The United States Corporate Transparency Act (“CTA”) became effective January 1, 2024, and requires corporations to file annually a report as to its ownership and control. with the Federal Government. Why should organizations, including certain not for profit corporations, care about compliance with the CTA? It is because the government made sure the CTA’s compliance provisions have “teeth.” For noncompliance, penalties include not only a $500 per-day civil penalty, up to a maximum of $10,000, but the ability for the government to seek criminal penalties. 

By way of background, the purpose of the CTA, we are told, is to further the federal government’s drive to promote “transparency” and to fight financial crimes including terrorist financing and money laundering. To that end, the CTA currently requires business entities such as corporations, including certain not for profit corporation, LLCs, and other entities that file formation documents with a Secretary of State, “reporting companies,’ to provide “beneficial owner” information (“BOI”) to the Financial Crimes Enforcement Network (“FinCEN”) on an annual basis. 

Whether its scope will be expanded in the future to cover additional entities, and more information is yet to be determined, but given the trend in increased government surveillance and regulation, it may be on the horizon. It should be noted that current weaponization of many federal agencies, including the Treasury Department’s FinCen, has many concerned with this new law reporting requirements. The U.S. House of Representatives’ Select Subcommittee on the Weaponization of the Federal Government recently released a report in which it cited FinCen in a report finding “alarming evidence of federal law enforcement engaging in broad financial surveillance and prying into the private transactions of American consumers.” Many Christian organizations have been included in this surveillance. 

It should also be noted that the law was recently struck as unconstitutional in an Alabama federal court. That case is likely to find its way to the Supreme Court, so the final word on this law is not out. For now, assuming the law to be enforceable outside of the Alabama court’s jurisdiction, here are the rules. 

“Reporting entities,” unless exempted, include all organizations that file with the Secretary of State. In addition to who is a reporting company, one should be aware of who it is that the CTA requires be disclosed. A “beneficial owner” who must be disclosed falls broadly under 2 categories: control or degree of ownership. Pursuant to 31 USCA 5336(a)(3) a beneficial owner is broadly defined as:

… an individual who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise –

  • (i) exercises substantial control over the entity; or
  • (ii) owns or controls not less than 25 percent of the ownership interests of the entity.”.
  • In the accompanying article in this Report further details of reporting for reporting entities are outlined. Here, we will focus specifically on not-for-profit corporations.

UNDER THE CTA NOT ALL NOT-FOR-PROFIT CORPORATIONS ARE EQUAL 

The good news is that generally, 501(c) tax exempt organizations are exempt from having to comply with the CTA’s reporting requirements. That would include most churches since they fall under Section 501(c)(3). So, the key is the status of the organization’s tax exemption.

Exemption from the CTA for Tax-Exempt Entities Only 

However, it should be noted, the exemption does not apply to every NFP. Not-for-profit status is a matter of state law and is determined by factors including ownership, the purposes, and the actual operations of the organization. For purposes of the CTA, however, as stated, the exemption is based on the organization’s qualification as tax exempt under Section 501(c) of the Revenue Code (“Code”). Since there are nfp corporations and entities that are not exempt and are taxable under federal law, these entities are subject to the reporting requirements of the CTA despite nfp status. 

So, the first step in determining whether your organization is exempt from the CTA and its reporting requirements is whether the organization is or qualifies under Section 501(c). To be exempt under Section 501(c)(3) of the Code, new organizations must generally notify the IRS that they are applying for official recognition of tax-exempt status. 26 USCA, Section 508(a). That approval initially comes in the form of a determination letter from the IRS. Subsequently, most organizations granted exemption are required to file a 990 or 990 EZ return annually and are listed on the IRS’ website. (https://www.irs.gov/charities-non-profits/tax-exempt-organization-search )

It should be noted however, that there are situations where official recognition by way of application and acceptance by the IRS is not required for a 501(c )(3) organization. For example, churches are not required to file a Form 1023 Tax Exemption Application in order to obtain 501(c)(3) exempt status. Rather, churches are an exception under Section 508(c)(1)(A) to the normal rule Section 508(a) of the Code which requires a written application. 

Churches therefore have ‘automatic’ exempt status without filing and, although they could file if they wished, are not required to file for recognition. Additionally, under Section 6033(a)(2)(A)(i) of the Code churches are also exempt from filing Form 990 annual returns. Since churches need not file for 501(c)(3) status, many churches do not have a letter from the IRS indicating that they are tax exempt. Nor will they appear on the IRS’ website listing exempt organizations. 

The CTA explicitly provides that the exemption is “determined without regard to section 508(a)” of the Code. Again, Section 508(a) is the provision that requires new organizations described under 501(c)(3) to notify the IRS that they are applying for official recognition of their tax-exempt status. Therefore, the exemption from reporting under the CTA should apply to churches and to new nonprofits organizations, which may not have yet applied for recognition of exemption,[3] or that which may not have received an IRS determination letter (e.g., churches).

A Square Peg For A Round Hole 

A further wrinkle for the CTA, which is a federal statute, which looks to filing with the Secretary of State to establishing its jurisdiction, is the Illinois Religious Corporation Act. This separate incorporation act has caused a great deal of confusion. This Act is peculiar to Illinois that provides a separate way to incorporate in Illinois as a religious entity. 805 ILCS 110.  Unlike the Illinois Not For Profit Act, 805 ILCS 105, which requires initial and annual filing with the Secretary of State, the Illinois Religious Corporation Act only requires a filing of an Incorporation Affidavit with the County Recorder’s Office at the time of incorporation.  Given that it is a religious corporation and, like churches registered under the Illinois Not For Profit Act, is entitled to 501(c)(3) exempt status without filing as outlined above, this should pose no problem for those organizations with regard to exemption from the CTA.

Keep on Trucking  

A frequent problem for many not for profits other than churches, whether characterized as charitable or as private foundations, especially when staffed by volunteers, is that of revocation of their 501(c)(3) status. This may occur by failure to file the annual IRS Forms 990, 990-EZ, 990-N for 3 consecutive years or by determination after an audit by the IRS and is not uncommon. A change in the law or case law could also affect an entity’s exempt status. The problem is that under these scenarios, the organization would then become a reporting corporation subject to the CTA’s reporting requirements with the directors and officers becoming beneficial owners subject to reporting because of their substantial control over the organization. 

With Whom Do You Keep Company? 

Having determined that your nfp organization is 501(c) tax exempt, further examination should be made with regard to other organizations your organization is participating with, such as joint ventures. Since they may not, in themselves, be 501(c) tax exempt, they may be subject to the reporting requirements of the CTA.  

We will monitor the legal trajectory of the CTA in the courts and keep you informed as to its determination.