Background
Congress, seeking to root out money laundering schemes and foreign criminal investments enacted the Corporate Transparency Act (CTA). In furtherance of the CTA the Department of the Treasury through the Financial Crimes Enforcement Network (FinCEN) enacted regulations and a Beneficial Ownership Information Report form (BOIR) that must be filed by January1, 2025 by every American company, including every professional practice that was organized as a corporate entity or an LLC. Only sole proprietorships (and certain specialized companies operating under other regulations) are exempted. As with all federal regulations, very substantial criminal and civil penalties are to be imposed on the noncompliant. In essence the BOIR reporting rule requires that every company must report detailed personal information of every individual who has any substantial controlling authority in the company and every person who owns 25% or more of the company. The information gathered is then to become available to most federal, state and local law enforcement agencies. Even the personal information of the person (the accountant or attorney) who legally formed the company must be reported.
Challenges to The CTA
Offended by this burden and intrusion into the lawful organization and operations of their companies several parties challenged the authority of Congress and The Department of the Treasury’s FinCEN to enact and enforce the CTA.
The main question in the challenge to the CTA was: where did the federal government get the right to delve into the ownership and management of 33 million innocent, innocuous, and private companies? Bearing in mind that Congress may only exercise the powers that the Constitution expressly vests it with and that the States and the people retain the remainder, Treasury argued Congress was, in fact, given such authority by the “commerce clause” Article I, Sec. 8, cl. 3 of U.S. Constitution. However, this week, by order issued in Texas Top Cop Shop, Inc., et al. v. Garland, et al (E.D. Tex.) the District Court ruled that nothing in the Commerce Clause gave the federal government the power to impose the CTA on business entities lawfully organized under state law. The Court found that these entities, simply by organizing and operating under state law, were not automatically in the channels of interstate commerce nor were they instrumentalities of interstate commerce. Further, the Court stated that the CTA did not actually regulate any interstate activity and the mere act of organizing and operating a company under state law had no substantial impact on interstate commerce. With this analysis completed, the District Court issued a preliminary injunction effective December 3, 2024 prohibiting the Department of Treasury from enforcing the CTA against any party nationwide.
So, did this ruling conclusively end the FinCEN reporting requirement? Sadly, no. There are three other ongoing cases challenging the CTA. As in Texas Top Cop, the Federal District Court for the Northern District of Alabama entered an order declaring the CTA unconstitutional and permanently enjoining the government from enforcing the CTA, but only against the named plaintiffs in that case. Nat’l Small Bus. United v. Yellen, No. 5:22-cv-01448-LCB, 2024. But, then conversely, in Firestone v. Yellen (134 A.F.T.R.2d 2024 5683; 2024 and Community Associations Institute v. Yellen (2024 U.S. Dist. LEXIS 193958, the courts ruled that the CTA was, in fact, a legitimate exercise of Congress’ authority under the Commerce Clause. No surprise, all four of these cases are now on appeal or in further litigation.
Conclusion
For now, it appears that the Texas Top Cop nationwide injunction against the CTA reporting requirements probably allows covered entities to defer reporting. However, Treasury has not yet made any public announcements on how it intends to accommodate these rulings.
FinCEN’s E-filing portal is up and running at https://www.fincen.gov/boi and anyone who wants to file can do so. Alternatively, those who choose to wait and see probably remain on solid ground, as well. At this point in time there is simply no right choice, but probably no wrong choice ether. So, for those who think it more prudent to file, a copy of the E-filing form is attached.
Caveat
This article is only intended as a review of typical facts and basic law. Its purpose is to help spot issues for discussion and further inquiry. It is not a substitute for obtaining advice from your legal counsel, other sources of authoritative expertise. or the government officials responsible for administering these laws.
The reader is advised that laws, regulations and especially published policies of state and federal agencies are constantly subject to amendment and changes in interpretation. Finally, reliance on this article in setting practice protocols or as a defense to government action is further limited in that audit and enforcement actions are always, to some degree, subject to the discretion of government officials.