Federal Court Blocks Enforcement of Corporate Transparency Act

Beneficial Ownership Information reporting is on hold (for the time being)

On December 3, 2024, the U.S. District Court for the Eastern District of Texas, Texas Top Cop Shop, Inc. v. Merrick Garland, issued a memorandum opinion and order granting a nationwide preliminary injunction against the enforcement of the Corporate Transparency Act (“CTA”) and its implementing regulations. The decision comes less than a month before businesses formed prior to January 1, 2024, were required to meet the Beneficial Ownership Reporting (BOI) deadline of January 1, 2025.

Summary of the court’s decision

A family operated firearms and tactical gear retailer, Texas Top Cop Shop, Inc., and other co- plaintiffs, challenged the constitutionality of the CTA, arguing that it violates their rights under the First, Fourth, Ninth, and Tenth Amendments. The plaintiffs sought a preliminary injunction to prevent the enforcement of the CTA.

The court granted the plaintiffs’ motion, finding, among other things, that they were likely to succeed on the merits of their Tenth Amendment challenge, that they would suffer irreparable harm without an injunction, and that the balance of equities and the public interest favors the plaintiffs. The court concluded that the CTA likely exceeds Congress’s powers under the Commerce Clause and the Necessary and Proper Clause of the U.S. Constitution, as it regulates the anonymous existence of corporations, which is not an activity that substantially affects interstate commerce.

Next steps for reportable entities

The CTA and its reporting rules are on hold for now. The government could appeal the court’s order or seek a stay of the injunction pending an appeal. It’s also possible that the injunction could be revisited when the case goes to trial.

Although companies are no longer required to submit BOI reports, reports can be filed voluntarily.

While this preliminary injunction represents a significant development regarding BOI reporting, it does not mean that the requirement will be gone forever. We recommend consulting with legal counsel and reviewing the information on FinCEN’s BOI homepage to become familiar with the reporting requirements. Additionally, it is advisable to continue gathering the necessary information for submitting BOI reports in the event that the injunction is lifted.

Background

The CTA is part of the National Defense Authorization Act. The CTA represents an anti-money laundering initiative by requiring entities with the potential to be considered anonymous shell companies to report information regarding beneficial ownership. The Financial Crimes Enforcement Network (FinCEN) is developing a database to store all information received from reporting entities. FinCEN can only release the data for law enforcement, national security, or intelligence purposes. In previous articles, we highlighted the provisions of the 2021 Corporate Transparency Act (CTA) and the Beneficial Ownership Reporting Rules.

We will continue to provide information on new or changing reporting requirements to keep your business up to date on compliance matters.

Sources

• Whiteford Law
• Williams Mullen