Are HOA’s Exempt From the CTA?
By January 1, 2025 over 32 million small companies must report their beneficial owners to the Treasury Department. Failure to report creates substantial criminal and civil liabilities for the company and its beneficial owners. The question has arisen, do homeowner associations have to report under the Corporate Transparency Act (CTA)? The State of Colorado seems to think so. https://dre.colorado.gov/division-notifications/hoa-center-advisory-corporate-transparency-act-applicability-to-common. Is Colorado correct? If you read the Colorado Department of Regulatory Agencies post, you would assume reporting is mandatory. I agree that reporting is the conservative route, but I am not convinced Colorado is correct.
CTA Exemption for 501(c)(4) Organizations
The CTA has a list of entities exempt from reporting. That exemption list includes an “organization that is described in [IRS] … section 501(c) … (determined without regard to section 508(a) …) and exempt from tax under section 501(a) … .” The key word is “described” which means the organization need only fit the description not necessarily that the organization had its status formally approved. Because of a long-running controversy about homeowner associations getting formally approved as 501(c)(4)’s, Congress enacted Section 528. https://www.law.cornell.edu/uscode text/26/528. Section 528 is not formally referenced in the CTA. However, Section 528(a) states that “A homeowners association shall be considered an organization exempt from income taxes for the purpose of any law which refers to organizations exempt from income taxes.”
No Explicit Exemption for Section 528 Organizations
If you go to the IRS website, there is a long discussion with very dated citations about homeowner associations not usually qualifying as 501(c)(4) organizations. https://www.irs.gov/government entities/irc-section-501c4-homeowners-associations. In Flat Top Lake Association, Inc. v. United States, 868 F.2d 108 (4th Cir. 1989), the federal circuit court ruled that the HOA did not qualify for 501(c)(4) status because the HOA did not provide services to the public. The dissent in Flat Top Lake Association argued that the HOA did qualify for 501(c)(4) status because the focus is not on providing services to the general public but providing a public benefit (water, sewer, trash/snow removal, etc.) and the quasi-governmental nature of the HOA. The only Tenth Circuit (Colorado) case I found even remotely on the subject infers the same position as the dissent in Flat Top Lake Association about the issue not being whether the HOA provides public services but provides public benefit. Ihc Health Plans, Inc. v. C.I.R., 325 F.3d 1188 (10th Cir. 2003). However this case was about 501(c)(3) status and not the exact issue with 501(c)(4)s.
CTA FAQs Not Helpful
The CTA website FAQ is no help. The FAQ states an HOA that meets the reporting company definition and does not qualify for any exemptions must report its beneficial owner(s). That is the question – does the HOA qualify for an exemption? Arguably some HOAs do not qualify for an exemption. But, what about an HOA with 300 single family homes, no member-exclusive common areas, and whose modest and primary expenses are maintaining road signs and facilitating fire mitigation?
Why the Big Deal?
So, why the big deal? Why not just report the HOA beneficial owners and be done with it? Getting homeowners to run for HOA office is hard enough without Treasury reporting requirements. Figuring out who is a beneficial owner is not as easy as the Treasury Department makes it out to be. Some beneficial owners are obvious. Others are not as obvious. Governing documents must be read with an eye towards the issue. Manager contracts reviewed. Questions asked about long-forgotten declarant rights. The tendency will be to err on the side of a Section 528 HOA reporting beneficial owners. Then, every year if not every time an officer or manager is replaced, the question must be asked, does beneficial ownership information need to be updated within 30 days of the change else face civil and criminal consequences.
Conclusion – File or No?
No easy answers here. Arguably the conservative route is to file the beneficial ownership information or revisit qualifying as a 501(c)(4) organization. In the meantime, for all those HOAs out there, file or don’t file at your own risk. And if you do file, be ready to keep filing for a very long time.
