By: Chris Way

Well, if you’ve been putting off completing your Beneficial Ownership Information (BOI) report, you’re in luck! As of December 3rd, the Corporate Transparency Act (CTA) is, at least temporarily, no more. If you’re wondering how the first acronym relates to the other, the CTA is the law that creates the BOI reporting requirement. This has been a big year for legal starts and stops! You might remember the noncompetition agreement drama of the spring and summer (which we wrote about here, here, here, and finally here).

TL;DR

If juicy legal details (perhaps, read: minutiae) aren’t your thing, then this paragraph is all you need. A Texas District Court has issued a preliminary injunction that prohibits the enforcement of the CTA and any requirement for you to complete a BOI report by the January 1, 2025, deadline. This is only a preliminary injunction though, and the issue has not been finally decided. But for now, businesses don’t need to worry about compliance with the CTA. If you didn’t complete your BOI report, FinCEN won’t be able to enforce any of the penalties associated with CTA non-compliance. Please note, the issue is not final. The requirements and enforcement authority may be reinstated in the future.

We Might Have Some Back-and-forth on This One Too

An important concept to understand here is that of a “preliminary injunction”. A preliminary injunction is a court order temporarily restraining, restricting, or suspending the ability to engage in some act. A court may grant a preliminary injunction if the plaintiff can demonstrate four elements.

(1) a strong chance of success on the merits of the case (meaning the plaintiff can convincingly show they have a good chance of winning in a future full-court proceeding when there’s time for a complete consideration of the issue).

(2) Substantial threat of irreparable harm to the plaintiff if the court does not grant the injunction.

(3) The harm to the plaintiff from not enjoining exceeds the harm to the defendant from not enjoining.

(4) The injunction does not harm the public interest. A preliminary injunction is not final or permanent. This means that whether the CTA is “absolutely unconstitutional” has not yet been decided. We may be in for a bit of back and forth as this issue works its way through any appeals.

What did the Court Say

The opinion (available from Bloomberg Law) comes from the Eastern District of Texas. Over 79 pages the Court determined that in enacting the CTA, Congress has committed constitutional overreach. At least they did to the standard needed for a preliminary injunction.

The Court recognized that the CTA and BOI reporting represented two significant departures from history and precedent. First, they found the CTA to be a federal attempt to exercise monitoring over business entities created under state law. The Court explained this is not generally permissible under our federalist system’s separation of powers between the national and state governments. Second, the Court found that the CTA ends corporate anonymity, which states were permitted to make a feature of state-level
business entities.

In possible defense of the CTA, the Court considered two possible sources of constitutional power for Congress to enact the CTA: the Commerce Clause and the Necessary and Proper Clause. Concerning the Commerce Clause, the district court found that the CTA did not regulate a channel or instrumentality of commerce. Nor did it regulate an activity that, in the aggregate, substantially affects commerce. Instead of regulating an existing activity, the Court felt that the CTA created a new activity. The court
provided, “And ‘anonymous existence’ is not an activity at all. It is a state of
being.”

Concerning the Necessary and Proper Clause, the Court stated that this clause must be linked to an enumerated power of Congress. It then held that the CTA was not sufficiently linked to Congress’ power under the Commerce Clause, Congress’ foreign affairs authority, or Congress’ power to collect taxes.

With that, the Court issued a nationwide preliminary injunction, explaining:

“The Court has determined that the CTA and Reporting Rule are likely unconstitutional for purposes of a preliminary injunction. It has not made an affirmative finding that the CTA and Reporting Rule are contrary to law or that they amount to a violation of the Constitution. Thus, the Court determines that the Government should be enjoined from enforcing the Reporting Rule and the January 1, 2025, compliance deadline under the
Reporting Rule should be stayed under § 705 of the APA”

“Therefore, the CTA, 31 U.S.C. §5336 is hereby enjoined. Enforcement of the Reporting Rule, 31C.F.R. 1010.380 is also hereby enjoined, and the compliance deadline is stayed under § 705 of the APA. Neither may be enforced and reporting companies need not comply with the CTA’s January 1, 2025, BOI reporting deadline pending further order of the Court.”

Wrapping Up

December is a busy time. Holiday parties, decisions to make before the close of the tax year, business planning for next year, and more. It may have felt difficult to squeeze in one more thing, the BOI report. If you were dreading making time for your BOI report, or confused about whether it applied to you, you’re in luck. The compliance deadline has been stayed and enforcement enjoined. We’ll keep an eye on this situation and report back as this situation develops.

And as you deal with the rest of your end-of-year planning, remember, that the team at Way Law is always here to help!