The Supreme Court lifted an injunction on the Corporate Transparency Act and its beneficial ownership information reporting requirement that had been imposed by a federal appeals court.

The lower courts will continue to hear arguments over the law, which requires companies to file reports on their true owners to the Treasury Department’s Financial Crimes Enforcement Network as a way to deter illicit activity such as money laundering, tax fraud, drug trafficking and terrorism financing by shell companies. New businesses were required to start filing the beneficial ownership information reports with FinCEN last year and existing ones to file the BOI reports starting Jan. 1 of this year. But a series of court decisions in recent weeks in federal district courts and appeals courts in Texas have alternately paused and reinstated and again paused the requirement, prompting the Justice Department to file an emergency request with the Supreme Court to lift the injunction.

The Supreme Court stayed the injunction against the CTA, leaving it to the U.S. Court of Appeals for the Fifth Circuit to weigh the case, Different panels on the appeals court have taken contrasting approaches to the law, reversing course in late December. Even with the injunction lifted in the case that came before the Supreme Court involving a Texas business called Texas Top Cop Shop, an injunction and stay was recently imposed in a separate case in Texas by a different court involving another pair of plaintiffs, Samantha Smith and Robert Means. The group representing the plaintiffs in that case, the Texas Public Policy Foundation, insisted the stay would remain in place despite the Supreme Court’s move lifting the injunction in the Texas Top Cop Shop case. 

Even the Supreme Court justices seemed divided. Concurring with the grant of the stay, Justice Neil Gorsuch wrote, “I agree with the Court that the government is entitled to a stay of the district court’s universal injunction. I would, however, go a step further and, as the government suggests, take this case now to resolve definitively the question whether a district court may issue universal injunctive relief.”

Justice Ketanji Brown Jackson believes it’s too soon for the Supreme Court to step in, and she dissented from the grant of the stay. “However likely the Government’s success on the merits may be, in my view, emergency relief is not appropriate because the applicant has failed to demonstrate sufficient exigency to justify our intervention,” she wrote. “I see no need for this Court to step in now for at least two reasons. First, the Fifth Circuit has expedited its consideration of the Government’s appeal. Second, the Government deferred implementation on its own accord—setting an enforcement date of nearly four years after Congress enacted the law—despite the fact that the harms it now says warrant our involvement were likely to occur during that period.  The Government has provided no indication that injury of a more serious or significant nature would result if the Act’s implementation is further delayed while the litigation proceeds in the lower courts. I would therefore deny the application and permit the appellate process to run its course.”

It’s unclear at this point how the appeals court will rule, and FinCEN has not yet updated its guidance. 

“The Supreme Court turned the CTA back ‘on,’ lifting the stay and allowing enforcement,” said Leila Carney, a member of the law firm Caplin & Drysdale. “The Supreme Court may simply be tossing the ball back to the agency. With the administration change and an incoming U.S. Treasury nominee, Mr. Bessent, FINCEN itself could pump the brakes on enforcement. The agency suffers little harm by delaying (as Justice Jackson pointed out), while filers can’t un-file. Unfortunately, taxpayers are back where they started—on edge and awaiting guidance, but they should remain prepared to file to avoid penalties.”

The National Federation of Independent Business, which was behind the lawsuit in the Texas Top Cop Shop case, issued a statement on Thursday in reaction to the Supreme Court move. 

“Today’s decision is a setback for small business,” said Beth Milito, vice president and executive director of NFIB’s Small Business Legal Center, in a statement. “Hopefully, Treasury recognizes the chaos that will ensue by requiring 32 million small businesses to imminently file their BOI information while the constitutionality of the reporting requirements is determined. As the next steps become clear, NFIB will inform small businesses on how to proceed.”

Corporate transparency advocates were heartened by the Supreme Court order, “The resumption of enforcement of the CTA is a blow to fentanyl dealers, human traffickers, terrorists, corrupt foreign leaders and other criminals that use anonymous companies to launder the proceeds of their illegal activities,” said Scott Greytak, director of advocacy for Transparency International US,  in a  statement. “Nearly 85% of all countries in the world have committed to collecting beneficial ownership information to protect against abuse of their financial systems. It is astonishing that the plaintiffs in this case believe the United States isn’t capable of doing the same. The order from the Supreme Court to stay this injunction should serve as a clear sign to the other courts currently weighing misguided challenges to the CTA that the law is constitutional.”

