Corporate Transparency Act: Spotlight Turns to Congress and the Fifth Circuit
Following the issuance in early December of a nationwide preliminary injunction (the “Injunction”) pausing enforcement of the Corporate Transparency Act (“CTA”), attention has now shifted to Congress and to the U.S. Court of Appeals for the Fifth Circuit (the “Fifth Circuit”). As part of a stopgap bill to avert a government shutdown, Congress may enact a one-year extension of an impending January 1, 2025 CTA reporting deadline for companies formed before 2024 (“pre-2024 companies”). Meanwhile, the Fifth Circuit is likely to decide very soon whether the Injunction against the CTA will remain in effect for now. We describe below how companies should prepare to respond to these possible developments.
Background
The CTA, a federal law that took effect in 2024, requires most privately-owned companies to confidentially report certain “beneficial ownership information” (“BOI”) about their 25%-or-more owners and other individuals with “substantial control.” The BOI reports are to be filed with the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”). Implementation of the CTA was bifurcated:
- Pre-2024 companies are required to file by January 1, 2025. There are believed to be over 20 million pre-2024 companies that have not yet made their BOI filings.
- Companies formed during 2024 are required to file within 90 days of their formation. (For companies that are formed in 2025 and subsequent years, the period will be 30 days.)
Possible Congressional Action
Funding for the federal government runs out on Friday, December 20. As with many prior funding deadlines, Congress plans to pass a “continuing resolution” (“CR”) as a stopgap measure to keep the government funded for the next few months. On Wednesday, December 17, the House of Representative released a draft CR, which represented a bipartisan deal negotiated between leaders of the Republican-led House and the Democratic-led Senate. We refer to that draft as the “bipartisan CR.”
Like all CRs, the bipartisan CR included many “add-ons” that are not directly related to government funding. One of those add-ons would have provided partial CTA relief. Buried deep within the bipartisan CR’s 1,500 pages was an amendment to the CTA that would have extended the reporting deadline for pre-2024 companies from January 1, 2025 to January 1, 2026.
- This would only have provided partial CTA relief, however, because it would only have extended the reporting deadline for pre-2024 companies. It would not have extended the 90-day deadline for companies formed during 2024 (or the upcoming 30-day deadline for companies formed during 2025 and later years). Nor would it have extended the CTA deadlines for updating or correcting BOI reports that have already been filed, whether by pre-2024 companies or those formed during 2024 or later.
The bipartisan CR, however, encountered strong opposition from conservative House members, Elon Musk and now President-Elect Trump. They opposed the bipartisan CR’s large add-ons and also insisted on including a debt-ceiling increase. Talks are currently underway in Washington to craft a substitute CR that will be acceptable to the major power blocs and that can pass in both houses of Congress. It is impossible to know if the one-year partial CTA relief will be included in the final CR. Such relief is presumably acceptable to Republican leaders, and is at least not opposed by Democratic leaders (who agreed to it in the bipartisan CR). But anything can happen in negotiations to finalize legislation, and that is particularly true for an add-on to a CR in the days and hours before (and sometimes after) a government shutdown.
Important Ruling Likely from the Fifth Circuit
Preliminary Injunction Against CTA
The proposed reporting extension in the bipartisan CR would provide simple and straightforward CTA relief for pre-2024 companies, at least for one year. But political considerations now render uncertain the fate of that simple and straightforward relief.
Meanwhile, a much more complicated CTA saga is playing out in the federal courts. It began in Sherman, Texas, but the center of attention has now shifted to the Fifth Circuit in New Orleans — the federal circuit court that hears appeals from Texas.
Numerous lawsuits have been filed in federal courts around the country challenging the CTA’s constitutionality. One such case is Texas Top Cop Shop, Inc. v. Garland, filed in the U.S. District Court for the Eastern District of Texas, Sherman Division. Mindful of the impending January 1, 2025 reporting deadline for pre-2024 companies, the plaintiffs in Texas Top Cop Shop (“TTCS”) asked the court to issue an injunction protecting them against CTA enforcement until their case can be fully decided. On December 3, the court issued a preliminary injunction (“Injunction”) that is even broader than the plaintiffs requested. The Injunction applies nationwide, and it protects not only the TTCS plaintiffs but also everyone who is subject to the CTA. The Injunction temporarily blocks all enforcement of the CTA, both as to pre-2024 companies (facing the impending January 1, 2025 reporting deadline) as well as companies formed in 2024 (which are subject to a 90-day deadline).
