Periodic Memos

Special Update:

THE BOIR FILING REQUIREMENT IS BACK IN EFFECT. REPORTING COMPANIES WHICH WERE FORMED BEFORE JANUARY 1, 2024 MUST FILE THEIR BOIRs NO LATER THAN MARCH 21, 2025. REPORTING COMPANIES FORMED AFTER JANUARY 1, 2024 MUST FILE THEIR BOIRs NO LATER THAN 30 DAYS AFTER FEBRUARY 19, 2025.

Congress enacted the CTA which took effect on January 1, 2024. The purpose of the CTA is to require for profit business entities to report the identity of the “flesh and blood” individual(s) who own at least 25% of the ownership interests or who control(s) the business entity. These individuals are referred to as the Beneficial Owners.

Referred to as a reporting company, any for profit business entity which is organized under the laws of any state of the United States must file with the US Department of the Treasury (FinCEN) a Beneficial Owner Information Report (BOIR). Also, any foreign (ie formed under the laws of a non-US country) which has received authority to do business in any state of the United States must file a BOIR.

The FinCEN gathers this information to determine whether a for profit business entity is being used to commit or facilitate criminal offenses such as money laundering, narcotics, and shielding criminal enterprises. The CTA does not involve any tax liabilities, tax issues or the Internal Revenue Service (IRS).

I. THE PRELIMINARY INJUNCTIONS

Since the CTA took effect on January 1, 2024, the CTA has been the subject of controversial federal litigation which has led to contradictory and confusing rulings. Through

February 19, 2025, five US district courts, one US appellate court and the US Supreme Court have issued rulings on the CTA. A nationwide preliminary injunction was in effect which prohibited the FinCEN from penalizing reporting companies for failing to report. This preliminary injunction has been lifted. Reporting companies must file their BOIRs no later than March 21, 2025.

A. Five US District Court Rulings

1. National Small Business United et al. v. Yellen et al.
C.A. 22-cv-1448 (N.D. Ala. March 1, 2024)
721 F.Supp. 3d 1260
US Court of Appeals for the Eleventh Circuit No. 24-10736 2024 WL 899372

The Alabama District Court issued the first ruling on the CTA. The Alabama District Court found the CTA to be unconstitutional. Among other constitutional arguments, the plaintiffs essentially complained that the reporting obligations, which the CTA compels, are not within any of the eight enumerated powers which Congress is empowered to exercise. The Government alleged that the reporting obligations were within the enumerated powers of Foreign Affairs, Commerce and Taxation as implemented under the Necessary and Proper Clause.

The Court found that the CTA caused the reporting obligation to attach as soon as a reporting company was created by filing a founding document with the appropriate state authority. The Court further found that creating and regulating business entities has always been a state function and not a federal function. After analyzing the legal substance and extent of the power which each enumerated power, which the FinCEN alleges, the Court ruled on the motions that compelling entities and individuals to report personal information was not within any of the enumerated powers which the FinCEN alleges. It enjoined the FinCEN from enforcing the reporting obligations only against the plaintiffs including each member of the National Small Business United. However, the Court did imply that the reporting obligation could be found to be within the Commerce Power, if the reporting obligation was “triggered” when an entity engages in commerce rather than when the entity is formed.

The FinCEN appealed the ruling to the US Court of Appeals for the Eleventh Circuit. The appellate court heard oral arguments on September 27, 2024. The plaintiffs essentially made the same arguments as did the plaintiffs in the Alabama district court. Some observers opine that based on the “tenor of the argument”, the appellate court may well reverse the district court.

2. Michael Firestone v. Yellen
Case No. 3:24-cv-1034-SI (DC Oregon, September 21, 2024) 2024 WL 4250192

The plaintiffs sought a preliminary injunction to enjoin enforcement of the CTA. The plaintiffs argued that the CTA was unconstitutional for essentially the same reasons set forth in the Alabama District Court decision. Finding that the CTA required that only reporting companies which were commercial in character must report and not individuals, the Oregon District Court found that the plaintiffs were unlikely to prevail on the merits. The Oregon District Court found that the CTA is likely constitutional, effectively rejecting the reasoning of the Alabama District Court, and dismissed the complaint for a preliminary injunction. The plaintiffs have appealed.

3. Community Association Institute v. Yellen
Case No. 1:24-cv-1597 (E.D. Virginia October 24, 2024) 2024 WL 4571412

Agreeing with the reasoning Oregon District Court, the Virginia District Court ruled that the CTA was likely constitutional and that the plaintiffs were “unlikely” to prevail on the merits. Like the Oregon District Court, the Virginia District Court ruling enables the FinCEN to enforce the CTA against only the plaintiffs in the Virginia District Court case. The plaintiffs have appealed.

4. Texas Top Cop Shop, Inc. v. Garland
Case No. 4:24-cv-00478 (E.D. Texas December 3, 2024) 2024 WL 5049220

Using reasoning similar to the reasoning in the Alabama District Court ruling, this court (referred to as Texas District Court 1), granted the preliminary injunction. The difference is that the Texas District Court 1 chose to use a legal doctrine entitled universal jurisdiction in a controversial manner. This doctrine enables the preliminary injunction which the Texas District Court 1 issued to apply nationwide. This means that FinCEN is enjoined from enforcing the CTA against each reporting company in the nation which does not report.

