The legal battles over the Corporate Transparency Act and its beneficial ownership information reporting mandate continue.
On Dec. 18, 2024, the New Civil Liberties Alliance filed an amicus curiae brief in Texas Top Cop Shop v. Garland, urging the Court of Appeals for the Fifth Circuit to reject the government's request to stay a preliminary injunction against enforcement of the CTA. Only a few days later, the Court of Appeals decided to
The CTA mandates that organizations that have filed under state law must submit detailed reports that include sensitive information to the Treasury.
"NCLA is concerned by the government's expansive interpretation of the Commerce Clause to authorize an administrative agency the power to regulate and obtain sensitive information from over 30 million for-profit and nonprofit corporate entities irrespective of any connection to economic activity that affects interstate commerce," argued NCLA's Sheng Li, counsel for amicus curiae. "Such an interpretation would transform the Commerce Clause into a grant of general police power — a power the federal government does not possess and that belongs to the states."
The Supreme Court has drawn a bright line limiting the Commerce Clause's reach to only economic activities that have a substantial effect on national markets, Li noted, adding that the government's request to stay the preliminary injunction ignores this important limitation.
"According to the government, Congress may regulate the creation and continued existence of corporate persons based on the theory that such entities will one day engage in economic activities that impact interstate commerce," Li noted. "This court should deny the stay request because it is based on a boundless interpretation of the Commerce Clause that is utterly incompatible with limited government."
Failure to comply with the filing requirement, whether by omission or by submission of false information, results in serious civil and criminal penalties that are not tied to commercial transactions nor to any other sort of economic activity, and are not limited to for-profit corporations but also apply to certain nonprofits.
The only "activity" that triggers the CTA's reporting requirements is the entity being created by the filing of incorporation paperwork with the appropriate official, according to LI.
"Such mere filing is not an economic activity regulable under the Commerce Clause, because it does not involve the production, consumption or exchange of any good or service for which there is a national market. Nor can the government anticipate future economic activity that a corporate person will one day engage in to justify regulating its birth and continued existence under the Commerce Clause," he said.
Don't stop collecting BOI information
Meanwhile, the issue is moving forward in other jurisdictions. Courts in Virginia and Oregon have approved the CTA, while courts in Alabama and Texas have ruled against it. Although some had pinned their hopes on Congress' continuing resolution to keep the federal government funded, the final version that passed failed to grant a delay in enforcement.
The American Institute of CPAs continues to advise members that, "at a minimum, those assisting clients with BOI report filings continue to gather the required information from their clients and are prepared to file the BOI report if the injunction is lifted."
Mark Limardo, a partner in the tax department with New York law firm Herrick, agreed. "The filing itself is pretty light," he said. "The actual work is leading up to determining whether an entity is exempt and has to file at all. It can get fairly complicated to determine if they have an exemption. The law is still evolving on how exemptions will apply. And once you get past the exemptions, you have to figure out organizational documents, and who the 25% shareholders are. If a company is owned 75% by another corporation, you have to figure out who those shareholders are, and that can be a problem. The way things stand, you have to do everything you need to do so you can push a button on short notice, but on the other hand you may be spending a lot of money and time on something that may never go into effect."
"However the issue is decided, it would have significant implications on Congress' ability to regulate under the Commerce Clause, which generally has been interpreted to mandate some sort of economic activity," Li concluded.
