On December 3, 2024, the U.S. District Court for the Eastern District of Texas issued a preliminary injunction against enforcement of the Corporate Transparency Act (CTA) and its beneficial ownership information (BOI) reporting requirement. As drafted, the CTA requires any entity that was formed or registered to do business in the United States prior to January 1, 2024, and does not fall into one of the 23 categories of exemptions, to report its BOI by January 1, 2025. U.S. District Judge Amos Mazzant ruled in the case of Texas Top Cop Shop v. Garland et al. (E.D. Tex., No. 4:24-cv-00478) that:
- “The CTA is likely unconstitutional as outside of Congress’s power.”
- “. . . the CTA, 31 U.S.C. § 5336 is hereby enjoined. Enforcement of the Reporting Rule, 31 C.F.R. 1010.380 is also hereby enjoined, and the compliance deadline is stayed under § 705 of the [Administrative Procedure Act].”
- “. . . reporting companies need not comply with the CTA’s January 1, 2025, BOI reporting deadline pending further order of the Court.
The Court’s reasoning for issuing the preliminary injunction is that Congress’s powers, under either the Constitution’s Commerce Clause or the Necessary and Proper Clause, do not extend to the implementation of the CTA. Judge Mazzant noted that “the Commerce Clause does not justify regulating all companies based on nothing more than a fear that a reporting company might shelter a financial criminal.” He further stated that the Necessary and Proper Clause only grants Congress authority to take actions “in conjunction with some enumerated power,” but determined that the CTA was not sufficiently related to any enumerated power.
It is important to note that the Court did not rule that the CTA is unconstitutional. Rather, the court ruled that the FinCEN agency is not allowed to enforce the CTA until a final determination is made regarding the constitutionality of the law. However, given that decision is unlikely to be made prior to the January 1, 2025 deadline, the Court determined that a preliminary injunction is an appropriate remedy.
The government will almost certainly file an expedited appeal within 60 days, likely mirroring the appeal currently pending in the Eleventh Circuit, which focuses on a similar enumerated powers argument. The government is also likely to file an expedited motion in the Fifth Circuit requesting a stay. If the Fifth Circuit grants the motion to stay, then the preliminary injunction will be put on pause. In this case, businesses will still need to comply with the CTA reporting requirements by January 1, 2025.
Clients who have CTA reporting obligations should keep a close eye on developments in this case as the appeal process unfolds. The final determination may not be known for a week or more. Given the impending deadline and lack of certainty, we would suggest clients either (i) submit their BOI reports by the January 1, 2025 deadline, as the injunction may be lifted or overruled, or (ii) hold off filing their BOI reports, but do the work necessary to be able to file their BOI reports by January 1, 2025 in the event the injunction is lifted or overturned before then.
For clients who have already filed BOI reports with FinCEN, you are in good standing with FinCEN. While this may be enjoined on a federal level, several states are implementing their own similar reporting requirements. The reports that have been filed may put those clients in a strong position to comply with state regulations, if any.
Further information on the CTA and step-by-step videos on how the file a BOI report and apply for a FinCEN ID is available in our CTA Resource Center.
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