In the wake of numerous corporations striving to adhere to the Corporate Transparency Act (CTA) - a federal statute enacted to thwart illicit activities such as tax fraud, money laundering, and terrorism financing - a federal district court in Alabama declared the law unconstitutional. The court’s decision primarily hinged on the CTA’s reporting requirements pertaining to corporate ownership information. While the presiding federal judge recognized the CTA’s commendable objectives, he noted, “Congress sometimes enacts smart laws that violate the Constitution.”
Under the CTA, businesses that meet certain criteria must submit a Beneficial Ownership Information (BOI) Report to the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN). FinCEN is the Treasury Department's criminal enforcement arm. The required report provides details identifying individuals who have some type of ownership interests in the reporting company. The CTA requires disclosure of this information even though there is no evidence, no probable cause, and no reasonable suspicion of a crime being committed.
In Nat’ll Small Bus. United, et. al., v. Yellen et al., Case No. 5:22-cv-1448-LCB (N.D. Ala. March 1, 2024), the issue was whether Congress has the power to regulate state corporations and their beneficial owners once they obtain formal corporate status from a state. The plaintiffs in the case filed a motion for summary judgment, arguing the CTA violated the First, Fourth, Fifth, Ninth, and Tenth Amendments of the U.S. Constitution. The government’s argued the CTA falls within Congress' powers under the Commerce, Taxing, and Necessary and Proper Clauses, along with Congress’ foreign affairs and national security powers.
On March 1, 2024, the Court granted the plaintiffs’ summary judgment ruling the CTA was unconstitutional for the following reasons:
- The CTA does not fall within the scope of the Commerce or Taxing Clause.
- The CTA does not meet the requirements of the Necessary and Proper Clause.
- The CTA cannot be justified under Congress' foreign affairs and national security powers.
- The CTA's civil penalties are not a tax and do not meet the requirements for a valid exercise of the taxing power.
On March 11, 2024, the government filed an appeal. The ruling affects only the plaintiffs in the case, and does not include any other business entity. Therefore, the CTA remains in effect for all other businesses. Indeed, FinCEN announced they will continue to implement the CTA, and other businesses remain obligated to submit their beneficial ownership reports as provided in FinCEN’s regulations.
The MSBA previously reported the CTA’s reporting requirements in their December blog, “The Corporate Transparency Act Becomes Effective January 1, 2024. Here’s What You Need to Know,” MSBA Blog (December 11, 2023). If your company was created or first registered after January 1, 2024, and you’re not part of the limited group involved in the Alabama case, you should submit your CTA filing within the 90-day period. If your company was formed or first registered before January 1, 2024, and your CTA reporting deadline is December 31, 2024, you may want to think about gathering the required CTA information but hold off on submitting the filing to FinCEN until the exhaustion of the government’s appeal or until the courts provide more clarity.