Is There a Silver Lining in the CTA Cloud?
Yesterday’s District Court decision lifting the injunction against the Corporate Transparency Act (CTA) is a setback for Main Street.
The Texas court lifted the second and only remaining injunction blocking filing under the CTA, again forcing millions of small (and not-so-small) businesses to report all their beneficial ownership information (BOI) to the Financial Crimes Enforcement Network (FinCEN) or face fines and jail time. As the Court ruled:
In light of the Supreme Court’s order in McHenry v. Texas Top Cop Shop, Inc., the Court has determined that the motion should be, and hereby is, GRANTED. The Court’s January 7, 2025 order granting preliminary relief is STAYED pending the disposition of the appeal.
The result is filing will resume in 30 days, per guidance posted on the FinCEN website today:
With the February 18, 2025, decision by the U.S. District Court for the Eastern District of Texas in Smith, et al. v. U.S. Department of the Treasury, et al., 6:24-cv-00336 (E.D. Tex.), beneficial ownership information (BOI) reporting requirements under the Corporate Transparency Act (CTA) are once again back in effect. However, because the Department of the Treasury recognizes that reporting companies may need additional time to comply with their BOI reporting obligations, FinCEN is generally extending the deadline 30 calendar days from February 19, 2025, for most companies.
So that’s the bad news – the CTA is back in effect.
What’s the silver lining? Several opportunities for success remain. First, bipartisan legislation recently passed the House that would delay filing until the end of the year. A companion bill has been introduced in the Senate by Banking Chair Tim Scott. This legislation is unlikely to move forward on its own, but it could catch a ride on a must-pass bill like the upcoming CR. Yesterday’s ruling could be the catalyst to get that done.
Second, today’s statement from FinCEN also opens the door for further administrative relief:
Notably, in keeping with Treasury’s commitment to reducing regulatory burden on businesses, during this 30-day period FinCEN will assess its options to further modify deadlines, while prioritizing reporting for those entities that pose the most significant national security risks. FinCEN also intends to initiate a process this year to revise the BOI reporting rule to reduce burden for lower-risk entities, including many U.S. small businesses.
What exactly they have in mind is unclear, but both the 30-day grace period and the recognition that the current CTA rules overreach is a massive step forward and a signal that the new Administration intends to take a more business-friendly approach to the CTA. Is a further filing deadline delay part under consideration?
Finally, yesterday’s ruling is not the final say in the courts either. By our count, there are eleven challenges to the CTA pending in federal courts and the lead case – NSBA v. Treasury – is awaiting a decision by the Eleventh Circuit any day now. We have a good chance to win that decision but the case is all but guaranteed to end up before the Supreme Court this year either way.
So the courts might save us from this poorly-conceived law in the end, but in the meantime we need help from the Administration. Vice President Vance and Secretary McMahon have already weighed in against the CTA. Yesterday’s court ruling means it’s time for our friends at Treasury to do the same in a meaningful way.
CTA Update | February 11, 2025
Notable Developments
- Smith ruling appealed
- FinCEN promises relief amid shifting legal landscape
- NFIB files amicus brief
- Delay bill sails through House
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Smith Ruling Appealed
On February 5, the DOJ filed a notice of appeal of a District Court’s ruling in Smith v Treasury, the case that led FinCEN last month to once again pause data collection under the CTA. However, the government also asked the appellate court to stay the nationwide injunction against the CTA’s reporting requirements pending a ruling in the case, meaning the current pause could be undone by the courts at any point.
Main Street businesses had hoped that the new Trump administration would not appeal the Smith ruling and instead allow its injunction to remain in place, but that unfortunately is not how things played out. Whether the Supreme Court weighs in – as it did in the Texas Top Cop Shop case last month after the DOJ filed an emergency petition with the high court – will depend on how the DOJ handles things from here.
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FinCEN Promises 30-Day Grace Period and Unspecified Relief
Shortly after the Smith appeal was filed, FinCEN posted the following announcement on its website:
On February 5, 2025, the Department of Justice—on behalf of the Department of the Treasury (Treasury)—filed a notice of appeal of the district court’s order and, in parallel, has sought to stay that order as the appeal proceeds.
