Corporate Transparency Act in Limbo
The Corporate Transparency Act (CTA), enacted in 2021, established new reporting obligations. Under the CTA, Reporting Companies must file both initial and updated reports with the Treasury Department, identifying their beneficial owners with 25% or more ownership and individuals with substantial control, such as officers and directors. On December 26, the Fifth Circuit Court of Appeals issued an order suspending the obligation for reporting companies to submit initial or updated beneficial ownership and control person reports under the Corporate Transparency Act (CTA) until at least April 2025.
This development follows a December 3, 2024, nationwide order (the “Preliminary Order”) from a federal District Court in Texas, which temporarily prohibited enforcement of the CTA's reporting requirements while a case challenging their constitutionality progresses. The District Court found the reporting obligations likely unconstitutional. In response, the government filed an emergency motion with the Court of Appeals seeking to stay the Preliminary Order's implementation until an appeal decision is reached.
On December 23, 2024, a three-judge motion panel of the Court of Appeals (the “Motions Panel”) suspended the application of the Preliminary Order, meaning CTA filings would be required until a decision on the appeal is issued. In an unusual ruling, however, on December 26 a different three-judge panel of the Court of Appeals – the panel that ultimately will hear the appeal (the “Merits Panel”) – vacated the Motions Panel’s December 23 decision and again suspended the obligation to make CTA filings. The government could appeal the Merits Panel’s decision to the full Fifth Circuit Court of Appeals, to be heard by all of its judges (referred to as an “en banc” review), or could appeal to the Supreme Court; however, presently it is unclear whether the government will do so.
The Merits Panel expedited the appeal, scheduling oral arguments for March 25, 2025, with a decision unlikely before April 2025 and possibly later. The panel's rulings so far do not definitively decide the fate of the Preliminary Order. Following the March hearings, the Merits Panel will determine whether to uphold or vacate the Preliminary Order. If upheld, reporting requirements will remain suspended until the District Court issues its final ruling on the CTA's constitutionality; if vacated, filings will resume during the litigation. A final determination on the CTA’s constitutionality is expected in the latter half of 2025, with potential appeals extending the timeline further.
Notably, the Fifth Circuit is not the only court examining the CTA. On March 1, 2024, a federal District Court in Alabama issued a limited order halting CTA enforcement for the parties in that case, also citing constitutional concerns. The Eleventh Circuit Court of Appeals is reviewing the government’s appeal in that matter. Meanwhile, federal District Courts in Oregon and Virginia have upheld the CTA’s constitutionality, declining to pause its enforcement.
Given the ongoing legal developments, it is essential for businesses to stay informed and seek guidance tailored to their specific circumstances. Out of an abundance of caution, companies may opt to voluntarily submit Beneficial Ownership Reports, although filing is not currently mandatory. Consult with your legal counsel or advisor to understand how these rulings may impact your obligations under the CTA and ensure compliance as the situation evolves.
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