Key Takeaways

• A federal district court has declared that the Corporate Transparency Act (CTA) is unconstitutional.
• The relief from this ruling currently applies only to the named plaintiffs, which include the members of the National Small Business Association (NSBA).
• The immediate impact of this ruling on all other companies is unclear. However, companies that were not party to the suit may not rely on this decision to avoid complying with the CTA, absent new guidance from the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) permitting them to do so.
• As of the publication of this alert, FinCEN has not issued a press release or other statement regarding its intended path forward regarding enforcement of the CTA in light of the district court’s decision.

Introduction and Background

On Mar. 1, 2024, a federal district judge in Alabama ruled that the CTA is unconstitutional, holding that it exceeds the powers granted to Congress by the U.S. Constitution. The ruling permanently enjoins FinCEN from enforcing the CTA against the named plaintiffs and casts uncertainty on the broader enforceability of the CTA going forward.

The CTA was originally enacted by Congress on Jan. 1, 2021, and became effective on Jan. 1, 2024. Designed to combat money laundering and illicit financing through anonymous shell companies, the CTA imposes new beneficial ownership information (BOI) reporting requirements on all companies formed or registered to do business in the U.S., unless an exemption applies. FinCEN estimated that the CTA would impact approximately 32.6 million existing entities at the time it went into effect and approximately 5 million new entities formed each year thereafter.

Case Summary

On Nov. 15, 2022, the NSBA filed suit in the Northern District of Alabama, alleging that the CTA’s mandatory disclosure requirements (i) exceeded the limits on Congress’ powers under the Constitution and (ii) infringed upon individual constitutional rights in violation of the First, Fourth and Fifth Amendments.

The government offered three sources of constitutional authority in support of Congress’ ability to enact the CTA: (i) foreign affairs power; (ii) Commerce Clause power; and (iii) taxing power.

The court rejected all three arguments:

• Foreign Affairs:
  • Government Argument: The CTA falls within Congress’ extensive powers over foreign affairs and national security because collecting BOI reports is necessary to protect vital national security interests by better enabling critical national security, intelligence and law enforcement efforts to counter money laundering, the financing of terrorism and other illicit activities.
  • Ruling: The CTA is not authorized by Congress’ foreign affairs powers because “those powers do not extend to purely internal affairs” like corporate formation, which “has always been the province of the States.”
• Commerce Clause:
  • Government Argument: The CTA fits within all three categories of activity that Congress may regulate under its commerce power that have been identified by the Supreme Court: (i) the channels of interstate and foreign commerce; (ii) the instrumentalities of, and things and persons in, interstate and foreign commerce; and (iii) activities that have a substantial effect on interstate and foreign commerce.
  • Ruling: The “act of incorporation is not enough to invoke the Commerce power,” and “the plain text of the CTA does not regulate the quintessentially economic activities the Government asserts or require entities to engage in those activities to be regulated.” Therefore, “[b]ecause the CTA does not regulate commerce on its face, contain a jurisdictional hook, or serve as an essential part of a comprehensive regulatory scheme, it falls outside Congress’ power to regulate non-commercial, intrastate activity.” The opinion also states that the CTA could have “easily … pass[ed] constitutional muster” with just a few changes, implying that the constitutional issues would be resolved with a simple amendment (e.g., limiting the reporting requirements to companies that are engaged in commerce).
• Taxing:
  • Government Argument: The CTA provides for the collection of information that would be useful for tax administration to help ensure that taxable income is appropriately recorded.
  • Ruling: The chain connecting the CTA to the taxing power is “weak” and would be too substantial of an expansion of federal authority. “All Congress would have to do to craft a constitutional law is simply impose a disclosure requirement and give tax officials access to that information.”

The court held that Congress lacked the constitutional authority to enact the CTA. This conclusion made it unnecessary to determine whether the law violates the First, Fourth and Fifth Amendments.

Impact of the Decision

As of now, this ruling technically applies only to the 65,000 members of the NSBA. In other words, no other company may rely on this decision to avoid complying with the CTA, absent new guidance from FinCEN permitting them to do so.

When a law is ruled unenforceable by a district court, the federal agency overseeing that law will typically indicate whether it intends to appeal the decision and issue clarifying guidance regarding compliance with and enforcement of that law during that interim period.

We expect FinCEN to appeal the decision. However, it is unclear how FinCEN will choose to administer the CTA as that process plays out. It may announce a stay of the CTA implementation and reporting timeline. Or FinCEN may announce that it disagrees with the district court’s decision and continues to expect all reporting companies not subject to the judgment to comply with the CTA until further notice.

As of the time of publication of this alert, FinCEN has not issued a press release or other statement relating to how this decision will impact its enforcement efforts. Therefore, the immediate impact of this ruling on all companies that were not party to the suit remains unclear.

We will provide updates regarding any further developments as they arise.

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