With Corporate Transparency Act Deadline Looming, Community Associations Are Denied Relief

Another federal court has sided with the government in a case challenging the Corporate Transparency Act’s reporting requirements, denying preliminary relief to a group representing community associations.

The U.S. District Court for the Eastern District of Virginia found in an October 24, 2024, decision that the Community Associations Institute (CAI) — which represents entities including condominium associations, homeowner associations, housing cooperatives, business trusts, and planned unit developments — was unlikely to succeed in its claim that its members fall under the Corporate Transparency Act’s nonprofit statutory exemption. (Community Associations Institute v. Yellen, 2024 WL 4571412 (E.D. Va. Oct. 24, 2024))

Under the Corporate Transparency Act, specified businesses must report to Treasury’s Financial Crimes Enforcement Network (FinCEN) information about individuals who own or control their company. Reports for existing businesses are due January 1, 2025.

The nonprofit exemption raised by CAI, said U.S. District Judge Michael S. Nachmanoff, “applies not to ‘organizations exempt from income taxes’ generally, but to the discrete category of organizations ‘described in section 501(c)… and exempt from tax under section 501(a).'” According to Nachmanoff, CAI is trying to “shoehorn” community associations into the exemption by arguing that all organizations exempt from income taxes qualify, rather than just those specifically described in Code Sec. 501(c) — as the Corporate Transparency Act provides.

CAI had requested in December 2023 that FinCEN exempt community associations from the reporting requirements. FinCEN, however, indicated in June 2024 updates to its Corporate Transparency Act FAQs that community associations that are not Code Sec. 501(c)(4) organizations may be required to file reports (question C.10). In addition, FinCEN clarified in its FAQs who qualifies as a beneficial owner of a community association (question D.13).

CAI also contends in its suit that FinCEN’s FAQs failed to meet Administrative Procedure Act notice-and-comment requirements, or that they are arbitrary and capricious. But Nachmanoff rejected these arguments, finding that the FAQs are not a final agency action, rather they “simply restate the [Corporate Transparency Act’s] preexisting statutory and regulatory requirements.”

Nachmanoff likewise found CAI was unable to succeed on the merits of its Commerce Clause argument or its claims that the reporting requirements violate CAI members’ First Amendment rights, or constitute an illegal search or seizure under the Fourth Amendment.

In light of the decision, Stephen Dombroski, a senior payroll tax compliance manager at Paychex, said that “until an exemption is issued by FinCEN, community associations should ensure they meet BOI reporting obligations set forth in the Corporate Transparency Act by the associated due dates.”

The decision out of Virginia marks the second in just over a month in favor of the government. In September, an Oregon federal district court also denied a request for a preliminary injunction to a group of “existing and newly formed Oregon entities.” (Firestone v. Yellen, 2024 WL 4250192 (D. Or. Sep. 20, 2024))

In Firestone, U.S. District Judge Michael H. Simon said the plaintiffs were unlikely to succeed on the merits of their arguments that Congress exceeded its authority in enacting the Corporate Transparency Act and that the law violates the plaintiffs’ constitutional rights. Simon also found that the plaintiffs had failed to describe “any hardships that they likely will suffer” or “how those hardships might be irreparable” — generally a prerequisite for a preliminary injunction.

And the 11th U.S. Circuit Court of Appeals seemed hesitant during September 27 oral arguments to side with plaintiff National Small Business United (NSBU) in its Corporate Transparency Act challenge. NSBU prevailed at the district court level earlier this year, with an Alabama federal court enjoining FinCEN from enforcing the Corporate Transparency Act against NSBU members, but the government appealed. (National Small Business United (DC AL 3/1/2024) 133 AFTR 2d 2024-885)

In particular, U.S. Circuit Judge Andrew Brasher seemed skeptical of NSBU’s argument that some entities that register with a state are not engaged in commerce — noting that “businesses don’t, like, write poetry or just … listen to music. So, it would have to be economic.” And he called the plaintiffs’ Fourth Amendment argument “really far reaching.”

According to Angela Gamalski, a partner at Honigman and chair of the firm’s Corporate Transparency Act Task Force, the 11th Circuit “just didn’t seem to be leaning towards what a strong group of people want to hear — that this isn’t constitutional.” She said that while a decision is likely before the end of the year, with beneficial ownership reports due January 1, 2025, for existing entities, they should “absolutely” not wait to file.

Meanwhile, another suit was filed on September 26, 2024, challenging the Corporate Transparency Act, this time in the U.S. District Court for the Northern District of Texas. (Hotze v. Yellen, No. 2:24-cv-210-Z). Individual beneficial owners and the Association of American Physicians & Surgeons contend that the law violates the First, Fourth, Fifth, and 10th amendments as well as the Administrative Procedure Act. The plaintiffs moved for a preliminary injunction in the case on October 28 — requesting the court act before the Corporate Transparency Act’s January 1, 2025, filing deadline.

And oral arguments have been scheduled for January 3, 2025 — days after the filing deadline — in a suit brought by an entity owner in the U.S. District Court for the District of Maine. (Boyle v. Yellen, No. 2:24-CV-00081)