United States District Court Judge Concludes Corporate Transparency Act (“CTA”) Likely Unconstitutional, Temporarily Halting Reporting Requirements.
December 5, 2024, by Devon Kwande, CPA
The Corporate Transparency Act (“CTA”):
The CTA requires that reporting companies must submit to the Financial Crimes Enforcement Network (“FINCEN”) a Beneficial Ownership Information Report (“BOIR”) that identifies each beneficial owner of the reporting company by full legal name, date of birth, residential/business address and a unique identifying number in the form of an acceptable identifying document or FINCEN identifier.
The CTA defines a “beneficial owner” as “an individual who directly or indirectly through any contract, arrangement, understanding, relationship, or otherwise, exercises substantial control over the entity; or owns not less than twenty five percent of the ownership interests of the entity” some exemptions apply.
A reporting company is a “corporation, limited liability company, or other similar entity that is created by filing of a document with a secretary of state or a similar office under the law of a State or Indian Tribe or formed under the law of a foreign country registered to do business in the United States by filing of a document with a secretary of state or a similar office under the law of a State or Indian Tribe.” Some exemptions apply.
The Courts’ Opinion:
Federal District Judge Amos L. Mazzant, of the Eastern District of Texas, Sherman Division, on December 3, 2024, issued a Memorandum Opinion and Order in Texas Top Cop Shop, Inc., Et Al, v. Merrick garland, Attorney General of The United States, Et Al., Civil Action No. 4:24-cv-00478 (see here), which in granting the Motion for Preliminary Injunction effectively temporarily halts the CTA reporting requirements and prevents enforcement of the reporting requirements. According to the opinion, The Corporate Transparency Act (CTA) “Represents Congress’s attempt to combat bad actors’ ability to cloak their criminal activities in a veil of corporate anonymity. At its most rudimentary level, the CTA regulates companies that are registered to do business under a state’s laws and requires those companies to report their ownership, including detailed, personal information about their owners, to the Federal Government on pain of severe penalties.” Texas Top Cop Shop, Inc., Et Al, v. Merrick garland, Attorney General of The United States, Et Al., Civil Action No. 4:24-cv-00478.
The judge concluded that “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 deference the Court must give Congress, the CTA appears likely unconstitutional. Accordingly, the CTA and its Implementing Regulations must be enjoined.”
The practical take away here is that the Government has been enjoined (prohibited by an issued injunction) from enforcing the BOIR rule and the looming January 1, 2025, compliance deadline has been stayed. Reporting companies need not comply with the January 1, 2025, BOIR deadline.
Comparison with previous case:
In a previous court case National Small Business United, d/b/a the National Small Business Association, et al v. Yellen, et al., there were concerns that the ruling only impacted the plaintiffs on the case and non-parties to the case were still required to comply with CTA reporting. However, in Texas Top Cop Shop, Inc., Et Al, v. Merrick garland, Attorney General of The United States, Et Al., Civil Action No. 4:24-cv-00478., “the government responded that if the Court were to enjoin the CTA and Reporting Rule, the scope of which included NFIB’s members, then the Court would, in practical effect, enter a nationwide injunction. The Court agrees with the Government’s point. A nationwide injunction is appropriate in this case.”
This effectively makes the injunction applicable nationwide and beyond just the plaintiffs to this case.
What to do now?
Clients may choose to continue filing their BOIR or may choose not to file their BOIR and wait for further developments.
Please reach out with any questions or if you are in need of Tax Planning, Tax Strategy or Tax Return Preparation services for yourself or your business.
Devon Kwande, CPA is a seasoned Tax Planner and Tax Strategist for individuals and businesses. He also assists with State and Federal Tax compliance matters for entities in Receivership. You may also contact Devon if you need compensation consulting services including pay program design, incentive plan design, compensation studies and pay equity analysis.