If the district court’s order is stayed, thereby allowing FinCEN’s Reporting Rule to come back into effect, FinCEN intends to extend the reporting deadline for all reporting companies 30 days from the date the stay is granted. Further, in keeping with Treasury’s commitment to reducing regulatory burden on businesses, FinCEN, during that 30-day period, will assess its options to modify further deadlines or reporting requirements for lower-risk entities, including many U.S. small businesses, while prioritizing reporting for those entities that pose the most significant national security risks. [Emphasis added.]
The good news is that if the courts reinstate CTA filing, FinCEN will grant entities a 30-day grace period to do so. It’s also encouraging to see that Treasury is considering putting in place a risk-based protocol for enforcement, something we’ve advocated for since Day 1.
The bad news is that the announcement still leaves much up in the air. As we pointed out in our trade association letter last week, Treasury has the authority to unilaterally delay the 1/1/25 filing deadline to the end of this year. We hope that, regardless of what happens in the courts, regulators will take that action and provide Main Street with much needed certainty.
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Delay Bill Sails Through House
Yesterday the House voted unanimously to advance the Protect Small Businesses from Excessive Paperwork Act of 2025 (H.R. 736), legislation that seeks to delay the CTA’s filing deadline for existing entities (those created prior to 2024). The strong show of support is a clear indication that there is bipartisan interest in at least delaying the CTA, and that affected businesses are calling their elected officials to spread the word. The bill now heads to the Senate.
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Court Recap
While their Texas case remains pending, our friends at the National Federation of Independent Business recent filed an amicus brief with the Fourth Circuit in the case of Community Associations Institute v Treasury. Here’s the key passage from their press release:
NFIB’s brief argues three main points: 1) the CTA does not regulate activity and cannot pass muster under the Commerce Clause, 2) to pass the substantial effects test under the Commerce Clause, Congress must be regulating economic activity, which is the introduction, production, or exchange of goods or services, and 3) because the Act regulates noneconomic activity, it fails the Commerce Clause’s substantial effects test.
The case brought forth by CAI, which represents thousands of homeowners associations across the country, is yet another reminder of the CTA’s staggering overreach – as everyone knows, HOA’s are not engaged in commerce.
Meanwhile, we continue to eagerly await the Eleventh Circuit ruling in NSBA et al v. Yellen and the initial ruling out of Michigan, where the judge has made some very pointed remarks about the validity of the CTA. All told, there are (by our count) eleven cases in various courts across the country challenging the validity of the CTA. Here are the links:
- Alabama (appealed): NSBA et al v. Yellen (11/15/2022)
- Ohio: Robert J. Gargasz Co., L.P.A. et al v. Yellen (12/29/2023)
- Michigan: Small Business Association of Michigan et al v. Yellen (3/1/2024)
- Maine: William Boyle v. Yellen (3/15/2024)
- Texas: NFIB et al v Yellen (5/28/2024)
- Massachusetts: BECMA et al v Yellen (5/29/2024)
- Oregon: Firestone v Yellen (6/27/2024)
- Utah: Taylor v Yellen (7/29/2024)
- Virginia: Community Associations Institute v. Janet Yellen (9/10/2024)
- Texas: Samantha Smith and Robert Means v. Treasury (9/12/2024)
- Texas: Association of American Physicians & Surgeons et al v Yellen (10/28/2024)
Main Street Asks Treasury for CTA Relief
Over 120 trade associations today called on the Treasury Department to offer Main Street some relief and certainty by delaying the CTA through at least the end of this year. As the letter sent to Secretary Scott Bessent reads:
Despite massive public awareness campaigns by the groups represented here, as of December 1, 2024 – just one month before a year-end deadline – FinCEN had received less than 30 percent of the required filings. Had the courts not intervened, tens of millions of business owners would have been out of compliance and at risk of felony prosecutions.
The myriad of legal challenges and court rulings has added to the confusion. A nationwide injunction issued against the CTA in December was subsequently overturned, reimplemented, and overturned again, all in a matter of weeks. An Alabama court ruling that found the CTA unconstitutional is still pending appeal in the Eleventh Circuit, while at least ten other legal challenges are still waiting to be heard.
