Corporate Transparency Act Compliance Paused Nationwide: Key Details and Implications
The Corporate Transparency Act (CTA) and its Beneficial Ownership Information (BOI) Reporting Rule, issued by the Financial Crimes Enforcement Network (FinCEN), require most legal entities created or registered in the United States to report their beneficial ownership information. The compliance deadline for these reporting companies was set for January 1, 2025. Noncompliance could lead to civil and criminal penalties.
However, a pivotal ruling on December 3, 2024, by U.S. District Judge Amos Mazzant of the Eastern District of Texas, has halted the enforcement of the CTA and the BOI Reporting Rule. His decision not only enjoins the law and its enforcement nationwide but also stays the compliance deadline until further notice.
Details of the Court’s Ruling
In the case of Texas Top Cop Shop, Inc. v. Garland (Case No. 4:24-cv-00478), Judge Mazzant ruled that:
The Corporate Transparency Act is enjoined:
“The CTA, 31 U.S.C. § 5336, is … enjoined.”
Enforcement of the BOI Reporting Rule is prohibited:
“[E]nforcement of the [BOI] Reporting Rule, 31 C.F.R. 1010.380, is also … enjoined.”
The compliance deadline is stayed:
“The compliance deadline is stayed ….”
No obligation for reporting companies:
“Reporting companies need not comply with the CTA’s January 1, 2025, BOI reporting deadline pending further order of the Court.”
The Court’s Constitutional Reasoning
Judge Mazzant’s decision hinges on the constitutional limits of Congressional power. He argued that the U.S. Constitution does not grant Congress the authority to regulate all aspects of public life, stating:
“Congress’s powers, expressly enumerated in the U.S. Constitution, do not include a federal police power to regulate all aspects of public life.”
The court also rejected the idea that the CTA was justifiable under:
The Commerce Clause: The court found that the CTA represented an overextension of Congress’s power to regulate interstate commerce.
The Necessary and Proper Clause: Judge Mazzant noted that this clause does not grant independent authority and must tie back to an enumerated power.
The ruling further stated:
“Upholding the CTA would require the Court to rubber-stamp what appears to be a substantial expansion of commerce power.”
The judge concluded that Congress’s authority to regulate commerce, foreign affairs, or taxation does not adequately justify the CTA’s requirements.
Although Judge Mazzant stopped short of declaring the CTA unconstitutional, he determined there was a strong likelihood it would be found unconstitutional, justifying the preliminary injunction.
Nationwide Application of the Injunction
Judge Mazzant’s decision applies nationwide, encompassing approximately 32.6 million legal entities subject to the CTA. He explained that because the plaintiff organization’s members are located across the country, a broad injunction was necessary to address the scope of the constitutional issues.
What Happens Next?
The U.S. Department of Justice (DOJ) may appeal the ruling to the U.S. Court of Appeals for the Fifth Circuit. Key questions remain:
Will FinCEN or the DOJ issue statements clarifying their stance on the ruling?
Will the DOJ file an appeal, and if so, how quickly will the appellate court respond?
Until further notice, the January 1, 2025, compliance deadline is stayed. Reporting companies are not currently required to submit BOI reports to FinCEN but should remain vigilant and monitor developments.
Implications for Businesses
Entities potentially subject to the CTA should consult legal counsel to understand the impact of this ruling. While the compliance deadline is paused, businesses should be prepared to act promptly should the injunction be overturned or modified.
For questions or further guidance, consider consulting attorneys specializing in corporate transparency, compliance, and federal regulatory matters.
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