Editor’s Note: 12/27/24: On December 26, 2024, the U.S. Court of Appeals for the Fifth Circuit paused the enforcement of the Corporate Transparency Act (CTA), thus pausing the beneficial ownership reporting requirements for U.S. small business owners. This reverses the earlier decision from December 23, 2024, to reinstate the CTA and its reporting requirements. The CTA remains on hold for now while under review. We will keep you updated as further developments unfold.
Federal Court Pauses Enforcement and Issues Temporary Injunction
Key Findings:
- Reporting companies may likely now postpone reporting beneficial ownership information (BOI) filings at this point
- The Court’s ruling is preliminary at this point, and the preliminary injunction ruling is likely not the final word
- The government may decide to challenge the injunction’s nationwide scope
Recently, the U.S. District Court for the Eastern District of Texas issued an injunction against enforcement of the Corporate Transparency Act (or the “CTA”). The Federal Court included a stay of the CTA’s Beneficial Ownership Information Reporting Rule (the “BOI Rule”). The Court in Texas Top Cop Shop v Garland et al., Case No. 4:24-cv-00478 (E.D Texas 12/3/24) determined the injunction should apply nationwide.
With its ruling, the U.S. District Court for the Eastern District of Texas sided with many plaintiffs and the National Federation of Independent Business (NFIB), who all challenged the CTA. Specifically, the Court held the compliance deadline was stayed and the reporting companies didn’t have to comply with the CTA’s BOI reporting deadline (January 1, 2025) unless and until further orders were issued by the Court.
Under the BOI Rule, legal entities formed in the United States or registered to do business in the United States must report beneficial ownership information to a Financial Crimes Enforcement Network (or “FinCEN”) database, which is within the United States Department of the Treasury.
Background Information
Congress passed CTA, P.L. 116-283 in 2021 as an initiative to stop money laundering, and it required certain disclosures. Willful violations remained punishable by a fine and additional penalties for unauthorized disclosure.
On January 1, 2024, the BOI Rule took effect, which stated:
Entities first registered or formed during 2024 must file their initial reports within the 90 days of registration or of notice of formation
Entities first registered or formed before 2024 must file initial reports no later than January 1, 2025
There are 23 exemptions to the reporting requirements.
Constitutional Issues
The Court found the Corporate Transparency Act (CTA) is likely unconstitutional and heard arguments that the CTA exceeds Congress’s specifically enumerated powers, inappropriately compels speech, violates states’ specified rights, diminishes First Amendment rights, and potentially violates Fourth Amendment rights by requiring private information to be disclosed.
The Court did not address the arguments regarding the First and Fourth Amendments but issued an order prohibiting CTA enforcement and the BOI Rule’s reporting requirements.
The Scope of the Court’s Order
The preliminary injunction is nationwide in scope. Therefore, the U.S. government might decide to appeal the injunction ruling at this point and might request expedited Fifth Circuit review or potentially with the Supreme Court. Also, the government may attempt to challenge the nationwide scope of this injunction since such injunctions that affect the entire country have faced increased criticism in recent years.
Reaction to the Order
Many wonder if the CTA is dead. This is not the case, as the Court simply issued a preliminary injunction at this point, which only momentarily pauses FinCen enforcement of the CTA and BOI Rule – pending the final resolution of the claims challenging the constitutionality of the CTA.
If the injunction is lifted by either an appeal or the District Court, CTA enforcement could promptly resume. Without relief from the courts or FinCEN, the preliminary reporting dates would likely be reinstated.
FinCEN has issued several six-month extensions for legal entities with a principal place of business in the areas primarily affected by natural disasters after January 1, 2024. With only one exception, the granted extensions did not ultimately give relief for business entities formed before 2024 and left the underlying January 1, 2025 timeline in effect.
If the injunction is lifted, again either by appeal or by the District Court, FinCEN could potentially grant additional limited relief and extend the time the injunction stays in effect. This would result in a pause of the time remaining for the business entities until the mandatory reporting deadline.
The District Court seems to realize that the resolution to the challenge will take substantial time and likely beyond the January 1, 2025 deadline. Therefore, any resolution to the injunction would likely be based upon the government seeking quick relief and asking for a stay of the injunction before the Fifth Circuit Court of Appeals.
What’s Next?
Although the implications of the ruling continue to develop, the preliminary injunction likely will have important implications as the January 1, 2025 initial reporting deadline approaches quickly for entities formed or first registered before 2024.
FinCEN is presently barred from enforcing its BOI filing requirements. Consequently, FinCEN is reviewing the Court’s order, and the Department of Justice also filed a formal notice of appeal following the injunction.
The AICPA created a BOI reporting resource center.
When asked how to proceed, Dawn Delia, a federal tax attorney at Delia Law, commented:
“With the current injunction in place, it’s reasonable for any reporting companies to pause submitting any new FinCEN filings with the database since the injunction does prohibit against BOI Rule enforcement nationwide.
“If the current injunction is lifted, then the CTA enforcement could begin again. At this point, it’s too soon to know if relief to filing parties will be granted or for what time frame. Please note the Court’s ruling is simply preliminary at this point and is actually based on the argument that the CTA is unconstitutional and outside Congress’s power.
Continuing to prepare filings – without submitting them to the FinCEN database – could allow for future compliance if the nationwide injunction is lifted.
My team will continue to monitor for any relevant developments following this Federal Court injunction.”
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Disclaimer: All information contained within this article has been prepared only for informational purposes and does not constitute legal advice.