Still another nationwide order to pause mandatory filing – issued by the District Court for the Eastern District of Texas in the case of Smith v Treasury – remains in place. While we appreciate FinCEN’s decision to respect that order and pause the collection of BOI, the relief provided through that regulatory action is contingent upon the order remaining in place.
Given the volatile legal landscape and the vast number of businesses targeted by the CTA’s unprecedented reporting mandates, we urge the Administration to issue new guidance to delay filing until at least the end of the year and ensure the courts have time to make a final determination regarding the CTA’s constitutionality. [Emphasis added.]
Our ultimate goal is to repeal this ill-conceived law for good, but in the interim Main Street needs certainty that, should courts reverse themselves, we are not suddenly on the hook for massive fines and criminal penalties. Fortunately, the current Administration is tuned into this challenge, and we look forward to working with them to stop this ill-conceived law.
CTA Update | January 31, 2025
Notable Developments
- FinCEN halts CTA enforcement
- S-Corp Advisor in the WSJ
- Our Latest Podcast with CIR Litigation Director
- Delay Bill Reintroduced
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FinCEN Halts CTA Enforcement (Despite SCOTUS Ruling)
Last Friday the Financial Crimes Enforcement Network announced that businesses and covered entities are still not obligated to file under the CTA, so long as the ruling in Smith v. Treasury remains in place. Here’s the alert:
On January 23, 2025, the Supreme Court granted the government’s motion to stay a nationwide injunction issued by a federal judge in Texas (Texas Top Cop Shop, Inc. v. McHenry—formerly, Texas Top Cop Shop v. Garland). As a separate nationwide order issued by a different federal judge in Texas (Smith v. U.S. Department of the Treasury) still remains in place, reporting companies are not currently required to file beneficial ownership information with FinCEN despite the Supreme Court’s action in Texas Top Cop Shop. Reporting companies also are not subject to liability if they fail to file this information while the Smith order remains in force. However, reporting companies may continue to voluntarily submit beneficial ownership information reports.
That good news came just a day after an unfavorable ruling in the Supreme Court that struck down separate nationwide injunction issued by a Texas court in the Texas Top Cop Shop case. However, a separate ruling in Smith v Treasury – which resulted in a stay of the CTA’s reporting deadline – was unaffected by the SCOTUS decision. Importantly, the Biden administration never appealed the January 7 Smith ruling, so as long as the DOJ under President Trump doesn’t do so, the pause should remain in place.
Finally, we’re closely watching NSBA v Yellen, which remains before the Eleventh Circuit and has a good chance of being heard by the Supreme Court this year. That appellate court heard oral arguments last fall and we expect a ruling to be handed down at any time now.
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S-CORP Advisor in the WSJ
Longtime S-Corp advisor and partner at the Milwaukee-based law firm Meissner Tierney Fischer and Nichols has a great Letter to the Editor that ran in the Wall Street Journal over the weekend. Entitled “Don’t bet on criminals and terrorists to be transparent,” it reads:
In “A Key Tool to Fight Terrorists and Criminals” (Letters, Jan. 10), Nate Sibley notes that the Corporate Transparency Act “is intended to tackle the pervasive use of shell companies.”
One problem: I’m a lawyer and I’ve talked with all my terrorist clients. None intends to comply with the CTA. The utility of the statute, then, depends first on all law-abiding citizens registering their entities—at an aggregate cost of “approximately $22.7 billion in the first year and $5.6 billion in the years after,” according to the Financial Crimes Enforcement Network. FinCEN then must digest this massive haystack of information to identify the needle of unreported scofflaw entities.
Mr. Sibley also notes that “there is no fee and most owners can simply file and forget,” except that they have an obligation to update the information for the rest of their lifetimes. He also assures us that data, which includes photo IDs, are “accessible only to law enforcement agents.” Has he read the papers regarding the Chinese hackers breaching closely guarded government databases? What could go wrong?
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Our Latest Podcast with CIR Litigation Director
S-Corp recently took a break from tax policy on our Talking Taxes in a Truck podcast and chatted with Caleb Kruckenberg, Litigation Director for the Center for Individual Rights. Caleb breaks down the latest rulings out of SCOTUS and the Texas Eastern District, the interplay between cases currently being appealed in the Eleventh and Fifth Circuits, additional challenges that have been filed across the country, and the Trump administration’s response.
