Earlier this week, a judge in the U.S. District Court for the Eastern District of Texas threw the fate of the Corporate Transparency Act (CTA) into question, blocking the U.S. Department of Treasury from enforcing the beneficial ownership information (BOI) reporting requirements across the country.
Now, the U.S. government has appealed the nationwide preliminary injunction—and FinCEN has backed off of its position that filings should continue.
Texas Ruling
In Texas Top Cop Shop, Inc., et al. v. Garland, et al., Judge Mazzant, an Obama appointee, granted the request of the National Federation of Independent Business (NFIB) for a preliminary injunction, blocking the U.S. Department of Treasury from enforcing the CTA’s reporting requirements. Because NFIB and its nearly 300,000 members were a party to this case, the judge blocked enforcement of the BOI reporting requirements nationwide.
In its lawsuit, NFIB (which filed suit with the Center for Individual Rights (CIR), Texas Top Cop Shop, Data Comm for Business, Mustardseed Livestock, Russell Straayer, and Libertarian Party of Mississippi) argued that the CTA is unconstitutional because it exceeds Congress’s authority over the states, improperly compels speech and contradicts the right of anonymous association guaranteed by the First Amendment, and violates the Fourth Amendment by forcing the disclosure of private information.
In his 74-page ruling, the Court agreed, noting, “For good reason, Plaintiffs fear this flanking, quasi-Orwellian statute and its implications on our dual system of government.” Judge Mazzan, writing for the U.S. District Court for the Eastern District of Texas, declared, “Despite attempting to reconcile the CTA with the Constitution at every turn, the Government is unable to provide the Court with any tenable theory that the CTA falls within Congress’s power. And even in the face of the deference the Court must give Congress, the CTA appears likely unconstitutional.”
While the Department of Justice did not comment on the matter initially, an appeal was expected. That’s precisely what happened—this week, the government filed a notice of appeal to the United States Court of Appeals for the Fifth Circuit. The timing of any ruling is uncertain.
FinCEN Responds
The question on the minds of many following the ruling was, “What now?”
In response to the confusion, FinCEN posted a statement on its website that “[t]he government continues to believe—consistent with the conclusions of the U.S. District Courts for the Eastern District of Virginia and the District of Oregon—that the CTA is constitutional.”
However, with that, FinCEN stated, “While this litigation is ongoing, FinCEN will comply with the order issued by the U.S. District Court for the Eastern District of Texas for as long as it remains in effect.”
That means, the agency says, that “reporting companies are not currently required to file their beneficial ownership information with FinCEN and will not be subject to liability if they fail to do so while the preliminary injunction remains in effect.” The agency added that “reporting companies may continue to voluntarily submit beneficial ownership information reports.”
Reporting Requirements
The CTA cast a wide net. Under the law, companies required to report are called reporting companies. A company may be a reporting company if it is a corporation, a limited liability company (LLC), or other entity created by the filing of a document with the state, local, or federal government (or a foreign company registered to do business in the U.S.)—some exceptions apply. Those reports are filed online with the Financial Crimes Enforcement Network (FinCEN). FinCEN expected to receive over 32 million reports in the first year that the law was effective—this year, 2024.
The law, intended to make it harder for bad actors to hide their identities and ill-gotten gains through shell companies or opaque corporate structures, pulls in companies and owners. The information that must be reported includes details about the owners, including the name, date of birth, address, and a scanned image of an identifying document like a driver’s license or passport—from each so-called “beneficial owner.” The same information, generally, has to be reported for a company applicant—typically the person who helped organize the company (most commonly, a corporate formation company or a lawyer).
That’s a lot of information. And companies were slow to react. Despite FinCEN opening its virtual doors for reporting earlier this year, only about 20% of companies—or six million—have filed a report.
The penalties for failing to comply are harsh. A person who willfully violates the reporting requirements may be subject to civil penalties of up to $500 for each day the violation continues, as well as criminal penalties of up to two years imprisonment and a fine of up to $10,000.
Court Rulings
Months after the CTA was enacted, a federal court found it unconstitutional. The ruling resulted from a lawsuit filed by the National Small Business United (also known as the National Small Business Association, or NSBA) and Isaac Winkles on November 15, 2022. On March 1, 2024, U.S. District Judge Liles C. Burke of the Northern District of Alabama, Northeastern Division, found the CTA unconstitutional. In his opinion, Burke, a Trump appointee, wrote, “Congress sometimes enacts smart laws that violate the Constitution.” This case, he continued, “illustrates that principle.”
(You can read the ruling here.)
However, while the ruling in National Small Business United bars the U.S. Treasury from enforcing the CTA against the Plaintiffs, it does not enjoin enforcement against others—this is a significant difference from the most recent ruling. The Government immediately appealed the ruling to the Eleventh Circuit, and the oral arguments were heard in October of this year (you can listen to those here).
The Virginia ruling FinCEN referenced was an October 24, 2024, ruling in Community Associations Institute v. Yellen. In that case, the Court denied the plaintiffs’ motion for a preliminary injunction, finding that the plaintiffs failed to show, among other things, a likelihood of success on the merits. On November 4, 2024, the plaintiffs filed a notice of appeal to the United States Court of Appeals for the Fourth Circuit.
Another court ruling denied a motion for a preliminary injunction in a lawsuit challenging the CTA. In that case, Firestone v. Yellen, filed in Oregon, the Court rejected a motion for a preliminary injunction, finding that the plaintiffs failed to show a likelihood of success on the merits of their claims that the CTA was unconstitutional. On November 18, 2024, the plaintiffs appealed to the United States Court of Appeals for the Ninth Circuit.
More and more, it looks like this matter could be finally resolved in the Supreme Court. For now, however, businesses have a reprieve.
Read the full article here