Business and International Tax Blog

With the year-end deadline looming for more than thirty million entities to file beneficial ownership information (“BOI”) reports with the Financial Crimes Enforcement Network (“FinCEN”) under the Corporate Transparency Act, 31 U.S.C. § 5336 (the “CTA”), a significant development has occurred. On December 3, 2024, a federal district court in the Eastern District of Texas issued a nationwide injunction on the CTA and its filing deadline in Top Cop Shop v. Garland et al., Case No. 4:24-cv-00478.

What Does this Ruling Say?

The CTA is preliminarily enjoined and cannot be enforced by FinCEN, a bureau within the U.S. Department of the Treasury. The court determined, among other reasons, that the law likely exceeds Congress’ authority and is therefore unconstitutional.

How has FinCEN Responded to this Ruling?

FinCEN has filed an appeal of the ruling. On December 7, 2024, FinCEN announced on its website that it will comply with the injunction while it remains in effect. FinCEN noted that companies are not currently required to file their BOI with FinCEN and will not be subject to liability if they fail to do so while the preliminary injunction remains in effect, but companies may continue to voluntarily submit BOI reports. Notably, FinCEN did not state whether it will provide a grace period or extended deadline for filing BOI reports if the preliminary injunction is suddenly lifted.

How is this Different from Previous Litigation?

In March, a federal district court in Alabama (National Small Business United v. Yellen, No. 5:22-cv-01448) similarly held the CTA unconstitutional, but that injunction applied only to the named plaintiffs. Other district courts, including those in Virginia and Oregon, have denied requests to enjoin the CTA. The Texas court’s ruling is the first to impose a nationwide injunction.

What Actions Should My Company Take Right Now?

1. Consider Whether to File Your BOI Report or Wait

   The constitutionality of the CTA remains unresolved, and the Fifth Circuit Court of Appeals could overturn the district court’s injunction at any time. If this happens, it is unclear how much time companies would have to file. To mitigate risk, some companies may choose to voluntarily file now, while others might adopt a wait-and-see approach. This decision should be based on your company’s risk tolerance and compliance readiness.

2. Be Prepared to File Quickly if the Injunction is Lifted

   FinCEN has not stated whether a grace period or extended deadline will be provided if the injunction is lifted. To avoid potential penalties, ensure your company is ready to file promptly should the need arise.

3. Monitor Fifth Circuit Rulings

   The Fifth Circuit Court of Appeals may overturn the injunction before ruling on the CTA’s constitutionality. Even if the appellate court finds the law unconstitutional, its decision may apply only to entities formed in Texas, Louisiana, and Mississippi that only operate in those states. A ruling by the Supreme Court may ultimately be needed to provide complete clarification across the United States if the CTA is constitutional. 

4. Factor the CTA into Business Changes

   Companies considering restructuring, mergers, consolidations, or dissolutions should continue evaluating the CTA’s potential implications. Likewise, changes in ownership or substantial control should not be overlooked, and ongoing compliance efforts should not be abandoned.

Conclusion

While the injunction provides temporary relief from the CTA filing requirements, the legal landscape is fluid. Companies should carefully weigh their options and remain proactive to ensure compliance if the injunction is lifted. Staying informed and prepared will help mitigate potential risks in this uncertain environment.

If you have any questions regarding the enforcement of the Corporate Transparency Act, or if we can be of any assistance, please reach out to our firm and we would be happy to assist.