REAL ESTATE AND BUSINESS LAW ALERT

TEXAS COURT ISSUES A NATIONWIDE STAY RESTRICTING ENFORCEMENT OF THE CORPORATE TRANSPARENCY ACT

December 13, 2024
James T. Walther, Esq., LL.M.
General Counsel

Last week, the U.S. Court of Appeals for the Fifth Circuit, in Texas, issued a memorandum opinion and order enjoining the application of the Corporate Transparency Act (“CTA”) on a nationwide scale. This ruling temporarily prevents the Financial Crimes Enforcement Network (“FinCEN”) from enforcing reporting requirements seeking Beneficial Ownership Information (“BOI”) for business entities under the CTA.[i]

FinCEN confirmed via its website that the injunction is applicable nationwide, and that BOI reporting is currently “voluntary.”[ii] You can access FinCEN’s statement on their website: “Alert: Impact of Ongoing Litigation – Deadline Stay.”  This development provides a reprieve for businesses, as the BOI reporting requirements have created administrative burdens for companies of all sizes.

On December 5, 2024, the Department of Justice filed an appeal seeking to reverse the Court Order and stay. There are also pending cases in other courts. Because the permanence of the stay and the overarching BOI reporting requirements are currently in a state of flux, entities seeking to maintain compliance may continue to voluntarily file their BOI reports until final determinations are made.

If you haven’t been keeping up with the passage of the CTA and developments, below is a summary. For more extensive background, please visit our website to read a detailed background article on the BOI reporting rules.

What is the Corporate Transparency Act?
Effective January 1, 2024, the Corporate Transparency Act required many business entities, already existing, and newly formed to file and report certain information with the Financial Crimes Enforcement Network (FinCEN). FinCEN published a comprehensive set of regulations to administer the reporting process.

The CTA mandates that many small companies, including corporations and limited liability companies, unless specifically exempt, report personal information about their beneficial owners and key management personnel. For more information, see the “FinCEN Small Entity Compliance Guide.” The CTA is part of the Anti-Money Laundering Act of 2020, a government initiative to combat money laundering and illegal transactions.

The CTA applies to most business entities and requires existing companies or non-profit organizations to report information about control persons and beneficial owners. Entities formed in 2024 were initially given a 90-day reporting deadline, with the deadline shortening to 30 days for entities formed in 2025 and beyond.

Was an Injunction Inevitable?
Over the past year, several lawsuits challenging the constitutionality of the CTA and its corresponding FinCEN reporting regulations have been filed by individuals, business associations, non-profits, and housing cooperatives. These lawsuits argue that the CTA is unconstitutional, citing concerns over its broad scope, burdensome requirements for smaller companies, intrusive nature, and infringement on state sovereignty.

These new BOI reporting requirements have been a significant burden for businesses of all sizes and their advisors. Despite the legal challenges and injunction, the CTA could still be deemed valid and enforceable. The nationwide injunction was issued less than a month before the original reporting deadline for all previously existing business entities.

Next Steps
Taxpayers should closely monitor these developments and at their discretion, seek to voluntarily report and comply with CTA requirements. If the law survives, willful failure to comply with disclosure reporting could result in civil and criminal penalties, including fines of up to $10,000, and imprisonment for up to two years.

Legal 1031 will continue to monitor developments related to the CTA and will keep our network informed of any material changes. Please note that Legal 1031 Exchange Services, LLC is not affiliated with the IRS or the U.S. Government. All information contained herein is based on public litigation and FinCEN’s website updates.

*For further details on this new case, see Texas Top Cop Shop, Inc., et al. v. Garland, et al., No. 4:24-cv-00478 (E.D. Tex.).

December 13, 2024
Written by: James T. Walther, Esq., LL.M. – General Counsel

[i] See 31 U.S.C. 5336 and the corresponding Regulations (31 CFR 1010.380 “Reports of Beneficial Ownership”).

[ii] Earlier this year, in one of the many lawsuits challenging the Constitutionality of the CTA, the TX Court had already granted an injunction on BOI reporting, however, the scope of the stay was limited to the Plaintiffs in the case, an association of Small Businesses and its members. See National Small Business Association, et al. v. Yellen,133 A.F.T.R.2d 2024-885.

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