Corporate Transparency Act Enforcement Halted by Federal Court

By Dan Pauley, Partner, Smith Pauley LLP

I.                    Background and Overview

On January 1, 2024, the Corporate Transparency Act (or “CTA”) became effective. The CTA requires U.S. certain legal entities (“Reporting Companies”) to report certain information regarding their owners to the U.S. Department of Treasury’s Financial Crimes Enforcement Network. Those Reporting Companies that fail to do so may be subject to significant civil and criminal penalties. Since going into effect, the CTA has encountered several significant legal challenges. In each challenge, a U.S. legal entity has claimed that the CTA is unconstitutional and, therefore, unenforceable.

On December 3, 2024, the U.S. District Court for the Eastern District of Texas granted a nationwide preliminary injunction that prohibits the federal government from enforcing the CTA and its requirements. The practical effect of this injunction is that Reporting Companies are not legally required to comply with CTA reporting obligations. Even so, the CTA landscape is unpredictable, and owners of U.S. entities should be prepared to come into compliance quickly should a U.S. federal court or administrative agency issue further guidance.

II.                  The Corporate Transparency Act

The Corporate Transparency Act is a federal law which aims to combat illicit activities such as money laundering, tax evasion, and financing of terrorism by increasing transparency in corporate ownership. It requires Reporting Companies to register with the US Financial Crimes Enforcement Network (FinCEN) and to disclose information about their beneficial owners. Practically, the CTA requires Reporting Companies across the U.S. to report the name, address, date of birth, and government-issued identification numbers of their “beneficial owners.”

For entities that existed prior to January 1, 2024, these disclosures must be made by January 1, 2025. For entities that were formed after January 1, 2024, these disclosures must be made within 90 days of formation. Failure to comply with these requirements may result in significant penalties, including but not limited to a daily fine of $500 for ongoing noncompliance. Criminal penalties, including imprisonment, may also be imposed.

III.               Legal History and Challenges to the CTA

Since the CTA’s enactment in January of 2021 (as part of the National Defense Authorization Act), it has encountered several notable legal challenges. For example, on March 1, 2024, Judge Liles Burke of the U.S. District Court for the Northern District of Alabama ruled that the CTA is unconstitutional because it exceeds Congress’ constitutional authority to act. Judge Burke enjoined the federal government from enforcing the requirements of the CTA, but this injunction only applied to the parties involved. See National Small Business United v. Yellen, No. 5:22-cv-01448 (N.D. Ala.) for reference. This case is currently on appeal to the Eleventh Circuit.

Notably, two additional district courts (the District of Oregon and the Eastern District of Virginia) have evaluated challenges to the constitutionality of the CTA. In both matters, the respective federal district courts held that the plaintiffs bringing challenge to the CTA failed to demonstrate a likelihood of success on the merits. Both cases have been appealed (to the Fourth and Ninth Circuit, respectively).

IV.               Most Recent Challenge

On December 3, 2024, the U.S. District Court for the Eastern District of Texas issued a nationwide halt to enforcement of the CTA. See Texas Top Cop Shop, Inc., et al. v. Garland, et al., No. 4:24-cv-478 (E.D. Texas Dec. 3, 2024) for reference. In this case, six plaintiffs (including several companies and an individual) filed a lawsuit seeking a declaratory judgment that the CTA is unconstitutional on several grounds; the plaintiffs filed a motion for preliminary injunction on June 3rd and the court granted the motion on December 3rd.  Under the preliminary injunction, neither the CTA nor its requirements may be enforced. Unlike the Alabama decision discussed above, this preliminary injunction applies generally to all Reporting Companies potentially subject to the CTA’s reporting requirements. The Court’s Order specifically noted:

“[T]he CTA … is hereby enjoined. Enforcement of the Reporting Rule ... is also hereby enjoined, and the compliance deadline is stayed…. Neither may be enforced, and reporting companies need not comply with the CTA’s January 1, 2025, BOI reporting deadline pending further order of the Court.”

On December 5th the U.S. Department of Justice filed a formal notice of appeal of the preliminary injunction to the Fifth Circuit. On December 6th, FinCEN released a statement in response to the Garland injunction, stating in pertinent part:

“In light of a recent federal court order, reporting companies are not currently required to file beneficial ownership information with FinCEN and are not subject to liability if they fail to do so while the order remains in force.”

V.                 Takeaways and Next Steps

The Garland injunction makes clear that Reporting Companies do not need to comply with the CTA and its requirements while the preliminary injunction remains in place. However, as the preliminary injunction has already been appealed to the Fifth Circuit, Reporting Companies should be aware that compliance could again be required on very short notice if the injunction is lifted.

As a result, some Reporting Companies may choose to continue voluntarily complying with the CTA reporting requirements. In doing so, these entities eliminate the risk of certain non-compliance penalties that may be imposed by FinCEN in the event the preliminary injunction is lifted.  Other Reporting Companies may choose to take no further action until a U.S. federal court or administrative agency provides additional guidance.

As you consider how best to proceed with your entities, note the following:

• Compliance with the Corporate Transparency Act is not legally required while the preliminary injunction remains in place;

• It is impossible to predict with any degree of certainty how the CTA’s legal battle will unfold;

• In the event the Garland injunction is overturned, it is unclear whether FinCEN will grant any sort of meaningful filing deadline extension; and

• In the event the Garland injunction is lifted, it is unclear whether FinCEN will waive late filing penalties, some of which can be significant (e.g., $500 per day of non-compliance for each entity) for those Reporting Companies that are not in compliance with deadline eventually imposed.

Disclaimer: nothing herein is intended to be used as specific legal advice for the reader. If you have any questions regarding the Corporate Transparency Act, please contact your Smith Pauley attorney to discuss your particular matter.

Dan Pauley is a Partner at Smith Pauley. As a corporate law and estate planning attorney, he uses the practical knowledge gained from his 100+ year-strong Pauley family office, commercial development, lumber yard, ranching and farming business to support the specific legal needs of his clients across the country. He counsels businesses and their owners on issues related to business formation, corporate and real estate transactions, succession planning, mergers and acquisitions, and estate planning.

He has extensive experience advising business clients in a variety of corporate and agricultural industries. From the start of any matter, he partners with his clients to deliver strategic solutions to meet their unique needs. He provides proactive, ongoing advice throughout the relationship, offering ideas to save time, costs and avoid business risks.

Skilled in advising clients through the various stages of the estate planning and probate process, he works with his clients to ensure their family’s futures are secured. His complex estate planning experience includes successfully litigating multimillion-dollar contested estates and trusts for his clients.