This Just In: CTA Reporting Requirement On Hold
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. decision can 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.
On January 23, 2025, the United States Supreme Court lifted the stay on all Corporate Transparency Act (CTA) filings. This means that all businesses, including co-ops and incorporated condominiums, will need to file to avoid penalties under the CTA. The Supreme Court’s order did not set a new deadline date for filings.
However, earlier today, FinCEN issued a release that the CTA is indeed still on hold under another Texas case titled Smith v. US Department of Treasury. The injunction issued in that case was not lifted by yesterday’s Supreme Court order. That being said, the Smith injunction is still subject to appeal and we expect that the Supreme Court will once again lift the stay.
We will continue to monitor the matter and issue an update when available.
Until then, we advise all clients who are required to file (including co-op boards and boards of incorporated condos) to have your filings on hand and ready to file for when the stay is again (most likely) lifted. When the previous stay was lifted last month, businesses were only given two weeks to file. So boards need to be prepared in the event of another quick deadline if/when the instant stay is lifted.
In the interim, the mind game that has become the CTA lives on.
Update: We are writing to update our clients with regard to the ongoing confusion surrounding reporting requirements under the Corporate Transparency Act (CTA). A nationwide injunction blocking enforcement of CTA issued by a District Court in Texas was lifted by the US Supreme Court on January 23, 2025. A second injunction issued from another District Court in Texas on January 7, 2025 again temporarily blocked enforcement. By order dated February 17, 2025, the District Court has now stayed the second injunction pending appeal and the CTA’s reporting requirements as to beneficial ownership are now back in force. This means that all businesses, including co-ops and incorporated condominiums, will need to file to avoid penalties under the CTA.
However, FinCEN has officially extended the reporting deadline for 30 days to March 21, 2025.
During this 30-day period FinCEN will assess its options to further modify deadlines, while prioritizing reporting for those entities that pose the most significant national security risks. FinCEN has also stated that it plans to initiate a rule revision process later this year to reduce the burden on lower-risk entities, including small businesses. We will continue to monitor the matter and issue an update when available.
Until then, we advise all clients who are required to file (including co-op boards and boards of incorporated condos) to be ready to file by the new deadline of March 21, 2025.
[Updated February 28, 2025]