COLUMBUS, Ohio — If you are one of those farm businesses putting off the requirement to file “beneficial ownership information” (BOI) to the federal government under the new Corporate Transparency Act (CTA), you just received an early Christmas present from a federal court in Texas. The U.S. District Court for the Eastern District of Texas has issued a nationwide preliminary injunction against the CTA, concluding that the law “appears likely unconstitutional.” The court halted enforcement of the CTA and its regulations (the Reporting Rule) and stayed the Jan. 1, 2025 deadline for BOI reporting.
What is the CTA?
The CTA is a new federal law that requires certain businesses to report the identities of those with “beneficial ownership interests” in the business to the federal Department of Treasury’s Financial Crimes Enforcement Network. The CTA’s first reporting deadline was set to be Jan. 1, 2025.
The parties who brought the lawsuit
Six Plaintiffs filed the lawsuit against the United States — a private individual, three businesses, the Libertarian Party of Mississippi, and the National Federation of Independent Business. The parties claimed that the CTA and its regulations are unconstitutional on several grounds: first, for violating State’s rights under the Ninth and Tenth Amendments; second, for violating the First Amendment by compelling speech and burdening rights of association, and third, for violating the Fourth Amendment by forcing disclosure of private information.
The court’s analysis
Stating that whether the CTA and its rules are absolutely unconstitutional “is a question for another day,” the court instead focused its opinion on its duty to determine whether the Plaintiffs satisfied the proof necessary for being awarded the “extraordinary relief” of an injunction. Doing so required the court to examine the elements a plaintiff must prove to receive an injunction. The court’s opinion consumes 79-pages, but here’s a snapshot of the court’s analysis of the required elements:
- That the CTA and Reporting Rule substantially threaten the plaintiffs with irreparable harm. The Plaintiffs presented two arguments that they would suffer irreparable harm by complying with the CTA reporting requirements. First, Plaintiffs claimed they would have to expend resources, spend time and effort, and incur compliance costs and legal expenses. Second, they argued that their constitutional rights would also be irreparably harmed because the fear of noncompliance and criminal punishment would force them to reveal protected information. The court agreed that Plaintiffs would suffer irreparable harm in both the form of compliance costs and substantial threats to their constitutional rights. In doing so, the court rejected the federal government’s argument that reporting costs would be minimal and “not a heavy lift.
- A substantial likelihood of success on the merits of any of their challenges. The lengthiest part of the court’s decision is its analysis of whether the Plaintiffs are likely to be successful in their argument that the CTA is unconstitutional. Plaintiffs raised several constitutional challenges, but the court addressed only the Tenth Amendment claim that Congress exceeded its authority by passing the CTA. The government first argued that the Constitution’s Commerce Clause authorized the CTA, but the court determine that the CTA appears to be a “substantial expansion of commerce power” because it neither regulates economic activity nor non-economic activity among the states, but instead “regulates reporting companies simply because they are registered entities and compels disclosure of information for a law enforcement purpose.” Likewise, the court rejected the government’s second argument, that the Constitution’s Necessary and Proper clause authorized it to enact the CTA as a necessary and proper extension of its power to regulate commerce and foreign affairs and to lay and collect taxes. The court found “no constitutional solace” in any of the government’s arguments, however. The Plaintiffs had a substantial likelihood of of proving their claim that the CTA exceeds Congress’ authority and violates the Tenth Amendment, the court concluded.
- That the threatened harm outweighs any damage the injunction might have on the Government and that preliminary injunctive relief will not harm the public. A final question the court deliberated is the “balancing of the equities,” or whether the threatened injury to Plaintiffs by not granting the injunction outweighs any potential harm to the government from issuing the injunction. The court quickly concluded that because the Plaintiffs’ injuries are concrete and because it is in the best interest of the public to prevent a violation of a party’s constitutional right by allowing enforcement of the CTA, the balance of equities favors issuing an injunction.
The extent of the injunction
The court’s final deliberation was whether the injunction should apply nationwide or only to the Plaintiffs, and whether it should also prevent enforcement of the CTA’s Reporting Rule and put the Jan. 1, 2025, compliance deadline on hold. Given that the CTA applies nationwide to nearly 33 million businesses, the court held that the extent of the potential constitutional violations Plaintiffs alleged would be best served through a nationwide injunction of the CTA and its Reporting Rule. Combined with a stay of the compliance date, the nationwide injunction will maintain the status quo and protect the parties from irreparable harm pending further review of the Plaintiffs’ claims.
What does the case mean for farm businesses?
Businesses who haven’t yet filed their BOI information with the Department of Treasury’s Financial Crimes Enforcement Network are not currently required to do so, and the Department of Treasury cannot enforce the law or issue penalties against businesses who do not report. The court case did not address or include any remedies for businesses that have already filed BOI information. Note that the lawsuit is not over and there will be further legal proceedings on both the constitutional challenges and the issuance of a permanent injunction. Expect to hear more from us in the future on the legal status of the CTA and its BOI reporting requirements.
Read the case, Texas Top Cop Shop v. Garland, here.
— Peggy Kirk Hall, Attorney and Director, Agricultural & Resource Law Program
Ohio State University CFAES
