Note: The original alert has been updated to reflect an updated notice regarding this decision that was issued by FinCEN on March 11, 2024.
Key Takeaways
- On March 1, 2024, a federal district court 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).
- On March 4, 2024, the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) issued a notice confirming that it will not enforce the CTA against those plaintiffs at this time, implying that all other reporting companies are still expected to comply with the CTA.
- On March 11, 2024, FinCEN updated this notice to: (i) announce that it filed a Notice of Appeal on the same date; and (ii) expressly confirm that it will continue to enforce the CTA while the litigation is ongoing against all reporting companies other than the named plaintiffs.
- Therefore, your company may not rely on this court’s decision to avoid complying with the CTA, unless (i) you were a member of the NSBA at the time of the decision; or (ii) FinCEN issues any subsequent guidance permitting you to do so.
Introduction and Background
On March 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The CTA was originally enacted by Congress on Jan. 1, 2021, and became effective on Jan. 1, 2024.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 at the time of the decision. In other words, no other company may rely on this decision to avoid complying with the CTA, absent subsequent 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.
On March 4, 2024, FinCEN published a notice acknowledging the district court’s decision and announcing that it will not enforce the CTA against the named plaintiffs, implying that all other reporting companies will be expected to comply with the CTA:
FinCEN will comply with the court’s order for as long as it remains in effect. As a result, the government is not currently enforcing the Corporate Transparency Act against the plaintiffs in that action: Isaac Winkles, reporting companies for which Isaac Winkles is the beneficial owner or applicant, the National Small Business Association, and members of the National Small Business Association (as of March 1, 2024). Those individuals and entities are not required to report beneficial ownership information to FinCEN at this time.
On March 11, 2024, FinCEN updated this notice by adding the following, which confirms that it has appealed the decision and expressly states that all reporting companies other than the named plaintiffs must still comply with the CTA:
The Justice Department, on behalf of the Department of the Treasury, filed a Notice of Appeal on March 11, 2024. While this litigation is ongoing, FinCEN will continue to implement the Corporate Transparency Act as required by Congress, while complying with the court’s order. Other than the particular individuals and entities subject to the court’s injunction, … reporting companies are still required to comply with the law and file beneficial ownership reports as provided in FinCEN’s regulations.
Our key takeaways from the initial statement and updated statement are as follows:
- At this time, FinCEN continues to expect all companies that were not party to the suit to comply with the CTA to the extent required.
- Companies that were not NSBA members as of March 1, 2024, cannot escape their CTA requirements by simply joining the NSBA today.
- FinCEN stated that it is not “currently” enforcing the CTA against the plaintiffs, and that such persons are not required to report BOI “at this time.” So, if the court’s decision is later overturned, FinCEN may seek to enforce the CTA against existing NSBA members for any subsequent violations.
We will continue to provide updates regarding any further material developments as they arise.