I. What is the Corporate Transparency Act?

The CTA was enacted by Congress on January 1, 2021 (31 USC 5301, et. seq.) to address “the disclosure of corporate ownership and the prevention of money laundering and the financing of terrorism.” In order to accomplish these goals the CTA requires small corporations, limited liability companies and companies (“Reporting Company”) to disclose “sensitive personal information” about their beneficial owners. Beneficial owners are “any individual who, directly or indirectly:”

1. Exercises substantial control over a corporation or limited liability company, or
2. Own 25% or more of the interest in a corporation or limited liability company. 

A. Information the CTA requires to be reported:

Reporting Company. The Reporting Company must file a beneficial ownership report with the Financial Crimes Enforcement Network of the U.S. Treasury Department (“FinCEN”) which includes:

1. The full legal name of the Reporting Company;
2. Any trade name or “doing business as” name of the Reporting Company;
3. The complete current principal place of business address of the Reporting Company;
4. The State of formation of the Reporting Company;
5. The State where the Reporting Company first registered to do business; and
6. The IRS Taxpayer Identification Number (“TIN”) of the Reporting Company. 

Beneficial Owner. The CTA mandates the creation of a database of Beneficial Ownership Information (“BOI”) for Reporting Companies. Every beneficial owner and company applicant with respect to a beneficial owner must include on the report:

1. The full legal name of the individual;
2. The individual’s date of birth;
3. The individual’s residential street address (or if the applicant is a company, the street address of the company);
4. A unique identifying number and issuing jurisdiction, which will likely be either
   • Driver’s License number and State; or
   • Passport number of the United States.
5. A copy of the Driver’s License or Passport

B. When does the CTA take effect:

For Existing Associations – 1/1/2025
For New Associations – as of 1/1/2024, within 30 days of incorporation.

C. The penalty if your association violates the CTA:

There is a civil fine of $500.00 per day, up to $10,000.00, plus criminal fines or prison time for willful failure to report or filing erroneous reports. So don’t forget to file. 

II. Why did an Alabama Court Federal District Court Find it Unconstitutional

A. The plaintiff small business owner and the National Small Business Association (“NSBA”) have standing to bring this suit:

To meet the standing requirement of the Constitution a claimant must present an injury that is:

1. Concrete, particularized, and actual or imminent
2. Fairly traceable to the defendant’s challenged behavior; and
3. Likely to be redressed by a favorable ruling. Davis v. Fed. Election Comm’n, 554 U.S. 724, 733 (2008).

The government claimed that the business owner failed to show a “concrete and particularized injury” and that the NSBA failed to support its “claim to organizational, third-party, or associational standing.” 

In finding for the Plaintiff business owner, the Court found that compelling the disclosures of the business owner’s “sensitive personal information” is a “concrete, imminent injury that is traceable to the government” and that it would be solved by a favorable decision. Accordingly, the owner had standing.

The government also attacked the standing of the NSBA on three separate grounds, but the Court held that because the business owner is a member of the NSBA and has standing, the NSBA has associational standing. 

B. The CTA is not Authorized by the US Constitution.

Although the Constitution grants Congress a fair amount of latitude in passing laws, the “express conferral of some powers makes clear that it does not grant others. And the federal government ‘can exercise only the powers granted to it.’” Citing to NFIB, 567 U.S. at 534-35 (quoting McCulloch, 4 Wheat. at 405). 

In this case, the Government argued that it has the power to enact the CTA for three reasons:

1. Foreign affairs powers;
2. Commerce Clause authority; and
3. Taxing powers.

The Court found that all three of these claims fail. 

1. Foreign Affairs & National Security. The Government’s argument is that both Congress and the Executive branch agree that the collection of BOI is to “better enable critical national security, intelligence, and law enforcement efforts to counter money laundering, the financing of terrorism, and other illicit activity.” This argument did not persuade the Court as it found that Congress can not regulate state created corporations under the Foreign Affairs powers, “absent a clear indication from Congress,” which does not exist here.
2. Commerce Clause Authority. In denying this Commerce Clause argument by the Government, the Court held that none of the three categories of activity that Congress may regulate under its commerce power have been met. In part, the Court reached this decision because the “plain text of the CTA does not regulate the channels and instrumentalities of commerce,” in that the word “commerce” is no where to be found in the CTA and because the Supreme Court has always held that Congress does not have the authority under the Commerce Clause to regulate non-commercial, intrastate activity even when certain entities use commerce in their operations to “affect interstate and foreign commerce.” Finally, the Court also held that the CTA lacks the jurisdictional hook that Congress knows how to include when it intends legislation to deal with matters “affecting commerce.” Here the complete lack of that phrase or a similar one make it impossible for a Court to read that language into the CTA.
3. Taxing Powers. The government argues that the CTA is constitutional because the regulations are sufficiently “incidental” to the taxing power. The Court found that such “unfettered legislative power ‘is in no way an authority that is ‘narrow in scope,’ or ‘incidental’ to the exercise of the commerce power…’ [and that even if ] the CTA’s provisions were ‘necessary,’ ‘such an expansion of federal power is not a ‘proper’ means for making those [policy goals] effective.”

The Court also held that because the CTA could not be justified under Congress’ enumerated powers that it was unnecessary to decide whether the CTA also violated the First, Fourth and Fifth Amendments of the Constitution.

This Court ruling only applies to the Northern District of Alabama, but you can be sure that in the coming days far more will be written about it and other courts will address the questions raised. So for those of you that are BOI or a Reporting Company that existed prior to 1/1/2024, but have not already sought to report, I would consider waiting 3-4 months to see how other courts or the Court of Appeals deals with this ruling that the CTA is unconstitutional. 

[View source.]