The Corporate Transparency Act (CTA) and its implementing regulations (Regulations) require entities within its scope (reporting companies) to disclose information, including about their beneficial owners, to the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN).
The Regulations set a reporting deadline of January 1, 2025, for initial reports to be filed by reporting companies formed before 2024 and require reporting companies formed beginning in 2024 to file within specified time periods following their formation (within 90 days for entities formed during 2024 and within 30 days for entities formed after 2024).
Plaintiffs throughout the country have challenged the CTA’s constitutionality. In Texas Top Cop Shop, Inc. v. Garland, No. 4:24-cv-478 (E.D. Tex. Dec. 3, 2024), the court enjoined the CTA nationwide and stayed the Regulations’ reporting deadlines. This injunction comes on the heels of three district court decisions handed down earlier this year, reaching different conclusions about the CTA’s constitutionality.
In deciding that plaintiffs were likely to succeed on the merits of their constitutional challenge, the court in Texas Top Cop Shop agreed with an earlier decision from a district court in the Northern District of Alabama, which held that the CTA is not a valid exercise of Congress’s power under the Commerce Clause or of Congress’s taxing and foreign-relations powers under the Necessary and Proper Clause. By contrast, district courts in the District of Oregon and the Eastern District of Virginia have held that plaintiffs were not likely to succeed on the merits of their arguments that the CTA exceeded Congress’s powers. All four cases are now on appeal — to the Fourth, Fifth, Ninth, and Eleventh Circuits.
The nationwide injunction prevents the government from enforcing the reporting requirements of the CTA and the Regulations, and on December 6, 2025, FinCEN suspended reporting while the injunction remains in effect. But reporting companies should stay attuned to further developments. The Department of Justice (DOJ) has appealed Texas Top Cop Shop to the Fifth Circuit and has asked for a stay of the injunction pending the appeal. If the nationwide injunction is dissolved or stayed, then reporting companies may have to comply with the CTA and the Regulations on short notice. And if the Supreme Court ultimately takes up the question whether Congress had the constitutional authority to enact the CTA, then the Court could issue one of the most consequential decisions on Congress’s enumerated powers since National Federation of Independent Business v. Sebelius, 567 U.S. 519 (2012).
The Corporate Transparency Act
Congress enacted the CTA as part of the Anti-Money Laundering Act of 2020. Congress noted that, under state law, companies are generally not required to disclose information about their “beneficial owners” — that is, the individuals who ultimately control the entities. National Defense Authorization Act of 2021, Pub. L. No. 116-283 §66402(2). Thus, Congress found, “malign actors” are able to “conceal their ownership of corporations” and use those effectively anonymous corporations for “money laundering,” “the financing of terrorism,” and “serious tax fraud.” Id. §66402(3).
To address that concern, the CTA requires any “reporting company” to submit to FinCEN a report containing information about the company and its “beneficial owners.” 31 U.S.C. §5336(b). A “beneficial owner” under the CTA is “an individual who, directly or indirectly … exercises substantial control over the entity” or “owns or controls not less than 25 percent of the ownership interests of the entity,” with various exceptions. Id. §5336(a)(3). And the CTA defines a “reporting company” as “a corporation, limited liability company, or other similar entity” that is either “created by the filing of a document with a secretary of state or a similar office under the law of a State or Indian Tribe” or “formed under the law of a foreign country and registered to do business in the United States.” Id. §5336(a)(11)(A).
But the CTA exempts from its disclosure requirements several categories of entities, including banks, companies registered with the Securities Exchange Commission under the Securities Exchange Act of 1934, and certain companies that have more than 20 full-time employees in the United States. Id. §5336(a)(11)(B). The CTA also authorizes the Secretary of the Treasury, in consultation with other officials, to exempt additional “class[es] of entities” if “requiring beneficial ownership information” from those entities “would not be highly useful in national security, intelligence, and law enforcement agency efforts to detect, prevent, or prosecute money laundering, the financing of terrorism, proliferation finance, serious tax fraud, or other crimes.” Id. §5336(a)(11)(B)(xxiv).
Willful violations of the CTA’s disclosure requirements carry civil and criminal penalties. For example, any person that willfully provides false or fraudulent beneficial ownership information or fails “to report complete or updated beneficial ownership information to FinCEN” may receive a $500 per day civil penalty and up to $10,000 in fines and two years in federal prison. Id. §5336(h)(1), (3)(A). And any person who knowingly discloses or uses beneficial ownership information without authorization may receive a $500 per day civil penalty, along with a $250,000 fine and five years in federal prison. Id. §5336(h)(2), (3)(B).
