Corporate Transparency Act May Come Back, But It’s Not Here Yet
Predicting the fate of the Corporate Transparency Act (“CTA”) is becoming more difficult than predicting snowfall in New Orleans. A surprise action by the U.S. Supreme Court in one Texas case makes it more likely the CTA will come back into effect. For now, however, the CTA remains blocked by a federal court order in a second Texas case. The CTA’s ultimate future may depend on the new Trump Administration, but the Administration’s position remains unknown.
Background
The CTA requires most private companies to confidentially report to the U.S. Treasury Department their 25%-or-more owners and other persons with “substantial control” over the company. Companies formed before 2024 were scheduled to become subject to the reporting requirements on January 1, 2025.
The CTA’s reporting requirements are unprecedented in U.S. law and have understandably encountered significant opposition. A number of lawsuits have been filed in federal district courts across the country challenging the CTA’s constitutionality. Two of the courts have ruled in favor of the CTA, while three others have ruled against it. In two of the latter cases, both from the Eastern District of Texas, the courts blocked CTA enforcement on a nationwide basis. Those two cases are now at the center of attention.
Texas Top Cop Shop v. Garland
In Texas Top Cop Shop, Inc. v. Garland (“TTCS”), a federal district court in Sherman, Texas ruled on December 3 that the CTA was likely unconstitutional, and issued a nationwide preliminary injunction against its enforcement (the “TTCS Injunction”). The federal government appealed the TTCS Injunction to the U.S. Court of Appeals for the Fifth Circuit (the “Fifth Circuit”), which is scheduled to hear oral arguments in that appeal on March 25. In addition, the government filed an emergency motion with the Fifth Circuit requesting a “stay” of the TTCS Injunction — which, if granted, would temporarily block the TTCS Injunction and therefore reinstate CTA enforcement. A “motions panel” of the Fifth Circuit initially granted the stay, but on December 26 a “merits panel” of the same court overruled that decision and denied the stay. The government quickly escalated its request for a stay to the U.S. Supreme Court. The government’s request initially went to Justice Alito, but he referred it to the entire Court.
On January 23, surprising most CTA observers, the Supreme Court granted the government its requested stay of the TTCS Injunction. This put the TTCS Injunction on hold until the Fifth Circuit, and possibly then the Supreme Court, can consider the TTCS Injunction “on the merits.” Only one Justice (Jackson) formally dissented, so it is likely that eight of the nine Justices were in favor of granting the stay.
The TTCS Injunction had put the CTA on hold, but the Supreme Court’s January 23 stay put the TTCS Injunction itself on hold. Some CTA observers, focusing solely on the TTCS case, rushed to announce that the CTA was back and filings would soon be due. Those observers were wrong, however, because they overlooked a separate district court decision that had also put the CTA on hold.
Smith v. U.S. Department of Treasury
The second decision had been issued by another federal district court in the Eastern District of Texas, this one in Tyler, in the case of Smith v. U.S. Department of Treasury (“Smith”). On January 7, the Smith judge had come to the same basic conclusion as his colleague in Sherman in the TTCS case: that the CTA was likely unconstitutional. The Smith court issued a nationwide preliminary order blocking the CTA’s reporting requirements (the “Smith Order”). The Smith Order is not technically an injunction, but it has the same practical effect.
It’s understandable that some observers overlooked the Smith Order, given that the TTCS Injunction had been elevated to the lofty, and high-profile, level of the Supreme Court. But the Supreme Court’s January 23 stay of the TTCS Injunction did not affect the Smith Order. The Smith Order was not at issue before the Supreme Court. In fact, the federal government has still not filed an appeal in the Smith case, much less requested that the Smith Order be stayed. The federal office that enforces the CTA — the Treasury Department’s Financial Crimes Enforcement Network, or FinCEN — has posted an alert on its website acknowledging that the Smith Order continues to block CTA enforcement, notwithstanding the Supreme Court’s stay of the TTCS Injunction. The bottom line is that the CTA remains on hold for now as a result of the Smith Order.
The fate of the Smith Order
If the federal government appeals the Smith Order, could it obtain a stay blocking the Smith Order like it obtained a stay blocking the TTCS Injunction? After all, the Smith Order has the same practical effect as the TTCS Injunction — it blocks CTA enforcement on a nationwide basis. Because the Supreme Court was willing to stay the TTCS Injunction (possibly by a lopsided 8-to-1 vote), wouldn’t the Court also be willing to stay the Smith Order?
The issue is not that simple, for a couple of reasons:
- The government’s request for a TTCS stay came to the Supreme Court on its “shadow docket.” Like the vast majority of decisions made by the Court on that docket, the Court order granting the stay was extremely short and contained no explanation for the decision. In other words, we don’t know why the Court decided to stay the TTCS Injunction. It’s therefore impossible to know if the Supreme Court would stay the Smith Order simply because it had stayed the TTCS Injunction.
- There are also timing considerations. Depending on certain procedural questions, it could possibly take the government some time to request a stay from the Supreme Court.
The political front
We still do not know the Trump Administration’s position on the CTA. Project 2025 called for the CTA’s repeal, and the CTA may be inconsistent with the new Administration’s general anti-regulatory philosophy. In that event, the new Administration could block the CTA in several different ways: for example, by declining to defend the CTA against lawsuits challenging its constitutionality (such as TTCS and Smith); by supporting proposed legislation to repeal or modify the CTA; or by voluntarily continuing to suspend enforcement efforts. Some methods would be easier than others, and some would potentially raise legal issues. But, ultimately, the fate of the CTA likely depends at least as much on what the Trump Administration does as what the federal courts do.
How Cokinos | Young can help
The corporate attorneys at Cokinos | Young continue to closely monitor CTA developments and will keep you updated as important events occur. If you have any questions, please contact one of our following corporate attorneys:
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