 | | The holidays may have come early for millions of businesses throughout the United States. Back in December 2023, we reported on the requirements under the Corporate Transparency Act (CTA). Unless a legal entity created in or registered to do business in the United States can satisfy one of the few and relatively narrow exemptions from reporting its beneficial ownership information (BOI) to the U.S. Department of the Treasury Financial Crimes Enforcement Network (FinCEN), the legal entity as a reporting company created before January 1, 2024, had until January 1, 2025, to file its BOI report with FinCEN. Reporting companies created on or after January 1, 2024, and before January 1, 2025, had ninety days after creation or registration to file. We have in fact been filing these BOI reports for many clients since the report is required under the CTA and the BOI reporting rule that FinCEN issued thereunder. Failure to timely file, amend, or correct a BOI report with FinCEN subjects the reporting company to potential civil, and in some cases criminal, penalties from FinCEN.
On December 3, 2024, U.S. District Judge Amos Mazzant from the Eastern District of Texas turned the CTA and the FinCEN BOI Reporting Rule on their heads, ruling that:
- "the CTA, 31 U.S.C. § 5336, is … enjoined";
- "[e]nforcement of the [BOI] Reporting Rule, 31 C.F.R. 1010.380 is also … enjoined";
- "the compliance deadline is stayed ….";
- "[n]either [the CTA nor the BOI Reporting Rule] 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."
Judge Mazzant reasoned that Congress's powers, which are expressly defined in the U.S. Constitution, do not include a "federal police power to regulate all aspects of public life." The Court disagreed that Congress had the power to enact the CTA under either the Constitution's Commerce Clause or its Necessary and Proper Clause.
According to the Court, "[u]pholding the CTA would require the Court to rubber-stamp what appears to be a substantial expansion of commerce power." Moreover, neither Congress's authority to (i) regulate commerce, (ii) regulate foreign affairs and further its national security interests, nor (iii) lay and collect taxes lead to the conclusion that the CTA is within Congress's powers.
The Court determined that the CTA and the BOI Reporting Rule are likely unconstitutional for purposes of a preliminary injunction. Judge Mazzant added that he has not yet made "an affirmative finding that the CTA and [BOI] Reporting Rule are contrary to law or that they amount to a violation of the Constitution." On this basis of his finding that the CTA and Reporting Rule are likely unconstitutional, however, Judge Mazzant determined that the U.S. government should be enjoined from enforcing the BOI Reporting Rule, and that the January 1, 2025, compliance deadline under the BOI Reporting Rule should be stayed.
The most surprising part of Judge Mazzant's order is his determination that the injunction should apply nationwide. Both the CTA and the BOI Reporting Rule apply nationwide to approximately 32.6 million existing reporting companies. Because the plaintiff in the Texas litigation is an organization with membership extending across the country, Judge Mazzant held that the extent of the constitutional violation plaintiffs have shown was best served through a nationwide injunction.
So what's next? The first question is whether the U.S. Department of Justice (DOJ) will appeal the preliminary injunction to the U.S. Court of Appeals for the Fifth Circuit, which handles appeals from proceedings in the Eastern District of Texas. Between now and December 31, 2024, reporting companies should monitor developments regarding this case. For instance, will FinCEN and/or the DOJ issue a position statement as to whether they will appeal or respect Judge Mazzant's decision? Or will the DOJ simply file an appeal? Either way, CTA compliance is reprieved, at least temporarily. If CTA withstands appeals and the potential adjustment under the incoming administration, companies may have a short window of time to ramp up compliance again at some point in the future. We will endeavor to provide additional guidance as the CTA landscape changes. In the meantime, please reach out to FWW for guidance as questions arise.
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