Updated: January 9, 2025
A Texas federal court has temporarily blocked the implementation of the Corporate Transparency Act (CTA) nationwide. The decision, issued by Judge Amos L. Mazzant III of the US District Court for the Eastern District of Texas, comes less than a month before millions of businesses were expected to comply with the new ownership reporting requirements.
Understanding the Corporate Transparency Act
The CTA was passed in 2021 to combat shell companies set up for money laundering, financing of terrorism, fraudulent purposes, and other illicit practices.
The law requires an estimated 32.6 million existing business entities to disclose their beneficial owners (defined as an owner with substantial control over the entity or a 25 percent ownership interest) to the Treasury Department's Financial Crimes Enforcement Network (FinCEN) by 2025.
The legislation's primary goal was to combat anonymous shell companies' use for money laundering, terrorism financing, and other illicit activities. By requiring companies to reveal their true owners, lawmakers hoped to peel back the layers of anonymity that often enable financial crimes.
However, on May 28, 2024, a lawsuit challenging the CTA was filed, arguing that the law exceeds Congress's constitutional authority.
The Legal Challenge
The lawsuit was filed by a family-run firearms and tactical gear retailer, Texas Top Cop Shop Inc., joined by the Libertarian Party of Mississippi. Their lawsuit argued that the CTA exceeded Congress's constitutional authority to regulate interstate and foreign commerce, as it applied to all incorporated entities regardless of their commercial activity.
On December 3, 2024, U.S. District Judge Mazzant agreed with the plaintiffs, describing the CTA as a "flanking, quasi-Orwellian statute” with concerning implications on the structure of our government. The court found that while Congress may have the power to regulate anonymous corporate operations, the Commerce Clause cannot be used to compel information disclosure for law enforcement purposes at this scale.
The court issued a preliminary injunction to stop enforcement of the law nationwide until the lawsuit was resolved.
"Though seemingly benign, this federal mandate marks a drastic two-fold departure from history. First, it represents a Federal attempt to monitor companies created under state law—a matter our federalist system has left almost exclusively to the several States. Second, the CTA ends a feature of corporate formation as designed by various States—anonymity."
On Again, Off Again
On December 5, the Department of Justice filed an appeal to stop the injunction. They succeeded on December 23, but three days later, another panel of the U.S. Court of Appeals for the Fifth Circuit rejected the appeal.
For now, the preliminary injunction remains in place blocking the enforcement of the CTA.
Immediate Impact and Implications of the Preliminary Injunction Against the CTA
Per the court order, “...reporting companies need not comply with the CTA’s January 1, 2025, BOI reporting deadline pending further order of the Court."
That said, businesses should remain alert!
On December 31, 2024, the Department of Justice, representing FinCEN, filed an emergency motion with the Supreme Court to stay (or put on hold) the preliminary injunction.
What If I Already Filed a Beneficial Ownership Information (BOI) Report to FinCEN?
The injunction blocks enforcement of the CTA nationwide but doesn't specifically address previously filed reports. The Treasury Department may provide specific instructions or information once the legal proceedings reach their final outcome.
Keep copies of previously filed reports, document when and what was filed, and watch FinCEN for further guidance.
More Legal Challenges
Meanwhile, parties in multiple jurisdictions have sued to stop the enforcement of the CTA and its reporting rule, although none have resulted in a nationwide injunction:
Another lawsuit was filed by two Texans, Samantha Smith and Robert Means, as well as the LLCs they formed to hold real estate. The plaintiffs argued that Congress exceeded its authority to regulate interstate and foreign commerce since their entities do not buy, sell, or trade goods or services in interstate commerce or own any interstate or foreign assets. The court agreed and issued a preliminary injunction prohibiting FinCEN from enforcing the rule against the plaintiffs and their entities.
The National Small Business United, an Ohio nonprofit corporation that "represents and protects the rights of small businesses", challenged the CTA in an Alabama federal court. The court sided with the plaintiffs, finding the CTA unconstitutional and granting a permanent injunction applicable only to the plaintiffs in this case.
Seven individuals challenged the constitutionality of the CTA in an Oregon federal district court (MICHAEL FIRESTONE, et al., Plaintiffs, v. JANET YELLEN, et al., Defendants.). In this case, while U.S. District Judge Michael H. Simon agreed that the rule was likely unconstitutional, he denied the plaintiff's motion for an injunction, writing that the plaintiffs offered no evidence to their motion.
The Community Associations Institute filed suit against Treasury Secretary Janet Yellen, in a Virginia federal court, requesting a motion for injunction arguing that they fall under the exception to CTA's definition of “reporting companies” for nonprofit organizations. Their motion was denied.
Two small business groups and their members filed suit in a U.S. district court in Michigan challenging the CTA on three constitutional grounds. The court denied the motion for a preliminary injunction due to lack of evidence of irreparable harm.
What’s Next for the CTA?
On December 31, 2024, the U.S. Department of Justice petitioned the Supreme Court to weigh in on the nationwide injunction imposed in the Texas Top Cop Shop, Inc. v. Garland case. Justice Samuel Alito set a deadline of January 10 for the plaintiffs to respond to the government's petition. A decision is expected within weeks of the deadline.
If the Supreme Court sides with the plaintiffs, the injunction will remain in place until the lawsuit is resolved. If the decision swings the other way, enforcement of the CTA rule could resume, potentially reinstating an earlier deadline of January 13, 2025, for compliance.
In the meantime, business owners are not obligated to comply with the CTA’s reporting requirements, pending further court action. However, FinCEN is continuing to accept voluntary BOI filings on its website.
At Hendershot Cowart, we are following developments on this issue and will continue to share updates as merited.
