In a key development relating to the Corporate Transparency Act (the “CTA”), on March 1, 2024, U.S. District Judge Liles C. Burke of the Northern District of Alabama issued a memorandum opinion and final judgment ruling the CTA unconstitutional on the grounds that it exceeds the Constitution’s limits on Congress’ power. As we have previously reported (here), the CTA requires certain entities to file Beneficial Ownership Information Reports with the Financial Crimes Enforcement Network (“FinCEN”) of the U.S. Department of Treasury
In National Small Business United v. Yellen, the National Small Business Association and one individual challenged the constitutionality of the CTA. The court analyzed Congress’ authority to enact the CTA under (1) Congress’ powers over foreign affairs and national security; (2) the Commerce Clause1; and (3) Congress’ taxing power, via the Necessary and Proper Clause.2 The court held that none of these constitutional provisions justified Congress’ enactment of the CTA. Accordingly, the court entered a declaratory judgment that the CTA exceeded the Constitution’s limitations on congressional power, and enjoined the Government from enforcing the CTA against the named plaintiffs in that case.
On March 4, 2024, FinCEN released a notice (the “March 4 Notice”) acknowledging the National Small Business decision and stating that, “[a]s a result [of that decision], the government is not currently enforcing the Corporate Transparency Act against the plaintiffs in that action,” a category the government defined as the individual named plaintiff, companies for which that individual is the beneficial owner or applicant, the National Small Business Association, and the members of that Association. The government explained that “[t]hose individuals and entities are not required to report beneficial ownership information to FinCEN at this time.”
Under the district court’s decision and the government’s March 4 Notice, only the individual plaintiff (Isaac Winkles, and companies for which he is a beneficial owner or applicant), the National Small Business Association, and the approximately 65,000 members of the National Small Business Association are relieved from reporting beneficial ownership information under the CTA. Currently, everyone else still has to comply with the CTA.
Note that the district court’s analysis in National Small Business analyzed the constitutionality of the CTA as applied to entities formed under the state laws of the individual United States. The court did not address, and the analysis might differ under, the application of the CTA to foreign entities (for example, entities incorporated outside of the United States). Thus, even if the district court’s conclusion here is eventually upheld on appeal or adopted on a broader basis, such that the CTA (as enacted) is unenforceable as to entities formed in the U.S., a different result might apply for enforcement of the CTA against foreign entities registered to do business in the U.S.
We will continue to monitor this situation, including for any changes in the government’s position (as articulated in the March 4 Notice), whether the Department of Treasury appeals to the U.S. Court of Appeals for the Eleventh Circuit, whether the government seeks any kind of interim relief from the district court’s injunction against enforcing the CTA, and whether other parties bring similar challenges to the CTA in other jurisdictions around the country, potentially expanding the groups shielded against CTA enforcement.
1 U.S. Const. art. 1, § 8, cl. 3.
2 U.S. Const. art. 1, § 8, cl. 18.
