Federal court blocks nationwide enforcement of Corporate Transparency Act (CTA)
Overview: A major setback for the Corporate Transparency Act
On December 3, 2024, a federal court in Texas issued a landmark ruling prohibiting the enforcement of the Corporate Transparency Act (CTA) across the United States.
The decision, made in the case of Texas Top Cop Shop, Inc. v. Garland (Case No. 4:24-cv-478, E.D. Tex.), challenges the constitutionality of the CTA, which aimed to mandate that millions of companies disclose sensitive beneficial ownership information (BOI) to the Financial Crimes Enforcement Network (FinCEN).
This ruling has effectively stalled the January 1, 2025, deadline for compliance, providing relief to an estimated 32.5 million US businesses.
What is the Corporate Transparency Act?
The CTA was designed to combat illicit financial activities by requiring most companies operating in the US to file a report with FinCEN identifying their beneficial owners.
Key requirements of the CTA
Who must report: Most entities created or registered under state law.
What must be disclosed: Names, addresses, dates of birth, and other identifying information of beneficial owners.
Deadlines:
- Existing companies: January 1, 2025.
- Newly created companies: Within 90 days of registration (30 days starting in 2025).
Failure to comply with the CTA carried significant penalties, including fines and potential criminal charges.
Court’s decision: Why the CTA was blocked
The federal court's decision cited constitutional concerns, emphasizing the CTA's broad reach and its potential harm to businesses.
Key points from the ruling:
- Exceeding Congressional power: The court criticized the CTA as “quasi-Orwellian,” arguing that Congress overstepped its legislative authority. It warned that upholding the Act could set a dangerous precedent, allowing unchecked federal regulation of businesses.
- Threats to constitutional rights: Forcing companies to submit BOI reports was deemed a violation of fundamental rights, including privacy and protection from government overreach.
- Nationwide impact: Unlike previous cases examining the CTA, this ruling included a nationwide injunction, ensuring no company in the US is obligated to meet the January 1 deadline or face penalties.
What happens next?
The court’s decision is a preliminary injunction, meaning it halts enforcement temporarily. However, this ruling sets the stage for ongoing legal battles.
Possible next steps:
- Appeals process: The federal government is expected to appeal the ruling to the US Court of Appeals for the Fifth Circuit. Further appeals could reach the Supreme Court.
- Impact on businesses: Unless the injunction is overturned, companies are not required to comply with the CTA’s reporting requirements.
What does this mean for businesses?
The court's decision provides temporary relief for millions of businesses, but uncertainty remains as legal challenges continue.
Immediate takeaways:
- Existing businesses: No BOI reports need to be filed by January 1, 2025.
- Newly formed companies: Reporting requirements are also suspended for those created in 2024 and beyond.
Long-term considerations:
Businesses should monitor updates on the CTA as the situation evolves. Compliance requirements could be reinstated if the injunction is overturned.
Final thoughts
This ruling is a significant pause in the federal government’s efforts to implement the CTA. While businesses are temporarily relieved from compliance, the legal and regulatory landscape remains uncertain.
At TFX, we help US businesses navigate complex tax and regulatory requirements. Stay informed and consult our tax experts to ensure you're prepared for any changes in the law.