5 Takeaways

• Appeals Court Lifts Stay: The 5th U.S. Circuit Court of Appeals overturned a Dec. 3 ruling by a Texas federal judge, allowing the Corporate Transparency Act (CTA) to be enforced while litigation continues.
• Impact on Reporting Deadlines: The Financial Crimes Enforcement Network (FinCEN) reinstated the Jan. 1 reporting requirement but extended the deadline for companies created before 2024 to Jan. 13, mitigating immediate compliance chaos.
• CTA's Purpose and Scope: Enacted in 2021, the law requires corporations and LLCs to report beneficial owners to combat money laundering and criminal misuse of corporate entities.
• Constitutional Debate: Opponents argue the CTA violates the Tenth Amendment and exceeds Congress's authority. However, the appeals court ruled it aligns with Congress's Commerce Clause powers.
• Plaintiffs Plan Further Appeals: Representing 300,000 companies, the National Federation of Independent Business and others continue challenging the law, citing disproportionate burdens on small businesses.

Pardon the whiplash: Two days before Christmas, a federal appeals court iced the stay issued at the start of the month by a lower court preventing enforcement of The Corporate Transparency Act.

Reuters reported on Monday that a three-judge panel from the 5th U.S. Circuit Court of Appeals had lifted the injunction issued by a Texas federal district court judge who declared the new law —  an anti-money laundering measure requiring corporate entities to report their beneficial owners to the U.S. Treasury Department — unconstitutional.

The National Federation of Independent Business and others sought that Dec. 3 ruling by U.S. District Judge Amos Mazzant in Sherman, Texas, ahead of a Jan. 1 deadline for entities to file initial reports under the law.

The ruling on Monday again permits the law’s enforcement while the case continues through the court system. The appeals court indicated that the U.S. Department of Justice presented a compelling argument, suggesting it is likely to succeed in defending the CTA's constitutionality.

U.S. Circuit Judge Catharina Haynes, an appointee of Republican former President George W. Bush, partly dissented from the three-judge panel's decision, saying that a nationwide injunction was inappropriate but that said she would have kept it in place for the plaintiffs, including NFIB's members.

The plaintiff group, comprised of 300,000 companies, is represented by the Center for Individual Rights, led by Todd Gaziano, its president; the group plans to appeal further.

“Because of this decision, small business owners must scramble to meet the reporting requirements of this egregious statute,” said Beth Milito, executive director of NFIB’s Small Business Legal Center, in a news release. “Enforcing a Jan. 1 deadline for compliance will mean massive chaos for our nation’s small businesses.” 

The National Roofing Contractors Association threw its support behind the drive to kill the measure last May.

The Treasury Department's Financial Crimes Enforcement Network (FinCEN) notified businesses after Monday's ruling that the reporting requirement was back in effect. However, it extended deadlines for filing reports, saying companies created before 2024 now had until Jan. 13 to file them with the agency.

Roofing Contractor's Legal Insights contributor Trent Cotney, who heads the Construction practice group at Adams & Reese, LLP, wrote in a LinkedIn article that with the incoming Trump administration taking office next month, the entire matter could be moot.

"[I]t is hard to say what will transpire in the weeks ahead; opposition to this case could request additional review from the Fifth Circuit, and other federal courts might challenge the ruling," Cotney wrote.

"Beyond that, the U.S. Supreme Court could get involved," he continued. "Also, as Donald Trump enters the White House in January, he and the Republican-controlled Congress may not support the CTA obligations."

The bipartisan measure was enacted as part of an annual defense spending bill in early January 2021, toward the end of President-elect Donald Trump's first term.

Under the law, corporations and LLCs must report their beneficial owners to FinCEN to help combat money laundering and related crimes.

Supporters of the measure assert the law was designed to combat the increasing trend of criminals using the country as a base to launder money. This is often done by establishing limited liability companies and other entities under state laws without revealing their involvement.

The law has faced several legal challenges. The Dec. 3 stay marked the first time a judge blocked the law's application in one of those cases. However, a federal judge in Alabama issued a more limited injunction, which is currently on appeal.

Mazzant ruled that Congress exceeded its authority in regulating commerce, taxes, and foreign affairs by adopting the "quasi-Orwellian statute," likely violating states' rights under the Tenth Amendment of the U.S. Constitution.

However, the 5th Circuit panel’s Dec. 23 decision said the reporting requirement fell within Congress' broad purview under the U.S. Constitution's Commerce Clause to regulate economic activity that would affect interstate commerce.

The case is Texas Top Cop Shop v. Garland, et al, 5th U.S. Circuit Court of Appeals, No. 24-40792.