By Dave Horwedel, EA, CEO of Torchlight and GuardDog Tax
A federal district court in Alabama held that the Corporate Transparency Act (CTA), P.L. 116-283, which requires the reporting of Beneficial Ownership Information (BOI) by businesses, is unconstitutional.
No Celebration Yet
This is a lower court opinion that is sure to be appealed to the U.S. Court of Appeals for the Eleventh Circuit, which handles Alabama federal court appeals. DO NOT START CELEBRATING YET!!
At this moment, most taxpayers are still required to comply and could run afoul of fines of up to $10,000 if they do not.
The district court granted the plaintiffs’ motion for summary judgment Friday in the case of National Small Business United v. Yellen, No. 5:22-cv-1448-LCB (N.D. Ala. 3/1/24).
The court found that the government’s arguments that Congress has “the power to regulate millions of entities and their stakeholders the moment they obtain a formal corporate status” from a state “are not supported by precedent” and that the CTA “exceeds the Constitution’s limits on the legislative branch”,
What is the Corporate Transparency Act?
This is the law, passed by Congress as an anti-money-laundering initiative in 2021, requiring “reporting companies” (defined as corporations, limited liability companies (LLCs), and similar entities) to disclose the identity and information about beneficial owners of the entities to the Treasury Department’s Financial Crimes Enforcement Network (FinCEN).
Reporting companies are required to provide information about both the companies and their beneficial owners and applicants, including full legal name, address, state or tribal jurisdiction of formation, IRS taxpayer identification number, birth date, and other details. Willful violations are punishable by a fine of $591 a day, up to $10,000, and two years in prison.
A beneficial owner is an individual who either directly or indirectly: (1) exercises substantial control over the reporting company, or (2) owns or controls at least 25% of the reporting company’s ownership interests.
For new entities incorporated after Jan. 1, 2024, reporting companies must also disclose the identity of “applicants” — defined as any individual who files an application to form a corporation, LLC, or other similar entity. These have 90 calendar days to file after receiving actual or public notice that their company’s creation or registration is effective.
Treasury’s Financial Crimes Enforcement Network (FinCEN), which administers the act, estimates that BOI reporting regulations apply to 32.6 million entities, with millions added annually.
You can read the actual ruling by clicking: https://jayadkisson.com/a_interesting/NSBU_SDALA_240301.pdf
What happens next??
An official from Treasury, which oversees FinCEN, said the agency would comply with the injunction and referred further questions to the Justice Department, which declined comment.
Even after the Eleventh Circuit issues its appellate ruling, the case will probably be further appealed to the U.S. Supreme Court
However, because this decision does hold the CTA to be unconstitutional, it may cause FinCEN to delay enforcement pending further appeal.
The bottom line was that the court held that the CTA was unconstitutional and now the matter will go on to the Eleventh Circuit.
Immediately after this opinion was filed, FinCEN put out a notice that this ruling only applies to the parties to the case. This means that the members of NSBU (National Small Business United) as of March 1, 2024, need not report, while everybody else must.
For now, however, LLCs and other named entities that were formed prior to 1 Jan 2024 are still under the deadline to make the CTA reporting by December 31, 2024. Newly formed entities have 90 days from date of formation.
That deadline now turns on what the Eleventh Circuit does, which will very probably be determined before this deadline.
If the Eleventh Circuit similarly holds the CTA to be unconstitutional, then FinCEN will very likely have to suspend enforcement for everybody until (and if) the U.S. Supreme Court takes up the issue and hands down what would be the final opinion.
Conversely, if the Eleventh Circuit reverses this ruling and upholds the constitutionality of the CTA, then the reporting requirement will probably be reinstated on everybody (including National Small Business United members) unless the U.S. Supreme Court either rules or imposes its own stay while it reaches a decision.
The Pragmatic Course of Action:
Thus, pragmatically, what we get from all this is that if you have one of the 32.6 million entities that will be reporting, don’t rush to file the report just yet, as FinCEN may suspend enforcement for everybody.
There are reports FinCEN is having trouble getting all its systems operational to handle the massive volume of expected reporting. FinCEN may use this ruling to its advantage to buy some time to get technical things in order.
If you decide not to file now (and who wants to file an additional governmental form?), be sure to check in on this well ahead of your filing date and do not risk incurring heavy penalties.
Final Thoughts:
The world is changing. Whether for the better or for the worse is for you to decide.
LLCs and other entities have been at the forefront of tax savings and asset protection strategies. Rules are changing.
Donald Trump in 2016 was the gold standard for how to strategically avoid taxes as a billionaire and his assets were well protected.
This is not a moral or ethical judgement. His strategies were working.
In 2024, he gets a $450 Million Dollar judgement against him and valuable assets are at risk. Those strategies stopped working.
Taxes, litigation, and asset protection strategies change.
Individuals, LLCs, Corporations, and Trusts, and the environment in which they operate change.
Donald Trump and his financial advisors did not see the legal attack on his New York assets coming. If they had seen the threat and taken action to protect their assets, they could probably have done something.
This is not a commentary on any political issue or philosophy.
Most people, on the Left or on the Right, would like to legally lower their tax bill, and increase and protect their assets.
This is not a Democrat, Libertarian, No Names, or Republican thing.
Torchlight Tax is offering a free consultation on tax saving and asset protection strategies.
Living Trusts can protect your heirs from probate.
Businesses can purchase equipment or added marketing services that will lower their current taxes while building their future income.
Proper uses of entities (LLCs, Partnerships, S Corporations, C Corporations, Trusts) can save tax dollars and protect your assets.
Cost segregation and accelerated depreciation can save tax dollars now and help you build the value of real estate investments more rapidly.
Qualified Opportunity Zones can increase your assets while helping disadvantaged areas and legally minimizing taxes.
1031 (like-kind commercial real estate) exchanges can defer profits on real estate sales indefinitely.
An Offer in Compromise can eliminate tax debt that you cannot realistically pay.
These are only a few of the many strategies available.
Contact us for a free consultation at Torchlight/GuardDog Tax at 1-877-758-7797 or email us a info@torchlighttax.com or info@guardDogtax.com.