For anyone looking for a crash course on how we got here and what to expect, be sure to listen here.
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Delay Bill Reintroduced
Congressman Zach Nunn (R-IA) last week reintroduced his CTA delay bill, following up on his efforts to move similar legislation in the previous session. Notably, the bill enjoys support from an even split of Democrats and Republicans, as well as the backing of House Whip Tom Emmer (R-MN). Information on the bill can be accessed here.
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Legal Update
As a reminder, there are (by our count) eleven cases in various courts across the country challenging the validity of the CTA. Here are the links:
- Alabama (appealed): NSBA et al v. Yellen (11/15/2022)
- Ohio: Robert J. Gargasz Co., L.P.A. et al v. Yellen (12/29/2023)
- Michigan: Small Business Association of Michigan et al v. Yellen (3/1/2024)
- Maine: William Boyle v. Yellen (3/15/2024)
- Texas: NFIB et al v Yellen (5/28/2024)
- Massachusetts: BECMA et al v Yellen (5/29/2024)
- Oregon: Firestone v Yellen (6/27/2024)
- Utah: Taylor v Yellen (7/29/2024)
- Virginia: Community Associations Institute v. Janet Yellen (9/10/2024)
- Texas: Samantha Smith and Robert Means v. Treasury (9/12/2024)
- Texas: Association of American Physicians & Surgeons et al v Yellen (10/28/2024)
The Experts are Wrong (Part V)
Several months ago, we asked Penn Wharton to help us score some ideas on tax reform. They politely declined. Too busy analyzing the 199A deduction, apparently. Their new paper on the deduction makes two points — the first is wrong and the second, while interesting, is not particularly helpful.
Their first point is that “Section 199A provides a 20 percent reduction in the tax rate for qualified business income relative to ordinary income tax rates.” That’s wrong. The Section 199A deduction reduces a pass-through’s Qualified Business Income, not the tax rate. The deduction makes no claims on tax rates.
This mischaracterization enables the Wharton folks to identify a non-existent “excess” benefit that rhetorically strengthens their case for changing the policy. That was never the policy, however, so there’s no excess benefit and no underlying rationale for the changes.
The straw man gets even more itchy when you incorporate the revenue raisers included in the TCJA. Remember, Section 199A wasn’t just about parity. It was about avoiding a tax hike on Main Street businesses. To calculate the real 199A benefit, you would need to net out base broadeners like the SALT cap, 163(j), the excess loss deduction cap, the loss of the manufacturing deduction, the amortization of R&E expenses, among others.
Finally, Wharton ignores the 199A guardrails. Not everybody gets a 20 percent deduction because QBI excludes foreign income and 1231 gains. So is income excluded from QBI due to the SSTB designation and other guardrails. The result is many larger pass-through businesses see a significantly reduced 199A deduction, while others see no deduction at all.
Add those tax hikes and limitations back into the calculator, and Wharton’s excess benefit quickly becomes a deficit.
Wharton’s second point, meanwhile, is interesting, but not really all that important. They observe that the interaction of 199A and the progressive rate schedule means some business owners with incomes hovering around the bracket inflection points might see a tax benefit that exceeds 20 percent. Setting aside the above objections, what of it? Again, the deduction was set at 20 percent, not the tax benefit. By comparison, the C corporation rate reduction from 35 to 21 percent is 40 percent. Talk about excess benefits!
What’s interesting is that Wharton’s so-called “excess benefit” is concentrated among lower- and middle-income pass-through owners. Larger businesses don’t benefit from this dynamic because their income stays above the top rate threshold, even after the deduction.
So if policymakers follow the Wharton recommendation, smaller pass-through businesses would shoulder the bulk of the tax hike.
In other words, not much to see here, folks. If the Wharton folks wanted to be helpful in this debate, they could study how the double corporate tax distorts behavior and hurts job creation, or how most of the tax benefit of the TCJA went to regular families and small businesses rather than billionaires, or how tax revenues have been strong post-TCJA while spending has spun out of control, or how the tax code favors public companies at the expense of family businesses. Haha, we jest. That’s not going to happen. Might as well ask Jared Bernstein why the government needs to borrow money.
Congress is going to extend the 199A deduction this year, but it will have to be without the help of the experts and the academics.