We previously reported that a federal court ruled that the Corporate Transparency Act is unconstitutional. But the decision only applied to the parties in that case. On December 3, another federal court blocked the Corporate Transparency Act. The good news is that this ruling applies nationwide.
The case, Texas Top Cop Shop, Inc., et. al. v. Garland, is in the Eastern District of Texas. The Plaintiffs sued the federal government earlier this year arguing that Congress does not have the power to pass the Act, and that the Act violates their individual Constitutional rights.
After many months of filings and hearings, the court issued a preliminary injunction. This means that the court has blocked the Corporate Transparency Act. The ruling also puts a pause on the rule that requires most small businesses to submit the Beneficial Ownership Information Report (BOIR).
Let’s discuss a few of the key parts of this decision and what may happen next.
What is the Corporate Transparency Act?
In 2021, Congress passed the Act with the purported goal of combatting money laundering and the financing of terrorism. It requires most small business owners to submit a report to the Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN).
The report must provide information about the business’s “beneficial owners.” A beneficial owner is someone who has at least 25% ownership of such a business, or who exercises substantial control over the business.
Reporting companies must disclose information such as who formed the company, the state of formation, the company’s address, tax ID number, and who the beneficial owners are. Individuals must submit their personal address or business address, state ID number and type, and an image of that ID document.
The law’s requirements are quite invasive. FinCEN would be storing tens of millions of records, with millions more being added every year. Failure to comply could lead to fines of $500 per day, and even federal prison if noncompliance was willful.
Why Did the Court Block the Corporate Transparency Act?
The Plaintiffs argued that the Act is not a proper exercise of Congress’s power. They also argued that the Act violates their Constitutional rights under the First and Fourth Amendments.
The court ultimately ruled on structural grounds in blocking the Corporate Transparency Act. It did not address the individual rights arguments.
The short and sweet of it is that neither the Interstate Commerce Clause nor the Necessary and Proper Clause empowers Congress to pass this law.
The Supreme Court has ruled that Congress can regulate interstate commerce in certain ways. This includes regulating the channels of interstate commerce, the instrumentalities of interstate commerce, and activities that substantially affect interstate commerce.
Using this reasoning, the court found that the Act did not regulate channels or instrumentalities of interstate commerce. There is not a particular object of the Act, unlike other cases that dealt with, for example, regulation of transportation or a specific commodity.
It also found that the Act does not substantially affect interstate commerce. The Act does not regulate a commercial act, but merely the creation of an entity with a government agency. There is not any distinctly commercial activity by filing a document with the secretary of state to form an LLC or corporation.
The fact that a company is a company does not knight Congress with some supreme power to regulate them in all aspects—especially through the CTA, which does not facially regulate commerce.
The court also rejected the government’s Necessary and Proper Clause argument. That clause in the Constitution gives Congress the authority to carry out the powers enumerated to it.
But the clause’s authority does not extend so far as to require small businesses to divulge owners’ sensitive information simply because a company exists. There has to be some commercial activity involved to bring in Congress’s power over interstate commerce—a “jurisdictional hook.”
In blocking the Corporate Transparency Act, the court also rejected arguments that the Act regulates foreign commerce and is a part of the government’s tax collection efforts.
Do Businesses Need to File the Beneficial Ownership Information Report (BOIR)?
The official order of the court blocks the government from enforcing the Corporate Transparency Act. The order also issues another restraint—a stay—on the BOIR compliance deadline of January 1, 2025.
[T]he CTA, 31 U.S.C. § 5336 is hereby enjoined. Enforcement of the Reporting Rule, 31 C.F.R. 1010.380 is also hereby enjoined, and the compliance deadline is stayed … Neither may be enforced, and reporting companies need not comply with the CTA’s January 1, 2025, BOI reporting deadline pending further order of the Court.
Unlike the other case out of Alabama, the Act is now blocked across the country. This means that no business needs to file the BOIR until the court issues a contrary order, or a higher court reverses this ruling.
What Happens Next?
The Alabama case is currently on appeal at the 11th Circuit. That court heard oral arguments in the fall and will likely issue a ruling sometime in early to mid-2025. The decision out of the Eastern District of Texas may speed up that timeframe.
Keep in mind that this is a preliminary injunction, not a final order. The injunction prevents enforcement while the litigation continues. So while the Corporate Transparency Act is blocked for now, its requirements could be back in the future.
The federal government appealed the injunction on December 5th, as expected. The case now goes to the Court of Appeals for the 5th Circuit. With the composition of that appellate court, the district court’s opinion will likely be upheld.
No matter how the 5th Circuit rules, that ruling would also likely be appealed to the U.S. Supreme Court. By that point, the 11th Circuit may also have its opinion published. If the 5th Circuit and 11th Circuit disagree, then it becomes highly likely that the Supreme Court would take the case.
But remember, any appeals from the court in Texas only deal with the preliminary injunction. They do not involve a final order from a district court. On the case shall go.
Final Thoughts on the Act Being Blocked
The future of the Corporate Transparency Act is uncertain. But for now, small businesses have a big win under their belts. The Act’s requirements are quite invasive and onerous. Few small business owners, in our experience, are even aware that this law exists.
Connell Law, PLLC is committed to helping entrepreneurs earn a good living by serving their customers. It is our position that the law should not compel entrepreneurs to disclose sensitive information to the federal government under threat of excessive fines and a prison sentence.
Unless the government has a reason to investigate a given business for criminal activity or civil violations, business owners are entitled to their privacy. We’re pleased that this federal court blocked the Corporate Transparency Act for all reporting companies.
We will continue to monitor these proceedings and keep our audience and clients informed. Please reach out to request a consultation if you have small business legal needs in Middle Tennessee.
This article has been updated since the original publication date.
