The Corporate Transparency Act (CTA) has faced significant legal challenges ahead of its January 1, 2025 reporting deadline.[1] Most recently, a federal district court in Texas issued a nationwide injunction halting the reporting requirements.[2] Unfortunately, the Fifth Circuit subsequently stayed that injunction, just before Christmas no less! This article will cover what the next steps in this litigation are and what that might mean for you or your clients as business owners.
For a quick recap: the CTA was passed on January 1, 2021 as part of the National Defense Authorization Act, and requires almost every business in America to report its “beneficial owners” and “company applicant” information to the Financial Crimes Enforcement Network (“FinCEN”) by January 1, 2025.[3] In March, the Northern District of Alabama ruled that the CTA was unconstitutional, but only enjoined its operation against the plaintiffs, namely National Small Businesses United and its members.[4] That decision has been appealed to the Eleventh Circuit without a ruling yet, but oral argument suggested the ruling was likely to be reversed. Combined with the United States District Court for the District of Oregon ruling that the CTA was constitutional, skeptics of the CTA had little reason for optimism.[5] Thankfully, just in time for the holidays, a federal district court for the Eastern District of Texas, ordered a nationwide preliminary injunction as a gift to businesses everywhere this holiday season.[6]
The Texas Top Cop Shop, Inc. v. Garland, No. 4:24-CV-478, 2024 WL 5049220 (E.D. Tex. Dec. 5, 2024) court granted a preliminary injunction against the CTA and its reporting requirements because it held the plaintiffs, one a private individual and five others being entities, demonstrated: (1) that there was a substantial threat of irreparable harm in the form of compliance costs;[7] and (2) that they were likely to succeed on the merits of their constitutional challenges under both the Commerce Clause[8] and Necessary and Proper Clause.[9]
The Department of Justice promoted three theories as to how the CTA was proper under the Commerce Clause, each rejected by the court. First, the court found the CTA does not regulate the channels or instrumentalities of commerce, and it instead regulates “reporting companies” based solely on their registration status, requiring them to disclose beneficial ownership information to the federal government.[10] The court stated that the “anonymous existence” of a company, by its nature, is neither a channel nor instrumentality of commerce, and is instead a “state of being”.[11] Second, the court found that the CTA is not constitutional under the Commerce Clause as it does not regulate an existing activity and in reality is creating one because it compels companies to file ownership reports, an action not previously required under state laws governing registration.[12] Lastly, even if “anonymous corporate existence” could be considered an activity, the court concluded that the CTA fails to satisfy the “substantial effects” test.[13] The CTA neither addresses a fungible good nor serves to regulate supply and demand.[14] Instead, its purpose is law enforcement, not the protection or regulation of commerce.[15]
Turning to the Necessary and Proper Clause argument, the court made quick work of this theory as well. It’s important to note first that Congress can only invoke the Necessary and Proper Clause in tandem with an enumerated power. Thus, “in determining whether the Necessary and Proper Clause grants Congress the legislative authority to enact a particular federal statute, [the Court] look[s] to see whether the statute constitutes a means that is rationally related to the implementation of a constitutionally enumerated power.”[16] The government argued that the CTA is Necessary and Proper in tandem with Congress’s enumerated powers of: (1) the commerce clause; (2) the power to regulate foreign affairs and further its national security interests; and (3) the authority to lay and collect taxes.[17] For those who followed the Northern District of Alabama decision, these arguments should be familiar. The court rejected the commerce clause argument because the CTA’s mandate to disclose beneficial ownership information is not incidental to Congress’s power to regulate commerce.[18] The court rejected the foreign affairs power argument because the court found that the CTA regulates domestic entities, not foreign affairs.[19] Lastly, the court rejected the power to lay and collect taxes argument as the CTA is only a regulation that carries an incidental tax benefit, as opposed to a tax that generates revenue.[20]
The district court in Texas Top Cop Shop granted the injunction, and because one of the plaintiffs has approximately 300,000 members nationwide, the CTA and January 1, 2025 reporting deadlines were stayed nationwide.[21] In light of this decision, FinCEN[22] posted on its webpage that it has suspended reporting while the injunction remains in effect.[23]
The Department of Justice was quick to appeal this decision, both to the district court and the Fifth Circuit Court of Appeals. The district court denied the request on December 17,2024,[24] and the Fifth Circuit ordered briefing for the plaintiffs and the Department of Justice on an expedited schedule. The Fifth Circuit issued an Order on December 23, 2024, and stayed the nationwide injunction, stating the government has made a “strong showing that it is likely to succeed on the merits in defending CTA’s constitutionality.”[25] In response, FinCEN issued a new statement that reporting deadlines are again in effect, with some extensions:
- Reporting companies that were created or registered prior to January 1, 2024 have until January 13, 2025 to file their initial beneficial ownership information reports with FinCEN. (These companies would otherwise have been required to report by January 1, 2025.)
