In a major legal development, the United States District Court for the Eastern District of Texas has temporarily halted the enforcement of the Corporate Transparency Act (CTA) through a nationwide injunction. This decision, handed down by Judge Amos Mazzant, raises critical issues about federal authority, constitutional rights, and the potential overreach of the CTA. Moreover, this injunction creates more uncertainty on whether the BOI report is still required to be filed. It must be clarified, that this injunction is temporary until the case is decided.
What is the Corporate Transparency Act?
The CTA, part of the Anti-Money Laundering Act of 2020, was designed to combat financial crimes such as money laundering and terrorism financing. It requires businesses to report detailed information about their beneficial owners to the Financial Crimes Enforcement Network (FinCEN). While its goals are commendable—enhancing transparency and aligning the U.S. with international anti-money laundering standards—its sweeping requirements have drawn sharp criticism, particularly from small businesses and privacy advocates.
Why Was Enforcement Suspended?
The court’s decision to grant a suspension centers on significant constitutional concerns raised by the plaintiffs. Below are the primary reasons cited for this pivotal ruling:
- Federal Overreach
The court emphasized that the CTA represents an unprecedented federal intrusion into matters traditionally regulated by states. Judge Mazzant’s memorandum highlighted that corporate formation and governance have historically been under state jurisdiction. The CTA’s requirements interfere with this arrangement, potentially violating the Ninth and Tenth Amendments, which protect states’ rights and limit federal power. The judge referred to this federal encroachment as a “quasi-Orwellian statute” that disrupts the delicate balance of the federalist system.
- Threats to Free Speech and Association
Nonprofits and political organizations argued that the CTA’s disclosure requirements force them to reveal sensitive ownership or donor information. Judge Mazzant agreed that this could deter individuals from associating with such entities, infringing upon their First Amendment rights to free speech and association. The ruling underscores that the constitutional protection of these freedoms cannot be overridden, even by legislation with noble objectives.
- Privacy and Fourth Amendment Concerns
The CTA mandates the disclosure of private ownership details without judicial oversight, such as a warrant or probable cause. The plaintiffs argued this constitutes an unreasonable search and seizure, violating Fourth Amendment protections. The court found these concerns compelling, recognizing that judicial review is a necessary safeguard to protect privacy rights.
- Irreparable Harm to Small Businesses
The court acknowledged that compliance with the CTA would impose significant, unrecoverable costs on small businesses. This includes legal fees, administrative expenses, and the loss of privacy, which the court classified as “irreparable harm.” According to FinCEN’s own estimates, compliance would cost businesses a collective $22.7 billion in the first year alone, with small businesses bearing the brunt of these costs.
- Likelihood of Success on the Merits
In granting the preliminary injunction, Judge Mazzant determined that the plaintiffs are likely to succeed on the merits of their constitutional challenges. The court’s analysis focused on the lack of a “tenable theory” from the government to justify the CTA’s scope under Congress’s enumerated powers. This strong likelihood of unconstitutionality weighed heavily in favor of the injunction.
What Happens Next?
The case now moves forward as the court evaluates the full merits of the constitutional arguments. Key questions include whether the federal government has overstepped its authority and whether the CTA’s requirements infringe on the rights of individuals and businesses.
For businesses and legal professionals, this case is relevant to allow them more time to file the BOI report after the January 1, 2025 deadline. However, is also important to note that this injunction is not the final word in the case, and businesses should be aware of taking the position that they are not required to file the BOI report.
Given that businesses face the imminent arrival of the January 1, 2025 deadline, this injunction provides a temporary relief. However, it must be noted that the government could appeal that injunction, and depending on the result of the appeal, such injunction could stand or be revoked. The conservative position is to continue filing the BOI report, until there is a final decision on the matter. This probably would take a few years until the Supreme Court takes on the case, given the contradiction between the different rulings being issued on the constitutionality of the CTA among the different circuits.
Relevance for Taxpayers and Tax Professionals
The suspension of the CTA highlights the ongoing tension between federal regulatory efforts and the protection of constitutional rights. While the law aims to address legitimate concerns about financial crime, its implementation must respect the limits set by the Constitution. This case serves as a reminder that even well-intentioned legislation cannot override fundamental liberties.
For small businesses, the stakes are particularly high. Compliance with the CTA involves disclosing detailed ownership information, which many view as an invasion of privacy. The administrative burden of meeting these requirements could also strain resources, especially for smaller entities operating on tight margins. The court’s decision provides some temporary relief on the filing of the BOI report. But, businesses also should remember that this injunction is not final, which creates uncertainty if eventually the CTA is deemed to be constitutional.