A Nationwide Injunction and Other Challenges to the CTA
Plaintiffs have challenged the CTA’s constitutionality, to mixed results, in federal district courts around the country. Most recently, a judge in the Eastern District of Texas enjoined the CTA and the Regulations nationwide, concluding that Congress lacked the constitutional authority to adopt the CTA. The four district courts to have considered the constitutionality of the CTA have divided on important constitutional questions.
The courts have split on whether the CTA likely is a valid exercise of Congress’s power under the Commerce Clause, with federal judges in Oregon and Virginia holding that it is and judges in Texas and Alabama holding it is not. The courts have also split on whether the CTA likely is authorized by the Necessary and Proper Clause, combined with Congress’s foreign-affairs or taxing powers, with a judge in Oregon holding that it is, and judges in Texas and Alabama holding that it is not.
A judge in the Eastern District of Texas issued a nationwide injunction
On December 3, 2024, a federal judge granted plaintiffs’ motion for a preliminary injunction in Texas Top Cop Shop. The court held that plaintiffs were likely to succeed on their constitutional challenge to the CTA and thus enjoined the government from enforcing the CTA or the Regulations and stayed the Regulations’ reporting deadlines. As a result, reporting companies need not file reports required by the CTA or the Regulations for as long as the injunction — which the government has appealed — remains in effect.
In issuing the injunction, the court concluded that plaintiffs had shown a substantial likelihood of success on the merits of their claims that Congress exceeded its authority in passing the CTA.
First, the court agreed with plaintiffs that Congress likely lacked the power under the Commerce Clause to enact the CTA. The court explained that the CTA does not regulate the channels or instrumentalities of interstate commerce because nothing in the statute’s text limits its reach to only companies engaged in interstate commerce. Slip Op. 36-40. The court acknowledged Supreme Court precedent holding that Congress may regulate activity under the Commerce Clause if “a ‘rational basis’ exists for concluding that the regulated activity, taken in the aggregate, substantially impacts interstate commerce.” Id. at 47 (quoting Gonzales v. Raich, 545 U.S. 1, 22 (2005)). But the court nonetheless concluded that the CTA fails that test, because the law “does not regulate a pre-existing activity, but instead compels a new one.” Id. at 40-46.
The court also explained why Congress could not enact the CTA under the Constitution’s Necessary and Proper Clause. As an initial matter, the court held that Congress may use the Necessary and Proper Clause only in tandem with one of its enumerated powers. And none of the enumerated powers the government relied on gave Congress authority to enact the CTA. The court held that the CTA falls outside Congress’s power to regulate foreign affairs because the law regulates a domestic issue, not a foreign one: “anonymous existence of companies registered to do business in a U.S. state.” Id. at 56-60. The court further held that the CTA falls outside Congress’s taxing power because the connection between the CTA and the collection of taxes is “tenuous at best.” Id. at 71.
Having concluded that plaintiffs were likely to succeed on the merits, the court also held that plaintiffs had satisfied the other preliminary injunction factors. The court explained that the costs of complying with a regulation later held to be invalid constitute irreparable harm. And the balance of the equities supported plaintiffs because, in the court’s view, a preliminary injunction was necessary to preserve the constitutional status quo.
A judge in the Northern District of Alabama had previously held that the CTA is unconstitutional
Nine months before the court in the Eastern District of Texas issued its injunction, the district court in National Small Business United v. Yellen, No. 5:22-cv-01448 (N.D. Ala. Mar. 1, 2024), had held that the CTA is unconstitutional and granted summary judgment to the plaintiffs in their challenge to that law. That is the only case in which a district court has decided the ultimate merits of the CTA’s constitutionality (as opposed to ruling in a preliminary-injunction posture), though that decision does not have nationwide effect and provides relief only to the plaintiffs.
The district court’s analysis in National Small Business resembles the court’s reasoning in Texas Top Cop Shop. First, the court held that Congress does not have power under the Commerce Clause to enact the CTA. Second, the court held that Congress’s foreign-affairs powers could not justify its enactment of the CTA because the CTA regulates “the purely domestic arena of incorporation.” Slip Op. 23. Third, the court held that the CTA is not a necessary and proper exercise of Congress’s taxing power, because there was not a sufficiently close relationship between that power and the CTA’s disclosure provisions.
Judges in the District of Oregon and the Eastern District of Virginia have denied preliminary injunctions, concluding the CTA is likely constitutional
Courts in the District of Oregon and the Eastern District of Virginia have reached different conclusions about the likelihood that the CTA is constitutional.