- Reporting companies created or registered in the United States on or after September 4, 2024 that had a filing deadline between December 3, 2024 and December 23, 2024 have until January 13, 2025 to file their initial beneficial ownership information reports with FinCEN.
- Reporting companies created or registered in the United States on or after December 3, 2024 and on or before December 23, 2024 have an additional 21 days from their original filing deadline to file their initial beneficial ownership information reports with FinCEN.
- Reporting companies that qualify for disaster relief may have extended deadlines that fall beyond January 13, 2025. These companies should abide by whichever deadline falls later.
- Reporting companies that are created or registered in the United States on or after January 1, 2025 have 30 days to file their initial beneficial ownership information reports with FinCEN after receiving actual or public notice that their creation or registration is effective.
- As indicated in the alert titled “Notice Regarding National Small Business United v. Yellen, No. 5:22-cv-01448 (N.D. Ala.)”, Plaintiffs in National Small Business United v. Yellen, No. 5:22-cv-01448 (N.D. Ala.)—namely, Isaac Winkles, reporting companies for which Isaac Winkles is the beneficial owner or applicant, the National Small Business Association, and members of the National Small Business Association (as of March 1, 2024)—are not currently required to report their beneficial ownership information to FinCEN at this time.[26]
What does all of this mean for businesses? The safest course of action would be to proceed with your filings by January 13, 2025, but check back for additional developments as guidance may continue to change. I strongly suspect that the Fifth Circuit may reverse this panel en banc but, if not, I would expect a Supreme Court petition to follow swiftly.
If you have questions about meeting the CTA’s reporting requirements or are interested in challenging the constitutionality of the CTA, please contact the experienced business and government litigators at Eckland & Blando LLP
[1] Research and drafting assistance provided by Lindsey Broda, law clerk at Eckland & Blando LLP. We have previously written on the CTA and its requirements, and have presented a CLE on the same. See Robert Dube, The Corporate Transparency Act: Unnecessary and Unconstitutional, Eckland & Blando LLP (Apr. 16, 2024),https://www.ecklandblando.com/blog/2024/04/the-corporate-transparency-act-unnecessary-and-unconstitutional/; See also Robert Dube, The Corporate Transparency Act: Blinding Small Businesses to Shine a Light on Corporate Malfeasance, Eckland & Blando LLP (Aug. 10, 2022), https://www.ecklandblando.com/blog/2022/08/the-corporate-transparency-act-blinding-small-businesses-to-shine-a-light-on-corporate-malfeasance/.
[2] Texas Top Cop Shop, Inc. v. Garland, No. 4:24-CV-478, 2024 WL 5049220 (E.D. Tex. Dec. 5, 2024).
[3] Pub. L. 116-283, title LXIV, § 6401 et seq., 134 Stat. 4604 (2021).
[4] See Nat’l Small Bus. United v. Yellen, No. 5:22-CV-1448-LCB, 2024 WL 899372, at *1 (N.D. Ala. Mar. 1, 2024) (ruling on multiple grounds that the CTA is unconstitutional).
[5] Michael Firestone, et al. v. Yellen, 2024 WL 4250192 (D.Or. 2024).
[6] Texas Top Cop Shop, Inc. v. Garland, No. 4:24-CV-478, 2024 WL 5049220, at *14 (E.D. Tex. Dec. 5, 2024)
[7] Texas Top Cop Shop, Inc. v. Garland, No. 4:24-CV-478, 2024 WL 5049220, at *14 (E.D. Tex. Dec. 5, 2024).
[8] Id. at *19.
[9] Id. at *26.
[10] Id. at *18-19.
[11] Id. at *21.
[12] Id. at *21-22.
[13] Id. at *22.
[14] Id. at *25.
[15] Id. at *21.
[16] Id. at *26 (internal quotation omitted).
[17] Id.
[18] Id.
[19] Id. at *28.
[20] Id. at *33.
[21] Id. at *35-37.
[22] The Financial Crimes Enforcement Network.
[23] Impact of Ongoing Litigation – Deadline Stay – Voluntary Submission Only, FinCEN (last accessed Dec. 23, 2024), https://www.fincen.gov/boi.
[24] Texas Top Cop Shop, Inc. et al v. Garland, et al., No. 4:24-CV-478, 2024 WL 5145951, at *5 (E.D. Tex. Dec. 17, 2024).
[25] Texas Top Cop Shop, Inc. v. Garland, 24-40792, at 3 (5th Cir. Dec. 23, 2024) ECF No. 140.
[26] Updates to Beneficial Ownership Information Reporting Deadlines – Beneficial Ownership Information Reporting Requirements Now in Effect, with Deadline Extensions, FinCEN (last accessed Dec. 24, 2024), https://www.fincen.gov/boi.