After months of being pelted with reminders that they must comply with reporting requirements of the Corporate Transparency Act and provide beneficial ownership information, businesses received an early holiday gift, as a Texas court has acted to block the Congressional edict.
The Corporate Transparency Act was passed in 2021, creating the beneficial ownership information (BOI) mandate.
The US Treasury Department and business associations have been issuing warnings to businesses, including farmers, that failure to comply with the law by January 1, 2025 could result in fines of $10,000 or more and possible jail time — not that their warnings have been heeded by most businesses.
Only about a third of the about 32.6 million businesses that are subject to the new law have complied, according to the US Treasury Department.
Ostensibly, the purpose of requiring that all businesses report who benefits from the operation of their business is meant to curb illicit finance. Businesses and owners who don’t file could face civil penalties of up to $591 a day for each day their violation continues.
On Dec. 3, a Texas court blocked the Department of Treasury and Financial Crimes Enforcement Network (FinCen) from enforcing the BOI requirements, in response to a suit filed by the National Federation of Independent Business (NFIB) last May, to overturn the BOI mandates. The NFIB argued that Congress exceeded its authority and violates the First and Fourth Amendment of the Constitution.
A press release from NFIB states that the organization has long argued that the CTA illegally imposes burdensome requirements on small businesses, infringes on free speech by forcing disclosure of private information, and constitutes and unreasonable search.
The district court agreed with NFIB. Known as the Commerce Clause, Article I, Section 8 of the United States Constitution states that “The Congress shall have power . . . To regulate commerce . . . among the several states[.]” The Government claimed that the BOI requirements were a valid exercise of Congress’s Commerce Clause power.
Not so said the Texas district court. It concluded that the “fact that a company is a company does not knight Congress with some supreme power to regulate them in all aspects—especially through the CTA, which does not facially regulate commerce.”
The court action means the agency can’t impose penalties while the court conducts a more thorough review of the rule’s constitutionality. For now, the January 1, 2025, reporting deadline is delayed until a higher court holds otherwise.
The court also weighed how far to extend its holding. In the judicial system, judges have the option to narrow their decisions to the parties before them in a given case. In a previous case out of Alabama, a judge ruled that the CTA was unconstitutional but applied that decision to only the few parties that brought the case.
Because of the breadth and strength of NFIB’s membership, ALL small businesses across the country are relieved from the BOI requirements. The court stated:
“At the Court’s hearing, Plaintiffs suggested that they sought an injunction on behalf of only the Plaintiffs before the Court, including the approximately 300,000 members of NFIB. The Government responded that if the Court were to enjoin the CTA and Reporting Rule, the scope of which included NFIB’s members, then the Court would, in practical effect, enter a nationwide injunction. The Court agrees with the Government’s point. A nationwide injunction is appropriate in this case. . . . NFIB’s membership extends across the country. And, as the Government states, the Court cannot provide Plaintiffs with meaningful relief without, in effect, enjoining the CTA and Reporting Rule nationwide. The extent of the constitutional violation Plaintiffs has shown is best served through a nationwide injunction.”
NFIB expects the government to appeal this decision. The organization said that it is prepared to defend the district court decision and fight against the burdensome and unconstitutional BOI requirements as long as the government seeks to saddle small business owners with the mandate.
“Businesses should still be filing their information,” said Erica Hanichak, government affairs director at the Financial Accountability and Corporate Transparency Coalition. “The deadline itself hasn’t changed. It just changes enforcement of the law.”
If the injunction is reversed, enforcement could resume.
