Tag: Corporate Transparency Act

The Death of the Corporate Transparency Act? (or not)

If you’re reading this, you’ve probably put a bunch of time into getting ready for compliance with the Beneficial Ownership Information reporting under the Corporate Transparency Act. You already know that there has been a nationwide injunction put in place to temporarily stop implementation of the requirements.

Texas Top Cop Shop, Inc. v. Garland (E.D. Tex. Dec. 3, 2024) is one of four cases floating through the judicial system attacking the Corporate Transparency Act. It is only one that has caused much of a ripple. The judge didn’t overturn the CTA. He merely issued the injunction based on the likelihood that the the CTA would be found to be unconstitutional.

Back in March in Alabama, the judge in National Small Business United v. Yellen merely applied his ruling to the parties to the case. If you were a member of the National Small Business United group, you’ve been celebrating for a while. That judge found the CTA to be unconstitutional.

On the other side, Courts in the District of Oregon and the Eastern District of Virginia have come down the other way. The judges in Firestone v. Yellen (D. Or. Sept. 20, 2024) and Community Associations Institute v. Yellen (E.D. Va. Oct. 24, 2024) found that the CTA was likely to be found constitutional and denied the request for an injunction.

All four decisions are under appeal. Do we think all four appellate courts are going to deny injunctions? Maybe. If we get splits, that would make it very likely that the US Supreme Court will take up the case to reconcile the dramatically different results.

Then we have to add in whether the Trump administration will continue to support the appellate process. Who knows what will happen after January 20.

I wish FinCEN was offering a better on-ramp. The current position has a hair-trigger.

[R]eporting companies are not currently required to file their beneficial ownership information with FinCEN and will not be subject to liability if they fail to do so while the preliminary injunction remains in effect. 

The way I read this if the injunction is lifted on January 2, then Reporting Companies have to immediately file to be in compliance.

You can currently file voluntarily. My provider has told me that the automated filing process has been disabled while the injunction is in place.

Hopefully, FinCEN will quickly get a better idea of timing and extend the compliance deadline out for several months while the litigation is ongoing.

The latest short term funding bill has a provision moving the compliance date from January 1, 2025 to January 1, 2026. Of course that could change.

The US filed a motion to stay the injunction pending the appeal. That was (no surprise) denied on December 17.

On the appeal, motions had to be filed this week with the Fifth Circuit Court of Appeals. FinCEN is asking for an emergency motion for stay pending appeal. Maybe the Court is looking to make a ruling by the end of the year. If it stays the injunction, that will cause havoc on many people’s year-end as they ramp back up for the filing process.

Based on filing on December 17 and December 18, the Fifth Circuit is allowing amicus filings on the appeal. That makes it seem less likely that a ruling will come out by year end.

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(update this morning from the original post)

Corporate Transparency Act Hits a Snag

On March 1, the US District Court in Northern Alabama ruled that the “Corporate Transparency Act is unconstitutional because it exceeds the Constitution’s limits on Congress’ power.” It’s not clear what effect this ruling is going to have on other parties and other jurisdictions.

Congress passed the 2021 National Defense Authorization Act which included a bill called the Corporate Transparency Act (“CTA”). The CTA requires most entities incorporated under State law to disclose personal stakeholder information to the Treasury Department’s criminal enforcement arm.

There are two dozen exemptions, mostly for entities that are otherwise regulated. Many private fund managers have been trying to figure out how the exemptions apply. There is still some uncertainty on these exemptions. For example, registered investment advisers are exempt and private funds listed on Form ADV are exempt. Subsidiaries can be exempt, but FinCEN Seems to want to keep that exemption very narrow.

L. 6. Does a subsidiary whose ownership interests are partially controlled by an exempt entity qualify for the subsidiary exemption?

No. If an exempt entity controls some but not all of the ownership interests of the subsidiary, the subsidiary does not qualify. To qualify, a subsidiary’s ownership interests must be fully, 100 percent owned or controlled by an exempt entity.

A subsidiary whose ownership interests are controlled or wholly owned, directly or indirectly, by certain exempt entities is exempt from the BOI reporting requirements. In this context, control of ownership interests means that the exempt entity entirely controls all of the ownership interests in the reporting company, in the same way that an exempt entity must wholly own all of a subsidiary’s ownership interests for the exemption to apply.

[Issued January 12, 2024] https://www.fincen.gov/boi-faqs#L_6

Back to the case…

The Government argued that it has three sources of constitutional authority for enactment of the CTA. First, the Government argues that Congress has the power to enact the CTA under its foreign affairs powers. The CTA comes from the government’s interest in curbing foreign money laundering and other bad foreign money influences. The second sources is the Commerce Clause authority. Because many entities engage in activities that qualify as or affect “commerce,” the act of corporate formation itself is enough to invoke Congress’ Commerce Clause powers. Third, the Government argued that the CTA is a necessary and proper exercise of Congress’ taxing power, because one purpose of the FinCEN database created by the CTA is to assist in efficient tax administration.

The Court didn’t agree with any of these three arguments.

So now what?

Unless you are Isaac Winkles or the National Small Business Association, the court’s ruling does not apply to you. I suppose if you are in Alabama, you could argue that it might cover you. For the rest of us, who have created a new non-exempt entity in 2024, I think we still have to make that filing it 90 days.

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