FinCen: The Community Property Conundrum

The federal Corporate Transparency Act (“CTA”)[1] requires tens of millions of business entities to report specified information concerning their beneficial owners[2] to the Financial Crimes Enforcement Network (“FinCEN”) of the U.S. Department of the Treasury. FinCEN’s online system for collecting such beneficial ownership information (“BOI”) has been up and running since January 1, 2024, and millions of “reporting companies” have filed their initial BOI reports with FinCEN since then.

FinCEN has engaged in outreach efforts to try to reach the many millions of additional reporting companies that have not yet filed their initial BOI reports with FinCEN but are required to do so by January 1, 2025.[3] In reaching out, FinCEN has stated that “there’s lots of guidance on the government’s website about who needs to file” the reports, and that “[f]iling is easy and free” and could take “less than 20 minutes.”[4]

It is certainly true that FinCEN has lots of guidance on its website about BOI reporting.[5] That includes two substantial compendiums of information: a 50-page “Small Entity Compliance Guide,” the second version of which was released in December 2023;[6] and a collection of “Beneficial Ownership Information Frequently Asked Questions” (“FAQs”), which, with the latest update on October 3, 2024, is now up to 59 pages.[7] The problem is that despite all of this guidance—and in some instances due to some of this guidance—figuring out who needs to file the reports is not necessarily easy, quick, or even free, if expert legal guidance is required.

A case in point is FinCEN’s latest update to its FAQs. On page 28 of the update released on October 3, FinCEN dropped in this new FAQ D.18:

If one spouse has an ownership interest in a reporting company, is the other spouse also considered a beneficial owner if the reporting company is created or registered in a community property state?

Possibly. Whether State community property laws affect a beneficial ownership determination will depend upon the specific consequences of applying applicable State law. If, applying community property State law, both spouses own or control at least 25 percent of the ownership interests of a reporting company, then both spouses should be reported to FinCEN as beneficial owners unless an exception applies.

This cryptic new FAQ has the potential to open up a can of worms.

In a true community property state, such as California, community property is not owned by either spouse individually but by a third entity: “the community.” Each spouse owns 50 percent of the community during the marriage but a 50 percent interest in the community does not translate into a 50 percent interest in each asset. In all community property states, including California, when the community is dissolved, the court must divide the entire estate 50/50 but has discretion in what percentage of each asset to award each spouse. For example, if wife is a lawyer and husband is not, then husband cannot be awarded any part of wife’s law practice, so wife would get the practice and husband would get other property of equal value, assuming an equal division. Another complicating factor, in California at least, is the Moore/Marsden rule, under which the marital community has a growing interest in otherwise separate property as community funds are used to increase the property’s equity.[8] For example, if husband owns a corporation on the date of marriage, it is separate property, but if he works to build the company’s value during marriage, then wife may have an interest in the company, at least for purposes of apportioning the value of that company when the marriage is dissolved. In addition, if divorce is not pending, most if not all community property states have statutes saying which spouse is allowed to manage the community property during the marriage. When managing community property, spouses have a fiduciary duty to consider the other spouse’s interests. At what point do any of these interests rise to the level of beneficial ownership interests that have to be reported to FinCEN under the CTA? And what if a spouse resides or has resided in more than one state?

Taken together, these considerations, among others, could make it a tricky legal matter to determine which spouse owns or exercises substantial control over a reporting company. Indeed, whether shares or membership interests in a company are community property and, if so, which spouse owns or controls the shares or interests and in what proportion, are frequently highly litigated issues. Figuring out these complicated legal issues in every community property state just for the purpose of filing one BOI report with FinCEN would obviously be the opposite of what FinCEN has represented is supposed to be a “quick,” “easy and free” process that takes “less than 20 minutes.”

Given the time and expense that could be involved in resolving these questions, we think the practical solution is to include the BOI for both spouses when reporting to FinCEN. If you incorrectly exclude a spouse who should have been included, and the exclusion is deemed willful, then substantial civil and/or criminal penalties (including a $591 per day penalty, a $10,000 fine, and up to two years’ imprisonment) could be imposed.[9] A potential counter-argument to including both spouses concerns the possibility that the FinCEN filing might be considered some kind of evidence in a later divorce proceeding that the shares or membership interests are, in fact, community rather than separate property despite what one or both of the spouses intended. That seems questionable, however, given that a BOI report is just a law enforcement filing and including both spouses is done to avoid any possibility of civil and/or criminal penalties. A cautious approach would seem especially prudent in light of FinCEN’s broad reading, in its rule implementing the CTA, that “[a]n individual may directly or indirectly own or control an ownership interest of a reporting company through any contract, arrangement, understanding, relationship, or otherwise, including … [j]oint ownership with one or more other persons of an undivided interest in such ownership Interest.”[10]

[1] The CTA is codified at 31 U.S.C. § 5336.

[2] With regard to who is a “beneficial owner” of a reporting company, see, e.g., eMinutes, FinCEN Reporting — Yes It Is Really Happening (Feb. 23, 2023).

[3] See FinCEN, BOI Newsroom.

[4] See FinCEN, Beneficial Ownership Information – Café Conversations (Aug. 7, 2024).

[5] See FinCEN, Beneficial Ownership Information.

[6] See FinCEN, Small Entity Compliance Guide v. 1.1 (Dec. 2023).

[7] See FinCEN, Beneficial Ownership Information Reporting Frequently Asked Questions (updated Oct. 3, 2024).

[8] See, e.g., In re Marriage of Mohler, 47 Cal. App. 5th 788, 790, 261 Cal. Rptr. 3d 221, 227 (2020) (“When an individual enters a marriage owning a piece of real property, and the marital community pays the property’s mortgage during the marriage, California law provides a formula through which to apportion the property’s value upon the marriage’s end. Known as the Moore/Marsden rule, the formula awards the marital community a growing interest in the otherwise separate property as community funds are used to increase the property’s equity.”).

[9] See 31 U.S.C. § 5336(h)(3)(A).

[10] 31 C.F.R. § 1010.380(d)(2)(ii)(A).