The TTCS court did not rule that the CTA is unconstitutional. It issued a preliminary Injunction, rather than a permanent one, to provide temporary relief until it can consider the constitutional issues “on the merits” and make a final decision. But, in order to issue even the preliminary Injunction, the court was required to decide whether the TTCS plaintiffs had a “substantial likelihood of success on the merits.” The court concluded that they did, because it decided the CTA is “likely unconstitutional” as outside Congress’s constitutional authority.
It could take the TTCS court a few months to receive briefs, hear oral arguments, and issue a final decision “on the merits” as to whether the CTA is constitutional. But, in the meantime, the focus of attention in the TTCS case has shifted to the Fifth Circuit, where an important decision about the Injunction may be handed down very soon.
FinCEN asks the Fifth Circuit to “stay” the Injunction
FinCEN — the agency responsible for enforcing the CTA — has responded to the TTCS court’s Injunction by agreeing that companies do not have to make any BOI filings, or otherwise comply with the CTA, while the Injunction is in effect. But FinCEN strongly believes the CTA is constitutional, and it has therefore appealed the Injunction to the Fifth Circuit. In connection with that appeal, FinCEN has filed an emergency motion asking the Fifth Circuit to order a “stay,” or temporary pause, of the Injunction, until the merits of FinCEN’s appeal of the Injunction can be considered by the Fifth Circuit.
- This illustrates how complicated the TTCS case has become. If the Fifth Circuit were to grant the requested stay, then the Injunction would be temporarily paused. And because the Injunction temporarily pauses the CTA, a stay of the Injunction would reinstate the CTA, including its January 1, 2025 reporting deadline for pre-2024 companies. In other words, FinCEN still hopes to require BOI reports by pre-2024 companies by the January 1, 2025 deadline, by convincing the Fifth Circuit to stay the Injunction before then.
The Fifth Circuit ordered the TTCS plaintiffs to file their reply to FinCEN’s stay motion, and FinCEN to file its response, on an expedited basis, and they have done so. This short-fuse schedule strongly suggests that the Fifth Circuit is considering whether to issue a stay pending appeal of the Injunction — or at least an “administrative stay” to give it more time to consider whether to issue a stay pending appeal — before the January 1, 2025 reporting deadline. If the Fifth Circuit grants FinCEN’s request for a stay (or grants an administrative stay), the Injunction will be paused, and the CTA would be at least temporarily reinstated. That would include the January 1, 2025 reporting deadline for pre-2024 companies.
Even if it declines to stay the Injunction, the Fifth Circuit will eventually consider FinCEN’s appeal of the Injunction. It could then either affirm the Injunction (leaving it in effect) — or it could strike down the Injunction by “lifting” it. “Lifting” the Injunction permanently ends the Injunction, while “staying” the Injunction only temporarily pauses it — but either would have the immediate practical effect of reinstating the CTA, including its reporting requirements.
No one knows if the Fifth Circuit will stay or lift the Injunction— or, on the other hand, if it will leave the Injunction in effect, thereby continuing to “pause” the CTA. The Fifth Circuit is a very conservative court, with a judicial philosophy that tends to distrust federal regulation. But it could potentially disapprove of a nationwide Injunction in a case where the plaintiffs themselves had not requested that sweeping protection.
If the Injunction is stayed or lifted, will companies have a “grace period” before they have to file BOI reports?
What we can say with certainty is that there will be very little if any advance warning of the Fifth Circuit’s decision. If the Fifth Circuit stays or (eventually) lifts the Injunction, therefore, companies will suddenly find themselves again subject to the CTA — and, in the case of pre-2024 companies, either facing an imminent January 1, 2025 reporting obligation, or theoretically an immediate reporting obligation after that date.
If that occurs, will companies be given a “grace period” in which to file their reports? No one knows for certain. As mentioned above, FinCEN is seeking an emergency stay from the Fifth Circuit in hopes of reinstating the January 1, 2025 deadline, so it may be unlikely to grant a grace period. Would the Fifth Circuit itself, if it stays or lifts the Injunction, grant companies a grace period? That is also impossible to know for certain, but granting a grace period of any type would not be consistent with normal Fifth Circuit practice. And, even if FinCEN or the Fifth Circuit granted such a grace period, it is impossible to predict how long that grace period would be.
