As I reported yesterday, the U.S. Supreme Court, in Texas Top Cop Shop, Inc. et al v. Merrick Garland, Attorney General of the United States et al., lifted the Fifth Circuit’s injunction, that had been preventing the government from enforcing the Corporate Transparency Act (“CTA”). However, as reported by Mengqi Sun of The Wall Street Journal, there is another Texas court (the Eastern District of Texas) where the judge issued a nationwide injunction against the government’s enforcement of the CTA and that the injunction remains in place. The Wall Street Journal further reported that there has been no appeal of that decision to a higher court.
I last reported on December 27, 2024, that the Corporate Transparency Act (“CTA”) hit yet another speed bump. The U.S. Court of Appeals for the Fifth Circuit (“Fifth Circuit”) put the CTA on ice as of December 24, 2024, restraining the government from enforcing the new law while it heard the underlying matter in Texas Top Cop Shop, Inc. et al v. Merrick Garland, Attorney General of the United States et al.
On December 31, 2024, the government petitioned the U.S. Supreme Court (“Supreme Court”), asking it to remove the stay, allowing the government to enforce the CTA pending the outcome of the Fifth Circuit case and the Supreme Court’s decision should it accept a writ of certiorari and ultimately rule on the constitutionality of the CTA.
INTRODUCTION
On December 6, 2024, I reported that the U.S. District Court for the Eastern District of Texas, in Texas Top Cop Shop, Inc. et al v. Merrick Garland, Attorney General of the United States et al, issued a 79-page decision, including a preliminary injunction, creating a nationwide prohibition against the government enforcing the Corporate Transparency Act (“CTA”).
As suspected, the government immediately filed an emergency appeal, asking the United States Court of Appeals for the Fifth Circuit (“Fifth Circuit”) to stay the injunction and to hear its arguments in favor of overturning the Texas court’s decision.
I have yet again encountered another important development diverting me from my multi-part blog series on Subchapter S. Earlier this week, the Corporate Transparency Act (“CTA”) hit a massive obstacle. I feel compelled to report about it.
On December 3, 2024, the U.S. District Court for the Eastern District of Texas, in Texas Top Cop Shop, Inc. et al v. Merrick Garland, Attorney General of the United States et al, issued a 79-page decision, including a preliminary injunction, creating a nationwide prohibition against government enforcement of the CTA.
This decision has created a tsunami of banter among members of the legal profession, the media and the business community. While the decision appears to have delivered an early holiday cheer to many, caution is advised. As my late tax professor, James J. Freeland, would have advised his students after reading the decision, pause for cause!
On June 28, 2024, in Loper Bright Enterprises v. Raimondo,[1] the U.S. Supreme Court overruled the landmark case of Chevron U.S.A. v. Natural Resources Defense Council, Inc. et. al.[2] Interestingly, the Loper decision was rendered exactly 40 years and three days after the U.S. Supreme Court had decided Chevron.
I expect there will be a slew of law review and other scholarly journal articles that will examine in detail the court’s decision and its impact on American jurisprudence. This blog article is not designed to provide that type of commentary. Rather, my aim is to provide readers with a succinct but clear understanding of the Loper ruling and its likely implications relative to the administration of our federal tax laws.
Overview
I am taking a break from my multi-part blog series, A Journey Through Subchapter S / A Review of the Not So Obvious & The Traps That Exist For The Unwary, to provide another update on the Corporate Transparency Act (“CTA”). The CTA continues to get a lot of media attention as there have been judicial and legislative efforts to obtain its repeal or to strike it down as unconstitutional.
As reported on June 7, 2023, the CTA is a new federal law that requires most U.S.-based companies, including corporations, partnerships and limited liability companies, to report information regarding their “beneficial owners” to the federal government through the Financial Crimes Enforcement Network (“FinCEN”) and a new FinCEN IT system known as the Beneficial Ownership Secure System (“BOSS”). Lawmakers enacted the CTA to help the government combat money laundering, financing of terrorist activities, tax fraud and other illegal activities.
I am taking a short break between the third and fourth installment of my multi-part series on Subchapter S. Before I publish the fourth installment on that topic, my colleague Steven Nofziger and I want to alert our readers to some recent developments relative to the Corporate Transparency Act (“CTA”).
CTA
As previously reported, the CTA is a new federal law that requires most U.S.-based companies, including corporations, partnerships and limited liability companies, to report information regarding their “beneficial owners” to the federal government through the Financial Crimes Enforcement Network (“FinCEN”) and a new FinCEN IT system known as the Beneficial Ownership Secure System (“BOSS”). The intent of the CTA and the reporting to FinCEN is to combat money laundering, tax fraud and other illegal activities.
As you may be aware, the Corporate Transparency Act (the “CTA”) is a new federal law that requires most U.S.-based companies, including corporations, partnerships and limited liability companies, to report information regarding their “beneficial owners” to the federal government through the Financial Crimes Enforcement Network (“FinCEN”) and a new FinCEN IT system known as the Beneficial Ownership Secure System (“BOSS”). The intent of the CTA and the reporting to FinCEN is to combat money laundering, tax fraud and other illegal activities.
