On March 1, 2024, the federal judge presiding over sole pending case testing the validity of the Corporate Transparency Act (CTA) struck down the CTA as unconstitutional. The CTA imposes mandatory reporting obligations on millions of small businesses operating throughout the US, ostensibly to enhance corporate transparency and combat financial crime.
The CTA, which took effect on January 1, 2024, requires a wide range of companies to provide personal information about their beneficial owners and company applicants to the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN). More than 32.5 million existing small and larger business entities appear to be subject to the CTA. This number includes many, if not most, small businesses operated in every U.S. state. By mid-February, approximately a half million reports had been filed under the CTA.
In National Small Business United d/b/a National Small Business Association v. Yellen, Judge Liles C. Burke of the United States District Court for the Northern District of Alabama held that the CTA exceeded Congress’s authority to regulate interstate commerce, and that the CTA was not necessary to the proper exercise of Congress’ power to regulate foreign affairs or its taxing power. The Court declared the CTA unconstitutional and issued an injunction prohibiting the federal government from enforcing the CTA’s reporting requirements against the plaintiffs in that case.
In its order, the Court noted that the CTA imposes requirements on corporate formation, which is a matter of internal state law. Further, the Court observed that the CTA applies to entities even if the entity conducts purely intrastate commercial activities or no commercial activities at all. Third, the Court concluded that the CTA’s disclosure requirements could not be justified as a data-collection tool for tax officials, because that would give FinCEN “unfettered legislative power.”
The Court’s decision creates uncertainty regarding reporting obligations under the CTA. Although the Court purported to limit its injunction to the parties in the litigation before it, the lead plaintiff in the suit is the National Small Business Association (NSBA). However, the Court held that the NSBA had associational standing to sue on behalf of its members. Thus, the Court’s injunction likely benefits all of the NSBA’s over 65,000 members.
Regardless of membership in the NSBA, however, the Court’s finding that the CTA is unconstitutional also raises serious doubts about the government’s ability to enforce the CTA’s reporting requirements against any business. The order may result in a de facto moratorium on CTA enforcement pending a final order.
The government will likely appeal this decision, but the Court’s injunction and declaration will remain in effect unless a stay is granted. If the district court denies a stay, the government will be able to seek a stay from the Atlanta-based United States Court of Appeals for the Eleventh Circuit. It may take over a year for a final order. However, tens of millions of companies are required to report under the CTA no later than January 1, 2025.
MWR 3/9/24
