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Editorial 12 MIN READ

The single-purpose entity, a 2021 field report

The Corporate Transparency Act pushed a reporting layer under every SPE, the §1031 real-property rule finally came out of proposed, and the OZ clocks moved one more time

The Editors
Staff, Incorporator.org
12 min read Updated
Contents 6 sections
  1. The Corporate Transparency Act, as it actually lands
  2. T.D. 9935 and the §1031 real-property definition
  3. Notice 2021-10 and the opportunity-zone calendars
  4. What the closing binder looks like now
  5. The edge cases worth watching
  6. Sources

he single-purpose entity picked up a new federal reporting layer on New Year's Day. When Congress overrode the presidential veto of the National Defense Authorization Act for Fiscal Year 2021 on January 1, 2021, the Corporate Transparency Act inside it became law, and every SPE formed in the United States became a future beneficial-ownership filer to a Treasury bureau that does not yet have a form to receive the filing.

This is the quarterly check-in on our October 2017 walkthrough of the single-purpose entity and the June 2019 revisit. The state-law spine has not moved. The federal overlay has. Three pieces arrived inside a ten-week window: the Corporate Transparency Act (Section 6403 of the NDAA, now 31 U.S.C. § 5336), the Treasury Decision finalizing the § 1031 real-property definition (T.D. 9935, published November 23, 2020), and IRS Notice 2021-10 (released January 19, 2021) extending opportunity-zone deadlines into 2021. Taken together they change the closing binder, the opinion list, and, for the first time since the 2017 Tax Act, the way an SPE is priced for ongoing compliance.

The Corporate Transparency Act, as it actually lands

The CTA enacts a new Section 5336 in Title 31 of the United States Code. Its operative requirement is that a "reporting company" file a beneficial-ownership report with the Financial Crimes Enforcement Network of the Treasury Department identifying each beneficial owner and each "applicant." A reporting company, under § 5336(a)(11)(A), is a corporation, limited liability company, or "other similar entity" created by filing a document with a secretary of state or similar office, or formed under foreign law and registered to do business in the United States. A beneficial owner, under § 5336(a)(3)(A), is any individual who, directly or indirectly, exercises substantial control over the reporting company or owns or controls not less than 25 percent of its ownership interests.

The statute lists 23 exemptions in § 5336(a)(11)(B). The useful ones for SPE practice are narrow. Public-reporting issuers under the 1934 Act are exempt; so are banks, credit unions, investment companies registered under the 1940 Act, broker-dealers, insurance companies, and certain regulated pooled investment vehicles. There is a "large operating company" exemption in § 5336(a)(11)(B)(xxi) for entities with more than 20 full-time U.S. employees, more than $5 million in gross receipts reported on the prior year's tax return, and an operating presence at a physical office in the United States. A conventional CMBS borrower holding a single building does not clear any prong of that test: no employees, no direct gross receipts after the mortgage cash-flow waterfall, and no office. A ProjectCo LLC formed to own a wind farm is the same picture.

So the reporting floor catches the SPE. The filing has to identify each beneficial owner's full legal name, date of birth, current residential or business address, and a unique identifying number from an acceptable identification document (passport, state driver's license, or a FinCEN identifier the individual has separately obtained). The applicant filing fields catch the corporate-services firm that files the certificate of formation, if the statute's implementing regulations follow the text without softening.

The implementing regulations are not out. Section 5336(b)(1)(D) directs the Secretary to promulgate rules within one year of enactment, which puts a rulemaking deadline of January 1, 2022 on FinCEN. Until the regulations issue, no filing is due. The statute tells us existing reporting companies will have up to two years after the effective date of the regulations to file an initial report, and new reporting companies formed after the effective date will have to file at the time of formation or within a period FinCEN sets by rule. The penalty exposure in § 5336(h)(1) is $500 per day of continuing violation up to $10,000 and two years of imprisonment for willful failures; there is a safe harbor for good-faith correction of a report within 90 days.

What this does to SPE practice, today, is add a line to the closing checklist and a paragraph to the borrower's covenants. Loan documents drafted after December 2020 are starting to require the borrower to maintain compliance with "applicable beneficial-ownership reporting requirements" and to deliver copies of FinCEN filings to the administrative agent. Counsel at closing is asking who will be named as the "applicant" and confirming that the sponsor's compliance calendar has the eventual filing on it. For a pre-existing SPE on the books today, nothing is due yet; for an SPE formed after the implementing regulations land, formation and FinCEN filing become parallel tasks rather than sequential ones.

