Federal Court Issues Injunction, Barring Enforcement of the Corporate Transparency Act

On Tuesday, December 3, the U.S. District Court for the Eastern District of Texas issued a nationwide preliminary injunction regarding the Corporate Transparency Act (CTA) and the beneficial ownership reporting rule requiring companies to file beneficial ownership information reports (BOIR) to FinCEN by January 1, 2025 (Reporting Rule). In Texas Top Cop Shop, Inc. v. Garland, the District Court found that the CTA and Reporting Rule were likely unconstitutional, falling outside of Congress’s power, and a nationwide injunction was appropriate given the “extent of the constitutional violation Plaintiffs have shown.”  Texas Top Cop Shop, Inc., et al. v. Garland, et al., No. 4:24-cv-478 (E.D. Texas Dec. 3, 2024).

The immediate effect of the Court’s decision is that neither the CTA nor the Reporting Rule may be enforced. Accordingly, reporting companies do not have to comply with the January 1, 2025, filing deadline. However, reporting companies should consider that the preliminary injunction is temporary. On December 5, the Department of Justice, on behalf of the Department of the Treasury, filed a Notice of Appeal, and is seeking an expedited review from the Fifth Circuit given the upcoming January deadline. On December 13, the Fifth Circuit accelerated the briefing schedule, likely allowing it to issue a ruling on the appeal within the next ten (10) days. The Fifth Circuit may stay, reverse, or modify the preliminary injunction, including modifying the preliminary injunction to only apply to Plaintiffs in Texas Top Cop Shop, Inc. v. Garland. Should that occur, reporting companies may have to act quickly to file BOIR by the January deadline to avoid civil or criminal penalties. It is also worth noting that other federal courts across the country have declined to enjoin enforcement of the CTA in similar challenges.

Following the Eastern District’s preliminary injunction, FinCEN released the following guidance:

“In light of a 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 remains in force. However, reporting companies may continue to voluntarily submit beneficial ownership information reports.”

“The government continues to believe – consistent with the conclusions of the U.S. District Courts for the Eastern District of Virginia and the District of Oregon – that the CTA is constitutional.”

However, FinCEN has not clarified whether it would enforce the original January 1, 2025, deadline if the preliminary injunction is lifted prior to year-end, nor has it indicated whether a grace period for compliance would be offered.

Given the uncertainty of the preliminary injunction’s staying power, reporting companies should closely monitor developments in this case and be prepared to comply with the CTA and Reporting Rule by January 1, 2025. Additionally, reporting companies should also consider that penalties for willful noncompliance are severe, including civil penalties of up to $500 per day (adjusted for inflation) and criminal penalties of up to two years’ imprisonment and a fine of up to $10,000.

As of December 16, the FinCEN database remains operational, and reporting companies may voluntarily submit BOIR filings in anticipation of the January deadline.

Kessler Collins recommends that reporting companies proceed with submitting necessary BOIRs by the original December 31, 2024, deadline to eliminate any risk of penalties should the injunction be lifted.

If you have questions about the status of the injunction, whether the CTA applies to your company, or completing the BOIR filing process, please contact the Kessler Collins team for assistance.