BOI Reporting and Tax Policy

"Told Ya So" and a Gripe

As I am sure you have read by now (I have been doing back-to-back seminars in various states this week and haven’t had a chance to write here) a federal district court judge in Texas has placed a nationwide preliminary injunction on the requirement to file Beneficial Ownership Information (BOI) reports which would otherwise be due as of 1/1/25 and thereafter at least until the courts (or Congress) resolve the matter. The case is Texas Top Cop Shop, Inc., et al. v. Garland, No. 4:24-CV-478, 2024 U.S. Dist. LEXIS 218294 (E.D. Tex. Dec. 3, 2024). The court concluded that the Corporate Transparency Act (CTA) (which contains the BOI reporting rules) likely exceeds Congress’s power under the Commerce Clause (Article I, Sec. 8, Clause 3) and was also not constitutional under the Necessary and Proper Clause (Article I, Sec. 8, Clause 18). The court noted (as did federal district court judge in the Alabama case decided earlier this year) that the CTA does not regulate an existing activity. Instead, it compels a new activity of disclosing beneficial ownership information which the Commerce Clause does not allow the government to compel. Interestingly, the judge cited the Supreme Court’s Obamacare ruling in the Sebelius case to bolster its opinion. Also, the court reasoned that even if the CTA regulated an existing activity, the CTA does not have a sufficient “nexus” to interstate commerce to fall with the commerce power that the Congress has. Relatedly, the court said that the CTA couldn’t be justified as a proper exercise of the foreign affairs power (Article I) or the taxing power (Article 1, Section 8, Clause 1), and that was the result even when those power are considered along with the Necessary and Proper Clause. Consequently, the court determined that the plaintiffs showed a substantial likelihood of succeeding on the merits of their Tenth Amendment challenge to the CTA.

While I have reservations about federal district court judges granting nationwide injunctions, one of the plaintiffs in the case was the National Federal of Independent Business that has members nationwide. As a result, the judge concluded that the appropriate remedy was a nationwide preliminary injunction to deal with constitutional violations that the judge determined existed.

As those of you know who have attended my seminars over the past year or two know, I never believed that there would be BOI filing requirement come 1/1/25. Indeed, I never filed the report for my own S corporation. I have been of this opinion for two reasons - the constitutional deficiencies of the CTA and the politics surrounding the reporting requirement. So, what does the future hold for the BOI reporting rules? Well, there are other cases still out there. The 11th Circuit has yet to rule on the appeal in the Alabama case that was decided in early 2024 (that also found the BOI reporting rules in the CTA to be unconstitutional). Other cases have been filed in federal district courts in Maine, Massachusetts, Michigan, Ohio and Utah. On the other side of the fence is the federal district court in Oregon that refused to grant an injunction on September 20. Firestone v. Yellen, No. 3:24-cv-1034, 2024 U.S. Dist. LEXIS 170085 (D. Or. Sept. 20, 2024). Also, the incoming Trump Administration could put the BOI reporting rules in the scope of regulations and statutes that need to be cut and encourage the Congress to eliminate the requirement. I don think there will be other political developments that will come to bear on this before Jan. 20, 2025. We shall see, but for now the reporting rules are on hold - all of them. Ultimately, it is possible that the matter gets to the U.S. Supreme Court. But, that’s down the road.

The problem in all of this that it wasn’t until early December that a nationwide injunction was put in place. For CPAs and attorneys that had a lot of BOI reports to file for clients, of course the prudent thing to do was to get started filing them. Unfortunately, that now means that clients got billed for something that didn’t need to be done by the end of this year (for covered businesses in existence as of 1/1/24). Those CPAs and lawyers may want to consider the PR with clients of rebating some or all of that fee.

Now for the gripe. I delivered a farm income tax presentation yesterday in Omaha. I didn’t have the entire day and before me was a presentation on the future of tax policy. The basic message was that because of the “cost” of the TCJA the incoming Trump administration would not be able to make the TCJA provisions permanent and that other provisions that were promised during the campaign could never be done. Well now wait a minute. Here’s the IRS data on federal revenue by the government’s fiscal year. For fiscal year 2018 (the first year when the TCJA was in effect) federal revenues were $3.33 trillion. For fiscal year 2023 federal revenues were $4.44 trillion. So, revenues have gone up while the TCJA provisions have been in effect - significantly. Now, the speaker’s point was that the deficit has increased. True, but that has nothing to do with the TCJA, it has everything to do with spending. Can you spell the Inflation Reduction Act??? So, the speaker’s entire premise was incorrect. The revenue estimates are all based on budget games and static revenue effects. Granted the speaker mentioned that the tariff revenues were not included in the revenue estimates if Trump initiates the tariffs, but I would stop the “handwringing” about the estimates. The games that go on due to the ten-year window (the “Byrd Rule”) sunsetting, and all of that nonsense should not become the guidepost of tax policy. The fact remains, the TCJA has triggered a significant increase in federal revenue.