10 Dec

Nationwide, preliminary Injunction blocks enforcement of Corporate Transparency Act and BOI reporting requirements.

By Kevin J. Palmersheim

December 10, 2024

On December 3, 2024, the Federal District Court for the Eastern District of Texas granted a preliminary injunction that bars the US Treasury/federal government from enforcing the Corporate Transparency Act (CTA) and the requirements for entitles and persons to file reports with FinCen disclosing company and personal beneficial ownership information(BOI). This preliminary injunction is immediate, and applies nationwide. While many businesses have already filed reports, those who have not can hold off – at least for now.

The Texas court ruled that the CTA constitutes an over-extension of congressional power to force entities created under state law to report for federal purposes, because none of the reporting or law is connected appropriately to interstate commerce. Furthermore, the law does not regulate an activity, but rather creates a regulation over state entities – many of which were formed under state laws that provide an ability for investors to remain anonymous. The anonymous corporate existence and operation of a business is not an economic activity that can be regulated. The Court further held that the government could not show that the CTA was “necessary and proper” to give the federal government constitutional authority to enact and enforce the law. Although the government certainly has an interest in detecting tax fraud and money laundering, it is an improper use of the federal government’s taxing power to create a regulatory system that does not, in any way, generate revenue.

The Court noted that the equities also favor the plaintiffs in granting the injunction. Interestingly, the court based its finding of irreparable harm principally on the plaintiffs’ affidavits which suggested they would have a cost burden of complying with the CTA reporting requirements. That seems to be somewhat of a stretch, given the relatively nominal costs associated with compliance, but shows how strongly the court feels that the law should not be enforced. The Court did suggest that even if irreparable harm did not exist based on the costs of compliance, that there would be irreparable harm based on the infringement of the reporting entities and individuals’ constitutional rights to privacy (The constitutional component seems to be more strongly in favor of irreparable harm. However, I assume the Court did not use the constitutional issue as its primary basis for irreparable harm in order to not make the privacy issue the primary one to go up on appeal, but that’s just my guess. I don’t know if the case will be appealed, now, given the outcome of the congressional and presidential elections).

Although the case was in Texas and involves a half dozen plaintiffs, and the plaintiffs expressly limited their request for a preliminary injunction to extend to those parties and the 300,000 members of one of the plaintiffs (the National Federation of Independent Business), the Court specifically states in its decision that a nationwide injunction is appropriate and that the injunction will be nationwide. This is a preliminary injunction, of course, and it means that the reporting requirements and all deadlines are stayed pending the final outcome of the case. But for now, those businesses who have not already reported can hold off on doing so.

Visit this link if you’d like to read the full decision.