could answer this ambiguity regarding these entities. For example, if a court determines that a registry of deeds office is a “similar office” to the secretary of state, condominium trusts would have to report BOI. Therefore, it may be prudent to comply proactively. The filing obligations under the Corporate Transparency Act are relatively minimal, so compliance might be straightforward, especially with the assistance of an experienced attorney.
Conversely, incorporated condo associations formed by filing documents with the secretary of state’s office must generally comply with the BOI filing requirements. Such condo associations usually fall within the definition of domestic reporting companies unless they qualify for an exemption, such as when designated as 501(c)(4) social welfare organizations.
Potential Risks and Considerations
The Corporate Transparency Act has significant implications for condo associations. It is essential to consider the law’s requirements and the potential consequences of noncompliance. Let’s discuss the possible risks, considerations, and challenges:
1. Determining Beneficial Owners and Responsibility
Condo associations, especially those in larger complexes with many owners, may struggle to identify all beneficial owners. Misclassification can lead to compliance issues, potentially resulting in civil or criminal liabilities. Others may also have challenges determining the Corporate Transparency Act’s applicability to their association. In either case, the attorneys at Calabrese Law Associates can help.
2. Data Sensitivity and Privacy Concerns
The Corporate Transparency Act requires disclosing personally identifiable information (PII) of the beneficial owners, which can raise privacy concerns among condo owners. Some owners may be apprehensive about their information being reported and potentially accessible to law enforcement, financial institutions, and even foreign governments upon request. Regardless of the concerns, filing the BOI is critical.
3. Administrative Burden
While condo associations must only file an initial BOI, any changes must also be reported. It may be prudent to have a dedicated resource to ensure compliance and avoid or reduce the risk of violations. Considering the implications of breaches, investing in legal and administrative services and maintaining accurate records might be worthwhile. Additionally, it is advisable to educate board members and management on compliance requirements.
4. Penalties for Noncompliance
A condo association that refuses or willfully fails to report the BOI may incur a civil penalty of up to $500 each day the violation continues. The amount is adjusted annually for inflation, meaning it can increase considerably. Culprits may also face criminal penalties of up to two years imprisonment and a fine of up to $10,000. Enforcement actions can be brought against an individual responsible for submitting or updating the BOI, such as the beneficial owner or company applicant.
5. Enforcement Actions and Government Discretion
The government may exercise discretion in enforcement actions, focusing on entities with a higher risk of financial crime. This uncertainty raises concerns for many people.
6. Evolving Legal Landscape
The Corporate Transparency Act is still a relatively new law that is evolving. With multiple lawsuits challenging its constitutionality, applicability, and scope, condo associations must stay informed about updates. Legal challenges could potentially arise regarding the interpretation of certain provisions, particularly around the definitions of beneficial ownership and compliance obligations. It would be best to engage legal counsel to navigate these complexities.
The BOI Filing Guidelines and Procedures
Submitting BOI to FinCEN is free. Also, there is no annual reporting requirement after filing the initial report. You only update it when the information changes, which should be done within 30 days after the change occurs. You can report your association’s BOI electronically on FinCEN’s website.
For now, submitting BOI is voluntary, and deadlines are suspended because of pending legal challenges. Enforcements of the Corporate Transparency Act and related penalties are on hold nationwide, at least until Texas Top Cop Shop, Inc., et al. v. Garland, et al. concludes. Condo trusts and associations should follow updates on this case and get legal advice to understand its outcome’s implications for their reporting obligations.
Why Condo Associations Need Attorneys for Corporate Transparency Act Compliance
Compliance with the Corporate Transparency Act could present legal challenges, making it beneficial to engage professional assistance. While optional, legal guidance can save time and money and possibly prevent criminal prosecution. Here are some reasons why partnering with an attorney is recommended:
1. Understanding Legal Requirements
The law has specific requirements and exemptions. Additionally, the multiplicity of suits creates uncertainty for many associations. An attorney can help clarify your obligations and keep you informed of changes. If you have challenges identifying your beneficial owners, you can consult a lawyer for support.
2. Compliance Strategy Development
Lawyers can help you develop tailored compliance programs incorporating the necessary policies, procedures, and training to meet the requirements. For example, legal counsel can help ensure that reports are filed on time and correctly, avoiding potential fines or sanctions if enforcement resumes.
3. Addressing Noncompliance Risks
If your association is found to be noncompliant, attorneys can guide you on how to address the situation. They may negotiate with authorities on your behalf or provide legal representation where necessary.
4. Adapting to Evolving Regulations
The legal landscape surrounding the law may evolve as new regulations are introduced or existing ones are amended. Lawyers can help you stay informed about these changes and adapt your compliance strategies accordingly. They can also provide ongoing support to remain compliant as the regulatory environment changes.
Why Trust Us?
At Calabrese Law Associates, we understand the complexities of the Corporate Transparency Act and its implications for condominium associations in Massachusetts. Our team is experienced in corporate compliance and real estate law, ensuring that your association confidently navigates this evolving landscape. We prioritize personalized service, taking the time to understand your unique needs and challenges.
With our in-depth knowledge of the Corporate Transparency Act, we can help you accurately identify and report beneficial owners, develop tailored compliance strategies, and safeguard sensitive information. Our proactive approach minimizes risks, ensuring your association remains compliant and protected from potential penalties.
Trust us to be your dedicated partner in navigating the intricacies of the Corporate Transparency Act, allowing you to focus on what matters most — maintaining a thriving community for you and your members. Let us guide you through this critical compliance journey with professionalism and integrity.
Consult Calabrese Law Associates for Professional Assistance
The Corporate Transparency Act is a new and evolving legislation with various legal implications. Considering how complex and uncertain the law has been since its inception, condo associations must stay informed and proactive.
Calabrese Law Associates has a team of knowledgeable professionals who can help your association determine its obligations and comply with the regulations. We are experienced in Massachusetts real estate and condo laws. Take the first step by contacting us now to speak to one of our trusted attorneys.
This publication and its contents are not to be construed as legal advice nor a recommendation to you as to how to proceed. Please consult with a local licensed attorney directly before taking any action that could have legal consequences. This publication and its content do not create an attorney-client relationship and are being provided for general informational purposes only.
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