A US District Court granted a preliminary injunction and stay in the case of Smith, et al. v. US Department of the Treasury, Case No. 6:24-cv-00336, US District Court ED Texas, finding that the Corporate Transparency Act (CTA) and its implementing rule are likely unconstitutional. The court determined that the plaintiffs, Samantha Smith and Robert Means, demonstrated a substantial likelihood of success on the merits, a substantial risk of irreparable harm, and that the balance of equities and public interest supported preliminary relief.

The court’s reasoning was as follows:

Likelihood of Success on the Merits:
- The court found the CTA likely exceeds Congress’s enumerated powers. The court cited United States v. Lopez, 514 U.S. 549, 552 (1995), stating that the Constitution creates a federal government of enumerated powers. The court also noted that the powers of state governments are numerous and indefinite, also citing Lopez, 514 U.S. at 552. The court stated the CTA expands federal power beyond constitutional limits, mandating disclosure of personal information while intruding on an area of traditional state concern. The court quoted United States v. Lopez, 514 U.S. 549, 557 (1995) (quoting NLRB v. Jones & Laughlin Steel Corp., 301 U.S. 1, 37 (1937)) stating that the defendants’ argument relies on “effects upon interstate commerce so indirect and remote that to embrace them . . . would effectually obliterate the distinction between what is national and what is local and create a completely centralized government”.
- The court determined that the CTA does not regulate the channels or instrumentalities of interstate commerce. The court cited United States v. Bailey, 115 F.3d 1222, 1226 (5th Cir. 1997) (quoting United States v. Parker, 911 F. Supp. 830, 842 (E.D. Pa. 1995)), stating that channels of interstate commerce are the routes through which people and goods move, such as highways and air routes. The court cited Hobby Distillers Ass’n v. Alcohol & Tobacco Tax & Trade Bureau, 2024 WL 3357841, at *13 (N.D. Tex. July 10, 2024) (citing United States v. Ballinger, 395 F.3d 1218, 1226 (11th Cir. 2005)) stating that instrumentalities of interstate commerce include planes and trains, as well as people associated with them. The court reasoned that the CTA regulates private companies formed under state law, not channels or instrumentalities of commerce. The court cited Texas Top Cop Shop, Inc. v. Garland, 2024 WL 5049220, at *19 (E.D. Tex. Dec. 5, 2024) (quoting Nat’l Small Bus. United v. Yellen, 721 F. Supp. 3d 1260, 1278 (N.D. Ala. 2024)) stating that the word “commerce” or references to any channel or instrumentality of commerce are not in the CTA.
- The court also found that the CTA does not regulate activities that substantially affect interstate commerce. The court cited GDF Realty Invs., Ltd. v. Norton, 326 F.3d 622, 628-29 (5th Cir. 2003) and Morrison, 529 U.S. at 609–12 and Groome Res., Ltd., L.L.C. v. Par. of Jefferson, 234 F.3d 192, 204–05 (5th Cir. 2000) To determine this, the court considered factors such as the economic nature of the regulated activity, citing GDF Realty, 326 F.3d at 635 and Morrison, 529 U.S. at 613. The court cited Terkel v. Ctrs. for Disease Prevention & Control, 521 F. Supp. 3d 662, 671 (E.D. Tex. 2021) stating that filing papers with a secretary of state to form a corporate entity is not “the production or use of a commodity that is traded in an interstate market”. The court cited GDF Realty, 326 F.3d at 629 stating that filing papers with a state is not the exchange or trade of goods or services.
- The court found that the CTA lacks a jurisdictional element that would limit its application to instances affecting interstate commerce. The court cited Nat’l Small Bus. United, 721 F. Supp. 3d at 1286 (quoting United States v. Goodwin, 141 F.3d 394, 400 (2d Cir. 1997)) stating that including a jurisdictional hook is "standard operating procedure for Commerce Clause legislation for good reason—it precludes any serious challenge to the constitutionality of the money laundering statute as beyond the Commerce power, because it guarantees a legitimate nexus with interstate commerce”.
- The court concluded that the Congressional findings were insufficient to demonstrate that the CTA fills an essential gap in a broader regulatory scheme of economic activity. The court cited Terkel, 521 F. Supp. 3d at 673 (quoting Lopez, 514 U.S. at 561) stating that when a statute purports to regulate noneconomic, intrastate activity, “helpful findings would demonstrate that the regulation is ‘an essential part of a larger regulation of economic activity, in which the regulatory scheme could be undercut unless the intrastate activity were regulated.’”. The court also cited Nat’l Small Bus. United, 721 F. Supp. 3d at 1284-86, stating the CTA is a “single-subject statute whose single subject is itself non-economic” and that the CTA is "far from essential" given other existing laws and regulations.
- The court also found that the link between the activity and commerce is too attenuated, citing Morrison, 529 U.S. at 612 and Lopez, 514 U.S. at 563–67; Terkel, 521 F. Supp. 3d at 674. The court cited Terkel, 521 F. Supp. 3d at 674, stating that forming or owning an entity under state law “does not alone have a self-evident substantial effect on interstate commerce”. The court also cited Nat’l Small Bus. United, 721 F. Supp. 3d at 1283-84 (quoting Sebelius, 567 U.S. at 558) stating, ‘Thus, ‘[n]o matter how inherently integrated’ corporate formation is with the activities of those entities, ‘they are not the same thing: They involve different transactions, entered into at different times, with different’ parties.”
