Mark A. Limardo, Partner

The U.S. Department of the Treasury (FinCEN) continues to issue important guidance on the Corporate Transparency Act (CTA) through updates to its Frequently Asked Questions. You can find links to the FAQs, the CTA regulations, and other CTA guidance in our Corporate Transparency Act Resource Center.

Before we review FinCEN’s latest guidance, we need to define a few terms for ease of reference:

• “Reporting Company” means an entity required to file a “beneficial ownership interest” report (“BOI Report”) under the CTA, absent an applicable exemption.
• “Disregarded Entity” means an entity that is disregarded for federal income tax purposes, such as a single-member limited liability company.
• “Foreign Disregarded Entity” means a Disregarded Entity that is not a U.S. Entity.
• “U.S. Disregarded Entity” means a Disregarded entity that is a U.S. Entity.
• “U.S. Entity” means an entity formed in the U.S.
• “U.S. TIN” means a U.S.-issued taxpayer identification number, such as an employer identification number (EIN), social security number (SSN), or individual taxpayer identification number (ITIN).

CTA Rule for Taxpayer Identification Numbers.  On a BOI Report, a Reporting Company must report (A) its U.S. TIN or (B) if the Reporting Company is not a U.S. Entity (i.e., foreign) and does not have U.S. TIN, a tax identification number issued by a foreign jurisdiction (along with the name of the foreign issuing jurisdiction).

Potential Conflict between CTA and Tax Rules for U.S. TINs.  For federal income tax purposes, a Disregarded Entity is disregarded and effectively consolidates into its equity owner.  Consistent with this approach, for tax purposes, a Disregarded Entity can choose either to obtain its own U.S. TIN or use the U.S. TIN of its direct equity owner (or, if the direct equity owner is itself a Disregarded Entity, the U.S. TIN of the first upper-tier entity that is not a Disregarded Entity).  Without additional guidance from FinCEN, the CTA rule requiring disclosure of a Reporting Company’s U.S. TIN may potentially force a Reporting Company that is a Disregarded Entity to obtain a U.S. TIN for CTA purposes, even though not required to do so for tax purposes.

Clarification for Disregarded Entities.  To address this potential conflict between the CTA rules and tax rules, FinCEN has issued additional guidance (FAQ F.13) on U.S. TINs, largely conforming the CTA to the tax rules used to assign a U.S. TIN to a U.S. Disregarded Entity.  However, the additional FinCEN guidance is unnecessarily complicated and, in some scenarios, assigns a U.S. TIN to a Reporting Company that is a U.S. Disregarded Entity differently from the way in which the tax rules would – a potential trap for the unwary.

Summary of New FinCEN Guidance on TINs.  As discussed in more detail below, the new FinCEN guidance for a Reporting Company that is Disregarded Entity focuses on three factors: (A) whether the  Reporting Company has its own U.S. TIN, (B) whether the Reporting Company is a U.S. Disregarded Entity or Foreign Disregarded Entity, and (C) if the Reporting Company is a U.S. Disregarded Entity and does not have its own U.S. TIN, whether a direct or indirect equity owner of the Reporting Company has U.S. TIN:

Disregarded Entity with a U.S. TIN.   If a Reporting Company that is a Disregarded Entity (U.S. or foreign) has its own U.S. TIN, use the Reporting Company’s U.S. TIN.

Foreign Disregarded Entity without a U.S. TIN.  If a Reporting Company is a Foreign Disregarded Entity and does not have its own U.S. TIN, use a tax identification number issued to the Reporting Company by a foreign jurisdiction (accompanied by the name of the issuing foreign jurisdiction). If such Reporting Company does not have foreign tax identification number, it will have to obtain a U.S. TIN.

U.S. Disregarded Entity without a U.S. TIN.  If a Reporting Company is a U.S. Disregarded Entity and does not have its own U.S. TIN, apply the following rules in order:

• Rule 1 (U.S. Disregarded Entity owned by an Individual with a U.S. TIN) – If the Reporting Company is directly owned by an individual (U.S. or foreign) with a U.S. TIN, use the individual’s U.S TIN (i.e., SSN or ITIN). If the individual does not have a U.S. TIN, go to Rule 4 below.

• Rule 2 (U.S. Disregarded Entity owned by a U.S. Entity with a U.S. TIN) – If the Reporting Company is directly owned by a U.S. Entity (other than an individual) with a U.S. TIN (e.g., a corporation, partnership or a U.S. Disregarded Entity that has obtained its own U.S. TIN), use the U.S. TIN (i.e., EIN) of the U.S. Entity.
• Rule 3 (U.S. Disregarded Entity owned by Disregarded Entity without a U.S. TIN) -  If the Reporting Company is directly owned by a Foreign Disregarded Entity or a U.S. Disregarded Entity without a U.S. TIN (each, a “First-Tier Entity”), then:
  • (A) use the U.S. TIN of the First-Tier Entity (if any)
  • (B) if the First-Tier Entity does not have a U.S. TIN, use the U.S TIN (if any) of first indirect equity owner (U.S. or foreign) of the Reporting Company above the First-Tier Entity that has its own U.S. TIN (including an upper-tier Disregarded Entity that has its own U.S. TIN), or
  • (C) if no U.S. TIN can be identified under clause (A) or clause (B), go to Rule 4 below.
• Rule 4: (U.S. Disregarded Entity without a Usable U.S. TIN) - If a Reporting Company that is a U.S. Disregarded Entity cannot identify a usable U.S. TIN under Rules 1, 2 or 3 above, the Reporting Company must obtain its own U.S. TIN for CTA compliance purposes.

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For more information on this and other CTA matters, please contact:

Mark A. Limardo at + 1 212 592-1494 or [email protected]
Daniel A. Etna at + 1 212 592-1557 or [email protected]
Leah Kelman at + 1 973 274-2004 or [email protected]
Ellen L. Shapiro at + 1 212 592-1533 or [email protected]
Fred R. Green at + 1 212 592-5910 or [email protected]
Louis Tuchman at + 1 212 592-1490 or [email protected]
Theresa J. Balducci at + 1 212 592-1481 or [email protected]

© 2024 Herrick, Feinstein LLP. This alert is provided by Herrick, Feinstein LLP to keep its clients and other interested parties informed of current legal developments that may affect or otherwise be of interest to them. The information is not intended as legal advice or legal opinion and should not be construed as such.