What should companies do while they wait for a Fifth Circuit decision on the Injunction, and how would Congressional action affect that advice?
As discussed above, it is possible that Congress may provide some CTA relief this week in a CR, although fast-moving political developments have now made that somewhat less likely. And, even if a final, enacted CR does contain any CTA relief, that relief will likely be limited to a one-year extension for pre-2024 companies (the same partial form of relief proposed in the bipartisan CR).
The government funding deadline expires at the end of Friday, December 20. Therefore, barring a prolonged government shutdown, we should know very soon what Congress does in the final CR, and in particular if it includes any CTA relief. Once that information becomes available, we propose that companies take the approaches described below. (Again, they are based on the assumption that any Congressional CTA relief will consist of only a one-year extension that is applicable only to pre-2024 companies, which we refer to below as “partial CTA relief.”)
Pre-2024 companies
If Congress passes partial CTA relief:
No action is required at this time. You now have until January 1, 2026 to make your initial BOI filing. (Happy holidays!)
If Congress does not pass partial CTA relief:
- No action is required at this time if:
- Your company has a simple ownership and management structure, and it will be easy for you to quickly compile BOI information from your 25%-or-more owners and other persons with “substantial control.” OR
- Your company has already substantially completed the process of compiling its BOI information.
- All other companies should seriously consider continuing the process of promptly compiling their BOI information. Not doing so constitutes a gamble that:
- the Fifth Circuit will leave the Injunction in effect;
- or, even if it stays or lifts the Injunction, FinCEN or the Fifth Circuit will grant a grace period for filing;
- or, even if such a grace period is not granted, FinCEN (or the incoming Trump administration) will decide not to enforce penalties against companies that fail to make filings promptly after the Injunction is stayed or lifted (and that a technical violation of the CTA will not trigger adverse consequences under the company’s loan agreements, governmental and other contracts, procurement requirements, etc.). This may or may not be a reasonable gamble to make — but, in any event, it is still clearly a gamble.
Companies formed during 2024
As stated above, we assume that any Congressional CTA relief will be only partial, benefitting pre-2024 companies but not companies formed during 2024. Therefore, companies formed during 2024 should consider the same approaches we have set out above under “Pre-2024 companies > If Congress does not pass partial CTA relief.”
Some companies (regardless of when formed) may decide to make voluntary BOI filings. For most companies, however, we recommend not making voluntary filings, and instead following the recommendations set forth above.
Finally, note that any partial CTA relief passed by Congress will not effect reporting deadlines for updating or correcting BOI reports that have already been filed.
On the horizon
TTCS lawsuit
As mentioned above, the TTCS court issued the Injunction as just a preliminary, temporary measure until the court can consider the plaintiffs’ challenge to the CTA’s constitutionality “on the merits.” That will occur regardless of whether the Injunction is stayed or lifted by the Fifth Circuit, but it may not occur for a few months. When it does, the losing side can appeal the decision to the Fifth Circuit.
Other lawsuits challenging the CTA
In addition to TTCS, several other cases challenging the CTA’s constitutionality are making their way through the federal court system. A federal district court in Alabama ruled in March 2024 that the CTA was unconstitutional, but its ruling protected only the plaintiffs in that case. (That decision is on appeal to the U.S. Eleventh Circuit Court of Appeals, which heard oral arguments in September and could rule at any time.) More recently, federal district courts in Oregon and Virginia have reached the opposite conclusion, affirming the CTA’s constitutionality. (Those decisions are also on appeal to their respective federal circuit courts.) None of those cases directly affects the TTCS case or the Injunction. But the differing results make it more likely that the constitutionality of the CTA may eventually be decided by the U.S. Supreme Court.
Trump administration
The upcoming change of Presidential administrations also may affect the CTA’s future. To our knowledge, President-Elect Trump has not publicly expressed a view on the CTA. Project 2025 called for its repeal, however, and the CTA may be inconsistent with the new administration’s general anti-regulatory philosophy. In that event, the new administration could effectively block the CTA in several different ways. But there are two important caveats: we do not know for certain what the new administration will do, and in any event it cannot take any official actions until January 20, 2025.
How Cokinos | Young can help
The corporate attorneys at Cokinos | Young are closely monitoring these CTA developments and will provide further updates as important events occur. In the meantime, if you would like to discuss what your company should do to comply with the CTA, please contact one of our following corporate attorneys:
