United States District Court Rules Corporate Transparency Act is Unconstitutional

The Corporate Transparency Act (CTA) was enacted by Congress in 2021 with a goal of improving law enforcement’s ability to address financial crimes by mandating that most business entities registered through a state disclose the identities of the entity’s beneficial owners to the Financial Crimes Enforcement Network (“FinCEN”) by filing a Beneficial Owner Information Report (BOIR).

The CTA went into effect on January 1, 2024 (codified at 31 C.F.R. § 1010.380). Six weeks later the Plaintiffs, the “National Small Business Association (NSBA)” and NSBA member/small business owner Isaac Winkles sued the Treasury Department, including the Treasury Secretary and Acting Director of FinCEN, alleging that the CTA’s mandatory disclosure requirements of beneficial owner information exceed Congress’ authority under Article I of the U.S. Constitution and violate the First, Fourth, Fifth, Ninth, and Tenth Amendments.

On March 1, 2024, Judge Liles C. Burke of the U.S. District Court for the Northeastern District of Alabama Northeastern Division issued summary judgment for the Plaintiffs in a 53 page Memorandum Opinion. At this time, it is unclear how this ruling will affect persons not a party to this case. It is anticipated that the Government will file an immediate appeal to the Eleventh Circuit Court of Appeals.

The Memorandum Opinion states that FinCEN estimates that the CTA reporting requirements applies to 32.6 million currently existing entities and will apply to an additional 5 million new entities formed yearly over the next ten years.

The Opinion states that “even in the pursuit of sensible and praiseworthy ends, Congress sometimes enacts smart laws that violate the Constitution.”

Under the CTA, if a beneficial owner knowingly and willfully does not file a BOIR within the applicable time period, the owner(s) can risk prison time and thousands of dollars in civil and criminal fines.

On page 15 of the Opinion, the Court expressed that Congress cannot do whatever it pleases and “the Constitution’s 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 NFIB, 567 U.S. at 534-35 (quoting MCCulloch, 4 Wheat. at 405)).

The Government argued that Congress had the power to enact the CTA under the powers of Foreign Affairs, The Commerce Clause, and their Taxing Powers.

While the Court stated that Congress could have more narrowly tailored the law to areas where it could govern, such as Interstate Commerce, the Court held that the current law was too broad to pass constitutional muster. After all, many people form businesses with an idea and never succeed at engaging in commerce.

The Court went further to describe how such a law could be effective and described that business entities like corporations are “creatures of state law” and opined state versus federal regulation in the areas of corporate formation and regulation and enforcement of local criminal activity. The Court did not state that the Government cannot ask for such information. Rather, that regulation in this area should be left to the States and not Congress.

The Court also stated that though compliance with international standards (other countries have similar regulations) may be good policy, it is not enough to make the CTA “necessary” and “proper” to be regulated by the federal government.

So, where does this Court decision leave us?

For now, the FinCEN’s Beneficial Owner website seems to be up and operational and the Government is expected to appeal this decision. We will be following this closely so we may continue to advise our clients. If BOIR filing continues to be available, you may want to ask yourself if you want to file now to check it off your list while the site is accessible. However, if you feel strongly that you should not have to file a BOIR, you may want to wait and see.

How can I be prepared either way?

Regardless of what happens to the CTA, 2024 is a good year for you to make sure you hold an annual meeting and review your business paperwork with your Business Law Attorney. Chances are, even if the CTA continues to lose court battles, many States will likely join the international trend of requiring BOIR.

What about New York?

On December 22, 2023, Governor Kathy Hochul signed the New York LLC Transparency Act (NYLTA) into law for domestic and foreign limited liability companies (LLCs). This means that beneficial ownership information reporting is now a New York State requirement. New York’s reporting requirements will be effective beginning December 21, 2024.

For more information on Beneficial Owner Information Reports (BOI report) and the CTA, check out our earlier blog post: https://saratogawills.com/blog/ctaandboi

You can read the full Court Opinion for this case, National Small Business United et al v. Yellen et al, No. 5:2022cv01448 - Document 51 (N.D. Ala. 2024), here: National Small Business United et al v. Yellen et al, No. 5:2022cv01448 - Document 51 (N.D. Ala. 2024) :: Justia

You can read more about the U.S. Court system here: About Federal Judges | United States Courts (uscourts.gov)

We understand this information may seem overwhelming.  The Harris-Pero Law Firm team is prepared and ready to assist clients with preparing and filing BOI reports for FinCEN should they continue to be necessary and for New York.  You can reach us at 518-860-5668 or info@SaratogaWills.com
with questions or to schedule a time to speak with one of our NY licensed attorneys.