A U.S. District Court has issued a preliminary injunction against the CTA (and its potentially onerous reporting requirement) as unconstitutional. What should companies do now?

 

The U.S. District Court for the Eastern District of Texas has created the biggest complication so far concerning the American Corporate Transparency Act (CTA) and its reporting requirement that was set to imminently affect millions of companies.

 

On Dec. 3, District Court Judge Amos L. Mazzant III issued an order calling the CTA “likely unconstitutional” and blocking the U.S. Treasury Department from enforcing it. The nationwide, preliminary injunction came just a few days before a Jan. 1 reporting deadline for many companies’ beneficial ownership information (BOI). Many business organizations have claimed that the reporting promised an onerous, if not unfulfillable obligation for companies. A few companies have also successfully challenged the requirement – which came with heavy fines for non-compliance – in local courts.

 

Where this leaves companies now remains partially unclear.

 

Original intent

The CTA was to mandate that beginning Jan. 1 companies, corporations, LLCs, limited partnerships and similar entities were to disclose information about their “beneficial owners” to the Financial Crimes Enforcement Network (FinCEN), a bureau within the Treasury.

 

With the aim to enhance financial transparency and combat money laundering, all domestic and foreign entities formed or registered to do business in the U.S. were to file a BOI report unless they were exempted (often due to size). FinCEN always maintained that the reporting itself was simple and quick, though acknowledged that the obligation would fall on millions of companies under threat of hundreds of dollars a day in initial fines for non-compliance.

 

Some American taxpayers quickly challenged the CTA and BOI as unconstitutional and an undue hindrance to business. Some local courts affirmed the challenges, and opponents of CTA hoped for more widespread rulings in their favor.

 

‘Quasi-Orwellian’

They may have gotten one. Early this month, a federal district court in Texas issued the injunction in the case of Texas Top Cop Shop, Inc., et al. v. Garland, et al., temporarily halting enforcement of the CTA’s BOI reporting requirements across the country (one of the plaintiffs represents members nationwide). Observers say this order stays all deadlines for reporting companies to comply with the CTA.

 

The Court wrote that the CTA “regulates companies that are registered to do business under a State’s laws and requires those companies to report their ownership, including detailed, personal information about their owners, to the Federal Government on pain of severe penalties. Though seemingly benign,” the ruling adds, “this federal mandate marks a drastic two-fold departure from history.”

 

The Court contended that the CTA represents a federal attempt to monitor companies that were created under state law in the U.S. (“a matter our federalist system has left almost exclusively to the several States”) and ends a feature of corporate formation as designed by various States, “anonymity. For good reason, Plaintiffs fear this flanking, quasi-Orwellian statute and its implications on our dual system of government.”

 

“Despite attempting to reconcile the CTA with the Constitution at every turn, the Government is unable to provide the Court with any tenable theory that the CTA falls within Congress’s power,” issuing Judge Amos L. Mazzant added. “And even in the face of the deference the Court must give Congress, the CTA appears likely unconstitutional.”

 

Observers added that the Court found that the CTA burdens businesses with significant compliance costs without clear safeguards against misuse of collected data.

 

What now?

The injunction, while in effect, halts enforcement of BOI non-compliance.

 

The question is, for how long? The U.S. government has appealed Mazzant’s injunction to the U.S. Court of Appeals for the Fifth Circuit (and was already appealing a narrower CTA halting order in a different Circuit). The American Institution of CPAs has since advised members “that, at a minimum, those assisting clients with BOI report filings continue to gather the required information from their clients and are prepared to file the BOI report if the injunction is lifted.”

 

Other American courts have upheld the CTA, observers add, though the incoming Trump administration is likely to support further curtailing of the CTA and its reporting requirement via funding cuts, revisiting regulations or

executive or legislative actions.

 

“The nationwide injunction marks only the beginning of what is likely to be a protracted legal battle,” Forbes has written. Throughout that battle, companies should seek out nimble advisors who keep constantly up to date on evolving compliance requirements.

 

Your tax specialist needs to stay on top of this and many other issues of wealth, foreign income and tax enforcement. If we can help, please let us know.

 

About the Author 

Alicea Castellanos is the CEO and Founder of Global Taxes LLC. Alicea provides personalized U.S. tax advisory and compliance services to high-net-worth families and their advisors.

 

Alicea has more than 20 years of experience. Prior to forming Global Taxes, Alicea founded and oversaw operations at a boutique tax firm, worked at a prestigious global law firm and CPA firm.

Alicea specializes in U.S. tax planning and compliance for non-U.S. families with global wealth and asset protection structures which include non-U.S. trusts, estates and foundations that have a U.S. connection.

 

Alicea also specializes in foreign investment in U.S. real estate property, and other U.S. assets, pre-immigration tax planning, U.S. expatriation matters, U.S. persons in receipt of foreign gifts and inheritances, foreign accounts and assets compliance, offshore voluntary disclosures/tax amnesties, FATCA registration, and foreign companies wanting to do business in the U.S.

 

Alicea is fluent in Spanish and has a working knowledge of Portuguese.

 

Alicea is an active member of the Society of Trusts & Estates Practitioners (STEP), the New York State Society of Certified Public Accountants (NYSSCPAs), the American Institute of Certified Public Accountants (AICPA), the International Fiscal Association (IFA), a member of Clarkson Hyde Global, a world-wide association of accountants, auditors, tax specialists and business advisors and the Global Referral Network (GRN).

 

Distinctly, in 2020, Alicea was awarded with a prestigious NYSSCPA Forty Under 40 Award. She was selected as someone that has notable skills and is visibly making a difference in the accounting profession.

 

In 2021 and 2022, Alicea was the Gold and Silver Winner, respectively, of Citywealth’s Powerwomen Awards in the category USA – Woman of the Year – Business Growth (Boutique). In 2023, she continued her winning streak by receiving the Gold award for Company of the Year Female Leadership (Boutique) and the Silver award for Accountancy Firm of the Year at the Magic Circle Awards. Furthermore, Alicea has consistently secured her position in the Global Elite Directory for four consecutive years, being recognized as a Private Client Global Elite Advisor and is currently listed for 2024 as a Non-Legal Adviser. This exclusive directory annually highlights the world’s elite lawyers and outstanding wealth advisors serving ultra-high net-worth clients.

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