On December 3, a Texas federal district court preliminarily barred enforcement of the Corporate Transparency Act nationwide — the broad decision came weeks before the January 1, 2025, deadline for 32.6 million business entities to report their beneficial ownership information. (Texas Top Cop Shop, Inc., v. Garland, 2024 WL 4953814 (E.D. Tex. 12/03/2024)
Some welcomed the decision in light of what they see as unclear or unconstitutional requirements. However, at least one attorney is advising her clients to still make the filings by year-end.
Background.
Congress passed the Corporate Transparency Act in 2021 with the intention of combating money-laundering, financing of terrorist activities, and tax evasion. It requires that specified business entities file reports detailing their owners, officers, and other control persons with Treasury’s Financial Crimes Enforcement Network (FinCEN). A September 2022 final rule implementing the act set the reporting deadline for most entities at January 1, 2025.
The Corporate Transparency Act has faced push-back both in the courts and from lawmakers. Some contend that FinCEN has not adequately publicized the requirements or clarified reporting procedures. Others have raised constitutional concerns — including that the reporting requirements violate the First Amendment, constitute an illegal search or seizure under the Fourth Amendment, and exceed Congress’ powers.
Two federal district courts have upheld the reporting requirements, while one has enjoined enforcement as to the named plaintiffs and their members only. The government has appealed that decision to the 11th U.S. Circuit Court of Appeals. In addition, several other lawsuits are still in the preliminary stages.
Texas court decision.
On Tuesday, the U.S. District Court for the Eastern District of Texas ruled in favor of a group of six plaintiffs — including five entities and one individual —granting a preliminary injunction barring enforcement of the reporting requirements. The memorandum opinion, authored by Judge Amos L. Mazzant, indicates that the Corporate Transparency Act “is likely unconstitutional as outside of Congress’s power.”
Harm to plaintiffs.
Judge Mazzant concluded that the plaintiffs were likely to suffer irreparable harm — a prerequisite for preliminary relief — because of the “resources” and “time and effort” they would need to expend satisfying the filing requirement. He rejected the government’s characterization of the “pecuniary injury” as “de minimis.” Even FinCEN, he said, “acknowledges that companies will incur compliance costs.”
Judge Mazzant also sided with the plaintiffs on their constitutional argument, finding that the “threat” of “revealing protected information on pain of criminal punishment” could cause irreparable harm. “Absent injunctive relief, come January 2, 2025, Plaintiffs would have disclosed the information they seek to keep private under the First and Fourth Amendments and surrendered to a law that they contend exceeds Congress’s powers,” Mazzant concluded.
Commerce clause analysis.
As far as whether the plaintiffs are likely to succeed on the merits — the second step in determining whether preliminary relief is appropriate — Judge Mazzant focused on the argument that Congress lacked the power to enact the Corporate Transparency Act. He disagreed with the government’s contention that the law falls within commerce clause powers. The text of the Corporate Transparency Act, he said, doesn’t indicate that regulated entities are engaged in commerce — rather just that they have filed a formation document or registered to do business.
And companies “are not a ‘channel’ or ‘instrumentality’ of commerce,” Judge Mazzant concluded. “If they were, then Congress could regulate any company, in any way, all the time.”
And as for whether the Corporate Transparency Act regulates an activity that “substantially impacts” interstate commerce, Judge Mazzant concluded that “the natural, idle state that any entity formed by registering with a secretary of state” is not such an activity. Although it may be “rational” for Congress to conclude that these entities “substantially impact commerce,” he said, “in light of our dual system of government, Congress’s commerce power cannot reach this far.”
Scope.
As to the scope of the injunction, Judge Mazzant said it would apply “nationwide.” Noting that plaintiff NFIB’s membership is nationwide and the “extent of the constitutional violation Plaintiffs have shown,” Judge Mazzant called a nationwide injunction “appropriate.”
Reactions.
American Institute of CPAs’s (AICPA) Melanie Lauridsen told Checkpoint her organization “understands the confusion and anxiety that business owners have struggled with regarding the reporting requirement.”
AICPA has pushed for a one-year delay in the deadline amid concerns about the details, including what they’ve called an “unnecessarily tight 30-day timeline” to submit beneficial ownership information updates after initial reports are filed. That timeline “makes monitoring client information incredibly complex for tax professionals,” reads AICPA’s letter to lawmakers.
“While we are still awaiting formal guidance from FinCEN, if this injunction is applicable as we believe, many small businesses would receive the much-needed BOI reporting relief,” Lauridsen added.
FACT Coalition’s Ian Gary, however, called the decision “a Christmas gift to criminals who use anonymous shell companies to traffic fentanyl, exploit people, and hide dirty money.” Other federal courts “have reached the opposite conclusion and denied injunctions in similar cases,” Gary said. “[W]e expect the government to move to stay this outlier order promptly.”
What’s next.
Melissa Wiley, a partner at Lowenstein Sandler, told Checkpoint “the court’s decision to issue a nationwide injunction needs to be put into perspective.” The decision was the fourth to address the law’s constitutionality, resulting in a 2-2 split between courts in four different circuits, she explained.
“While national injunctions are on the uptick, they are still somewhat controversial,” said Wiley. “I think that’s particularly so in this case where we have three active appeals — to the 4th, 9th, and 11th Circuits — and can reasonably expect the government to appeal this decision as well.”
Wiley said she’s advising her clients to “go ahead and make the filings required under the law, especially if they are in the process of collecting the necessary information.”
But with several million reports yet to be filed by the deadline, Wiley acknowledged that many people may — in light of the Texas court’s decision — conclude that filing a report by year-end isn’t a priority. “I think this ruling gives them the leeway to push off complying until there’s further clarity, at least for as long as the preliminary injunction is still in place,” she said.
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