On December 3, 2024, in Texas Top Cop Shop, Inc., et. al v. Merrick Garland, the U.S. District Court for the Eastern District of Texas issued a nationwide injunction enjoining enforcement of the Corporate Transparency Act (CTA) and the accompanying regulations implementing beneficial ownership reporting. The court also stayed the Reporting Rule's beneficial ownership information (BOI) reporting deadline, saying "reporting companies need not comply with the CTA's January 1, 2025, BOI reporting deadline pending further order of the Court." Though companies need not report by the end of the year in light of the ruling, companies with complicated beneficial ownership would be wise to complete their CTA analysis so they are prepared in case the reporting deadline is reinstated. 

Calling the CTA "quasi-Orwellian," the Texas federal court found that the plaintiffs satisfied the prerequisites for a preliminary injunction, noting that the CTA is "likely unconstitutional" because it exceeds Congress's enumerated powers. Specifically, the court held that it is likely the plaintiffs could demonstrate that the Commerce Clause does not authorize the CTA because, first, the law applies to all reporting companies, not just companies that engage in interstate commerce, and second, the CTA does not regulate an activity that substantially affects interstate commerce but instead regulates the mere existence of a company. The court also found that the plaintiffs could likely demonstrate that the CTA is not justifiable under the Necessary and Proper Clause because the law is not rationally related to any of Congress's enumerated powers, including Congress's power to regulate commerce, foreign affairs, or lay and collect taxes. The court acknowledged the plaintiffs' challenges to the First and Fourth Amendments but did not address them. 

Other federal courts that have considered the constitutionality of the CTA have declined to issue a nationwide injunction. For example, in March 2024, a federal court in Alabama stayed the enforcement of the CTA based on similar grounds, but that court's ruling was limited to the plaintiffs in that matter. National Small Business United v. Yellen, N.D. Ala., Case No. 5:22-cv-1448-LCB, 2024 WL 899372 (N.D. Ala. Mar. 1, 2024). And some courts have found that the CTA likely is constitutional. See Cmty. Ass'ns Inst. v. Yellen, No. 1:24-cv-1597 (MSN/LRV), 2024 BL 382792 (E.D. Va. Oct. 24, 2024); Firestone v. Yellen, No. 3:24-cv-1034-SI, 2024 BL 331907 (D. Or. Sept. 20, 2024). 

Unsurprisingly, the government already has appealed and it likely will ask the Fifth Circuit to stay the injunction pending appeal, which could reimpose the CTA's reporting requirements and deadlines with little notice. The Financial Crimes Enforcement Network (FinCEN) acknowledged the injunction but said that "the government continues to believe... that the CTA is constitutional" and that companies may continue to voluntarily submit BOI reports pending the legal challenges. Furthermore, on December 11, FinCEN asked the Texas district court to stay the preliminary injunction, arguing that it introduced confusion for companies regarding the impending deadline, that it was detrimental to anti-money laundering efforts, and that the significant time, resources, and funds spent on educating companies about the CTA could not be recouped, resulting in irreparable harm. FinCEN's request for a stay is further evidence that the government will fight the nationwide injunction, not only through appeal to the Fifth Circuit but also at the district court level.

Considering the uncertainty around the Texas ruling and the timing of the appeals, companies should finalize their analysis regarding what BOI (if any) must be provided to FinCEN pursuant to the Reporting Rule, so that they are prepared in advance of any reinstated filing deadline. The CTA requires certain U.S. and foreign companies to provide FinCEN with information about any individual who owns at least 25 percent of the company or exercises substantial control over the company. Many companies are exempt from reporting under one of the 23 reporting exemptions and others have simple ownership structures that are easy to report. However, for entities with complicated ownership structures, determining which individuals own 25 percent and which individuals exercise substantial control can be a complicated analysis and involve not just review of corporate formation documents but also close coordination with entities and individuals in the ownership structure. 

This analysis can take time to complete and the CTA imposes significant civil and criminal penalties for failure to report. Willfully failing to report or reporting false information is punishable by $500 for every day that the violation is not remedied and a criminal penalty of up to two years in prison and a $10,000 fine. Though companies need not file while the injunction is in place, they should continue to analyze their corporate records and their ownership structures to determine their BOI so they can be prepared to file on relatively short notice if the injunction is eventually lifted. 

For more information, please contact:

Ian A. Herbert, iherbert@milchev.com, 202-626-1496

Leah Moushey, lmoushey@milchev.com, 202-626-5896

Peter Kentz, pkentz@milchev.com, 202-626-5891

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