12/04/2024
On December 3, 2024, a Texas-based federal court issued a sweeping order prohibiting the federal government from enforcing the Corporate Transparency Act (CTA) anywhere in the country. Texas Top Cop Shop, Inc., et al. v. Garland, et al., Case No. 4:24-cv-478 (E.D. Tex.). The Court held that the CTA—which would have required an estimated 32.5 million companies in the United States as of January 1, 2024, to submit sensitive information regarding their “beneficial owners” (BOI) to the United States Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) by January 1, 2025—was likely unconstitutional and that its implementation would irreparably harm reporting companies if they were forced to comply. The Court enjoined the CTA’s enforcement nationwide, specifically stating that neither the Act nor its related regulations may be enforced, and that “reporting companies need not comply with the CTA’s January 1, 2025, BOI reporting deadline[.]”
The Court determined that Congress exceeded its legislative powers when it enacted the CTA, which the Court characterized as “quasi-Orwellian.” In the Court’s view, upholding the CTA and its requirement that most entities created or registered under state law must continually disclose information to the federal government “would be to rubber-stamp a new form of federal power” that would “threaten the very fabric of our system of federalism.” The Court saw the CTA as a dangerous precedent, observing that “[i]f the Court were to sanction such an extension of legislative power today, then there is no telling how Congress would control companies tomorrow. 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[.]” The Court further found that forcing reporting companies to comply with the CTA substantially threatens their constitutional rights. Given the CTA’s constitutional flaws and threatened harm, the Court enjoined the federal government from enforcing it pending further order of the Court.
Key Takeaways
Unlike other court decisions that have examined the CTA’s constitutionality, Texas Top Cop Shop explicitly enjoined the CTA nationwide, finding that “[a] nationwide injunction is appropriate in this case.” This means that “[existing] reporting companies need not comply with the CTA’s January 1, 2025, BOI reporting deadline,” and that FinCEN cannot enforce any of the CTA’s penalties for willful noncompliance against entities or individuals.
In addition to existing companies whose reporting deadline was just weeks away, the CTA requires companies created or registered in the United States during 2024 to submit a BOI report to FinCEN within 90 days of creation or registration, which timeframe shortens to 30 days as of January 1, 2025. According to FinCEN’s estimates, 5 million companies are created or registered in the United States each year and would be captured. As of last month, reportedly more than 8 million BOI reports had been submitted to FinCEN, most of which were presumed filed by newly formed reporting companies. The Court’s order enjoins enforcement of the entirety of the CTA.
The Court’s decision will likely not be the final word on the CTA’s enforceability. To begin, the Court entered only a preliminary injunction, which it could theoretically reconsider at some point in the future. The more likely next step, however, is that the government will immediately appeal this decision to the United States Court of Appeals for the Fifth Circuit. A further appeal could be taken to the United States Supreme Court. But unless a court specifically dissolves the Texas Top Cop Shop injunction, companies will not be required to comply with the CTA’s reporting requirements.
I am not surprised, other than it happened so quickly! I have ceased preparing these unless or until the situation changes.
