Corporate Transparency Act Blocked Nationwide by a Texas Federal District Court Judge

A Texas Federal District Court Has Held the Corporate Transparency Act to be Unconstitutional and Has Issued a Nationwide Injunction Against It and the Reporting Regulations

            On December 3 a Federal District Court (E.D. Tx), in a case styled Texas Top Cop Shop, Inc. v. Garland (Case No. 4:24cv478), held on a preliminary basis that the Corporate Transparency Act (31 U.S.C. § 5336) and the related regulations (primarily 31 C.F.R. § 1010.380(a)) are unconstitutional on the basis that Congress, in approving the law, acted outside its enumerated powers. Tex. Top Cop Shop, Inc. v. Garland, 2024 U.S. Dist. Lexis 218294 (E.D. Tx. Dec. 3, 2024). The primary substantive analysis of the decision assesses whether Congress’ power to regulate commerce under the Commerce Clause is sufficiently broad to encompass the CTA. The court found it is not and that the fact of existence without a showing that the entity is engaging in commerce is not enough to trigger coverage by the Commerce Clause.

            The decision does little to distinguish its analysis from the holdings in Firestone (134 A.F.T.R.2d 2024 5683; 2024 WL 4250192; 2024 U.S. Dist. LEXIS 170085 (Sept. 20, 2024)) and Community Associations Institute (2024 U.S. Dist. LEXIS 193958 (Oct. 24, 2024)), each to the effect that the CTA is a legitimate exercise of Congress’ authority under the Commerce Clause.

            In the coming days and months there will be no doubt significant commentary on the merits of this decision. Of greater immediate import is what will FinCEN do? As of this morning the BOSS website is still operating and accepting filings, and as I type this message neither the FinCEN nor the Department of the Treasury websites have published a statement as to what will be their next steps. That could well have changed by the time you read this message, so be checking those resources.

            But as to the preliminary injunction that was issued, “The Court determines that the injunction should apply nationwide.” Further, “Just as the injunction against enforcement of the CTA should apply nationwide, a stay of the Reporting Rule should apply nationwide.” What that means in substance is that reporting companies (corporations, LLCs, etc.), irrespective of when created, are not subject to an obligation to file and update beneficial ownership reports and are not subject to any of the CTA’s penalty provisions.

            It would be too much, however, to assume the CTA is dead. This case will be appealed to the 5th Circuit Court of Appeals. At this juncture we do not know the arguments that will be made, but an emergency request to either stay the injunction or to amend it to restrict its benefit to the plaintiffs (a group that would encompass the members of the National Federation of Independent Business) would not be surprising. The latter approach would recognize that this is a preliminary injunction issued before a trial on the merits, a posture in which a nationwide injunction is (arguably) inappropriate. You the practicing attorney will need to assess this uncertainty and determine with your clients whether it is better to stop all CTA compliance efforts, to proceed with collecting necessary information but not proceeding to file a BOIR, or something else.

            As for those other cases, the decision in National Small Business United, it holding the CTA is unconstitutional, has been appealed to the 11th Circuit Court of Appeals, and oral argument was held on September 27; we await that ruling. The Firestone and Community Associations Institute decisions (each substantively a denial of a preliminary injunction against the CTA) have been appealed to, respectively, the 9th and the 4th Circuit Courts of Appeal.