The CTA does not override state law on beneficial-ownership disclosure for formation. Delaware still forms an LLC on the information in 6 Del. C. § 18-201, which does not require members or managers to appear on the public certificate. What the Act adds is a nonpublic federal database of the humans behind the veil, accessible to law enforcement, certain federal agencies, and, with customer consent, to financial institutions performing customer due diligence. The Delaware veil-preserving formation is intact. A new layer of nonpublic federal identification sits underneath it.

T.D. 9935 and the §1031 real-property definition

On November 23, 2020 Treasury and the IRS published T.D. 9935 in the Federal Register, finalizing the proposed regulations we walked through in the November 2020 statutory-trust field report. The final rule applies to exchanges beginning on or after December 2, 2020, with a taxpayer option to apply it to earlier post-TCJA exchanges. Treas. Reg. § 1.1031(a)-3 is the section to read.

The final definition of real property tracks the June 2020 proposal with two material changes. First, the purpose-or-use-test for "inherently permanent structures" was dropped. The proposal had asked whether a structure would remain in place indefinitely; the final rule drops that inquiry and relies on the list of enumerated structures, the weight of the structure, the manner of attachment, and the time and expense required to move it. Second, the "state-law" fallback was removed. Under the proposal, property that was real property under state or local law could nonetheless fail the federal test; the final rule holds that state-law classification is sufficient on its own, even if the property would not otherwise meet the federal factors. That softens the edge case for a taxpayer whose state-law answer is clean.

The enumerated real-property list in the final regulations keeps the headline categories from the proposal: land, buildings and other inherently permanent structures, structural components, unsevered natural products, and water and air rights. Intangible interests (licenses, permits, leaseholds) qualify as real property when they derive their value from real property and are not held primarily for sale. Machinery that is an integral part of an inherently permanent structure is real property if it functions as a structural element. Machinery that is primarily tied to a business process (production lines, process equipment, dedicated manufacturing tooling) is not.

For the real-estate SPE, this mostly cleans up edges. A conventional CMBS borrower holding land, a building, structural components, and incidental tenant improvements has a real-property position that was already defensible under the proposal and is better defended under the final rule. A warehouse borrower with racking and dock levelers keeps the position underwriters have been assuming since early 2018. The cleaner answer is for mixed-use deals with any process machinery inside the building envelope, where the functional-use cut is now on the page instead of being argued case by case.

For a Delaware statutory trust holding real property under Rev. Rul. 2004-86, the final regulations do not alter the trustee-prohibition framework. A DST that complies with the seven prohibitions (no new contributions after close, no investment of proceeds outside specified short-term instruments, no renegotiation of the senior loan, no leasing discretion beyond the limits in the ruling, no more than minor structural modifications, no reinvestment of sale proceeds, and ministerial-only trustee cash flow) continues to be treated as holding real property for § 1031. The final § 1031 regulations and Rev. Rul. 2004-86 now sit on the same shelf with clearer language about what "real property" the ruling is classifying the beneficial interests as representing.

What the final regulations do not reopen is personal-property exchanges, exchanges of intangibles that do not derive value from real property, or the TCJA's § 13303 elimination of non-real-property like-kind treatment. The 2017 statutory contraction still holds. The 2020 regulations give operators a more reliable way to describe what is left.

Notice 2021-10 and the opportunity-zone calendars

IRS Notice 2021-10, released January 19, 2021, extends most of the opportunity-zone deadlines that Notice 2020-39 had previously moved. The relief comes in on four tracks. The 180-day deadline for investing eligible capital gains in a Qualified Opportunity Fund, if the original deadline falls on or after April 1, 2020 and before March 31, 2021, is extended to March 31, 2021. The 30-month substantial-improvement period under § 1400Z-2(d)(2)(D)(ii) is tolled for the period from April 1, 2020 through March 31, 2021. The working-capital safe harbor for a QOZB under Treas. Reg. § 1.1400Z2(d)-1(d)(3)(v) extends the maximum safe-harbor period by 24 months for plans already in place on or before June 30, 2021, capped at 55 months total (or 86 months for QOZBs in federally declared disaster areas). The 12-month reinvestment period for QOF sale or disposition proceeds under Treas. Reg. § 1.1400Z2(f)-1(b)(1) is extended by 12 months for proceeds received on or after January 20, 2020, not to exceed 24 months total.

