Texas Court Grants NATIONWIDE Injunction Halting Enforcement of the Corporate Transparency Act Requirements Less Than One Month Before Reporting Deadline

As we have advised all of our condo and co-op clients over the past year, the Corporate Transparency Act (CTA) became effective in January 2024. It required many businesses – including condos and co-ops – to report the personal information of their “beneficial owners” (the individuals who ultimately own or control the company) to the federal government. 31 U.S.C. § 5336 (CTA) and the Reporting Rule 31 C.F.R. 1010.380.

The CTA was passed to limit “money laundering, terrorist financing, corruption, tax fraud, and other illicit activity.” We have advised our clients that, unfortunately, co-op and condominium boards are not exempt from the filing requirement. Thus, we advised our condo and co-op clients to comply with the law to avoid stiff penalties.  Noncompliance could result in civil penalties of $500 per day, criminal penalties of up to $10,000, and up to 24 months in prison.

The initial deadline to file this information for companies in existence before 2024 was January 1, 2025.

However, on December 3, 2024, a U.S. District Court in Texas issued a nationwide injunction barring enforcement of the CTA in Texas Top Cop Shop, Inc., et al. v. Garland et al.,No. 4:24-CV-478 (E.D. Tex. filed Dec. 3, 2024). The decision prevents the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) from requiring compliance with the CTA’s reporting obligations. In reaching its decision, the court found that “the CTA appears likely unconstitutional” as outside of Congress’s power. Specifically, the court found that the CTA was not authorized under the Commerce Clause or the Necessary and Proper Clause of the U.S. Constitution. Although the case included only six plaintiffs, the court expanded the injunction across the country, noting that one of the plaintiffs, the National Federation of Independent Business (NFIB), had members across the U.S.

The injunction will remain in effect unless and until the court modifies the ruling or an appeal overturns it.

So what does this mean for reporting companies?  There are essentially three options:  (1) wait and see if the injunction is lifted before complying with the CTA reporting requirements; (2) prepare the required filings and have them ready to be filed if the injunction is lifted; or (3) go ahead and file now regardless of the injunction.  Because this is a preliminary injunction, it is entirely possible that the requirements could be reinstated, and ALBPC recommends that businesses (including condos and co-ops) remain on alert and be prepared to complete the filing process in the future if required. Given we are just weeks away from the deadline, many companies likely have their filings ready anyway.

ALBPC will continue to monitor developments in this case and others concerning the CTA and will provide updates accordingly.

A copy of the Texas Top Cop Shop, Inc., et al. v. Garland et al. decisioncan be found here: https://www.bloomberglaw.com/public/desktop/document/TexasTopCopShopIncetalvGarlandetalDocketNo424cv00478EDTexMay28202?doc_id=X3PI3GTJP5E9HSPN0JK6CAU8E8G.

Unincorporated Condominiums are Not Covered by the Corporate Transparency Act

Most condominiums in New York are not corporations.  Therefore, they do not have to comply with the requirements of the CTA. That said, some condominiums are incorporated and do have to comply with the CTA’s requirements. Incorporated condominiums are a subspecies of homeowners associations.   This is recognized by FinCEN.   As a corporation, they would need to have filed with the Secretary of State.   Then FAQ C10 (below) would apply.  A recent pronouncement indicated that condo associations formed as trusts were not reporting companies.

From FinCENs FAQ’s:

C. 10. Are homeowners associations reporting companies?

It depends.  Homeowners associations (HOAs) can take different forms.  As with any entity, if an HOA was not created by the filing of a document with a secretary of state or similar office, then it is not a domestic reporting company.  An incorporated HOA or other HOA that was created by such a filing also may qualify for an exemption from the reporting requirements.  For example, HOAs recognized by the IRS as section 501(c)(4) social welfare organizations (or that claim such status and meet the requirements) may qualify for the tax-exempt entity exemption.  An incorporated HOA that is not a section 501(c)(4) organization, however, may fall within the reporting company definition and therefore be required to report BOI to FinCEN.

[Updated June 10, 2024]