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Legitimate Interest

Few would argue that the federal government does not have a legitimate interest in preventing, detecting, and punishing tax fraud, money laundering, and other financial crimes. Likewise, I imagine few would disagree with the precept that the means by which the federal government chooses to perform these functions must not exceed its constitutionally enumerated powers.[i] Among Congress’s enumerated powers is the power to “regulate Commerce with foreign nations, and among the several States, . . .”[ii]

Limits – Enumerated Powers

As you may recall from your studies of Constitutional Law, the Commerce Clause is among the most debated and broadly construed provisions of the Constitution. Thus, it should come as no surprise that those federal courts[iii] that have considered challenges to the Corporate Transparency Act (the “Act”) over the last year or so have been inconsistent in their assessment of whether Congress exceeded its enumerated powers under the Constitution when it passed the Act.

Stop-Go-Stop-Go-Wait

Indeed, events over the last month alone have taken enough twists and turns to qualify the anxious owners of many closely held businesses – not to mention their advisers – for a spot in a Pepto-Bismol commercial.[iv]

Given the degree of uncertainty surrounding the legal status of the Act – and of the obligations imposed on businesses and their owners thereunder – it may be helpful to provide a scorecard, of sorts, that traces the development of opposition to enforcement of the Act and provides a status update. Here it goes.[v]

