FinCEN Corporate Transparency Act: Where Does It Currently Stand?
FinCEN Corporate Transparency Act Reporting
The history of reporting required under the FinCEN Corporate Transparency Act (“CTA”) has more twists than the latest Lee Child Jack Reacher novel. While federal district courts in Michigan, Virginia, and Oregon have denied preliminary injunctions related to the reporting requirements under the CTA, other federal district courts in Alabama and Texas have found the CTA unconstitutional and have issued preliminary injunctions. In the Alabama case, the Court issued a preliminary injunction against the enforcement of the reporting requirements limiting it solely to the parties in the case and members of the trade organization that brought the litigation.
Injunction Against the Enforcement of the CTA
This all changed in the case filed in the Eastern District of Texas, Sherman Division. On December 3, 2024, District Court Judge Mazzant for the Eastern District of Texas, Sherman Division, in the case of Tex. Top Cop Shop v. Garland, Civil Action 4:24-CV-478 (E.D. Tex. Dec. 3, 2024), issued a nationwide preliminary injunction against the enforcement of the CTA. The judge found that the CTA could not be justified on the basis of the Commerce Clause of the United States Constitution, essentially because the CTA regulated the formation of companies rather than the commerce they actually conducted. In fact, entities are required to file reports under the CTA even if they conduct no commerce at all. Further, the Court found that the CTA does not regulate an activity but rather creates one—the filing of the beneficial ownership report. The government filed a motion to stay the preliminary injunction, but the Court denied the motion on December 17, 2024. Tex. Top Cop Shop, Inc. v. Garland, Civil Action 4:24-CV-478 (E.D. Tex. Dec. 17, 2024). The government then appealed the matter to the 5th Circuit Court of Appeals. On December 23, 2024, a motions panel of the 5th Circuit Court of Appeals granted the government’s emergency motion for a stay pending appeal. Texas Top Cop Shop, Inc. v. Garland, No. 24-40792, 2024 WL 5203138 (5th Cir. Dec. 23, 2024). The U.S. Department of the Treasury’s Financial Crimes Enforcement Network (otherwise known as FinCEN) promptly issued a notice that reporting companies formed before January 1, 2024, would have to file their initial beneficial ownership reports by January 13, 2025.
The 5th circuit Expedited Briefing
The twists and turns do not end there. Three days later, on December 26, 2024, the merits panel, “in order to preserve the constitutional status quo while the merits panel considers the parties’ weighty substantive arguments”, vacated the motion panel’s order granting the stay of the nationwide injunction. The 5th Circuit has set an expedited briefing and hearing schedule, which should have the matter ready for decision by late March 2025. The tortured history of the nationwide injunction does not end there, however. The government appealed the matter to the U.S. Supreme Court in late December where on January 22, 2025, the Court stayed the Texas Top Cop Shop nationwide injunction.
Nationwide Delay
The saga does not end even here. Immediately following the U.S. Supreme Court order in Texas Top Cop Shop, the Texas Public Policy Foundation issued a press release announcing that the reporting regulation’s effective date had been stayed in another Texas case decided in the Eastern District of Texas, Tyler Division, Samantha Smith and Robert Means vs. U.S. Department of Treasury, No. 6:24-CV-336 (E.D. Texas Jan. 7, 2025). In Smith, District Court Judge Kernodle found for reasons similar to the decision in Texas Top Cop Shop that the CTA reporting requirements were unconstitutional and issued a preliminary injunction covering only the plaintiffs, but using 5 U.S.C. § 705, stayed the effective date of the Reporting Rule (31 C.F.R. § 1010.380) for all reporting companies while the Smith lawsuit is pending. The Government sought a stay of the delay of the effective date of the rules and promised that reporting companies would have 30 days to comply from the issuance of an order. In one more turn of this tortured tale, on February 18, 2025, Judge Kernodle lifted his stay of the effective date of the beneficial ownership reporting requirements. As result, FinCEN issued a notice that the reporting requirements are now back on and the new date for compliance is March 21, 2025. FinCEN has also promised to revisit its rules to reduce the compliance burden on small businesses.
So Where Does the Obligation to File Beneficial Ownership Reports Currently Stand?
FinCEN has indicated that reporting companies are now required to file their initial reports by no later than March 21, 2025. Also, newly formed companies are required to file their initial reports within 30 days of formation. Unless something changes (which is always possible), reporting companies should be prepared to file their initial reports by March 21, 2025.
Klemchuk stands ready to assist its clients in determining whether reporting companies are required to file beneficial ownership reports and who is considered a beneficial owner.
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This article is provided for informational purposes only and does not constitute legal advice. For guidance on specific legal matters under federal, state, or local laws, please consult with our IP Lawyers.
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