Last week, in a federal district court in Texas, a significant event took place. Judge Amos Mazzant issued an injunction against the United States Treasury, preventing the implementation and enforcement of the Corporate Transparency Act. This act, signed into law in 2021 as part of the Defense reauthorization package, aimed to address the issue of money laundering through shell companies. Since early this year, Overdrive readers have been aware of the CTA's setup of a reporting system for small business LLCs and corporations. These entities were required to report their "beneficial ownership" identity information to the U.S. Treasury's Financial Crimes Enforcement Network (FinCEN). However, a big deadline for required filings was looming at the end of this month, with stiff penalties for non-filing. But Judge Mazzant's December 5 ruling in Texas Top Cop Shop, et al v. Merrick Garland put that deadline on hold, favoring arguments against the law's constitutionality. The suit was brought by the named plaintiff, a seller to law enforcement in Texas, and five others, including the National Federation of Independent Business (NFIB), which sued on behalf of its membership.

NFIB's Perspective on the Ruling

Beth Milito, executive director for NFIB's Small Business Legal Center, emphasized that the BOI reporting requirements are a harmful invasion of small business owners' privacy and a misuse of their valuable time. Thankfully, the Court agreed and granted a preliminary injunction, providing small business owners with a reprieve from this burdensome rule. This ruling is seen as a huge victory for small businesses nationwide, especially as many Main Street small businesses were only four weeks away from the deadline to file their information according to the CTA.First Judge's Ruling Against the ActJudge Mazzant's ruling against the act is not an isolated incident. As early as May, a district court in Alabama was the first to declare the law unconstitutional following a suit brought by the National Small Business Association with a named plaintiff as a member. This shows that there are concerns about the constitutionality of the CTA from different judicial perspectives.Relief from the Law's RequirementsThe relief from the law's owner-info-reporting requirements was applied narrowly in the previous case, including only the named plaintiff and NSBA members. But with this new order, FinCEN's website acknowledges broad relief as long as the order remains in effect. FinCEN noted that in light of the recent federal court order, reporting companies are not currently required to file beneficial ownership information with FinCEN and are not subject to liability if they fail to do so while the order is in force. However, reporting companies may still continue to voluntarily submit beneficial ownership information reports.FinCEN and Treasury's ResponseFinCEN and Treasury were swift with an appeal, filing the same day as the ruling, December 5. As the case plays out, the deadlines for filing and penalties for non-filing will remain on hold. FinCEN also mentioned that its reporting system for small businesses will remain functional for voluntary filings, anticipating the law's potential long-term effectiveness. It is unknown whether the FinCEN/Treasury appeal will be successful, and if the injunction were to be lifted after the original end-of-year deadline, it is unclear whether enforcement of the reporting requirement would be retroactive for owners who take advantage of the relief from filing. FinCEN/Treasury representatives have yet to respond to Overdrive inquiries about the potential for retroactive enforcement.Judge Mazzant's InterpretationJudge Mazzant's interpretation in the ruling against the CTA hinges on constitutional principles. At its most basic level, the CTA regulates companies registered under state laws and requires them to report their ownership, including detailed personal information about their owners, to the Federal Government, with severe penalties for non-compliance. This federal mandate marks a drastic departure from history. It represents a Federal attempt to monitor companies created under state law, which our federalist system has left mostly to the states. Additionally, the CTA ends the anonymity feature of corporate formation designed by various states. Plaintiffs fear this statute and its implications on our dual system of government. Despite the government's efforts to reconcile the CTA with the Constitution, no tenable theory has been provided. Even in the face of the deference the Court must give to Congress, the CTA appears likely to be unconstitutional. Accordingly, the CTA and its implementing regulations must be enjoined.Origins and Filing ProcessIt is important to read more about the origins of the CTA and the mechanics of the filing process. Currently, with the injunction in place, the filing process is only voluntary. Understanding these aspects provides a better understanding of the implications of the judge's ruling and the ongoing legal battle.