February 2022 Update
Corporate Transparency Act: Forthcoming Implementing Regulations
The Corporate Transparency Act (CTA) (Pub L 116–283, 134 Stat 4604) became law as of January 1, 2021, as part of the Anti-Money Laundering Act of 2020 (Pub L 116–283, Div F at §§6001–6511, 134 Stat 3388). It is codified in its entirety at 31 USC §5336. The CTA essentially eliminates the possibility of complete anonymity for the beneficial owners of many corporations, LLCs, and “other similar” entities.
The new law is intended to better enable law enforcement to combat money laundering, terrorism financing, tax and securities fraud, and other crimes by imposing new federal reporting requirements for beneficial ownership of many domestic as well as foreign business entities. There are significant civil and criminal penalties for false reporting and failure to report, including a civil penalty of not more than $500 per day that the violation continues, and a fine of not more than $10,000, imprisonment for up to 2 years, or both. See 31 USC §5336(h). The reports are confidential, subject to certain exceptions.
The CTA will become effective when implementing regulations are promulgated by the Secretary of the Treasury (not later than January 1, 2022). 31 USC §5336(b)(5).
Once the regulations take effect, existing “reporting companies” (as defined in 31 USC §5336(a)(11)) will have 2 years to submit the required reports to the Financial Crimes Enforcement Network (FinCEN) of the U.S. Department of the Treasury, while newly formed entities must submit reports at the time they are formed or registered. Any change in ownership of the entity must be reported within 1 year after the change. 31 USC §5336(b)(1).
As of this writing, it is clear that general partnerships will not be subject to the CTA; however, the status of limited partnerships is not certain. Counsel should watch for the implementing regulations and be prepared to comply with the reporting requirements for limited partnerships if the regulations so provide. For further interim discussion of the CTA, see Forming and Operating California Limited Liability Companies, chap 7A (3d ed Cal CEB).
In Bacall v Shumway (2021) 61 CA5th 950, 964, the court upheld an arbitration award that an unlicensed lawyer’s agreement with a client to provide legal and other services was illegal, and the lawyer was not entitled to payment for the legal services. See §1.2.
Chapter 1 expands the discussion of the Rules of Professional Conduct as applicable to partnerships, including with respect to limiting the scope of representation (§§1.4, 1.14); informed written consent (§§1.4, 1.6, 1.8); protecting confidential information (§§1.8, 1.9); ethical “walls” or ethical “screens” (§1.10); attorney fees paid by parties other than the client (§1.16); and advance fees (§1.21).
Beginning January 1, 2022 (or when the Secretary of State has updated its new forms), the annual Statement of Information filed with the Secretary of State must include a statement indicating whether any officer or director of a domestic or foreign corporation, or member of a domestic or foreign LLC, has an outstanding final judgment issued by the Division of Labor Standards Enforcement or a court of law, for a violation of any wage order or provision of the Labor Code. See §§2.9, 2.15, 2.85.
As of this writing, the Secretary of State has indicated that the launch date of the California Business Connect Project will occur in March 2022, which follows the publication of this title’s update. See chap 2 for related discussion.
For taxable years beginning January 1, 2021, and expiring January 1, 2024, limited partnerships, limited liability partnerships, and limited liability companies are not subject to the $800 minimum tax until their second year of business. See §§2.5–2.7, 2.11–2.12, 2.15, 2.51–2.52, 9.2.
Chapter 3 further clarifies California’s stance on single-member partnerships and its treatment of California limited partnerships with a single owner for tax purposes. See §3.3.
Franchise Tax Board Notice 2020–04 describes California’s procedure for requesting changes to accounting periods or methods. See §3.58.
The 2017 Tax Cuts and Jobs Act (Pub L 115–97, 131 Stat 2054) created new rules regarding issuance of profits interests (also referred to as “carried interests”) in exchange for services. Final regulations under the Tax Cuts and Jobs Act were issued on January 19, 2021. See TD 9945, 86 Fed Reg 5452 (Jan. 19, 2021). These regulations are comprehensive and beyond the scope of chaps 3, 6, and 13; however, practitioners are advised to review them with respect to partners holding a “carried interest.” See §§3.3, 3.29, 6.33, 13.5.
