Corporate Transparency Act Enforcement Preliminarily Enjoined Nationwide – What It Means To Reporting Companies

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 reporting (BOIR) requirement.

Under the terms of the CTA, any entity formed or registered to do business in the U.S. prior to January 1, 2024, and which does not fall into one of the 23 categories of exemptions, is required to file a BOIR by January 1, 2025.

In Texas Top Cop Shop v. Garland et al. (E.D. Tex., No. 4:24-cv-00478), the judge issued an opinion and order 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 District Court's reasoning for issuing the preliminary injunction is that Congress' powers, under either the Constitution's commerce clause or the necessary and proper clause, do not extend to the implementation of the CTA. The court did not rule that the CTA is unconstitutional. Rather, it ruled that FinCEN is not allowed to enforce the CTA until a final determination is made regarding the constitutionality of the CTA. However, because any such final determination of CTA constitutionality is unlikely to be made prior to the January 1, 2025, BOIR filing deadline, the court determined that a preliminary injunction is an appropriate remedy. And, in a surprising turn that was not requested by the plaintiffs, the court concluded that the scope of the injunction should be nationwide and not limited to the plaintiffs in the case.

The government is likely to file an expedited appeal within 60 days, mirroring the appeal currently pending in the Eleventh Circuit, which focuses on a similar constitutional argument. The government is also likely to file an expedited motion in the Fifth Circuit requesting a stay of the Texas preliminary injunction. If the Fifth Circuit grants the expedited motion to stay, the preliminary injunction in this case will be put on pause and nonexempt reporting companies may be required to comply with the CTA BOIR requirements by January 1, 2025.

What to Do Now?

We anticipate that, given the looming January 1 filing deadline under the CTA and the potential significant impact of the Texas case on that deadline, FinCEN will issue a statement in the coming days regarding the deadline. However, in the meantime, nonexempt reporting companies facing the January 1 deadline under the CTA should consider whether they wish to (i) submit their BOIRs by the January 1, 2025, deadline in any event or (ii) delay filing their BOIRs for now, but continue to do the work necessary to be able to file their BOIRs by January 1, 2025, in the event the injunction is lifted, overturned or narrowed before then.

For More Information

If you have any questions about this Alert, please contact Thomas R. Schmuhl, Jocelyn Margolin Borowsky, Joel N. Ephross, Bruce H. Jurist, Hope P. Krebs, Lee J. Potter Jr., any of the attorneys in our Corporate Transparency Act Group, the attorney in the firm with whom you are regularly in contact, or Michael A. Gillen or any of the professionals in the Tax Accounting Group.