A Snapshot

  • The House passed its version of the Corporate Transparency Act in late 2019;[vi]
  • After several months of negotiations and changes, the Senate passed the Anti-Money Laundering Act;
  • The bill was added to the National Defense Authorization Act for FY 2021;
  • After more negotiation and editing, the bill was passed by Congress in December 2020 and then sent to the President, whose veto of the bill was overridden;[vii]
  • The bill was enacted January 1, 2021;
  • Relevant to this post was the addition of a new section to the Bank Secrecy Act, which required “reporting companies” to submit specified beneficial ownership information (“BOI”) to the Financial Crimes Enforcement Network (“FinCEN”);[viii]
  • The statutory requirement for reporting companies to submit BOI was to take effect “on the effective date of the regulations” implementing the reporting obligations;[ix]
  • Under the Act, reporting companies created or registered to do business after the effective date were required to submit the requisite information to FinCEN at the time of creation or registration, while reporting companies in existence before the effective date would have a specified period in which to report;[x]
  • FinCEN issued final BOI reporting rules on September 30, 2022, with an effective date of January 1, 2024;[xi]
  • As issued, the rules required (a) companies formed before January 1 to file a BOI report with FinCEN by December 31, 2024, and (b) companies created on or after the rule’s effective date (of January 1, 2024) and before January 1, 2025, to file within 30 calendar days of notice of their creation;
  • In November 2022, National Small Business United challenged the Act in the U.S. District Court for the Northern District of Alabama claiming the Act exceeded Congress’s enumerated powers and was unconstitutional (the “NSBU case”);
  • The reporting rules were amended in November 2023 to provide an extended filing deadline of 90 calendar days for reporting companies created on or after January 1, 2024 and before January 1, 2025; entities created on or after January 1, 2025 will continue to have 30 calendar days from notice of their creation to file their BOI reports with FinCEN;[xii]
  • December 29, 2023, a lawsuit was filed with the U.S. District Court for the Northern District of Ohio[xiii] alleging that the Act exceeded Congress’s constitutional authority;
  • The reporting rules became effective January 1, 2024;
  • March 1, the U.S. District Court in the NSBU case[xiv] concluded that the Act was “unconstitutional because it cannot be justified as an exercise of Congress’s enumerated powers” – it did not regulate commercial or economic activity but only the act of incorporation – and enjoined FinCEN from enforcing the Act against the plaintiffs;[xv]
  • March 11, the Justice Department filed a Notice of Appeal to the Eleventh Circuit Court of Appeals on behalf of the Treasury[xvi] – the Circuit Court granted expedited review and scheduled oral Arguments for September 27, 2024;
  • March 11, FinCEN issued a notice in which it stated that, while the NSBU litigation was ongoing, FinCEN would continue to implement the Act as required by Congress, while complying with the District Court’s order; thus, other than the individuals and entities subject to the District Court’s injunction, reporting companies would still be required to comply with the Act and file BOI reports as provided in FinCEN’s regulations;[xvii]
  • March 15, a plaintiff filed a complaint in the U.S. District Court for the District of Maine in which they argued that the Act was unconstitutional because it exceeded Congress’s power to regulate interstate commerce, and asked that the Court enjoin FinCEN from enforcing the Act against the plaintiff;[xviii]
  • March 26, the Small Business Association of Michigan filed suit with the U.S. District Court for the Western District of Michigan challenging the constitutionality of the Act,[xix] and asking that the Court enjoin FinCEN from enforcing the Act against the plaintiff while the case was pending – the Court denied the motion for an injunction;[xx]
  • April 17, the proceedings in the District Court for Northern District of Ohio were stayed pending the decision of the Eleventh Circuit;[xxi]
  • April 29, a bill was introduced in the House to repeal the Act;[xxii] a similar bill was introduced into the Senate on May 9;[xxiii]
  • May 20, twenty-two States joined in filing an amicus brief with the Eleventh Circuit in which they urged the Court to affirm the above March 1 decision by the District Court in Alabama, based largely on principles of federalism[xxiv]
  • May 28, the National Federation of Independent Business filed a suit in the District Court for the Eastern District of Texas challenging the Act (the Texas Top Cop Shop case) in which it sought a declaratory judgment that the Act was unconstitutional on the grounds that it exceeded Congress’s enumerated powers, including its power to regulate interstate commerce, and asking that the Court grant a permanent injunction prohibiting enforcement of the Act, including the reporting rule;
  • May 29, the Black Economic Council of Massachusetts sued the Treasury over the Act, asserting it was unconstitutional;[xxv]
  • June 3, the plaintiffs in the Texas Top Cop Shop case sought a preliminary injunction against the Act and reporting rule; 
  • July 18, the Eleventh Circuit scheduled oral argument in the NSBU case for September 27;  
  • August 14, the Eleventh Circuit requested that the parties submit supplemental briefs regarding whether the District Court erred “in not holding the plaintiffs to their burden of showing that there are no constitutional applications of the Corporate Transparency Act”;[xxvi]
  • September 20, the U.S. District Court for the District of Oregon ruled[xxvii] that the plaintiff businesses were not likely to succeed on the merits of their suit alleging the Act exceeded Congress’s power to regulate interstate commerce, concluded that the Act was a legitimate exercise of Congress’s broad authority to regulate interstate commerce, and declined to enjoin enforcement of the Act;
  • September 27, a three-judge panel of the Eleventh Circuit heard oral arguments in the NSBU case;
  • October 9, 2024, the District Court in the Texas Top Cop Shop case held a hearing on the matter of the injunction;
  • October 24, the U.S. District Court for the Eastern District of Virginia denied the plaintiff’s request for injunctive and declaratory relief to prevent enforcement of the Act, finding that the plaintiff was unlikely to be able to show that Congress overstepped “the outer bounds of its commerce power” when it enacted the Act;[xxviii]
  • November 5, the Midwest Association of Housing Cooperatives filed a complaint in the U.S. District Court for the Eastern District of Michigan in which it asserted that the Act exceeded Congress’s constitutional authority;[xxix]
  • December 3, the District Court in the Texas Top Cop Shop case[xxx] determined that the Act was likely unconstitutional as outside of Congress’s power, and granted the plaintiff’s motion for a preliminary injunction, as a result of which enforcement of the reporting rule was enjoined nationwide, and compliance with the January 1, 2025 BOI reporting deadline was stayed pending any further order of the Court;
  • December 4-5, supplemental authorities were filed in the Eleventh Circuit’s NSBU case;
  • December 5, the government appealed the District Court’s preliminary injunction in the Texas Top Cop Shop case to the Fifth Circuit Court of Appeals;[xxxi]
  • December 9, FinCEN stated on its website “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,” but added that “reporting companies may continue to voluntarily submit beneficial ownership information reports” while the government appeals the injunction;
  • December 11, the government filed a motion with the Fifth Circuit to stay the Court’s order enjoining enforcement of the Act and the reporting rule;
  • December 13, the government filed an emergency stay motion in the Fifth Circuit requesting relief no later than December 27 in order to reinstate the January 1, 2025 deadline, and the Circuit Court entered an expedited briefing schedule;
  • December 17, House Speaker Johnson unveiled a continuing resolution that would have extended by one year the deadline for existing companies to report their beneficial ownership information to FinCEN, as required under the Act;[xxxii]
  • December 19, the U.S. District Court for the District of Utah stayed a case to block the Act and denied the plaintiff’s request for a preliminary injunction against enforcement of the Act,[xxxiii] stating that the “parties agreed to a 90-day stay, pending the new presidential administration”;[xxxiv]
  • December 23, 2024, a split motions panel[xxxv] of the Fifth Circuit granted a stay of the district court’s preliminary injunction against enforcement of the Act, entered in the Texas Top Cop Shop case, pending the outcome of the Department of the Treasury’s ongoing appeal of the district court’s order, and reinstated the January 1, 2025 reporting deadline;
  • December 23, FinCEN issued an alert notifying the public of the Fifth Circuit ruling, and recognizing that reporting companies may have needed additional time to comply with beneficial ownership reporting requirements, FinCEN extended the reporting deadline as follows for reporting companies created: before Jan. 1, 2024, have until Jan. 13, 2025 to file BOI reports with FinCEN; on or after Sept. 4, 2024, that had a filing deadline between Dec. 3, 2024, and Dec. 23, 2024, have until Jan. 13, 2025, to file; on or after Dec. 3, 2024, and on or before Dec. 23, 2024, have an additional 21 days from their original filing deadline; on or after Jan. 1, 2025, have 30 days after receiving notice that their creation;
  • December 24, the plaintiff in the Texas Top Cop Shop case asked the Fifth Circuit for an expedited rehearing by the entire Court to determine whether the injunction against enforcement of the Act should be reinstated, and asked that the Court rule on its petition no later than January 6, 2025;
  • December 26, a different panel of the Fifth Circuit issued an order vacating the earlier panel’s December 23 order that had granted a stay of the preliminary injunction in the Texas Top Cop Shop case, thereby restoring the injunction issued by the District Court and relieving reporting companies from the requirement to file BOI with FinCEN;[xxxvi]
  • December 27, the Fifth Circuit issued an expedited schedule for briefing (the government’s opening brief is due February 7, 2025) and oral argument (March 25);[xxxvii]
  • December 27, FinCEN issued an alert stating: “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.”[xxxviii] 
  • December 31, the DOJ asked the U.S. Supreme Court[xxxix] to issue a stay of the preliminary injunction issued by the District Court in the Texas Top Cop Shop case, pending the consideration and disposition of the government’s appeal to the Fifth Circuit and, if the Circuit affirms the District Court in whole or in part, pending the timely filing and disposition of a petition for a writ of certiorari and any further proceedings in the Supreme Court.

