By William J. Labovitz, Esq. & Caleb S. Dunn, Esq.
Business owners have one less thing to worry about as we approach the end of the year.
A federal district court in Texas ruled on December 3 that a federal law imposing reporting obligations on certain companies is likely unconstitutional. The court issued a nationwide injunction blocking the federal government from enforcing the law, including an upcoming January 1 compliance deadline.
In a 79-page opinion and order in Texas Top Cop Shop, Inc., et al. v. Merrick Garland, Attorney General of the United States, et al., No. 4:24-CV-478, Judge Amos L. Mazzant III of the U.S. District Court for the Eastern District of Texas granted plaintiffs’ motion for a preliminary injunction and enjoined the Corporate Transparency Act (“CTA”), 31 U.S.C.A. § 5336, and its implementing regulations.
The CTA requires certain corporations, limited-liability companies and other business entities in the United States to submit information — including their legal and trade names, their principal places of business and the identity of “beneficial owners” — to the Financial Crimes Enforcement Network (“FinCEN”), the criminal enforcement arm of the U.S. Department of the Treasury. The CTA primarily applies to small businesses.
Under Judge Mazzant’s ruling, non-exempt companies formed prior to January 1, 2024, are no longer required to file their initial Beneficial Ownership Information (“BOI”) reports by January 1, 2025. We believe that the court’s order also precludes enforcement of requirements under the CTA that non-exempt companies formed in 2024 file their initial BOI reports within ninety days of formation, and that non-exempt companies formed in 2025 meet a thirty-day reporting deadline.
The federal district court in Texas held that the CTA and its related Reporting Rule may not be enforced “and reporting companies need not comply with the CTA’s January 1, 2025, BOI reporting deadline pending further order of the Court.”
Similar to a ruling by a federal district court in Alabama on March 1, the Texas federal court found that Congress likely exceeded its authority under the Commerce Clause of the Constitution in passing the CTA.
“Despite attempting to reconcile the CTA with the Constitution at every turn, the Government is unable to provide the Court with any tenable theory that the CTA falls within Congress’s power,” the court opined in the Texas Top Cop case. “And even in the face of the deference the Court must give Congress, the CTA appears likely unconstitutional.”
Judge Mazzant’s ruling was the first nationwide order blocking the CTA. The prior ruling by the U.S. District Court for the Northern District of Alabama only enjoined the government from enforcing the CTA against the plaintiffs in that particular case. The U.S. Court of Appeals for the Eleventh Circuit is currently considering the injunction issued by the Alabama district court.
Other federal district courts in Virginia and Oregon have declined to preliminarily block CTA enforcement, according to Bloomberg Law in a story posted on December 5.
“We continue to believe—consistent with the conclusions of other federal courts—that the CTA is constitutional,” a FinCEN spokesperson told Bloomberg Law, noting the agency is reviewing the ruling to determine its next steps.
Following the ruling by the federal district court in Texas, companies in Pennsylvania and elsewhere that are subject to the CTA may elect to postpone filing their BOI reports. However, business owners should take into account that the court’s ruling is preliminary. The federal government may appeal the ruling, including the nationwide scope of the injunction, to the U.S. Court of Appeals for the Fifth Circuit.
Business owners should monitor the changing regulatory landscape by subscribing to our legal updates, and reach out with any questions.
For more information about how the CTA and this ruling may impact your business, call us at 412-209-3200 or email wlabovitz@palawfirm.com or cdunn@palawfirm.com to schedule a free, no-obligation consultation.