Federal Court Suspends BOI Reporting After Questions on CTA’s Constitutionality

The US District Court for the Eastern District of Texas has temporarily suspended BOI reportings following challenges on the constitutionality of the Corporate Transparency Act (CTA).

The preliminary injunction, issued last December 3, 2024, prohibits the federal government from nationwide enforcing the CTA and its BOI reporting requirements. This decision comes after Texas Top Cop Shop, Inc., et al. g. Garland ruled the CTA’s Beneficial Ownership Information (BOI) reporting requirements unconstitutional and could be considered an overstep of its powers under the Commerce Clause.

Notably, this isn’t the first legal challenge the CTA has faced. Courts in three other circuits have also questioned the constitutionality of BOI reports.

Understanding The Basics of the BOI Reporting

Enacted as part of the Anti-Money Laundering Act of 2020, the CTA requires “reporting companies” to submit Beneficial Owner Information (BOI) reports to the US Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) before or on January 1, 2025.

BOI reports are designed to uphold corporate transparency and prevent illegal activities such as money laundering and serious tax fraud. They contain information about the “reporting company” and its “beneficial owners.” 

The CTA defines a reporting company as “a corporation, limited liability companies (LLCs), or other similar entities created by the filing of a document with a Secretary of State or a similar office under the law of a State” or “formed under the law of a foreign country and registered to do business in the United States.”

A beneficial owner is “an individual who, directly or indirectly, exercises substantial control over an entity” or “owns or controls not less than 25% of the entity’s ownership interests.”

Any reporting company that fails to submit its BOI reports may face civil and criminal penalties depending on the violations committed.

A Question of Constitutionality

Businesses in four circuits have questioned the CTA’s constitutionality and each lawsuit led to different conclusions.

In Texas Top Cop Shop, Inc., et al. g., Garland, the District Court of the Eastern District of Texas agreed with the plaintiffs’ claim that Congress doesn’t have enough power under the Commerce Clause to enact CTA’s reporting requirements.

The court explained that the CTA does not regulate channels of interstate commerce because, according to its text, its reach is only limited to companies that engage in interstate commerce.

A Supreme Court precedent holds that Congress can regulate specific activities under the Commerce Clause if there is a “rational basis” for concluding that the regulated activity significantly affects interstate commerce. 

However, the Eastern District of Texas says the CTA did not pass this test because the statute “does not regulate any pre-existing activity.”

Nine months before the preliminary injunction, the Northern District of Alabama also received a lawsuit similar to Texas Top Cop Shop.

In National Small Business United v. Yellen, Northern Alabama’s district court ruled that the CTA was unconstitutional. The court granted summary judgment to its plaintiffs, citing the same reasoning that the Eastern District of Texas used in its injunction.

The district court argued that Congress’s foreign affairs powers could not justify the enactment of BOI reporting because the law only regulates domestic incorporation. 

Conversely, the District of Oregon and the Eastern District of Virginia claimed the CTA was constitutional. 

Although both circuits denied the motion for preliminary injunction in Firestone v. Yellen and Community Associations Institute v. Yellen, respectively, their reasoning for the ruling differs.

The District of Oregon explained that the CTA is constitutional under the Commerce Clause. However, it did mention that the statute must establish a rational basis for concluding that the regulated activities significantly impact interstate commerce.

In contrast, the Eastern District of Virginia reasoned that the plaintiffs in Community Associations Institute v. Yellen did not have enough evidence to prove that the CTA was an invalid exercise of Congress’s commerce power. Virginia’s district court did not share its views on the CTA’s constitutionality.

What’s Next?

FinCEN has since released an alert on its BOI webpage, expressing its disagreement with the injunction.

The alert stated, “While this litigation is ongoing, FinCEN will comply with the order issued by the Eastern District Court of Texas for as long as it remains in effect. Therefore, reporting companies are not currently required to file their BOI reports with FinCEN and will not be subject to liability if they fail to do so while the preliminary injunction remains in effect.”

The agency also stated that it will still accept BOI reports voluntarily filed while awaiting further legal proceedings.

Meanwhile, the government has appealed the nationwide injunction from Texas Top Cop Shop to the Fifth Circuit. The three other court decisions we’ve mentioned are also on appeal in the Ninth, Fourth, and Eleventh Circuits.

Experts say any disagreement among the appeals courts could lead to a Supreme Court review.

NCH Empowers Clients to Make the Right Call

While FinCEN has stated it won’t enforce CTA’s noncompliance penalties while the BOI reporting is suspended, NCH encourages its clients to decide whether to submit their reports.

Filing a BOI report remains a proactive measure for ensuring compliance with the current regulatory requirements. Indeed, the ruling raised significant uncertainties about CTA’s legality, but its future is still in the air. The Fifth Circuit may reverse the injunction or vote to uphold the suspension.

Until a final ruling is made, the decision is up to you, the business owner. You could continue preparing your BOI report while the suspension is still in effect. This way, you’ll be prepared should the Fifth Circuit lift the injunction.

You can also choose to wait until the dust settles. Regardless of your choice, NCH empowers you to make the right decision.

We aim to ensure that you are aware of your legal obligations as a business owner. We will continue to assist you and provide the necessary tools and resources to help you make informed decisions about your business. 

Stay ahead of the curve! Visit our website here to track the latest developments on the BOI injunction and get expert advice on what to do next.