What’s Next?

Over the last few weeks, the Texas Top Cop Shop case has been front and center among the many lawsuits initiated by businesses and business organizations to challenge the Act as unconstitutional.

Although this is understandable – especially so after the DOJ brought the Supreme Court into the mix on New Year’s Eve – we must not lose sight of the fact that any day now the Eleventh Circuit may render an opinion in the NSBU case.[xl]

One has to wonder what effect that Circuit’s opinion would have upon the Supreme Court’s response to the DOJ’s request for a stay of the nationwide preliminary injunction issued by the District Court in the Texas Top Cop Shop case, or upon the Fifth Circuit’s ultimate disposition of that case.    

One also has to wonder whether the new Trump Administration and this Congress will try to repeal the Act. As indicated above, the District Curt in Utah seems to have adopted this not unreasonable approach.

Hear Me Out

Setting the foregoing litigation aside for a moment, let’s consider why Congress thought the Act was a good idea just a few years ago.

Congress found that more “anonymous” legal entities,[xli] including corporations and LLCs, are formed in the U.S. than in any other national jurisdiction. It also determined that such legal entities are often being used by domestic and foreign criminals to engage in various illicit activities, to launder the proceeds from such activities, and to otherwise access and transact business in the U.S. economy to their benefit with relative impunity.

Congress observed that such activities are facilitated by the fact that the U.S. did not have a centralized or complete store of information about who owns and operates legal entities within the U.S.[xlii] Moreover, the information about such entities that was already available to law enforcement was generally limited to the information required to be reported when the entity was formed at the state level. Even then, however, most states do not require the identification of an entity’s individual beneficial owners at the time of formation, and the vast majority of states require disclosure of little to no contact information or information about an entity’s officers.[xliii]

Congress believed that bad actors, being aware of the dearth of information regarding beneficial ownership, have exploited state entity formation procedures to conceal their identities when forming corporations or LLCs in the U.S., and have then used the newly created entities to commit crimes affecting commerce, including tax fraud.

