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A Texas federal court judge has thrown a Christmas curveball at FinCEN with less than one month remaining before the CTA deadline of Jan. 1, 2025. On that date more than 30 million companies would be required to report their ownership information to the Treasury Department.

Judge Amos L. Mazzant III, of the U.S. District Court for the Eastern District of Texas, granted a nationwide preliminary injunction to temporarily block the enforcement of the Corporate Transparency Act. The ruling is only temporary, and the government has not yet announced its response to the decision, which could include an immediate appeal. Businesses should monitor for further developments if reporting may be required in the future.

Judge Mazzant wrote in his opinion:

Though seemingly benign, this federal mandate marks a drastic two-fold departure from history. First, it represents a Federal attempt to monitor companies created under state law — a matter our federalist system has left almost exclusively to the several States. Second, the CTA ends a feature of corporate formation as designed by various States — anonymity. For good reason, Plaintiffs fear this flanking, quasi-Orwellian statute and its implications on our dual system of government. As a result, Plaintiffs contend that the CTA violates the promises our Constitution makes to the People and the States. Despite attempting to reconcile the CTA with the Constitution at every turn, the Government is unable to provide the Court with any tenable theory that the CTA falls within Congress’s power.

The opinion was published on Dec. 3 in Texas Top Cop Shop, Inc. v. Garland (E.D. Tex., No. 4:24-cv-00478). A family-owned firearms and tactical gear retailer along with other businesses and the Libertarian Party of Mississippi alleged that the CTA falls outside of Congress’s powers to regulate interstate and foreign commerce. The plaintiffs reasoned that the CTA would regulate incorporated entities regardless of whether they engage in commercial activity.

This is not the first time a district court has ruled against the CTA. On March 1, 2024, the Northern District of Alabama Northeastern Division, in National Small Business United v. Yellen, No. 5:22-cv-1448 (N.D. Ala.), ruled the Corporate Transparency Act unconstitutional. However, the holding only applied to the plaintiffs in the Alabama federal case. (Click here to read the Adams and Reese alert on that decision)

What Now?

Continuing on the curveball and baseball analogy, we stay at the plate, wait for the next pitch, and get ready for the appeals process and future court decisions.

If you have already reported your Beneficial Ownership Information (BOI) to the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN), then that’s great news. If you have not yet filed, it is recommended to continue to get your affairs in order pertaining to ownership and stakeholder information in the event the injunction is overturned which would require entities to comply.

CTA Intended to Prevent Illicit Activity

The CTA is a federal law that requires businesses to disclose and report information about their owners and controllers to FinCEN. It was enacted by Congress in 2021 as an expansion of the anti-money laundering laws, intended to prevent terrorist financing, corruption, tax fraud, and other illicit activity. It went into effect on Jan. 1, 2024.

The Department of Justice previously announced that failure to comply with the reporting requirements of the CTA may result in significant civil penalties of $500 per day (up to $10,000) and imprisonment for up to two (2) years for willful violations. Non-compliant entities could face restrictions on their ability to conduct business with financial institutions.

The CTA reporting obligation applies to many U.S. corporate entities, approximately 32.6 million (Bloomberg Tax). A “Reporting Company” defined by FinCEN includes corporations, small businesses, limited liability companies (LLCs), and similar entities formed under state law, which do not meet one of the delineated twenty-three (23) exemptions; this even includes companies formed this year that were dissolved.

The CTA lists twenty-three (23) exemptions, such as companies in heavily regulated industries, like federal and state credit unions, certain banks, insurance companies, and established tax exempt organizations. Another common exemption is the Large Operating Company exemption, as defined in the CTA as having (1) at least 20 full-time employees, (2) more than $5 million in gross receipts or sales (on the latest tax return), and (3) an operating presence at a physical office within the United States. 

Conclusion

Adams and Reese will monitor the court systems and specifically FinCEN for any news and guidance on how to proceed following this federal court ruling.

For more information and detailed guidance, businesses are encouraged to consult with legal or tax professionals or visit the FinCEN website.

About Our Authors

Sean Buckley is a corporate services attorney in the Adams and Reese Houston office. Sean advises clients on a wide array of corporate matters, including the purchase and sale of equity and assets, and in a diverse array of industries, including real estate transactions, entity selection and formation, corporate governance, and franchise opportunity matters.

Brian Smithweck is a corporate services attorney in the Adams and Reese Mobile office. Brian practices in the areas of corporate, partnership and limited liability company planning, estate planning, probate, trusts and estates, M&A, tax planning and tax controversies. He represents businesses, individuals and families. He has a Master of Laws in Taxation.

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