This transcript has been edited for clarity.

David D. Stewart: Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. This week: on again, off again.

While many of us in the tax world took some time off over the holidays, including myself, the courts handling the Corporate Transparency Act challenges were in full swing. Over the break, we ended up with a sort of Schrödinger's disclosure rule, where the CTA's status depended on when it was observed.

For more background on the CTA and how we got to this point, check out our previous episode, which we'll link to in the show notes. But joining me now to catch us up to speed on where things are is Lili Martin-Mashburn, a partner at Morris, Manning & Martin. Lili, welcome to the podcast.

Lili Martin-Mashburn: Thanks so much for having me.

David D. Stewart: So why don't we start off with a brief refresher on what this CTA is?

Lili Martin-Mashburn: Absolutely. The Corporate Transparency Act is really a landmark piece of legislation that was enacted in 2021 that gets enforced by the Treasury Department's Financial Crimes Enforcement Network, or FinCEN for short. And the intent of the CTA is to get at the Marty and Wendy Byrdes of the world. The government really wants to increase transparency by creating a centralized beneficial ownership registry, with the goal of preventing bad actors from using shell companies to engage in illicit activities, including money laundering, human and drug trafficking, terrorism, tax evasion, and fraud.

And under the CTA, certain entities created in the U.S. or that are registered to do business in the U.S., which are called reporting companies under the CTA, will be required to report certain information about their businesses, as well as their beneficial owners, to FinCEN. Reporting companies include limited liability companies, corporations, and partnerships. And this is really aimed at those smaller businesses.

So the CTA has 23 different exemptions, mostly related to companies that are already required to report a lot of this information to the government — for example, to the SEC. So the CTA is really trying to fill in that gap. And a couple of things to note about why the CTA is so controversial: First, apart from the constitutional arguments that we'll discuss in a bit, and in addition to providing a lot of information to the government that was not already previously required, a failure to timely file under the CTA, or even update a report if any of your information changes, can result in significant penalties on a per-entity basis. These penalties include monetary penalties of up to now $590 per day when adjusted for inflation, criminal penalties of up to $10,000, and up to two years of imprisonment.

The second thing to note is that this really applies to a lot of businesses and small businesses. FinCEN estimated that in 2024 the CTA would impact 32.6 million businesses alone, and that each year thereafter it would impact 5 million new businesses.

And the last thing to note is that it is extremely expensive to comply. FinCEN estimates that it would cost over $22.8 billion — with a B — for the 2024 entities, and take over 126 million hours of work to comply. And then for entities in 2025 and beyond that are having to comply, it would cost $5.6 billion, or 35 million hours of work. And based on what I'm seeing with my clients, I think those estimates are actually underestimates.

David D. Stewart: This sort of information is very important to tax authorities. Why hasn't the U.S. government been collecting it until now?

Lili Martin-Mashburn: So for these smaller businesses, the government has not specifically been collecting this information. In some ways, I guess you could say that it has a lot of the information that it's asking for, particularly about each individual reporting company: the name, legal address, tax identification number. Most of those entities are going to have to report that on its tax return. And in terms of the beneficial owners, some of that information will be on the reporting company's tax returns. But up until this point in time, the government has not collected that information, though this has been, honestly, decades in the making.

David D. Stewart: So where are we on enforcement of the CTA?

Lili Martin-Mashburn: So right now the government is enjoined from enforcing the CTA on a universal basis. And what this means is that the CTA's reporting requirements are currently on hold. Reporting companies are able to file their reports on a voluntary basis, but the government's not requiring entities to do so.

David D. Stewart: So let's get into some of these court challenges that have been brought against the CTA. We've discussed the Alabama case in the past; could you tell us about where that case stands?

Lili Martin-Mashburn: Sure. So in March 2024 the Alabama district court agreed with the plaintiffs that the CTA was likely unconstitutional under the commerce clause and issued a preliminary injunction that only applied to the plaintiffs in that case. Since then, the government did appeal that case to the Eleventh Circuit and the Eleventh Circuit heard oral arguments on September 27, 2024.

We're still waiting on a decision from the Eleventh Circuit, and I suspect the Eleventh Circuit is waiting to see what the Supreme Court does in the Texas Top Cop Shop case, which is really the one that's been getting a lot of publicity.

David D. Stewart: All right, well we'll hold that one back for just one moment longer. Could you tell me where things stand in the Small Business Association of Michigan v. Yellen case?

