Enforcement of New Reporting Rules Temporarily Halted by Federal Judge

A federal judge in Texas issued a preliminary injunction on December 3, that suspends Treasury’s enforcement of the new reporting requirements under the Corporate Transparency Act.

Significantly, this decision does not represent the final say as to the validity of the new law.  The grant of the injunction, while an unexpected development (particularly, a mere four weeks ahead of the year-end deadline), reflects the initial analysis of one federal judge concerning the likelihood that the new law ultimately will be deemed to violate certain fundamental Constitutional principles, together with and relative to the associated compliance costs imposed on small businesses to satisfy the related beneficial ownership reporting requirements.

The preliminary injunction has NO impact on businesses who have already submitted their initial reports to Treasury’s FinCEN (including many newly-formed or -incorporated entities), and no further action is required for such companies.

For businesses who have not completed their initial beneficial ownership reporting submission, Treasury’s website guidance advises that they “will not be subject to liability if they fail to [the requisite beneficial ownership reports] …while the preliminary injunction remains in effect.”

As expected, the government appealed the injunction almost immediately.  It is very possible (albeit unknown at present) that the government will ask the appeals court to reinstate the implementation of the new law (that is, to impose a “stay” on the injunction).  If the appeals court does reverse the injunction, Treasury has remained silent as to whether businesses will be afforded a corresponding grace period or other accommodation adjustment to the applicable deadlines to come into compliance with such resumed filing requirements.

There are at least 14 other lawsuits pending in federal courts that challenge the legality of the new law.  Other federal courts in Michigan, Oregon and Virginia have rejected attempts to obtain a preliminary injunction, and other judges have concluded that the Corporate Transparency Act likely does pass Constitutional muster.

Although still uncertain, this temporary halt in the roll-out of the new beneficial ownership reporting rules could be just that – a short reprieve – and the requirements could be reinstated on relatively short notice.  Possible civil and criminal penalties for noncompliance with the new reporting rules include daily fines of up to $500 per day for continued violations, not to exceed $10,000, and possible imprisonment of not more than two (2) years, or both.  Businesses, therefore, should continue to evaluate their respective obligations under the new reporting rules, and prepare for the submission of required beneficial ownership disclosures, in order to be poised to submit any required reports if, and in the event that, the Texas ruling may be reversed.