The Corporate Transparency Act (CTA), with reporting requirements for business entities, has become the ball in constitutional ping pong. It’s on, it’s off, it’s on, it’s off – and the deadline for the first Beneficial Ownership Interest (BOI) report was originally Jan. 1.

Don’t worry about missing the deadline. The U.S. Court of Appeals for the Fifth Circuit has blocked enforcement of the CTA, including its reporting requirements.

What Is the CTA?

The CTA – a vast law codified at 31 U.S.C. § 5336 – serves to ferret out illicit ownership interests that may be using corporate entities for money laundering to finance criminal activities, including terrorism.

The CTA delegates to the Secretary of the Treasury the ability to make rules governing the BOI reports that go to the Financial Crimes Enforcement Network (FinCEN).

The law’s critical component requires business owners to report their interests in corporate entities to FinCEN.

Although many exceptions exist for the BOI reporting requirements, a corporate entity can be as simple and easy to create as a limited liability company.

Even in ruling against the CTA, the U.S. District Court for the Eastern District of Texas, Sherman Division, said the law has a worthy goal, but that goal didn’t cure the law’s violation of federalism.

The district court in Texas Top Cop Shop Inc. v. Garland issued a nationwide preliminary injunction on Dec. 3, blocking enforcement of the CTA’s reporting requirements.

The government appealed to the Fifth Circuit Court of Appeals. Initially, the Fifth Circuit Court of Appeals overruled the preliminary injunction, granting a temporary stay of the district court’s order and injunction pending appeal.

However, three days later, the Fifth Circuit vacated the temporary stay, meaning the nationwide preliminary injunction against the CTA is back in effect. The federal government has asked the U.S. Supreme Court lift the injunction pending appeal.

District Court Injunction

Calling the act “quasi-Orwellian,” Judge Amos L. Mazzant III of the U.S. District Court for the Eastern District of Texas viewed the CTA, and its BOI requirements, as “a drastic two-fold departure from history.”

Those departures, Judge Mazzant wrote, included “a Federal attempt to monitor companies created under state law – 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.”

A court may grant an injunction if plaintiffs demonstrate they are likely to suffer irreparable harm in the absence of an injunction, the plaintiffs are likely to succeed on the merits, and the balance of equities favors an injunction.

Critical to that equation, Judge Mazzant concluded that the CTA is “likely unconstitutional” – the plaintiffs are “substantially likely” to succeed on the merits.

The Commerce Clause didn’t apply, Mazzant said, because the CTA doesn’t involve interstate transportation routes or the means of that transportation.

The word “commerce” never appears in the CTA, Mazzant noted, nor does the CTA regulate commerce; the CTA creates an activity.

The Necessary and Proper Clause doesn’t support the law, Judge Mazzant concluded, because the CTA is not tied to a federal power, such as interstate or foreign commerce, foreign affairs, or taxation. Instead, the CTA affects state-chartered domestic entities and doesn’t create a tax.

The CTA’s requirements apply to approximately 32.6 million entities nationwide, according to information the court pulled from the Federal Register. Based on “[t]he extent of the constitutional violation,” Judge Mazzant enjoined the CTA nationwide.

In addition, Judge Mazzant cited the Administrative Procedure Act, section 705 (5 U.S.C. § 705), to enjoin FinCEN regulations authorized under the CTA.

Section 705 authorizes a reviewing court to “issue all necessary and appropriate process to postpone the effective date of an agency action or to preserve status or rights pending conclusion of the review proceedings” to the extent necessary to prevent irreparable injury.

Appealing the Decision

The government asked the district court to lift the injunction. In its argument before the district court, the government noted results contrary to the district court in district courts in Oregon and the Eastern District of Virginia, which found the CTA constitutional.

That argument, Judge Mazzant pointed out, failed to take into account the reasoning of the Northern District of Alabama, which ruled against the CTA.

“Given the Court’s prior reasoning …, it does not appear that the government has a ‘substantial case on the merits,’ at least as to Plaintiffs’ enumerated powers challenge.”

Even if the government did have a substantial case on the merits, Judge Mazzant ruled that “the equities here do not ‘weigh heavily’ in favor of granting the stay.”

An initial decision by the Fifth Circuit Court of Appeals on Dec. 23 found that the CTA’s regulations of corporate entities affected interstate commerce consistent with the Commerce Clause.

The minimal time and expense of preparing BOIs was not a significant harm – and “protecting our country’s national security” favored the stay, according to that panel, which noted that the other district court that decided against the CTA did not issue a nationwide injunction.

The appellate court expedited the appeal with oral arguments scheduled for March 25.

Three days later, on Dec. 26, the Fifth Circuit Court of Appeals panel assigned to review the merits of the appeal restored the nationwide injunction “to preserve the status quo.”

Asking the Supreme Court

The U.S. Solicitor General on Dec. 31 asked the Supreme Court to lift the injunction. As the assigned circuit judge for the Fifth Circuit, Justice Samuel A. Alito, Jr., received the application. A response brief was filed Jan. 10.

In its filed petition, the government asserts it is likely to succeed on the merits.

“The Act’s reporting requirements are important to the government in preventing, detecting, and prosecuting claims such as money laundering, tax fraud, and the financing of terrorism,” the petition argues.

“The requirements therefore fall comfortably within Congress’s authority under the Commerce Clause to regulate economic activities (here, the anonymous operation of business entities) that substantially affect interstate commerce.”

The government argued that the CTA is necessary and proper “to regulate interstate and foreign commerce and to collect taxes, as well as Congress’s powers with respect to foreign affairs.”

The government said the injunction causes it irreparable harm. An act of Congress is presumed constitutional, and the CTA is critical to prevent financial crime and protect national security, the government argued.

In the balance, the government argued, the estimated 90 minutes of time for a business to make the free submission to FinCEN bears little burden.

“At a minimum,” the petition argued, “this Court should narrow the district court’s vastly overbroad injunction” – which itself may justify granting certiorari to determine whether nationwide injunctions are themselves constitutional.

For now, enforcement of the CTA and its reporting requirements is blocked while the U.S. Supreme Court considers whether to lift the injunction pending appeal on the merits.