Lili Martin-Mashburn: Sure. So in the Small Business Association of Michigan v. Yellen case, that one was filed right after the Alabama case came out. They echoed a lot of the arguments that were made in the Alabama case. They asserted a few different arguments, but the district court in Michigan was unpersuaded and they denied the temporary restraining order. So the parties in that case have gone on with their full briefings, which were submitted on December 16.

So in addition to the Michigan case, there are a couple of other pending lawsuits where the district court was unpersuaded, one in Oregon and one in Virginia, where the motions for preliminary injunctions were denied. There are a couple of other lawsuits that are pending, including ones in Oregon and in Virginia where the district courts have denied the motions for preliminary judgment. So there's a lot of uncertainty right now.

David D. Stewart: All right, so now turning to the main event here. We have the Texas Top Cop Shop, which is kind of fun to say. What is happening with that case?

Lili Martin-Mashburn: Well, it would not be an understatement to say that there has been a lot of whiplash with this one. In Texas Top Cop Shop, like the one that's now pending before the Eleventh Circuit, the plaintiffs asked the court for a preliminary injunction so that the government couldn't enforce the CTA against them. And notably, the plaintiffs only asked for relief for themselves.

One of the plaintiffs in that case is the National Federation of Independent Businesses, which has roughly 300,000 members across the U.S. So on December 3, 2024, the Eastern District of Texas Sherman Division granted that motion. And in doing so, not only did the court grant the motion for the plaintiffs, but they granted a universal injunction. During the hearing, before the court order came out, the government argued that granting the motion would essentially be a nationwide injunction because of the size of the National Federation of Independent Businesses.

And in its order, the court essentially said, "Hey government, you're right. Let's go ahead and make this a universal injunction." So to no one's surprise, a couple of days later the government appealed the decision to the Fifth Circuit asking the court to stay the injunction or at least to limit it to the plaintiffs. Couple of weeks go by, advisors, small businesses were all nervously waiting. And on December 23, less than 10 days before the original January 1 deadline for most companies to comply with the CTA, a three-judge motions panel on the Fifth Circuit stayed the injunction by the district court, meaning the Corporate Transparency Act was back on again.

That same night, FinCEN announced on its website that it would extend the deadlines. Essentially for most companies, even though there was a 20-day delay between the CTA being on to the CTA being off to it being back on, FinCEN announced that it would give most businesses a 12-day extension.

So after this ruling by the motions panel, the plaintiffs requested that the full Fifth Circuit reconsider this panel decision. Then three days later, on December 26, a different "merits panel" on the Fifth Circuit reinstated the injunction to "preserve the constitutional status quo," meaning that the CTA was once again halted.

So at this point, the plaintiffs withdrew their request for a full Fifth Circuit hearing. Five days later, on December 31, the DOJ submitted an application to the Supreme Court to halt the injunction and narrow its scope, arguing that it unfairly blocked all businesses from compliance rather than just the plaintiffs involved. Since then, there have been many briefs filed, dozens of amicus briefs, briefs from all parties. And at this point, we're still waiting on the Supreme Court's decision. And keep in mind that at this point, it's unlikely that the court will determine whether the CTA is actually constitutional. This all relates to the stay and whether it was appropriate.

David D. Stewart: So could you tell me a bit about these constitutional arguments about the CTA?

Lili Martin-Mashburn: Sure. So the primary argument that the courts are really focused on is the commerce clause argument. The commerce clause is the provision in the constitution that gives Congress the authority to regulate interstate economic activity and commerce with foreign nations. So here, the government has a pretty clear argument that Congress had the ability to enforce the CTA with respect to businesses that are formed in foreign nations and that are just registered to do business in the United States.

But for the cases that we're seeing now, they relate to those domestic companies that have been formed in the United States. And their argument is that Congress does not have the constitutional authority to enforce the CTA under the commerce clause because forming an entity doesn't necessarily mean that the entity is engaging in interstate commerce. The act of forming an entity on its own is not economic activity. So therefore, requiring entities that are not involved in any economic activity to comply with the CTA or be subject to these extreme penalties, exceeds the constitutional limits of Congress. And the case that they cite here is the National Federation of Independent Business v. Sebelius relating to the invalidation of the Affordable Care Act's individual mandate.

