What are the constitutional arguments against the Corporate Transparency Act?

Challengers argue the CTA exceeds Congress's enumerated powers under the Commerce Clause and the Necessary and Proper Clause because it regulates the internal corporate structure of entities that may have no connection to interstate commerce. The government argues the CTA is a valid exercise of power to combat money laundering and terrorism financing.

What should businesses do about CTA filing during the ongoing litigation?

Despite the legal uncertainty, businesses should prepare their beneficial ownership information reports and be ready to file on short notice. Courts have alternately imposed and lifted injunctions, and enforcement could resume at any time. Having reports ready minimizes the risk of missing a suddenly reinstated deadline.

Fifth Circuit: CTA Injunction Analysis and Business Impact | Lynch Law

The Fifth Circuit Court of Appeals is now squarely at the center of the constitutional challenge to the Corporate Transparency Act. Following the district court's December 3 nationwide injunction halting enforcement of the CTA's beneficial ownership information reporting requirements, the government sought emergency relief from the Fifth Circuit. The resulting procedural twists underscore both the high stakes of this litigation and the deep uncertainty facing the millions of businesses subject to the law.

The District Court's Injunction

On December 3, 2024, Judge Amos Mazzant of the Eastern District of Texas issued a preliminary injunction in Texas Top Cop Shop, Inc. v. Garland, finding that the plaintiffs were likely to succeed on the merits of their constitutional challenge to the CTA. The court concluded that Congress likely exceeded its enumerated powers in enacting the statute, which requires millions of small businesses to report detailed personal information about their beneficial owners to the Financial Crimes Enforcement Network. The injunction applied nationwide, halting all CTA enforcement while the appeal proceeded.^[1]

The Fifth Circuit's Procedural Whiplash

What followed was a remarkable series of procedural developments. On December 13, the Department of Justice filed an emergency motion to stay the injunction. The Fifth Circuit accelerated briefing, setting a compressed schedule. On December 23, a motions panel of the Fifth Circuit granted the government's emergency motion, temporarily lifting the injunction and reinstating the CTA's reporting requirements.

But the relief for the government was short-lived. On December 26, a merits panel of the Fifth Circuit vacated the stay, reinstating the district court's injunction in full. The merits panel concluded that the equities favored maintaining the status quo while the appeal was fully briefed and argued, noting the significant burdens that immediate enforcement would impose on small businesses that had been relying on the injunction.^[2]

The Constitutional Arguments

The core constitutional question is whether Congress has the authority under its enumerated powers to require state-registered entities to report their ownership information to a federal agency. The plaintiffs argue that the CTA exceeds Congress's power under the Commerce Clause, the Necessary and Proper Clause, and the taxing power. They contend that requiring disclosure of ownership information from entities that are created and regulated under state law is a matter traditionally within the province of the states.

The government argues that the CTA is a valid exercise of Congress's power to regulate foreign affairs and national security, as the reporting requirements are designed to combat money laundering, terrorist financing, and other illicit activities that cross international borders. The government also invokes the Commerce Clause, arguing that anonymous shell companies facilitate illicit commercial activity that affects interstate and international commerce.

Where Things Stand for Businesses

As of this writing, the CTA's reporting requirements remain enjoined nationwide. FinCEN has acknowledged the injunction and stated that companies are not currently required to file beneficial ownership information reports and will not be subject to penalties for failing to do so while the injunction remains in effect.

However, the injunction is a preliminary measure, not a final resolution. The Fifth Circuit will hear full briefing and oral argument on the merits of the constitutional challenge. If the government prevails on appeal, reporting deadlines could be reimposed with relatively short notice. The government has also indicated that it intends to seek Supreme Court review if necessary, which could extend the period of uncertainty well into 2025.

Practical Guidance

We continue to advise clients to prepare their beneficial ownership information even though filing is not currently required. Gathering the necessary information, including the full legal names, dates of birth, addresses, and identifying document numbers of all beneficial owners, takes time. Businesses that wait until enforcement resumes may find themselves scrambling to meet compressed deadlines.

For businesses that had already filed BOI reports before the injunction, no action is needed. Those reports remain on file with FinCEN. For businesses that had not yet filed, the prudent course is to compile the required information and be prepared to file promptly if and when the injunction is lifted. We will continue to monitor this rapidly evolving situation and provide updates as the litigation progresses.

References

^[1] Texas Top Cop Shop, Inc. v. Garland, No. 4:24-cv-00478 (E.D. Tex. Dec. 3, 2024) (granting nationwide preliminary injunction against CTA enforcement).
^[2] Texas Top Cop Shop, Inc. v. Garland, No. 24-40792 (5th Cir. Dec. 26, 2024) (merits panel vacating stay and reinstating injunction).
^[3] Corporate Transparency Act, 31 U.S.C. §§ 5336 (requiring reporting companies to file beneficial ownership information with FinCEN).