UPDATE: On March 21, 2025, the Financial Crimes Enforcement Network issued an Interim Final Rule removing Beneficial Ownership Information Reporting requirements for U.S. companies and U.S. individuals under the Corporate Transparency Act. For more details, please view our latest alert here.
The Corporate Transparency Act (“Act”) has recently survived a federal-court challenge to its applicability to Community Associations, which encompasses HOAs and Condominium Associations.
On September 10, 2024, a lawsuit was filed in the U.S. District Court for the Eastern District of Virginia (Community Associations Institute v. Yellen, No. 1:24-cv-1597) on behalf of the Community Associations Institute and several community associations, seeking an injunction to halt the enforcement of the Act against community associations. On October 24, the federal circuit court denied the plaintiffs’ motion for a preliminary injunction.
The plaintiffs argued specifically that Community Associations should be considered exempt from the requirements of the Act because: (1) Community Associations fall under the nonprofit exemption to the Act as Section 528 nonprofit organizations, and (2) the FAQs supplementing the Act, which note that Community Associations may fall within the definition of a “reporting company,” violate the provisions of the Administrative Procedure Act (“APA”) by failing to follow its notice-and-comment procedures or, alternatively, by constituting arbitrary and capricious agency action.
The Court rejected the first of these arguments – that Community Associations should fall under the nonprofit exemption to the requirements of the Act – because Community Associations generally lack 501(c) nonprofit status. The nonprofit exemption of the Act excludes from its requirements, in particular, any “organization that is described in section 501(c) of the Internal Revenue code of 1986… and exempt from tax under section 501(a) of such code.” Because Community Associations are typically Section 528 tax-exempt entities, as opposed to the Section 501(c) tax-exempt entities recognized by the Act, the Court ruled that the nonprofit exemption does not apply.
The Court additionally rejected the second of these arguments – that the FAQs relevant to the Act are violative of the APA – due to the FAQs’ merely explanatory nature and a lack of final agency action. The said FAQs, which are published on the Financial Crimes Enforcement Network (FinCEN)’s website, are the only source specifically identifying Community Associations as subject to the requirements of the Act, such that “an incorporated HOA that is not a section 501(c)(4) organization… may fall within the reporting company definition and therefore be required to report” beneficial ownership information. The Court determined that the FAQs are explanatory interpretive rules exempt from the APA’s notice-and-comment procedures, and therefore do not violate the APA in this respect. Furthermore, the Court determined that the FAQs do not constitute final agency action on the part of FinCEN, and therefore cannot be considered arbitrary and capricious agency action.
Following this challenge, Community Associations continue to be subject to the reporting requirements of the Act. For a comprehensive overview of the Act’s reporting requirements applicable to Community Associations, please view our prior alert here.
If you have questions regarding compliance with the Corporate Transparency Act’s reporting requirements for Community Associations, please reach out partner Stacey MacNeal, attorney Natalie Alexander or any member of Barley Snyder’s Business Practice Group or Corporate Transparency Act Response Team.