5. Smith v. The Department of Treasury et al.
Case No. 6:24-cv-336 2025 (E.D. Texas January 7, 2025)
2025 WL 41924

In a separate case on the CTA, another judge of the US District Court for the Eastern District of Texas enjoined the FinCEN from enforcing the CTA on grounds which are substantially the same as the grounds used by Texas District Court 1. Texas District Court 2 had also imposed a nationwide preliminary injunction. On February 17, 2025, this Texas District Court 2 granted the motion of FinCEN to stay the preliminary injunction consistent with the decision of the US Supreme Court which is described, infra.

B. The US Court of Appeals for the Fifth Circuit

On December 3, 2024, the FinCEN filed an emergency appeal of the Texas District Court 1 ruling (Case No.24-40792) in the US Court of Appeals for the Fifth Circuit. On December 23, 2024, a 3-judge panel of the US Court of Appeals for the Fifth Circuit stayed the preliminary injunction which the Texas District Court 1 had issued. In effect, this 3-judge panel of the Court found that the CTA is likely constitutional. Based on this ruling, the FinCEN mandated that all reporting companies must report by January 13, 2025.

On December 26, 2024, a 7-judge panel of the US Court of Appeals for the Fifth Circuit overruled the 3-judge panel and effectively reinstated the preliminary injunction of the Texas District Court 1 (Case No. 24-40792). Oral argument is scheduled for March 25, 2025.

C. The US Supreme Court

On December 31, 2024, the FinCEN asked the US Supreme Court, on an emergency basis, to stay the preliminary injunction until an appeal on the merits is heard and enable the FinCEN to require reporting companies to report (McHenry v. Texas Top Cop Shop Inc. Case No. 24A653). On January 10, 2025, the plaintiffs filed an opposition to FinCEN’s emergency motion and many amicus briefs have been filed.

On January 23, 2025, the US Supreme Court stayed the preliminary injunction. The FinCEN took the position that, although the preliminary injunction issued by the Texas District Court 1 is stayed, the preliminary injunction issued by Texas District Court 2 was not at issue before the US Supreme Court. Therefore, the nationwide preliminary injunction issued by Texas District Court 2 remained in effect. On February 17, 2025, based on McHenry, supra., the Texas District Court 2 stayed the preliminary injunction. This means that the reporting requirement is in effect.

D. The Effect of a Preliminary Injunction

1. A preliminary injunction is an interim court order which a trial judge issues early in a lawsuit to prevent the defendant from continuing the actions about which the plaintiff has complained until a final judgment on the merits of the case can be issued.
2. Among the items which a plaintiff must demonstrate to support its request for a preliminary injunction, is that there is a “likelihood” that the court will ultimately rule in favor of the plaintiff after the court has had an opportunity to hear the merits of the plaintiff’s arguments/evidence and the defenses/evidence of the defendant.

a. A preliminary injunction is not a final judgement.
b. After hearing the merits of the case, the trial court or an appellate court could rule in favor of the defendant and issue a judgment which would bind all reporting

II. THE STATUS OF THE REPORTING REQUIREMENT 

Because the preliminary injunction is stayed, each reporting company in the US must report. The FinCEN has set March 21, 2025 as the deadline for each such filing for reporting companies which were formed before January 1, 2024. For reporting companies which were formed after January 1, 2024, they must report no later than 30 days after February 19, 2025. Any reporting company which fails to report by these dates shall incur penalties.

III. US CONGRESSIONAL ACTION

On February 10, 2025, the House of Representatives, using an expedited procedure, passed HR 736 by a margin of 408 to 0 with 25 not voting. If it is enacted, reporting companies which were formed before January 1, 2024 would have until January 1, 2026 to file their reports. The bill does not address the filing deadline for reporting companies which are formed after January 1, 2024. On February 11, 2025, S.505 was introduced in the Senate which is substantially similar to HR 736.

IV. OBSERVATIONS

A. BOIR Filing Requirement as of February 17, 2025

Because the Texas District Court 2 lifted the preliminary injunction, all reporting companies in the nation which were formed before January 1, 2024 must file their BOIR no later than March 21, 2025. Each reporting company which is formed after January 1, 2024 must file its BOIR no later than 30 days after February 19, 2025. Note that, for technical procedural reasons, the plaintiffs in the Alabama District Court case (see I,A,1, supra.) are not required to file. Any reporting company which fails to file will incur penalties.

B. Future Legal Actions

1. No court has yet issued a final ruling on the merits as to whether or not the CTA is constitutional. Ultimately, the US Supreme Court will decide whether or not the CTA is constitutional.
2. The 119^th Congress could amend the CTA or repeal the CTA.

C. Re-Imposition of the Preliminary Injunction

1. Until the US Supreme rules on the CTA or the Congress amends or repeals the CTA, the preliminary injunction can be re-imposed by one of the US appellate courts.
2. Even if the preliminary injunction is re-imposed, each reporting company in the nation still has a legal obligation to file its BOIR. The difference will be that the FinCEN cannot penalize a reporting company for not timely filing its BOIR.
3. Even though reporting companies may not be penalized for failing to file their BOIR, banks, private equity and other financial institutions may consider the failure to file as an issue in its “know your customer (KYC)” program or as an incident to a due diligence process.
4. Each reporting company must make a business decision, not a legal decision. Each reporting company must consider whether the “burden” of filing its BOIR outweighs not performing a legal obligation which is in effect but compliance with it is temporarily voluntary.