For an SPE wearing the QOZB hat, the practical effect is that construction schedules disrupted through 2020 have another year to meet the 30-month substantial-improvement test, and that new investment dollars sitting on the sidelines at qualified intermediaries have until the end of Q1 2021 to land in a QOF. The QOF itself gets a longer runway on reinvestment of internal sale proceeds, which matters for multi-asset funds that are rotating inside the zone while holding the ten-year clock. None of this changes the underlying tests in § 1400Z-2(d)(3); it moves the dates on which the tests are measured.

The extension does not reach every OZ deadline. The 90-percent asset test under § 1400Z-2(d)(1), which applies at the QOF level and measures semiannually, is not tolled past the relief Notice 2021-10 provides by treating any failure during the covered period as due to reasonable cause under § 1400Z-2(f)(3). The ten-year hold for basis step-up to fair market value under § 1400Z-2(c) is statutory and cannot be tolled by notice. The December 31, 2026 recognition date for the original deferred gain under § 1400Z-2(b) is statutory and also unchanged, which means a 2019 investor still faces a 2026 recognition on the deferred gain regardless of pandemic extensions.

What the closing binder looks like now

A CMBS closing binder assembled in early 2021 includes what it included in 2019, plus the additions from this piece. The core is unchanged: a Delaware LLC formed shortly before closing, rating- agency separateness covenants tracking the post-General Growth tightening, one or two independent managers from a recognized corporate-services firm depending on loan size, a springing-member provision, a § 163(j)(7)(B) election on the inaugural return where the math favors it, and a § 199A posture that the owners can actually use. The non-consolidation opinion remains the gating deliverable on loans above roughly $50 million.

Three items are new relative to the 2019 checklist. One is a representation and covenant addressing the Corporate Transparency Act: that the borrower will comply with beneficial-ownership reporting as implementing regulations issue, will furnish the administrative agent with a copy of the initial and updated filings, and will notify the agent of any change in the identified beneficial owners or applicants. Two is a tax-opinion paragraph confirming that the borrower's real-property assets meet the definition in T.D. 9935, which matters for any future § 1031 exchange out of the asset. Three, for QOF-SPE pairings, is a covenant tracking the Notice 2021-10 extensions into the working- capital schedule and the substantial-improvement budget, so that a borrower that has used the additional 24 months cannot later be argued to have missed the original deadline.

Pricing has not moved for any of these additions. The sponsor side of the desk is quietly pricing the CTA compliance overhead as a fee item in the asset-management agreement, in the same column as annual franchise tax and registered-agent renewal. Corporate-services firms are raising their base quotes, modestly, to cover the administrative work of tracking which SPEs in a portfolio will need to file and when.

The edge cases worth watching

The CTA's definition of "substantial control" is not further elaborated in the statute; FinCEN's forthcoming regulations will decide whether, for example, an independent manager whose consent is required for a bankruptcy filing is exercising substantial control for reporting purposes. If the regulations read the phrase broadly, the independent may have to be disclosed as a beneficial owner on the FinCEN filing, notwithstanding that the independent holds no equity. If they read it narrowly, the independent stays off the report. Comment letters to FinCEN this spring will matter.

The T.D. 9935 state-law fallback has an overlooked consequence for mixed-use or multi-state deals. A hotel SPE holding rooms classified as real property by state law but arguably personal property under the federal factors now has a cleaner state-law argument, and so does a billboard SPE whose signage is real property in some states and not others. Tax counsel drafting § 1031 opinions for those deals will want the state-law analysis on the front page, not the back.

Notice 2021-10's overlapping extensions create one drafting problem worth flagging. A QOZB whose working-capital plan was already in place on or before June 30, 2021, and that is now using both the original 31-month safe harbor and the additional 24 months, will be operating under a plan that is more than five years long. Budget lines and construction milestones drafted in 2019 have to be checked against the realities of a 2024 or 2025 completion, and the plan amendments have to be documented in the QOZB's records to preserve the safe-harbor argument if audited.

The SPE in early 2021 is still what it was in 2017 and 2019: a Delaware vehicle owning one thing and restrained from doing anything else. The federal overlay keeps thickening. The 2017 Tax Act added interest-limitation and pass-through-deduction considerations. The 2020 statutory trust field report picked up Notice 2020-23 and the proposed real-property rules. This quarter's additions are a Treasury reporting regime that treats the veil as visible to a federal database, a finalized definition of the "real" in real property, and one more tolling round for the OZ calendars. The binder is thicker. The entity has not moved.

Sources

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