“For years, police and prosecutors have tried to combat a flood of dirty money associated with often violent crimes, but that can’t happen if they run into a wall of shell companies and secrecy,” said Ian Gary, executive director of the FACT (Financial Accountability and Corporate Transparency) Coalition, in a statement. “Today’s order is a reminder of the urgency of opening the money trail so our law enforcement officials can crack down on criminals who abuse the system.”

The on again, off again nature of the CTA hasn’t been resolved yet, and may remain on hold due to the other court case. The Texas Public Policy Foundation said the CTA would remain stayed because the stay it secured in the Eastern District of Texas earlier this month is still in effect nationwide.

“The CTA, part of the National Defense Authorization Act for FY 2021, imposes burdensome reporting requirements on small businesses,” said the group. “TPPF argues the Act exceeds Congress’s power under the Commerce Clause. As the judge who issued the order emphasized, TPPF’s case is based on different facts and arguments from the one in front of the Supreme Court. It is not affected by the Supreme Court’s order.

Clients with diversified yet heavily appreciated stocks could more effectively defer capital gains and avoid the tax hit of dividends by converting them into a newly burgeoning type of ETF.

Transferring the varied holdings into an ETF with a similar basket of investments based on the rules of Section 351 of the Internal Revenue Code enables what is known as an “in-kind” exchange of assets. The approach has existed for nearly a century, but a raft of new ETFs — starting with the launch last month of the Cambria Tax Aware ETF (ticker: TAX) — reflect how financial technology is applying it on a mass scale, according to Mebane “Meb” Faber, co-founder and chief investment officer of Cambria Investment Management. The quantitative management and alternative investments firm collaborated with ETF tax and operational advisory firm ETF Architect on the Dec. 18 start of TAX.

READ MORE: IRS silence allows investors to exploit ETF loophole, study finds

Appreciated stock portfolios — especially those using increasingly popular forms of direct indexing — can often get “stuck” in limbo with their rising values and the potential for realizing taxable capital gains, Faber said. Financial advisors could think of the Section 351 transfer as a 1031 like-kind exchange that is for stocks rather than other kinds of assets. Even though the tax law provision has existed for a long time, some “99.9% of people” that Cambria spoke with in several hundreds of calls last quarter hadn’t heard of Section 351 transfers, according to Faber. The Securities and Exchange Commission’s 2020 ETF Rule cleared the way for software and other technology powering new products that focus on the tax impact of asset location.

“These are all ideas and strategies that are going to get developed more over the next five years,” Faber said. “You’re going to see an enormous amount of interest in this in the next six months as people kind of get it and shift.”

‘Kind of a big deal’: How Section 351 ETFs work

The TAX ETF and other funds coming to market soon represent “a very investor-friendly trend” toward returns with less risk at a lower cost, according Brent Sullivan, a consultant on taxable investing product marketing and development to sub-advisory and ETF firms. Sullivan writes the Tax Alpha Insider blog, where he’s tracking a half dozen new or pending funds from Cambria and three other sponsors pitching the Section 351 transfer strategy. Sullivan has been following the launch of TAX closely for several months, and he wrote in a “28 Days Later” dispatch earlier this month with samples from his upcoming “memezine” explaining Section 351 conversions to advisors. (“I hate white papers,” Sullivan wrote. “They feel like homework. So, I wrote and illustrated an adviser’s guide to seeding ETFs in-kind using some words, but mostly memes.”)

READ MORE: The 10 best- and worst-performing ETFs of 2024

Section 351 exchanges revolve around the idea of moving “disaggregated assets into an aggregated fund that can achieve lower cost and also better tax deferral” without booking any capital gains, he said. They could be beneficial to, for example, clients in “separately managed accounts that are way above cost basis so they can’t do tax loss-harvesting anymore,” according to Sullivan. In effect, stock assets in a status informally known as “locked” due to their potential tax burdens flow into a diversified ETF.     

“It removes tax friction from the reallocation decision. It makes assets less sticky, and, in general, that’s good,” Sullivan said. “It’s kind of a big deal, and advisors are the ones who are going to be needing to vet these products, because oftentimes they don’t come with a track record.”

