On December 5, 2024 the Government filed a notice of appeal to the U.S. Court of Appeals for the Fifth Circuit challenging the preliminary injunction issued by the U.S. District Court, Eastern District of Texas in Texas Top Cop Shop, Inc. v. Garland, C.A. No. 4:24-CV-478.
Conflict among courts as to CTA’s constitutionality
It is important to remember that a preliminary injunction is a temporary measure and that the court’s ruling is not a final determination of the Corporate Transparency Act’s constitutionality. And in fact, the court’s decision conflicts with those of federal district courts in Michigan, Oregon, and Virginia, which denied plaintiffs’ motions for a preliminary injunction in their challenges to the constitutionality of the CTA. Significantly, there is a conflict of opinion as to whether the CTA is within Congress’ enumerated powers under the Constitution. While the Texas court held that there is substantial likelihood that the Corporate Transparency Act (CTA) is not within Congress’ powers, other federal district courts have held that the CTA may be within Congress' powers under the Commerce Clause and/or the Necessary and Proper Clause of the Constitution.
In Texas Top Cop Shop, Inc. v. Garland, C.A. No. 4:24-CV-478, decided December 3, 2024, the U.S. District Court, Eastern District of Texas granted the plaintiffs’ motion for a preliminary injunction, enjoining the Corporate Transparency Act (CTA) and FinCEN’s reporting rule and staying the compliance deadline. The court stated that neither the CTA nor the reporting rule may be enforced and reporting companies need not comply with the January 1, 2025 BOI reporting deadline pending further order from the court.
With the government’s appeal of the preliminary injunction companies and their advisors should continue to evaluate the applicability of the CTA and, if not exempt from reporting, gather the necessary beneficial ownership and other reporting information so that reporting companies will be prepared to submit reports if the injunction is stayed, lifted or modified. Reporting companies can still proceed with filings to ensure compliance and avoid year-end timing issues if the preliminary injunction is lifted.
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