On the other hand, the government argues that by forming an entity, you're owning and operating an entity, which in itself is economic activity and even local activities can have potential interstate impact, which would fall under their authority. For example, a business in North Carolina could sell products to out-of-state persons even if that business is only selling its products in North Carolina. So here, the government relies on Gonzales v. Raich, which upheld federal regulation of locally cultivated and consumed marijuana under the Controlled Substances Act, finding that the activity affected the broader interstate marijuana market.

The other arguments that the courts have not focused on as much, that you have First Amendment arguments that the CTA burdens the rights of association and it's compelling speech. It violates the Fourth Amendment because it compels disclosure of private information, so it's an unreasonable search and seizure. Arguments that it violates the Fifth Amendment, a privilege against self-incrimination. You have arguments that it violates the Eighth Amendment, that the penalties are so excessive that it constitutes cruel and unusual punishment.

You also have arguments that it's unconstitutionally vague and it violates states' rights under the Tenth Amendment, but of course the government turns to, "This is a national security concern. We're trying to prevent these illicit activities. This is our way of catching those people." So there's certainly some tension between privacy concerns and national security. And one other thing is that the CTA was passed under the Trump administration. So with the changing of administrations, I'm definitely interested to see how the next Congress will react to all of these challenges.

David D. Stewart: And if it wasn't enough with all of these cases going back and forth after all of this, we had another decision out of Texas. Could you tell me about Smith v. Treasury?

Lili Martin-Mashburn: Absolutely. So on January 7 of this year, 2025, a second federal district court in the Eastern District of Texas this time in the Tyler division, so a different judge, they issued a preliminary injunction enjoining enforcement of the CTA, again on a universal basis. So what's interesting here is that even if the Supreme Court rules in Texas Top Cop Shop, however they rule, if they were to limit the injunction in that case to the plaintiffs, in that case, the reporting deadlines would not necessarily automatically spring into place unless the Supreme Court also took action in this case. So your guess is as good as mine about what will happen in the future with the CTA.

David D. Stewart: Now, what has all this on-again off-again, business done for the practice of advising clients in this area?

Lili Martin-Mashburn: It has been chaos. You send out a client alert because of course, advisors want everybody to stay in compliance again because the penalties are so severe. And you send one out and then it feels like as soon as you have sent out that client alert, you have to retract it or change it or provide an update. It's really been a whirlwind.

David D. Stewart: Were clients far along in the process of compliance and just stopping immediately? Or are you seeing people that say, "You know what, I'll just use that voluntary side"?

Lili Martin-Mashburn: I've seen a little bit of both. So for some of our larger clients who have literally hundreds of entities, their plan and what I have recommended to everyone is that as we've seen, this whole thing could change on a dime. So even if we are not filing the actual reports, we should be ready to file those reports. So particularly where a reporting company is part of a much larger complex structure and it's going to take time to really figure out what needs to be reported, it's a good idea to go ahead and get that information in hand and know what you would need to report if it comes back.

David D. Stewart: Now, would you expect a long time window before you'd have to comply if this was reinstated?

Lili Martin-Mashburn: I would hope so. But given that FinCEN gave a 12-day extension when we had a period of 20 days where it was unclear what was going to happen, I don't know how long it would be. Maybe 30 days, but at this rate, it's all so up in the air and I think it's going to be chaotic if it does get reinstated, no matter what extensions may be given.

David D. Stewart: Do you have any sense of what's likely to happen on appeal for these cases?

Lili Martin-Mashburn: So I think for a lot of the lower courts, they're going to wait to see what the Supreme Court does, and given the Supreme Court's general distaste for universal preliminary injunctions, I think it's likely that they will grant the government's application and get rid of the injunction so that the constitutional claims can be heard at the lower courts. I think it's also likely that the Supreme Court may just keep things the way they are, much like the merits panel did, where we're going to keep this injunction in place and hear those constitutional claims. Honestly, I think it's probably 50/50. That's how I view it. We'll just have to see what happens.

David D. Stewart: Well, there's certainly a lot to keep an eye on. Lili, thank you so much for helping us understand it.

Lili Martin-Mashburn: Oh, thank you for having me.

David D. Stewart: That's it for this week. You can follow me online @TaxStew, that's S-T-E-W, and be sure to follow @TaxNotes for all things tax. If you have any comments, questions, or suggestions for a future episode, you can email us at podcast@taxanalysts.org. And as always, if you like what we're doing here, please leave a rating or review wherever you download this podcast. We'll be back next week with another episode of Tax Notes Talk.

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