On Friday, March 1, 2024, a federal judge in Alabama ruled that the Corporate Transparency Act is unconstitutional. See NSBU v. Yellen, No. 5:22-cv-1448, 2024 BL 69366, 2024 Us Dist Lexis 36205 (N.D. Ala. Mar. 01, 2024). Here is a brief summary of the ruling.

The ruling. The federal government argued that the CTA is a valid exercise of several Congressional powers grounded in the Constitution, including: the foreign affairs and national security powers, the Commerce Clause, and the Taxing Clause (plus the Necessary and Proper Clause in support). But, United States District Court Judge Liles Burke concluded that the CTA was not justified on any of those grounds.

First, Judge Burke found that the regulation of entity incorporation is a matter for the states, not the federal government. Therefore, he reasoned that the foreign affairs and national security powers could not support the CTA.

Next, Judge Burke held that because the CTA regulated most state-created entities—not just entities that “move in commerce”—the Commerce Clause was also inapplicable. 

Finally, Judge Burke concluded that the CTA was not justified by the Taxing Clause because the government argued that the disclosures required by the CTA would be merely “useful” (as opposed to necessary) for tax collection purposes.

Who is affected? The ruling applies only to the plaintiffs. One plaintiff is the National Small Business Association (which is the d/b/a of National Small Business United). The other plaintiff is an individual member of the NSBA.

Because the NSBA was suing on behalf of over 65,000 businesses and individuals across the country, its members received the benefit of this ruling as well. The federal government has recognized as much: the Financial Crimes Enforcement Network (FinCEN) acknowledged that all NSBA members are currently exempt from the CTA. 

What’s next? Copycat lawsuits have already commenced elsewhere in the country (including in Maine and Michigan) with more likely to follow, as businesses attempt to emulate the success in Alabama. Of course, Judge Burke’s ruling is not binding on any other district courts—let alone circuit (appellate) courts—in the country. Looking ahead, disagreement among jurisdictions is a distinct possibility.

In the meantime, the federal government will appeal the Alabama ruling to the Eleventh Circuit, which is generally considered one of the most conservative appellate courts in the federal system and could affirm the ruling. At some point in the next few years, the CTA might have its day in the Supreme Court.

Given the Supreme Court’s conservative shift over the last several years in various areas of the law, it is possible that the Court might take the opportunity to revisit Commerce Clause doctrine again. A couple decades ago, it seemed that the Supreme Court was poised to significantly curtail Congress’ powers under the Commerce Clause, but that effort stalled.  Perhaps the Court—which is more conservative now than it was then—might renew that effort.

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