Just over a month after its inception, the TAX ETF has attracted $32.5 million of net assets. It carries an expense ratio of 0.49% and the requirements that no single positions in an incoming portfolio comprise more than 25% of the holdings and any that are over 5% add up to less than 50%. Cambria intends to open two more funds that use Section 351 conversions this year, with an ETF using the ticker “ENDW” that “tracks an endowment-style allocation” across global holdings at the end of the first quarter and another targeting global equities at the end of the second, according to Faber. Advisors have likely grown familiar with the fact that mutual funds are converting to ETFs, he noted. Section 351 transfers could drive more assets to ETFs.  

“We knew there was going to be some demand for this idea and topic, and it was 10 times what we expected,” Faber said. “If you’re a taxable investor, particularly a high-tax investor, the last thing you want is dividends, because you’re paying taxes on those every year.”

READ MORE: 10 key investment strategy stories of 2024

The new ETFs are giving more advisors and their clients the opportunity to use a tactic that was previously only available to the wealthiest households, according to Sullivan.

“Meb is doing this all out in the open,” Sullivan said. “Normally this is only offered to family offices and in really one-on-one, behind-the-scenes sales. The public appeal is specifically what’s new about this moment.”

The Internal Revenue Service doesn’t have the authority to independently verify that recipients of Low Income Taxpayer Clinic grants are eligible to receive them, according to a new report.

The report, released Tuesday by the Treasury Inspector General for Tax Administration, found the IRS’s LITC Program Office is restricted by the White House Office of Management and Budget regulations from viewing LITC client information. TIGTA reviewed a sample of grant applications along with interim and year-end review summary reports for 15 out of 130 LITCs from the 2022 grant year and found the Program Office mainly relied on self-certified information from the LITCs. The Program Office is able to administer and monitor the LITC Program, but it lacks the ability to independently validate client information to ensure the terms of the grants are being followed.  

The LITC Program is a federal grant program administered through the Taxpayer Advocate Service that provides matching grants up to $100,000 per year to qualifying organizations. The goal of the program is to provide low-income taxpayers who are involved in tax controversies with the IRS with free or nominal cost legal assistance to ensure that they have access to representation and to provide Limited English Proficiency taxpayers with education on their taxpayer rights and responsibilities.  For an organization to qualify for an LITC grant, it needs to meet the requirements specified in Section 7526 of the Tax Code. The LITC Program had the authority to grant up to $26 million and $28 million to qualified LITCs in calendar years 2023 and 2024, respectively. 

Nevertheless, for the 2023 grant year, over 75% of the LITCs were subject to an independent audit. The auditor has to determine whether the entity has complied with federal statutes, regulations, and the terms and conditions of federal awards, which includes grants. The Treasury Department could subject the LITC Program to more focused oversight by including it in a supplementary audit guide prepared annually. This guide directs the external auditor’s testing to the compliance requirements most likely to cause improper payments, fraud, waste, or abuse, or generate audit findings for which the IRS would impose sanctions. Lastly, we determined that the Program Office’s workflow lacks a consolidated centralized system; therefore, reviews of LITC data are a manual and labor-intensive process, making the process vulnerable to human error. 

TIGTA recommended the National Taxpayer Advocate should add an attestation on forms where data about taxpayers whose income exceeds the 250% of the poverty level limitation is reported, affirming accuracy, and acknowledging the penalty for making a false statement. The report also suggested the Taxpayer Advocate Service should work with the Treasury Department to request that LITC grant requirements be included within the Treasury Department’s Compliance Supplement to ensure that grant recipients are abiding by the rules. The Taxpayer Advocate should also develop a centralized system to administer the LITC grant program.  The Taxpayer Advocate Service management agreed with all of TITA’s recommendations and stated that they have started to take or plan to take corrective actions. 

National Taxpayer Advocate Erin Collin said in response to the report that the Taxpayer Advocate Service has entered into an agreement with the Treasury’s Chief Information Officer to develop a new grants management system for the LITC program office that will “streamline processes by centralizing operations, reducing manual tasks and minimizing reliance on other systems.”

She also noted that the LITC review process for current grantees includes evaluating their history of performance derived from report, site visits and interactions. Application evaluations are not solely based upon applicant-provided information but also includes observations of grantees by staff.