- The court found the CTA is not a necessary and proper exercise of Congress’s power to regulate foreign commerce because it does not regulate foreign trade or commerce itself, nor does it regulate the channels or instrumentalities of foreign commerce. The court cited United States v. Rife, 33 F.4th 838, 842 (6th Cir. 2022) (quoting 1 S. Johnson, A DICTIONARY OF THE ENGLISH LANGUAGE 422 (6th ed. 1785)), stating that the term “commerce” at the Founding meant “trade” or economic “intercourse,” which consisted of the “exchange of one thing for another,” “interchange,” or “traffick”. The court also cited Lopez, 514 U.S. at 586 (Thomas, J., concurring), stating that “commerce” did not include “productive activities such as manufacturing and agriculture”. The court cited Rife, 33 F.4th at 843 stating that the Supreme Court “has not extended it to Congress’s power to regulate under the Foreign Commerce Clause” the category of “activities that substantially affect interstate commerce”. The court cited Williams v. Homeland Ins. Co., 18 F.4th 806, 818 (5th Cir. 2021) (Ho, J., concurring) stating that “we decide every case faithful to the text and original understanding of the Constitution, to the maximum extent permitted by a faithful reading of binding precedent”.
- The court determined that the CTA is not a necessary and proper exercise of Congress’s power to regulate foreign affairs and national security. The court cited Top Cop, 2024 WL 5049220, at *28 (quoting U.S. CONST. art. I., § 8, cls. 3, 4, 11, 12, 13, 14) stating “Congress’s foreign affairs powers are not express in Article I . . . , other than the clauses stating that Congress may ‘regulate commerce with foreign nations,’ ‘Establish an uniform Rule of Naturalization,’ ‘declare war,’ ‘raise and support armies,’ ‘provide and maintain a navy,’ and ‘make rules for the [G]overnment and regulation of the land and naval forces’”. The court cited Nat’l Small Bus. United, 721 F. Supp. at 1275, and Top Cop, 2024 WL 5049220, at *28 (quoting Santa Fe Indus. v. Green, 430 U.S. 462, 479 (1977)) stating that forming and owning a company under state law are “purely internal affairs,” and these entities “remain ‘creatures of state law.’”.
- The court also concluded that the CTA is not a necessary and proper exercise of Congress’s taxing power. The court cited Nat’l Small Bus. United, 721 F. Supp. 3d at 1288, stating the CTA is not a tax. The court cited Nat’l Small Bus. United, 721 F. Supp. 3d at 1289 (quoting Sebelius, 567 U.S. at 560) stating it would be a “substantial expansion of federal authority” to permit Congress to bring its taxing power to bear just by collecting “useful” data and allowing tax-enforcement officials access to that data.
Risk of Irreparable Harm:
- The court found that compelling individuals to comply with an unconstitutional law constitutes irreparable harm, citing BST Holdings, LLC v. OSHA, 17 F.4th 604, 618 (5th Cir. 2021) (quoting Elrod v. Burns, 427 U.S. 347, 373 (1976)) and Carroll Indep. Sch. Dist. v. U.S. Dep’t of Educ., 2024 WL 3381901, at *6 (N.D. Tex. July 11, 2024).
- The court also cited Wages & White Lion Invs., LLC v. FDA, 16 F.4th 1130, 1142 (5th Cir. 2021), and determined that incurring unrecoverable costs of compliance with federal law constitutes irreparable harm. The court reasoned that the plaintiffs must expend money to comply with the reporting requirements of the CTA, which is unlikely to be recovered since federal agencies generally enjoy sovereign immunity for any monetary damages.
- The court determined that the disclosure of private information is a type of harm that “cannot be undone through monetary remedies”, citing Dennis Melancon, Inc. v. City of New Orleans, 703 F.3d 262, 279 (5th Cir. 2012) and *Top Cop Shop, 2024 WL 5049220, at 15.
Balance of the Equities and the Public Interest:
- The court concluded that the injuries likely to occur without an injunction outweigh any harm in granting it, citing Top Cop, 2024 WL 5049220, at 34. The court stated the government has no interest in enforcing a law that violates the Constitution, citing Book People, Inc. v. Wong, 91 F.4th 318, 341 (5th Cir. 2024).
- The court reasoned that public interest is not harmed by preventing the enforcement of unconstitutional laws and unlawful rules, citing Top Cop, 2024 WL 5049220, at 34 and Texas v. Becerra, 2024 WL 3297147, at *11 (E.D. Tex. July 3, 2024).
- The court stated that “the government/public-interest analysis collapses with the merits analysis,” and because the court concluded the CTA is likely unconstitutional, the Department and the public will not be injured by an injunction temporarily enjoining the law, citing All. for Hippocratic Med. v. FDA, 78 F.4th 210, 251 (5th Cir. 2023) and Sierra Club v. U.S. Army Corps of Eng’rs, 990 F. Supp. 2d 9, 43 (D.D.C. 2013).

The court stated that injunctive relief should be no more burdensome to the defendant than necessary to provide complete relief to the plaintiffs, citing Madsen v. Women’s Health Ctr., Inc., 512 U.S. 753, 765 (1994) (quoting Califano v. Yamasaki, 442 U.S. 682, 702 (1979)). The court enjoined the Department from enforcing the CTA (31 U.S.C. § 5336) against the plaintiffs and their related entities. The court stayed the effective date of the Reporting Rule (31 C.F.R. § 1010.380), citing 5 U.S.C. § 705. The court cited Texas v. Becerra, 2024 WL 4490621, at *1 (E.D. Tex. Aug. 30, 2024) and Career Colls. & Schs. of Tex. v. Dep’t of Educ., 98 F.4th 220, 255 (5th Cir. 2024) in its decision to stay the rule for all parties, not just the plaintiffs.

Case text:

https://www.taxnotes.com/tax-notes-today-federal/beneficial-ownership/another-court-enjoins-enforcement-corporate-transparency-act/2025/01/08/7q16v