Federal Judge Strikes Down The Corporate Transparency Act As Unconstitutional. But, It’s Not Dead Yet.
On March 1, 2024, in National Small Business United v. Yellen, No. 5:22-cv-01448 (N.D. Ala.) (“NSBA Suit”), Judge Liles C. Burke, a federal district judge in Alabama, issued an opinion holding that the federal law known as the Corporate Transparency Act (“CTA”) is unconstitutional. To read the opinion, click here: NATIONAL SMALL BUSINESS UNITED dba the NATIONAL SMALL BUSINESS ASSOCIATION et al and click here: NSBA v Yellen Final Judgment and Injunction.
What is the CTA?
Described as the “furthest-and widest-reaching federal business entity law ever enacted”,[1] the CTA is a federal law enacted in 2021 that is intended to prevent the use of an anonymously owned company for money laundering or other illegal purposes. The Financial Crimes Enforcement Network (FinCEN), a division of the U.S. Treasury Department, will enforce compliance with the CTA.
Beginning January 1, 2024, every company deemed a Reporting Company (defined below) under the CTA must file a Beneficial Ownership Information report (“BOI Report”) that includes certain information about itself and each of its “beneficial owners.” Most small business entities (those with $5 million or less in gross receipts or having fewer than 21 full time employees) will fall within the definition of a Reporting Company. The BOI Report must be filed with FinCEN via an online portal, which opened for filing on January 1, 2024.
We have provided a brief overview of the BOI reporting requirements here.
FinCEN estimates that the CTA applies to 32.6 million currently existing entities and is projected to apply to 5 million new entities formed each year from 2025 to 2034. Under the CTA, the penalties for failure to file the BOI Reports are steep: $500 per day, up to $10,000 and up to 2 years of imprisonment for willful non-compliance.
For specific information from FinCEN on the CTA and its requirements, click here.
NSBA challenge to the CTA.
In November 2022, the National Small Business Association (NSBA) and its member Isaac Winkles (collectively, “NSBA Plaintiffs”), filed the NSBA Suit to challenge the constitutionality of the CTA. In his 53-page ruling, Judge Burke granted the NSBA Plaintiffs’ motion for summary judgment and struck down the CTA after determining that the “CTA exceeds the Constitution’s limits on the legislative branch and lacks a sufficient nexus to any enumerated power to be a necessary or proper means of achieving Congress’ policy goals…”. In his ruling, Judge Burke noted that the legislative authority of the U.S. Congress is wide-ranging, but it is not unbounded.
In attempting to defend the constitutionality of the CTA, the Government made three primary arguments, all of which were rejected by Judge Burke.
First, the Government contended that the CTA was an appropriate exercise by Congress of its power over foreign affairs and national security because foreign parties use domestic shell companies to harm United States’ interests. However, Judge Burke held this reasoning insufficient to justify the CTA’s far-reaching domestic impact, after determining the CTA to be a federal reporting requirement imposed on entities that voluntarily incorporate their businesses, an action which he found to be a purely internal affair, ordinarily within the sovereign purview of the States and not the federal government.
Second, the Government argued that the CTA was an appropriate exercise by Congress of its power under the Commerce Clause, which permits Congress to regulate the channels and instrumentalities of interstate and foreign commerce. However, the CTA requirements for “Reporting Companies” is not limited to entities engaged in “interstate and foreign commerce”, but also applies to entities which may never engage in commerce outside a particular State. (The CTA defines a “Reporting Company,” with some exceptions, as any entity “created by the filing of a document” with a secretary of state or a similar office under the law of a State or Indian Tribe.”) In rejecting the Government’s argument, Judge Burke concluded that the mere filing of a document was not the engagement in interstate or foreign commerce, and thus Congress could not regulate that activity just because some Reporting Companies might engage in interstate or foreign commerce.
Finally, the Government argued that the CTA represented an appropriate exercise by Congress of its power and authority to levy taxes. In rejecting this final Government argument, Judge Burke found that, although the relationship between disclosure provisions and the taxing power is “well recognized,” the collection of information under the CTA was not sufficiently connected to the taxing power because the CTA had nothing to do with taxes.
What Happens Next?
By its terms, the Court’s ruling prohibited the enforcement of the CTA BOI reporting requirements only with respect to the NSBA Plaintiffs, which consist of the NSBA, its members, Isaac Winkles and entities under their control. This of course limits the ruling’s effect to only a small percentage of the 32.6 million business entities currently subject to the CTA. Moreover, the Government is likely to appeal the decision. Therefore, at this point, unless the Treasury Department should suspend current enforcement of the CTA, CTA BOI Reports will need to be filed by all of the millions of other entities that are currently obligated to file BOI Reports under the CTA.
Click here to contact the Corporate and Business Law attorneys at BPJ for advice on CTA.