Likewise, according to Congress, the lack of available beneficial ownership information impeded the efforts of law enforcement to investigate corporations and LLCs suspected of committing such crimes.

Having concluded that the identities of the beneficial owners of legal entities are of interest to the federal government because of their economic status as the persons who own or control a company that operates, at least in part, within the U.S., the federal government enacted the Act, with bipartisan support, and delegated authority to the Treasury to establish an effective date for filing and updating beneficial ownership information reports and to promulgate regulations regarding these reports.[xliv]

Although the means selected to remedy what Congress believed to be a defect in the law may ultimately itself be found wanting, the federal government continues to have a legitimate interest in accomplishing the intended goal.

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[i] I would add that the federal government must balance its obligation to enforce, say, the federal tax laws against its obligation to protect the equally legitimate interests of its constituents in maintaining their privacy. Of course, I am referring to the members of society from whom the government derives its authority, and whom the government serves, at least in theory.

[ii] U.S. CONST. Art. I, Sec. 8, Cl. 3.

[iii] As you’ll see below, there have been several.

[iv] You know the one: The Pepto-Bismol 5-Symptom Song & Dance, with its famous line – nausea, heartburn, indigestion, upset stomach, diarrhea. Please don’t shoot the messenger.

[v] All dates are in 2024 except as otherwise indicated.

[vi] Earlier versions were introduced in 2017.

[vii] The Senate voted 81-13 to override President Trump’s veto. The House had previously approved the bill by a vote of 322-87.

[viii] 31 U.S.C. 5336.

[ix] 31 U.S.C. 5336(b)(5).

‘‘(5) EFFECTIVE DATE — The requirements of this subsection shall take effect on the effective date of the regulations prescribed by the Secretary of the Treasury under this subsection, which shall be promulgated not later than 1 year after the date of enactment of this section.”

[x] 31 U.S.C. 5336(b)(1)(B), (C).

[xi] Published Document: 2022-21020 (87 FR 59498).

[xii] Published Document: 2023-26399 (88 FR 83499).

[xiii] Robert J. Gargasz Co. LPA v. Janet Yellen, Case No. 1:23-cv-02468 (N.D. Ohio filed Dec. 29, 2023).

[xiv] The suit was filed in November 2022.

[xv] National Small Business United, d/b/a National Small Business Association, et al., v. Janet Yellen, in her official capacity as Secretary of the Treasury, et al., No. 5:22-cv-01448 (N.D. Ala.).

[xvi] National Small Business United et al. v. U.S. Department of the Treasury et al., case number 24-10736, in the U.S. Court of Appeals for the Eleventh Circuit.

[xvii] https://www.fincen.gov/news/news-releases/updated-notice-regarding-national-small-business-united-v-yellen-no-522-cv-01448

[xviii] Boyle v. Yellen , D. Me., No. 2:24-cv-00081 (D. Me. Mar. 15, 2024).

[xix] Small Business Association of Michigan, et al v. Yellen.

[xx] Small Business Ass’n of Mich. v. Yellen, No. 1:24-cv-00314-RJJ-SJB (W.D. Mich. Apr. 26, 2024).

[xxi] https://www.pacermonitor.com/public/case/51852710/Robert_J_Gargasz_Co,_LPA_et_al_v_Secretary_of_the_Treasury_et_al

[xxii] H.R.8147, the “Repealing Big Brother Overreach Act”. 

[xxiii] S.4297, Among other things, the sponsors cited the severe penalties for noncompliance.

[xxiv] https://assets.law360news.com/1839000/1839407/https-ecf-ca11-uscourts-gov-n-beam-servlet-transportroom-servlet-showdoc-011013344879.pdf,: Alabama, Arkansas, Florida, Georgia, Idaho, Iowa, Kansas, Kentucky, Louisiana, Mississippi, Missouri, Montana, Nebraska, Ohio, South Carolina, South Dakota, Tennessee, Texas, Utah, Virginia, West Virginia, and Wyoming.

