The best-known compositions of the early 20th century Italian composer Ottorino Respighi are three-tone Roman symphonic poems (musical composition written to “illustrate” a non-musical source) written in the 1920s. Most often performed of these symphonic poems , Les Pins de Rome, features four movements, each creating an impression of the pines in a different part of Rome.

The instrumentation of Pines of Rome is as unique as the images Respighi attempts to create with his music. The composition involves the recording of a nightingale and six buccina of different sizes. A buccina was a brass instrument from ancient Rome.

As there are few buccina or professional bucinne players today, the orchestras substitute for the buccina other brass instruments that are almost as obscure. Frequently, mellophones, a fanfare replacing the French horn, or bugles, a piston bugle that looks (and sounds like) a big trumpet, play the buccina parts.

To add to the drama, the buccina parts are generally not performed on stage in the orchestra. Instead, they perform in three groups in the concert hall or even hidden behind the scenes. Since the nightingale sound is a recording, its source in the concert hall can be even more obscure. A first-time Pines of Rome audience member may find themselves searching around for the hidden source of these unusual instrument sounds.

Like the audience members of Pines of Rome, people trying to figure out who owns a private or limited liability company (I’ll use the term corporation to describe both) can be frustrated as well. Because most states do not require that owners be disclosed, often, sometimes, only the owners or management of the business know who owns the business.

On December 11, 2020, as part of the National Defense Authorization Act (NDAA), Congress passed the Corporate Transparency Act (CTA). CTA will require US companies to disclose their ownership. The NDAA was passed with enough leeway to make it veto-proof, so it will eventually become law even if the president veto it.

CTA is likely to have a significant impact on real estate investments and can affect small businesses. Due to lender requirements, most of these are owned by special purpose entities, which could be considered shell companies under the CTA.

Which companies will be submitted to CTA?

The CTA applies to so-called “front” companies or to companies without significant operations. The CTA defines “reporting company” as any corporation, limited liability company (LLC) or “similar entity” that is created by filing with a federal, state or court or that is authorized doing business in the United States, except for entities that:

  • have more than 20 full-time employees in the United States

  • report more than $ 5 million in gross revenue or sales to the Internal Revenue Service (IRS)

  • have an operational presence in a physical office in the United States

  • entities, such as banks that are already subject to strict federal regulation

  • entities considered “dormant”

Information that CTA must report

Under the LTC, reporting companies will be required to provide FinCEN with the following information for beneficial owners:

  • full legal name

  • Date of Birth

  • business or residential address

  • unique identification number (for example, unexpired driver’s license, state ID or passport number)

Reporting companies must report to FinCEN when they are incorporated and when there is a change in beneficial owner.

The beneficial owners whose information must be declared include any natural person who, directly or indirectly:

These people are not considered beneficial owners under the CTA:

  • persons acting as intermediaries, custodians or agents of someone else

  • minors, provided that the information of their parents or guardians is reported

  • natural persons acting only as employees of an entity whose control and economic benefits derive only from their professional status

  • people whose only rights in the declaring company are inheritance rights

  • most creditors

What the promoters claim CTA will do

CTA claims that “malicious actors seek to conceal their property or their companies, limited liability companies or similar entities in the United States to facilitate illicit activity.” CTA describes these “shell companies” as Russian “Matryoshka” dolls in various secret jurisdictions. The CTA concludes that there must be a “clear federal standard for incorporation practices.”

Who opposed CTA and why?

Despite claims by supporters that CTA is needed to prevent illegal activity, dozens of reputable organizations, including the American Bar Association, American Civil Liberties Union, National Federation of Independent Business, National Grocers Association, The National Retail Foundation, the National Association for the Self-Employed, the National Apartment Association and the National the Restaurant Association opposed CTA when it was first proposed in 2019. The concerns were over “heavy claims and redundant “, the impact on small businesses and the erosion of” the privacy of law-abiding people. citizens.”

How CTA can affect real estate investments

Mortgage lenders almost always require real estate investments to be held in special purpose entities (SPEs). Unless they own a large property, real estate SPEs generally do not benefit from any exemption. These PES generally have no employees and rarely have 20 employees. Small real estate investments do not generate the $ 5 million in gross income required to qualify for the exemption. Whether they have a physical office or a commercial location will depend on whether the regulations, once enacted, treat real estate as a commercial location.

Many real estate SPEs have only one or a handful of owners. Thus, if the SPE is a reporting company, some or all of the owner information will likely need to be reported.

Real estate funds can also be reporting companies under the CTA. Real estate funds rarely have employees. Real estate development funds won’t have $ 5 million in gross revenue, at least not initially. Real estate investment funds will have no income until they invest in properties and, depending on their size, may never reach the $ 5 million threshold to be excluded from reporting requirements.

Another challenge is that as the real estate fund is marketed, its beneficial ownership will constantly change. Until the regulations are enacted, there is no way to know if every new sale of units requires a new FinCEN report or if only changes that add 25% owners need to be reported.

Unreported consequences

There are stiff penalties – up to $ 500 per day for civil penalties – for failing to make the required CTA reports. Criminal penalties for willfully providing false information include up to two years in prison and a fine of $ 10,000. And the penalties for non-reporting apply to both the beneficial owners and the reporting company. Unless regulations exempt passive beneficial owners, this could negatively affect equity investments in small businesses or small real estate investments.

Confidentiality concerns

Information reported under the CTA will not be publicly available. But it will be available to law enforcement and the IRS. And financial institutions will be able to access the information for certain purposes.

Much of the mystique of Pines of Rome comes from the antiphonic buccina parts and the music performed by backstage musicians. Much would be lost if the performers were to perform on stage.

Increased transparency of ownership and reporting obligations may well deter the use of shell companies to hide illegal behavior, as CTA supporters expect. Time (and regulation) will tell if increased transparency also has a chilling effect on small businesses and real estate, as opponents fear.

This series draws on Elizabeth Whitman’s experience and passion for classical music to illustrate creative solutions to legal challenges faced by businesses and real estate investors.



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