Congress enacted the Corporate Transparency Act (the “Act”) for Fiscal Year 2021 as part of the National Defense Authorization Act with an effective date of January 1, 2024. The Act requires any “Reporting Company” to file a “Beneficial Ownership Information” (“BOI”) report with the Financial Crimes Enforcement Network (“FinCEN”) disclosing its “Beneficial Owners.” Every Reporting Company created on or after January 1, 2024, also needs to disclose its “Company Applicants.” Reporting Companies also need to report changes in Beneficial Owners as they occur. Failure to report the required information may result in civil penalties of up to $500/day until corrected or criminal penalties of 2 years imprisonment or a $10,000 fine. The penalties increase depending on the severity of the failure to report. For greater detail on the definitions of these words or the general provisions of the Act itself, refer to the earlier blogs.
The Act has created waves in the Estate Planning community because of its broad application, steep penalties, and complex provisions. Plaintiffs have challenged the Act in at least fourteen different federal court cases. Of those cases, National Small Business United, et al. v. Yellen, et al., United States District Court, Northern District of Alabama, Case No. 5:22-cv-01448-LCB seemed to have the most traction because the district court granted the plaintiff’s motion for summary judgment and ruled that the Act exceed Congress’ constitutional authority. The court enjoined the Treasury Department from enforcing the Act against the plaintiffs in that case. It was important because it was the first case to declare the Act unconstitutional, albeit with a narrow class of litigants. The Treasury Department appealed to the 11th Circuit Court of Appeals which heard oral arguments on September 27, 2024. As of this writing, the court has not issued an order, although many expect a remand to the lower court.
I have watched these cases closely and have advised clients regarding the need to file the BOI reports and tried to answer questions regarding who should file, the information required in the filing, and the deadline for disclosure. Countless resources have reminded everyone that as of January 1, 2025, every single Reporting Company, regardless of its date of creation, needs to file its initial BOI report. The holding of a recent case questions the obligation to file the report by that deadline, the imposition of penalties for failure to file, and the legality of the Act itself.
On December 3, 2024, Judge Amos L. Mazzant, III granted a preliminary injunction preventing the government from enforcing the terms of the Act in the United States District Court for the Eastern District of Texas, Sherman Division case, Texas Top Cop Shop, Inc., et. al. v. Merrick Garland, Attorney General of the United States (E.D. Tex., No. 4:24-cv-00478). For those interested in reading the opinion in full, you can find it at Bloomberg Law Court Dockets Case No. 4:24-cv-00478-ALM.
In the opinion, Judge Mazzant carefully considered the scope of the injunction and indicated that the Constitution vests district courts with the “judicial power of the United States” which gives the court power to issue a nationwide injunction. That power exists only insofar as necessary to provide complete relief to the plaintiff. The opinion continues that in this case, the plaintiffs find complete relief only with a nationwide ban because the plaintiffs were located nationwide; anything short of that would not work. Ultimately, the opinion concluded that the Act was unconstitutional because it exceeded Congress’ power. It reasoned that the reporting rule that implemented the Act was likewise unconstitutional and thus enjoined the government from enforcing the provisions of the Act.
Although the opinion in this case purported to invalidate the Act nationwide, that is not the end of the story. The Texas court issued only a preliminary injunction meaning that the court could reconsider it at any time. More likely, though, the government will appeal this decision to the United States Court of Appeals for the Fifth Circuit and depending on what happens there, the case may make its way to the Supreme Court. Unless and until that happens, or until another court dissolves the Texas Top Cop Shop injunction, Reporting Companies have no duty to comply with the Act reporting requirements but that does not necessarily mean that they should not comply. Failure to file a BOI report carries significant penalties. Arguably, if the Act does not apply, then neither do those penalties; however, if a court lifts that injunction or a higher court dissolves it, that could result in significant penalties for all Reporting Companies that failed to file their BOI reports. A Reporting Company can avoid penalties by filing its BOI report. Anything else leaves the Reporting Company, or rather the individuals running the company, vulnerable to imposition of penalties.
As this article demonstrates, the Act has faced significant scrutiny since its passage. Given the numerous challenges and this recent ruling, questions exist regarding the constitutionality of the Act. Ultimately, each Reporting Company needs to determine whether the benefits of filing when unnecessary and thereby avoiding any potential penalties outweigh the potential burden of filing and disclosing the requested information.