Twenty-Five States have filed in the Texas Top Cop Shop case.

[xxv] Black Economic Council of Mass., Inc. v. Yellen, D. Mass., No. 1:24-cv-11411, 5/29/24.

[xxvi] https://www.courtlistener.com/docket/68332749/national-small-business-united-v-us-department-of-the-treasury/  

[xxvii] Firestone v. Yellen, D. Or., No. 3:24-cv-01034, 9/20/24.

[xxviii] Community Associations Institute v. Yellen, U.S. District Court for the Eastern District of Virginia, No. 1:24-cv-1597 (MSN/LRV).

[xxix] Midwest Ass’n of Hous. Coop. v. Yellen, E.D. Mich., No. 2:24-cv-12949, complaint filed 11/5/24.

[xxx] Texas Top Cop Shop, Inc. v. Garland, E.D. Tex., No. 4:24-cv-00478, 12/3/24.

[xxxi] Texas Top Cop Shop, Inc. v. Garland, U.S. Court of Appeals (5th Cir.), No. 24-40792 (12/26).

[xxxii] You may recall that President-elect Trump opposed this Continuing Resolution.

Sec. 122 of the Continuing Resolution: 

Section 5336(b)(1)(B) of title 31, United States Code, is amended by striking ‘‘before the effective date of the regulations prescribed under this subsection shall, in a timely manner, and not later than 2 years after the effective date of the regulations prescribed under this subsection,’’ and inserting ‘‘before January 1, 2024, shall, not later than January 1, 2026,’’.

[xxxiii] Phillip Taylor et al. v. Yellen et al., case number 2:24-cv-00527, in the U.S. District Court for the District of Utah.

[xxxiv] Interesting that the Court wanted to see what the incoming Administration would do with respect to the Act. A very practical approach.

[xxxv] One Judge would have kept the injunction in place for the plaintiff.

[xxxvi] According to this panel, it vacated the earlier order “In order to preserve the constitutional status quo while the merits panel considers the parties’ weighty substantive arguments, that part of the motions-panel.”

[xxxvii] The panel also allowed the plaintiff’s earlier petition for an en banc hearing to be withdrawn.

[xxxviii] Query whether another extension is likely.

[xxxix] Garland v. Texas Top Cop Shop Inc., U.S., No. 24A653, application 12/31/24.

[xl] Or will that Circuit wait on the Supreme Court’s decision regarding the Texas District Court’s nationwide preliminary injunction?  

[xli] Anonymous in the sense that the ownership of such entities is not a matter of public record.

[xlii] In contrast to the U.S., member countries of the European Union are required to have corporate registries that include beneficial ownership information.

[xliii] H. Rept. 116-227 – Corporate Transparency Act of 2019;

https://www.congress.gov/congressional-report/116th-congress/house-report/227/1;. As the Committee Report put it:

“A person forming a corporation or limited liability company within the United States typically provides less information at the time of incorporation than is needed to obtain a bank account or driver’s license and typically does not name a single beneficial owner.”

[xliv] Id. § 5336(b)(1).

In general, the CTA requires each reporting company to submit to FinCEN a report identifying each beneficial owner of the reporting company and each applicant with respect to that company by: (1) full legal name, (2) date of birth, (3) current residential or business street address, and (4) unique identifying number from an acceptable identification document.

The applicant is the individual who files the document that forms a domestic corporation or LLC under state law. They are required to file a list of a reporting company’s beneficial owners, along with certain identifying information, with FinCEN at the time the company is formed.

In general, a reporting company includes a corporation, LLC, or “other similar entity” that is created under state law by filing a document with the secretary of state (or a similar office) of the governing jurisdiction.

However, certain entities are not treated as reporting companies. Significantly, from the perspective of many closely held businesses, the term “reporting company” does not include any U.S. company that:

i. has more than 20 employees on a full-time basis in the U.S.,

ii. filed Federal income tax returns in the U.S. in the previous year demonstrating more than $5 million in gross receipts or sales in the aggregate (including the receipts and sales of other entities it owns or through which it operates), and

iii. has an operating presence at a physical office within the U.S.

The term “beneficial owner” means a natural person who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise:

i. Exercises substantial control over a company; or

ii. Owns or controls 25 percent or more of the equity interests of a company.