[co-author: Jennifer Cytryn]

Overview

In 2021, Congress passed the Corporate Transparency Act (CTA), which will be administered and enforced by the Financial Crimes Enforcement Network (“FinCEN”) of the United States Treasury Department, in an effort to implement heightened transparency disclosure requirements for almost all U.S. and foreign limited liability companies (LLC), corporations, limited partnerships, and other closely held entities.

The CTA became effective as of January 1, 2024, requiring many entities formed or registered to do business in the United States to report beneficial ownership information reports for each of its “beneficial owners”. The CTA defines “beneficial owners” as any individuals (natural persons) who either (A) directly or indirectly own or control 25% or more of the vested and unvested equity interests in any corporate entity that is created or by virtue of filing a document with a state government (i.e., LLCs and corporations), or (B) have substantial control over the entity. Law firms filing the Beneficial Ownership Report on behalf of their clients are required to obtain personal information about beneficial owners, including their names, addresses, and information about the reporting company.

However, now, an Alabama federal district court has addressed the innate feeling and burning question on the minds of many business owners of whether the CTA reporting requirements overstep the boundaries set out by the U.S. Constitution.

On Friday, March 1, 2024, Judge Liles C. Burke of the U.S. District Court of the Northern District of Alabama issued a landmark decision and final judgment in National Small Business United v. Yellen[1], declaring the CTA unconstitutional and permanently enjoining the enforcement of the CTA. The key question in this case is whether Congress held the requisite authority pursuant to any of its enumerated constitutional powers to promulgate a law that regulates millions of state law entities and demands personal information regarding their beneficial owners. The court held the CTA as unconstitutional because it “exceeds the Constitution’s limits on the legislative branch and lacks a sufficient nexus to any enumerated power to be necessary or proper means of achieving Congress’s goals.”[2]

A Deeper Dive into the Dispute Examined by NSBU v. Yellen

Plaintiffs, the National Small Business Association and one of its members, Issac Winkles, commenced an action against the U.S. Treasury Department, specifically naming the Treasury Secretary, Janet Yellen, and Acting Director of FinCEN, Himamauli Das, as defendants in the action.[3] The Plaintiffs contended that the mandatory disclosure requirements of the CTA exceeded Congress’s authority under Article I of the Constitution and violated the First, Fourth, Fifth, Ninth, and Tenth Amendments.[4]

The parties cross-moved for summary judgment and the Government moved to dismiss. Since the issues in dispute here are purely legal and there is no genuine issue as to any material fact, the Alabama court primarily analyzed the second element required to grant a motion of summary judgment, which was whether either party was entitled to a judgment as a matter of law. The Government argued that it had requisite authority to enact the CTA under it powers granted to Congress pursuant to its (1) foreign affair powers and the necessary and proper clause, (2) authority under the Commerce Clause, and (3) taxing powers and the necessary and proper clause.

The Plaintiffs and the Alabama court disagreed.

Dissecting the Constitutional Claims of Authority

Foreign Affair Powers & the Necessary and Proper Clause. The Court was not persuaded by the Government’s argument that the collection of beneficial ownership information under the CTA is necessary for national security purposes to counter money laundering and financing of terrorism.[5] Furthermore, since Congress’s foreign affairs powers do not apply to matters of internal affairs such the state’s sovereign right to regulate corporate formations, the Court held that Congress does not have the power to regulate corporations under its foreign affairs powers.

Commerce Clause Authority. Although Congress is bestowed broad authority under the Commerce clause, the Court reasoned that that the powers of Congress under the Commerce Clause did not support enactment of the CTA because (A) the “plain text of the CTA does not regulate the channels and instrumentalities of commerce, let alone commercial or economic activity” and (B) “‘[t]he proximity and degree of connection between’ the formation of an entity and its [economic] activities is too attenuated”.[6] The Court further reasoned that the CTA seeks to regulate many entities that do not actually make use of any channels or instrumentalities of interstate commerce, thereby exceeding congressional authority.

Taxing Powers & the Necessary and Proper Clause. The Government further argued that “the collection of beneficial ownership information is necessary and proper to ensure taxable income is appropriately reported”.[7] The Court found that the fundamental purpose of the CTA is not incidental to the exercise of Congress’s taxing power and that the justification of the collection of information is not a sufficient basis for Congress to invoke its taxing powers.[8]

What Now? Who Needs to File a BOI Report?

On Monday, March 4, 2024, FinCEN released an official notice in response to the landmark decision. FinCEN announced that the agency will comply with the court’s order for as long as it remains in effect and that it is not enforcing the CTA against the Plaintiffs in the case[9]. Reading between the lines of FinCEN’s short 158-word statement, it appears that it plans to enforce the CTA against everyone else who is not a Plaintiff.

Therefore, other reporting companies are presumably still bound by the CTA and should continue to comply with the CTA’s reporting requirements. It is expected that other courts will address the constitutionality of the CTA. FRB will continue to monitor any ongoing litigation on the matter and report any updates.

[1] Nat'l Small Bus. United v. Yellen, No. 5:22-cv-01448-LCB (N.D. Ala. 2022).

[2] Id.

[3] Id.

[4] Id.

[5] Id.

[6] Id.

[7] Id.

[8] Id.

[9] https://fincen.gov/news/news-releases/notice-regarding-national-small-business-united-v-yellen-no-522-cv-01448-nd-ala