In Firestone v. Yellen, No. 3:24-cv-1034 (D. Or. Sept. 20, 2024), the court denied a preliminary injunction, holding that plaintiffs failed to show a likelihood of success on the merits of their constitutional challenge.
The court first held that the CTA is likely a valid exercise of Congress’s power under the Commerce Clause. The court noted that it need determine “only whether a ‘rational basis’ exists” for concluding that “the regulated activities, taken in the aggregate, substantially affect interstate commerce.” Slip Op. 12-13 (quoting Raich, 545 U.S. at 22). The CTA likely satisfied that test, in the court’s view, because Congress “sought to deter money laundering, the financing of terrorism, and other illicit economic transactions.” Id. at 14.
The court also held that the CTA is likely constitutional under the Necessary and Proper Clause, given that “Congress has broad authority to effectuate the government’s powers over national security and foreign affairs and to lay and collect taxes.” Id. at 12. As to Congress’s taxing power, the court reasoned that Congress determined that corporate ownership reporting requirements are useful in combatting tax fraud and tax evasion. And as to Congress’s foreign-affairs powers, the court explained that Congress rationally concluded that the disclosure requirement is necessary to protect national security and promote U.S. interests abroad.
The district court in Community Associations Institute v. Yellen, No. 24-cv-01597 (E.D. Va. Oct. 24, 2024), similarly denied plaintiffs’ motion for a preliminary injunction, concluding that plaintiffs were not likely to show that the CTA was an invalid exercise of Congress’s commerce power. The court did not address whether the CTA was likely valid under Congress’s foreign-affairs or taxing powers.
Next Steps and Implications
The government has appealed the nationwide injunction issued in Texas Top Cop Shop to the Fifth Circuit. And with the other district court decisions currently on appeal in the Ninth, Fourth, and Eleventh Circuits, any disagreement among the courts of appeals in resolving these issues would tee up possible Supreme Court review.
The government has asked for a stay of the injunction pending the Texas Top Cop Shop appeal, given the Regulations’ previous reporting deadline of January 1, 2025. Thus, for as long as that injunction remains in effect, companies do not face reporting deadlines under the CTA or the Regulations. That could change, however, if the Fifth Circuit or Supreme Court reverses the district court’s decision or if a court stays the district court’s injunction pending further proceedings.
Meanwhile, appeals from the other three cases are further along. Plaintiffs have filed their opening briefs in the Ninth and Fourth Circuits, in appeals from the district courts’ denials of their motions for preliminary injunctions. See Firestone v. Yellen, No. 24-6979 (9th Cir.); Community Association Institute v. Yellen, No. 24-2118 (4th Cir.). And in National Small Business United v. Yellen, No. 24-10736 (11th Cir.), a three-judge panel of the Eleventh Circuit (Judges Jordan, Newsom, and Brasher) heard oral argument in September 2024 in the government’s appeal from the district court’s summary judgment ruling holding the CTA unconstitutional.
The Supreme Court would likely grant certiorari and review any court of appeals decision that holds on the merits that the CTA is unconstitutional. It is also possible that the Supreme Court would weigh in on this question earlier, through its emergency docket, if the lower courts deny the government’s motion for a stay of the injunction in Texas Top Cop Shop and the government makes that request to the Supreme Court. If the Supreme Court ultimately reaches the merits of whether the CTA is a valid exercise of Congress’s commerce power, that could be one of the most significant Commerce Clause decisions since National Federation of Independent Business, 567 U.S. 519, where the Court held that the Affordable Care Act was a valid exercise of Congress’s taxing and spending powers, but not its commerce power.
Conclusion
The district courts that have addressed the issue have disagreed about whether Congress had the constitutional authority to enact the CTA. The nationwide injunction recently entered in Texas Top Cop Shop prevents the government from enforcing the CTA and the Regulations until further order from that district court or a higher court. Thus, entities otherwise subject to the CTA do not have to make filings under the CTA while that injunction remains in effect. But those entities should closely follow legal developments to determine their compliance requirements. If the Fifth Circuit or Supreme Court reverses the district court’s injunction, or if a court stays the injunction pending further proceedings, these entities would find themselves required to comply with the CTA and the Regulations. And, more broadly, a decision from the Supreme Court striking down the CTA would have profound implications for the scope of Congress’s constitutional powers.
This memorandum is provided by Skadden, Arps, Slate, Meagher & Flom LLP and its affiliates for educational and informational purposes only and is not intended and should not be construed as legal advice. This memorandum is considered advertising under applicable state laws.