The CTA reporting requirements will become effective on January 1, 2024, for newly formed companies (which do not otherwise qualify as exempt); provided, however, existing non-exempt companies have until January 1, 2025 to comply.
Introduction
More than two decades ago, the Service announced its intention to consider simplifying the entity classification rules in Notice 95-14. It stated:
“The Internal Revenue Service and the Treasury Department are considering simplifying the classification regulations to allow taxpayers to treat domestic unincorporated business organizations as partnerships or as associations on an elective basis. The Service and Treasury also are considering adopting similar rules for foreign business organizations. Comments are requested regarding this and other possible approaches to simplifying the regulations.”
The Service asked for public comments on simplification of entity tax classification. It scheduled a public hearing on the matter for July 20, 1995.
In May 1996, proposed entity classification regulations were issued by Treasury. About seven months later, on December 17, 1996, Treasury finalized the regulations. The regulations are found in Treasury Regulation Section 301.7701.
The regulations were clearly designed to accomplish the IRS’s stated goal – simplifying entity tax classification. The regulations, commonly referred to as the “Check-the-Box” regulations, successfully brought an end to much of the long existing battle between taxpayers and the Service over entity tax classification. The regulations generally became effective on January 1, 1997. In a little over a month from now, they will be 25-years old.
The regulations, despite judicial challenge (e.g., Littriello v. United States, 2005-USTC ¶50,385 (WD Ky. 2005), aff’d, 484 F3d 372 (6th Cir. 2007), cert. denied, 128 S. Ct. 1290 2008)), have persevered, making the entity classification landscape free of many tax authority challenges and providing taxpayers with some objectivity and more importantly, much needed certainty. That said, despite the simplification brought into the world of entity tax classification by the Check-the-Box regulations, for which tax practitioners applauded the government, several new hazards were created. Whether these new hazards were intentional or unintentional is subject to debate. Unfortunately, not all of these hazards are obvious to taxpayers and their advisors. If taxpayers and their advisors are not extremely careful in this area, disastrous unintended tax consequences may exist. Accordingly, a good understanding of the regulations and the consequences of making, not making or changing an entity tax classification decision is paramount.
Last month, I presented a White Paper that I authored on the regulations at the NYU 81st Institute on Federal Taxation in New York City, and I will be presenting it again for NYU in San Diego on November 17, 2022. The paper provides exhaustive coverage of the regulations and covers numerous nuances and traps that exist for unwary taxpayers and their advisors. An issue which is often overlooked by practitioners is whether using the regulations to change entity status for income tax purposes is always a good idea. While I discuss the issue in some detail in the paper, the sub-issue of whether a taxpayer should use the regulations to change the tax status of a limited liability company (“LLC”) taxed as a partnership to a corporation taxed under Subchapter S needs discussion. I explore that sub-issue below.
More than 25 years ago, effective January 1, 1997, Treasury issued what have been called the “Check-the-Box” regulations (the “Regulations”).1 The Regulations ended decades of battles between taxpayers and the IRS over entity classification. Further, the Regulations simplified entity classification and brought much needed certainty to most entity classification decisions.
Under the Regulations, a business entity with more than one owner is either classified for federal tax purposes as a corporation or a partnership.2 Likewise, a business entity with only one owner is either classified as a corporation or is disregarded for federal income tax purposes as being separate and apart from its owner.3
If a business entity is disregarded, its activities are generally treated for federal tax purposes as the activities of its owner. There are five notable exceptions to that rule.
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Larry J. Brant
Editor
Larry J. Brant is a Shareholder and the Chair of the Tax & Benefits practice group at Foster Garvey, a law firm based out of the Pacific Northwest, with offices in Seattle, Washington; Portland, Oregon; Washington, D.C.; New York, New York, Spokane, Washington; Tulsa, Oklahoma; and Beijing, China. Mr. Brant is licensed to practice in Oregon and Washington. His practice focuses on tax, tax controversy and transactions. Mr. Brant is a past Chair of the Oregon State Bar Taxation Section. He was the long-term Chair of the Oregon Tax Institute, and is currently a member of the Board of Directors of the Portland Tax Forum. Mr. Brant has served as an adjunct professor, teaching corporate taxation, at Northwestern School of Law, Lewis and Clark College. He is an Expert Contributor to Thomson Reuters Checkpoint Catalyst. Mr. Brant is a Fellow in the American College of Tax Counsel. He publishes articles on numerous income tax issues, including Taxation of S Corporations, Reasonable Compensation, Circular 230, Worker Classification, IRC § 1031 Exchanges, Choice of Entity, Entity Tax Classification, and State and Local Taxation. Mr. Brant is a frequent lecturer at local, regional and national tax and business conferences for CPAs and attorneys. He was the 2015 Recipient of the Oregon State Bar Tax Section Award of Merit.
