Reversal of Corporate Transparency Act Injunction Brings Turmoil

US businesses are dealing with uncertainty as a federal appeals court decision earlier this week reinstated deadlines to comply with the Corporate Transparency Act and shortly after a federal agency pushed back the date by two weeks.

The US Court of Appeals for the Fifth Circuit on Dec. 23 lifted an injunction that blocked the nationwide enforcement of the CTA—an anti-money laundering law that requires US entities that existed before 2024 to disclose who owns and controls their businesses by Jan. 1, 2025. The panel found that the federal government “has made a strong showing that it is likely to succeed” in defending the constitutionality of the law.

With this decision, an estimated 32.6 million US businesses will need to disclose their beneficial ownership information, or face penalties from the Treasury’s Financial Crimes Enforcement Network. That requirement will also apply to an estimated 5 million new businesses incorporated each year across the country, FinCEN estimates.

Fast-Moving Situation

The Christmas-week move likely caught many professionals by surprise, said Seth Ashby, a partner at Grand Rapids, Michigan-based Varnum LLP and chair of its CTA task force. The split decision had Judge Catharina Haynes voting to keep the injunction in place for the parties involved in the case, while Judges Carl E. Stewart and Stephen A. Higginson opting to lift it.

“I can only imagine the level of frustration at this point,” Ashby said. “Not only do many business owners not have a general awareness of the CTA, but for many of them it’s also not a simple task, particularly for complex organizations with a lot of holding companies in their structure.”

Shortly after the Fifth Circuit opinion was issued, FinCEN pushed back the deadline for companies to file their BOI reports to Jan. 13. There is a rolling deadline for companies that were created in the later months of 2024 as well as those that qualify for disaster relief.

That should allow companies some reprieve to gather the information they need, said Tom O’Saben, director of tax content and government relations at the National Association of Tax Professionals. And though the case continues, it’s best to start gathering the needed information instead of risking the $500-a-day civil fines imposed by FinCEN.

“The best thing to do is to go ahead and comply,” O’Saben said. “It’s not a tax return, so this is a one-and-done filing until you change your address.”

Michael Chuah, principal at Pasadena, Calif.-based Paxterra Law, said most clients have collected information in case they needed to comply but held off on filing their reports. While he’s heard a variety of opinions from them, most have or will soon file reports. The system has been “fairly robust” and they have run into few problems filing.

Opposing Views

The lifting of the injunction was cheered by advocates who have called for more transparency to help the government suss out financial crimes committed through shell corporations. Ian Gary, executive director of the Financial Accountability and Corporate Transparency Coalition, told Bloomberg Law on Dec. 24 that the injunction was a “harmful and erroneous” delay.

“For years, police and prosecutors have tried to combat a flood of dirty money associated with often violent crimes, but that can’t happen if they run into a wall of shell companies and secrecy,” Gary said. “This ruling finds that the CTA is likely constitutional, as Congress had every right to open the money trail so our law enforcement officials can crack down on the crooks and criminals who abuse the system.”

But business groups, which have opposed the CTA, said they would continue to fight its requirements. Beth Milito, executive director of the National Federation of Independent Business, said in a statement it would continue to lobby for the repeal of the CTA while the suit is pending.

“The district court, in granting the preliminary injunction, rightly recognized that the BOI reporting requirements would have devastating consequences for small business owners,” she said. The NFIB is already working to quickly appeal this terrible decision.”

Not the End of the Road

The plaintiff in the case, firearm retailer Texas Top Cop Shop, filed an emergency petition for rehearing en banc, to have all the judges on the Fifth Circuit decide on the case by Jan. 6. It said in its filing the requirement would cost businesses $22.7 billion to comply.

If the Fifth Circuit denied the request, Texas Top Cop may try to press the US Supreme Court for emergency relief, but absent a circuit split, that court might be hesitant to take it up, Ashby said.

But several other pending cases could also present further legal arguments that could derail the CTA too. These include a case launched by National Small Business United that is pending at the Eleventh Circuit and a suit from several housing coops in the US District Court for the Eastern District of Michigan that raises Fourth Amendment questions of unreasonable search and seizure within the CTA.

Chuah said that the number of pending cases leaves open more room for the courts to interpret the CTA differently, but to this point the opinions on the act have largely favored that it is constitutional and within the powers granted to the government by the Commerce Clause.

Bruce Ely, a tax partner at Bradley Arant Boult Cummings LLP in Birmingham, Ala., thinks differently. He expects the circuit courts to split on the CTA and predicts that the Eleventh Circuit will rule for the taxpayers as the other circuits favor the government.

Ely called the CTA a “back-ass-ward way” to tamp down on money laundering. “They’re doing it with a shotgun rather than a .22,” he said.

The case is Texas Top Cop Shop Inc. v. Garland, 5th Cir., No. 24-40792, opinion 12/23/24.