Chapters 3 and 6 also include several updated Internal Revenue Bulletin, Cumulative Bulletin, and Treasury Regulation citations. See, e.g., §3.58.
Effective January 1, 2021, the names of corporations, limited liability companies, and limited partnerships must be distinguishable in the records from an existing entity of the same type on record with the Secretary of State, and “may not be likely to mislead the public.” Corp C §9122(b) (corporations); Corp C §17701.8(b) (limited liability companies); Corp C §15901.08(d) (limited partnerships); 2 Cal Code Regs §§21002, 21003. See 2 Cal Code Regs §§21000–21006 (Secretary of State’s name regulations and additional statutory requirements and restrictions). See §§4.9–4.12, 4.39.
With respect to Cal Rules of Prof Cond 1.1(c), the California Supreme Court recently issued a comment making it clear that “the duties set forth in this rule include the duty to keep abreast of the changes in the law and its practice, including the benefits and risks associated with relevant technology.” This comment is considered in the context of California attorneys representing out-of-state partnerships. See §5.24.
Under Treas Reg 1.702–1(a), as amended, each partner who is subject to IRC §1061 (regarding the carried interest rules) must take into account gains and losses from sales of capital assets held for more than 1 year under §1061 and Treas Reg §§1.1061–1—1.1061–6. See TD 9945, 86 Fed Reg 5452 (Jan. 7, 2021), generally effective January 19, 2021. See §§5.39, 6.33; chap 13.
In June 2021, the IRS issued new Schedules K-2 and K-3 for partnerships, S corporations, and U.S. persons who are required to file Form 8865, with respect to controlled foreign partnerships that must provide certain international tax information. The IRS then issued draft instructions for these new forms for tax years 2021 and beyond. The updated forms apply to any persons required to file Form 1065, 1120-S, or 8865, if the entity for which the form is being filed has items of international tax relevance (generally foreign activities or foreign partners). The changes do not affect partnerships and S corporations with no items of international tax relevance. See IRS Notice 2021–39, Int Rev Bull 2021–27 (July 6, 2021). See §§6.14A, 6.56A, 13.6.
The Certificate of Correction that a limited partnership may file is now titled Certificate of Correction (Secretary of State Form LLC-LP-11). The URL for obtaining the form from the Secretary of State’s website has been updated. See https://bpd.cdn.sos.ca.gov/lp/forms/llc-lp-11.pdf. See §7.79.
Several clarifying edits have been made to chap 11, including but not limited to further delineating limited partnerships from general partnerships (and limited partners from general partners) (see §§11.5–11.8, 11.17); elaborating on the definition of a “security,” including its history and rationale (see §11.9A); expanding the discussion of the Howey test, including new case law, Foxfield Villa Assocs., LLC v Robben (10th Cir 2020) 967 F3d 1082 (see §11.11); elaborating on discussion of the “family resemblance” test (see §11.13); securities and transactions exempt from the registration requirement (see §11.15); the statutes and regulations comprising securities law (see §11.16); and updating discussion on crowdfunding (see §11.28B) and Rule 144 (see §11.28E).
The Governor of California approved an act to amend Corp C §§25102, 25501, 25503, and 25608 implementing a new crowdfunding law. Assembly Bill 511 was filed with Secretary of State on October 7, 2021. See §11.51.
In San Francisco CDC LLC v Webcor Constr. L.P. (2021) 62 CA5th 266, the court observed that the statutory purpose of Bus & P C §7031 is to discourage persons who have failed to comply with licensing from offering or providing their unlicensed services for pay. The purpose of the disgorgement is to penalize the contractor; it is subject to the 1-year statute of limitations under CCP §340(a). See §12.15.
The IRS has issued several sets of proposed regulations, amendments, corrections, and final regulations that provide guidance in applying IRC §199A. The IRS initially issued proposed regulations at 83 Fed Reg 40884 (Aug. 16, 2018). The IRS published a second notice of proposed rulemaking providing additional guidance at 84 Fed Reg 3015 (Feb. 8, 2019), along with final regulations implementing the §199A(a) deductions at Treas Reg §§1.199A–1—1.199A–6, available at TD 9847, 84 Fed Reg 2952 (Feb. 8, 2019). The IRS issued corrections to TD 9847, published at 84 Fed Reg 15954 (Apr. 17, 2019). See §13.2.
