The U.S. Corporate Transparency Act (“CTA”) became effective on January 1, 2024, requiring the provision of “beneficial owner information" (“BOI”) to the Financial Crimes Enforcement Network (“FinCEN”) starting in 2025. In early December 2024, on the verge of the primary reporting deadline, a federal trial court enjoined the CTA’s applicability nationwide. Consequently, while most nonprofits were already exempt from CTA obligations, this court ruling removed BOI reporting requirements all together.
But wait! On December 23, 2024, the Fifth Circuit Court of Appeals changed course and halted the trial court’s ruling. For now, the BOI reporting requirement thus remains in place. Importantly (for those to whom the CTA applies), FinCEN published an alert following the Fifth Circuit decision, notifying the public that filing deadlines were extended from January 1, 2025, to January 13, 2025, for reporting entities created prior to January 1, 2024. Details for other categories of reporting entities are available on the FinCEN website.
This article provides an overview of the last month of critical updates regarding the CTA. While BOI reporting is still largely inapplicable to nonprofits (as our firm wrote earlier) and may yet be invalidated, the potential penalties for noncompliance (up to $500+ per day) is enough to keep it on everyone’s legal compliance radar.
Halt! Texas District Court Enjoins CTA Reporting, Nationwide
On December 3, 2024, Judge Mazzant of the U.S. District Court for the Eastern District of Texas issued a nationwide preliminary injunction temporarily halting enforcement of the CTA and its implementing regulations. (See Texas Top Cop Shop v Garland et al., Case 4:24-cv-00478). According to the written opinion, the court took this step to “preserve the constitutional status quo” while legal challenges proceeded, and in the face of the looming January 1, 2025, reporting deadline.
Judge Mazzant concluded that the CTA is “likely” unconstitutional, reflecting congressional overreach and carrying significant harm from enforcement on reporting entities. Taking pains to address the extensive constitutional arguments within the litigation’s preliminary injunction posture, Judge Mazzant summarized the dispute in quite concerning terms:
Plaintiffs challenge an unprecedented law known as the Corporate Transparency Act (“CTA”). It represents Congress’s attempt to combat bad actors’ ability to cloak their criminal activities in a veil of corporate anonymity. At its most rudimentary level, 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, this federal mandate marks a drastic two-fold departure from history. First, it represents a Federal attempt to monitor companies created under state law—a matter our federalist system has left almost exclusively to the several States. Second, the CTA 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. As a result, Plaintiffs contend that the CTA violates the promises our Constitution makes to the People and the States.
Through a nearly 80-page opinion, Judge Mazzant agreed with the Plaintiffs:
“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. And even in the face of the deference the Court must give Congress, the CTA appears likely unconstitutional. Accordingly, the CTA and its Implementing Regulations must be enjoined.”
Based on these compelling considerations, Judge Mazzant further ruled that the injunction should apply nationwide in scope, particularly since the CTA applies to “approximately 32.6 million existing reporting companies.” Correspondingly, the “Court cannot provide Plaintiffs with meaningful relief without, in effect, enjoining the CTA.”
Reversal! Fifth Circuit Court of Appeals Stays District Court Injunction
Representing the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN), the U.S. Attorney General’s Office swiftly sought emergency relief from the Fifth Circuit Court of Appeals. The Government argued in favor of a “stay” (i.e., a delay of the trial court’s injunction), articulating concerns about irremediable disruptions to the CTA’s implementation, resulting confusion about legal compliance, and resulting international security enforcement problems. The Government additionally asserted that the CTA is indeed constitutional and therefore should be upheld, both now and ultimately through further litigation proceedings. The Government also argued that to the extent any injunctive relief is upheld, it should apply only to the six plaintiffs (five entities and one individual) who are the parties in the pending litigation instead of on a nationwide basis.
On December 23, 2024, the Fifth Circuit Court of Appeals sided with the Government and issued a “stay,” which stops the nationwide injunction – at least for now – through a written 7-page order. In so ruling, the Court of Appeals first determined that the “government has made a strong showing that it is likely to succeed on the merits in defending CTA’s constitutionality,” particularly in light of Congressional authority under the Constitution’s Commerce Clause. The Court then observed that “the CTA regulates the ownership and operation of businesses by imposing modest disclosure requirements to a facilitate a regulatory scheme aimed at combatting financial crimes.: Consequently, “because Congress only needs a ‘rational basis’ to conclude that a regulated activity ‘substantially affects interstate commerce,’ enacting the CTA was within its commerce power.” The Court further engaged in a brief balancing of equities involved here, concluding quickly that “balancing this harm against the public’s urgent interest in combatting financial crime and protecting our country’s national security, equity favors a stay.”
What’s Next for CTA Reporting Obligations
The Fifth Circuit’s ruling additionally ordered that the Government’s appeal is “expedited to the next available oral argument panel.” Consequently, further court action may take place soon. In the meantime, Congress could intervene in ways that could impact CTA implementation. A draft continuing resolution released by the U.S. House of Representatives on December 17, 2024, proposes extending the initial January 1, 2025, BOI reporting deadline to January 1, 2026, for reporting companies formed before 2024, while leaving deadlines for newer entities unchanged.
Additionally, FinCEN has published an alert providing updated legal compliance requirements. In particular, FinCEN has now added an extension through January 13, 2025, for reporting companies that were in existence prior to January 1, 2024.
Nonprofits and CTA Reporting
Notwithstanding the flurry of CTA-related legal developments, remember that Section 501(c)(3) and other tax-exempt nonprofits are generally exempt from CTA reporting requirements, along with their wholly owned or wholly controlled subsidiaries. Keep in mind, however, that nonprofits may nevertheless encounter the CTA’s reach in a few limited scenarios, as follows:
1. Joint Ventures: Nonprofits participating in partnerships or joint ventures with non-exempt entities may trigger reporting obligations for the joint venture itself. For example, an LLC co-owned by a nonprofit and a taxable corporation would not be exempt under the CTA.
2. Taxable Nonprofits: Some nonprofit organizations that lack federal tax-exempt status remain subject to the CTA’s requirements despite their nonprofit structure under state law.
3. Loss of Tax-Exempt Status: Nonprofits that lose their federal tax-exempt status—whether due to an IRS revocation (by failure to file required Form 990s or otherwise) —could become “reporting companies” under the CTA, particularly if they fail to promptly garner retroactive reinstatement.
4. Initial Corporate Formation: It is possible that newly formed nonprofits – not yet recognized by the IRS as tax-exempt – could fall subject to the CTA’s BOI requirement. Further guidance from experienced counsel thus should be sought for such situations, such as for organizations that need not affirmatively apply for IRS recognition of tax-exempt status.
These scenarios highlight the importance of maintaining federal tax-exempt status and understanding organizational structures that might trigger CTA obligations. Our firm’s January 2024 blog article further addresses the CTA’s applicability, its BOI reporting requirements, exemptions, and potential penalties. Our law firm’s LLC article provides additional context for nonprofit organizations that may use such corporate structuring tool for a variety of helpful purposes, such as for subsidiaries and also as noted in No. 1 above.
Wrapping up, these CTA developments may be fast moving, but they ultimately should have limited impact on nonprofits. Nevertheless, nonprofit leaders should continue paying attention to legal compliance matters, whether on an ongoing basis or through new legal developments.
