You've Got Forever (The Corporate Transparency Act)

Looks Like You Have More Time To File

Well. Let me tell you, it seemed like the U.S. District Court for the Eastern District of Texas’ ears must’ve been ringing.

Quite literally the day after last week’s article was published, which dealt with the Corporate Transparency Act’s (the “CTA”) Beneficial Ownership Interest Report (the “BOI Report”) filing requirements and deadline, the Eastern District of Texas issued a nationwide temporary injunction against the Financial Crimes Enforcement Network (“FinCEN”) on enforcing those exact filing requirements. For reference, an injunction is a court order to stop doing a particular thing. So, the Eastern District of Texas has stopped FinCEN from enforcing the CTA’s BOI Report requirement nationwide.

Texas Top Cop Shop v. Merrick Garland, Attorney General of the United States: The Source of the Injunction

The injunction arises out of a case called Texas Top Cop Shop v. Merrick Garland, Attorney General of the United States. There are six plaintiffs, varying from individuals, to domestic corporations that do not engage in interstate commerce, to foreign business entities that do, as well as not-for-profit corporations, and 501(c)(3) tax-exempt entities. Most, but not all, of the Plaintiffs are subject to the BOI Report filing requirements and sued on May 20, 2024, to declare the CTA unconstitutional and render it unenforceable.

To grant a preliminary injunction, the court must find that the party asking for the injunction has a “likelihood of success on the merits,” meaning they will ultimately win the case at trial.

The Honorable Amos Mazzant, the judge overseeing the case, noted the CTA was “unprecedented,” as the Federal government was attempting to establish a mechanism to monitor state business entities, and effectively ending corporate anonymity, which states, like Wyoming, have intentionally included as part of the state’s process for forming business entities.

While ultimately leaving the constitutionality of the CTA for another day, it appears he found the Plaintiff’s arguments very persuasive, as he granted a preliminary injunction against the CTA’s enforcement that the Plaintiffs sought on December 3, 2024.

Should I Submit Anyway?

So, what happens now? Well for the time being, if you are a Reporting Company, which FinCEN has defined as basically any business entity created through a state’s department of state, with the exception of not-for-profit corporations (i.e. corporations, limited liability companies, limited liability partnerships, limited liability limited partnerships, business trusts, and limited partnership) that is not already subjected federal reporting requirements by virtue of the industry the business entity is in (i.e. banking, insurance, securities, nonprofits, etc.) You do not have to comply with the CTA’s BOI Report filing requirements as of the date of the injunction. You may still wish to do so, but by virtue of said preliminary injunction issued by the federal district court out of the Eastern District of Texas, FinCEN cannot enforce the penalties for noncompliance, which were civil penalties of up to $591 per day and criminal penalties of two years imprisonment and a fine of up to $10,000.

Is This It For the Corporate Transparency Act?

In my opinion, this maybe it for the CTA. Judge Mazzant’s relied heavily on statutory interpretation (using the text of the law as is and not considering Congress’ intention when passing the law) to dissect the issues in the case. And his reasons for finding that the CTA would not succeed on the merits were based on understanding the CTA as Federal overreach and a violation of State’s rights.

Favorable views towards statutory interpretation, opposing Federal overreach, and supporting the preservation of state’s rights are common in conservative jurisdictions like Texas. So, it would not be surprising if the appellate court, which is the United States Court of Appeals for the Fifth Circuit, which also oversees Louisiana and Mississippi, also found these arguments persuasive. Similarly, there is commonly what is referred to as a “conservative supermajority” on the Supreme Court,” who would probably agree with Judge Mazzant’s approach and reasoning.

The one consideration that might help a ruling in favor of the CTA is the national security considerations. The CTA is aimed at stopping international criminal groups from using corporate anonymity to fund their activities. However, I believe it is more likely that courts will tell Congress that its goal is acceptable, but the CTA affects too many people in its pursuit of that aim; so they need to try again.

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