The IRS also issued proposed regulations under IRC §§199A and 1388, providing specialized rules for payments from cooperatives and special cooperatives at Prop Treas Reg §§1.199A–7—1.199A–12; those proposed regulations may be found at 84 Fed Reg 28668 (June 19, 2019). Those proposed regulations were then corrected at 84 Fed Reg 38148 (Aug. 6, 2019). The proposed regulations also withdrew all proposed regulations issued under former IRC §199 and proposed to remove the final and temporary regulations under former §199. The IRS has now issued final regulations applicable to cooperatives and special cooperatives that remove all final and temporary regulations under former IRC §199 in TD 9947, effective on January 14, 2021, at 86 Fed Reg 5593 (Jan. 19, 2021). See §13.2.
The IRS published a proposed revenue procedure on methods for calculating W-2 wages under IRC §199A. See IRS Notice 2018–64, 2018 Int Rev Bull 460. The IRS issued Rev Proc 2019–11 at the same time it issued the final regulations above, replacing the proposed revenue procedure at IRS Notice 2018–64. See §13.2.
“Chart: Deduction for Qualified Business Income of Pass-Through Entities” has been updated to account for inflation adjustments (2021). See §13.2A.
The IRS issued proposed regulations on November 24, 2020, to except certain special enforcement matters from the ambit of the centralized partnership audit regime, to address how to elect out of these rules as they apply to partnerships with QSubs, and to clarify other aspects of the existing regulations. Comments were due to the IRS by January 25, 2021. If adopted, they are retroactive to November 20, 2020, with a special exception for rules effective after December 20, 2018. The proposed regulations can be found at 85 Fed Reg 74940 (Nov. 24, 2020). See §13.3A.
Chapter 15 includes case developments, including Brice v Plain Green, LLC (9th Cir 2021) 13 F4th 823 (agreement delegating to arbitrator gateway question of whether underlying arbitration agreement is enforceable must be upheld unless that specific delegation provision is itself unenforceable) and Wilson-Davis v SSP Am., Inc. (2021) 62 CA5th 1080, 1091 (arbitrability reviewed by court when parties did not clearly and unmistakably delegate threshold issue of arbitrability to arbitrator) (see §15.4); Olson v Lyft, Inc. (2020) 56 CA5th 862 (following Correia v NB Baker Elec., Inc. (2019) 32 CA5th 602 to hold that Iskanian v CLS Transp. Los Angeles, LLC (2014) 59 C4th 348 remains good law after Epic Sys. Corp. v Lewis (2018) 584 US ___, 138 S Ct 1612), Contreras v Superior Court (2021) 61 CA5th 461, and Winns v Postmates Inc. (2021) 66 CA5th 803 (see §15.5A); Farina v SAVWCL III, LLC (2020) 50 CA5th 286, 299, and T.A.W. Performance, LLC v Brembo, S.p.A. (2021) 53 CA5th 632, 644 (doing-business test is essentially same as that applied to foreign corporations for jurisdictional purposes) (see §15.16); Rubio v CIA Wheel Group (2021) 63 CA5th 82 (upholding 3.5:1 ratio of punitive damages based on reprehensibility) (see §15.82); and Sass v Cohen (2020) 10 C5th 861, 891 (plaintiff alleging accounting action must plead specific dollar amount to support default judgment awarding monetary relief) (see §15.84).
The statutory range for the Labor Code Private Attorneys General Act of 2004 (PAGA) has been updated (Lab C §§2698–2699.8). See §§15.5, 15.5A.
As held by the court in Han v Hallberg (review granted Aug. 21, 2019, S256659; superseded opinion at 35 CA5th 621); review dismissed (2020) 476 P3d 240, a partner that is a trust or trustee in a trust is not dissociated as a result of a change of trustee. If the partners want a change of trustee to be an event of dissociation, the partnership agreement should specify this. The California Supreme Court dismissed review of this case because appellant had conceded that an ordinary express trust can be a general partner. See §§16.3, 16.42.
“Form: Waiver of Right to Court Decree of Dissolution” has been deleted. See §17.43.
The form in §18.53, “Certificate of Merger (Secretary of State Form OBE MERG),” has been modified slightly and replaced since the last update.