The Corporate Transparency Act (CTA) requires most entities formed or registered to do business in the United Sates to report to the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) certain information about each entity and personal information about its beneficial owners and, in some cases, the individuals who formed the entity.
On March 1, 2024, the U.S. District Court for the Northern District of Alabama declared the CTA to be an unconstitutional exercise of congressional authority in the case of National Small Business United v. Yellen.
The court held 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.” The court’s decision, while narrow in scope, places the future of the CTA in an uncertain light. The court also enjoined the Government from enforcing the CTA, but that injunction only applies to the plaintiffs in that particular case – the CTA otherwise remains effective, at least for the time being.
The Corporate Transparency Act
Congress enacted the CTA on January 21, 2021 in an effort to combat money laundering and other financial crimes. The CTA went into effect on January 1, 2024 and requires non-exempt domestic and foreign entities, referred to as “reporting companies,” to report, among other things, beneficial ownership information (BOI) for each beneficial owner to FinCEN. A beneficial owner of a reporting company is an individual person who exercises substantial control over the reporting company or owns or controls 25% or more of the direct or indirect ownership interests of the reporting company. For entities first registered to do business after January 1, 2024, the CTA further requires reporting companies to submit BOI reports for each of its company applicants – the person or persons responsible for the initial formation (or initial registration in the US with respect to a foreign entity) of the reporting company.
BOI reports generally include personal information of the reported individuals, including their legal names, dates of birth, current street addresses and driver’s license or passport number (along with an image copy of the applicable identification). FinCEN maintains the information in a national database accessible to law enforcement, national security agencies and financial institutions.
Any person who willfully fails to report or update required information, or willfully provides false information to FinCEN could be liable for civil penalties of up to $500 for each day of noncompliance, or criminal penalties of imprisonment of up to two years and fines of up to $10,000.
National Small Business United v. Yellen
The National Small Business Association (NSBA), an Ohio nonprofit, and Isaac Winkles, an NSBA member and owner of two small businesses, brought suit against the Treasury Department, on the theory that the CTA’s mandatory disclosure requirements exceed Congress’ enumerated powers and violate the First, Fourth, Fifth, Ninth and Tenth Amendments of the United States Constitution. The parties cross-moved for summary judgment.
The Government argued that Congress has the authority to enact and enforce the CTA pursuant to its: (1) foreign affairs powers; (2) Commerce Clause powers; and (3) necessary and proper exercise of taxing power. The court disagreed with all three arguments, holding that the CTA is an unconstitutional exercise of congressional power and permanently enjoining the Government from enforcing the CTA against the Plaintiffs. [1] It held that Congress’ foreign affairs powers do not justify the CTA’s regulation of “creatures of state law” (i.e., the formation of corporate entities), which fall under the “States’ historically exclusive governance of incorporation.” The court next held that the CTA does not fall within Congress’ Commerce Clause power, finding that the CTA regulations do not fall within any of the three categories of activities that Congress can regulate under the Commerce Clause (namely, (i) the channels of interstate or foreign commerce, (ii) the instrumentalities of interstate and foreign commerce, or (iii) activities that have a substantial effect on interstate and foreign commerce). Finally, the court held that the collection of beneficial ownership information under the CTA is not necessary and proper to ensure the appropriate reporting of taxable income. The court reasoned that Congress cannot invoke its taxing power simply by collecting “'useful' data and allowing tax-enforcement officials access to that data.”
In light of its holding outlined above, the court granted the Plaintiffs’ Motion for Summary Judgment and entered a declaratory judgment finding the CTA unconstitutional and permanently enjoining the enforcement of the CTA against the Plaintiffs.
Further Developments and Impacts of the Decision
On March 11, 2024, the Government appealed the decision of the District Court to the U.S. Court of Appeals for the Eleventh Circuit. FinCEN has issued a press release confirming that it will comply with the court’s injunction and refrain from enforcing the CTA against the Plaintiffs and, at least for the time being, members of the NSBA. However, the press release confirms that all other “reporting companies are still required to comply with the law and file beneficial ownership reports as provided in FinCEN’s regulations.”
Meanwhile, another lawsuit, Robert J. Gargasz Co. v. Yellen[2] which appears to seek a more widely applicable injunction against enforcement of the CTA, is pending in Ohio. So, more to come on this developing area of the law.
[1]Nat’l Small Bus. United v. Yellen, No. 5:22-cv-01448-LCB, 2024 WL 899372 (N.D. Ala. Mar. 1, 2024).
[2]Robert J. Gargasz, Co., LPA v. Yellen, No. 1:23-cv-02468 (N.D. Ohio).
