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Federal Register / Vol. 86, No. 233 / Wednesday, December 8, 2021 / Proposed Rules
proposed approach will help minimize compliance burdens.
Regarding the $5,000,000 filing threshold, FinCEN proposes to make clear that the relevant filing may be a federal income tax or information return, and that the $5,000,000 must be reported as gross receipts or sales net of returns and allowances on the entitys IRS Form 1120, consolidated IRS Form 1120, IRS Form 1120S, IRS
Form 1065, or other applicable IRS
form, excluding gross receipts or sales from sources outside the United States, as determined under federal income tax principles. For entities that are part of an affiliated group of corporations within the meaning of 26 U.S.C. 1504
that filed a consolidated return, FinCEN
proposes that the applicable amount should be the amount reported on the groups consolidated return. FinCENs proposal to exclude gross receipts or sales from sources outside the United States reflects the CTAs domestic focus in requiring that a qualifying entity have filed Federal tax returns in the United States. 137 This focus on the United States is reinforced in other prongs requiring that an entitys 20 or more employees be employed in the United States, and that the entity have an operating presence at an office within the United States.138 FinCEN believes that focusing on gross receipts or sales from U.S. sources would maintain consistency with the exemptions overall United States-centric approach, but welcomes comments on the feasibility of applying this test to only U.S.-sourced gross receipts.
Proposed 31 CFR 1010.380c2xxii would clarify the exemption for entities in which the ownership interests are owned or controlled, directly or indirectly, by 1 or more specified entity types that do not qualify as reporting companies. 139 FinCEN is calling this the subsidiary exemption, and interprets the definite article the in the quoted statutory text as requiring an entity to be owned entirely by one or more specified exempt entities in order to qualify for it. In addition to expressing greater fidelity to the statutory language, this interpretation also prevents entities that are only partially owned by exempt entities from shielding all of their ultimate beneficial ownersincluding those that beneficially own the entity through a non-exempt parentfrom disclosure.
137 31 U.S.C. 5336a11BxxiII emphasis added.
138 31 U.S.C. 5336a11BxxiI.
139 31 U.S.C. 5336a11Bxxii emphasis added.

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The last category of exempt entities for which FinCEN proposes to clarify ambiguous statutory language is the exemption for dormant entities that meet the criteria provided at 31 U.S.C.
5336a11Bxxiii. Under the CTA, the exemption applies to any entity: 1
In existence for over 1 year; 2 that is not engaged in active business; 3
that is not owned, directly or indirectly, by a foreign person; 4 that has not, in the preceding 12-month period, experienced a change in ownership or sent or received more than $1,000; and 5 that does not otherwise hold assets of any type.
The phrase in existence for over 1
year is ambiguous because the CTA did not specify whether it refers to entities in existence for over one year at the time of the CTAs enactment or to entities in existence for over one year at any time the statute is applied. While other prongs of the exemption use the present tense is not engaged in active business; does not hold assets and such present-tense language generally does not include the past, the first prong notably lacks any verb, much less one in the present tense.140 Moreover, both the CTAs text and its legislative history suggest that the exemption was understood to be a grandfathering provision for entities in existence before the CTAs enactment. Another CTA
provision expressly refers to entities subject to this exemption as exempt grandfathered entities. 141 And in a floor statement made just before the passage of the CTA, Senator Brown explained that the exemption for dormant companies is intended to function solely as a grandfathering provision that exempts from disclosure only those dormant companies in existence prior to the bills enactment. 142 He added, No entity created after the date of enactment of the bill is intended to qualify for exemption as a dormant company. 143
It therefore appears reasonable to interpret the dormant entity exemption as a grandfathering provision applicable only to entities in existence for over one year at the time the CTA was enacted.
This interpretation also limits opportunities for bad actors to exploit the exemption by forming exempt shelf companies for later use.
140 See Carr v. United States, 130 S. Ct. 2229, 2236 2010.
141 31 U.S.C. 5336b2E.
142 Senator Sherrod Brown, National Defense Authorization Act, Congressional Record 166:208
December 9, 2020, p. S7311, available at https
www.govinfo.gov/content/pkg/CREC-2020-12-09/
pdf/CREC-2020-12-09.pdf.
143 Id.

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FinCEN notes that this exemptions first prong may appear to bear some similarity to its fourth, with the latter requiring an entity to have not experienced a change in ownership or sent or received more than $1,000 in the preceding 12-month period.
However, FinCEN does not propose to interpret this language as applying to the 12-month period before the enactment of the CTA. This fourth prong not only uses different language from the first, but also focuses on repeatable actions by the entity rather than its creation date. Requiring an entity to be in existence one year before the CTAs enactment is consistent with an understanding of the exemption as a grandfathering provision for entities created before that date because creation is a one-time event. Changes in ownership and funds transfers, by contrast, are not necessarily events that occur once and then never again. They may occur at any time after an entity comes into existence. For these actions, we do not believe that the 12-month period prior to the enactment of the CTA is more significant than any other subsequent 12-month period. If a company experiences an ownership change or transfers more than $1,000 at some later date after the CTAs enactment, we do not see a reason why the company should be subject to the exemption simply because it did not take those actions for the 12 months prior to the CTAs enactment. FinCEN
therefore proposes to interpret the first prong of the dormant entity exemption as applying to the one-year period before enactment, but FinCEN
understands the fourth prong as applying to any 12-month period.
In addition to the exemptions Congress specified in the CTA, Congress also provided an exemption for any entity or class of entities that the Secretary of the Treasury, with the written concurrence of the Attorney General and the Secretary of Homeland Security, has, by regulation, determined should be exempt. 144 To make such a determination, there must be a finding that requiring beneficial ownership information would not serve the public interest and would not be highly useful in national security, intelligence, and law enforcement agency efforts to detect, prevent, or prosecute money laundering, the financing of terrorism, proliferation finance, serious tax fraud, or other crimes. 145 Commenters to the ANPRM suggested creating exemptions for state-licensed accounting companies;
federally regulated health care 144 31

U.S.C. 5336a11Bxxiv.

145 Id.

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