United States: Corporate Transparency Act Declared Unconstitutional By Northern Alabama Federal Court

On March 1, 2024, in the case National Small Business United v. Yellen,¹ the US District Court for Northern District of Alabama ruled that the Corporate Transparency Act ("CTA") is unconstitutional because it cannot be justified as an exercise of Congress's enumerated powers.

We previously reported on the CTA and its prescribed beneficial ownership information ("BOI") requirements on January 10, 2024. The reporting requirements prescribe that "reporting corporations" (which includes most private corporations, limited liability companies or other similarly registered entities that conduct business in the United States) must submit a BOI report to the Department of Treasury's Financial Crimes Enforcement Network ("FinCEN"). In each BOI report sent to FinCEN, a reporting company must provide each 2% or more beneficial owner's name, date of birth, residential or business address, and an identification document. However, there are 23 types of entities that are exempt from reporting requirements, including for e.g. "Large Operating Compan[ies]," which concerns companies with physical operations in the US, with more than 20 full-time employees in the US, that have filed federal income tax or information return in the US for the previous year end that demonstrate more than $5 million dollars in sales or gross receipts. For additional information on how to file a report refer to the BOI portal.

The Northern Alabama court held as a matter of law that the CTA exceeded the Constitution's limits on congressional authority. As a result, the court declared the CTA unconstitutional and permanently enjoined the Department of Treasury ("Treasury") and FinCEN from enforcing the CTA against the plaintiffs in that case. It is important to note that this decision is only applicable to those plaintiffs (including members of the National Small Business Association) and that the beneficial ownership reporting requirements are still in play for all other reporting corporations at this time.

The Treasury argued that Congress had authority to enact the CTA under: 1) Congress's Foreign Affairs powers, 2) Commerce Clause authority, and 3) Congress's Taxing Power & Necessary and Proper. Ultimately, the Northern Alabama Court rejected those arguments, holding, among other points, that the CTA is not authorized by congressional foreign affairs powers, because those powers do not extend to purely internal affairs. Further, the court held that the CTA neither regulates the channels and instrumentalities of commerce, nor prevents their use for a specific purpose. As a result, the court found the CTA cannot be justified as a valid exercise of Commerce Clause authority. The court also found that the CTA "has no express jurisdictional element" to limit its reach, noting the lack of a jurisdictional hook. Finally, the court found that it would be a "substantial expansion of federal authority" to permit Congress to justify the CTA reporting requirements simply on the premise that the requirements collect useful data and allow tax-enforcement officials access to that data.

Shortly after the decision, FinCEN issued a press release, on March 4, 2024, confirming that it will comply with the court order as long as it remains in effect and will refrain from enforcing the CTA against these plaintiffs. Further, FinCEN explicitly noted that "[o]ther than the particular individuals and entities subject to the court's injunction," reporting companies are still required to submit BOI reports to FinCEN in accordance with the CTA. This press release was later updated on March 11, 2024, to reflect that the Justice Department, on behalf of the Treasury, filed a notice of appeal on March 11, 2024, before the Eleventh Circuit.

We also note that there is an additional challenge to the CTA, Gargasz v. Yellen,² pending in the District Court of the Northern District of Ohio. Unlike the complaint in National Small Business United v. Yellen, the plaintiffs in Gargasz cite a broader array of constitutional rights and seek a nationwide injunction on CTA reporting requirements.

Although there are pending challenges to CTA requirements on a national scale, we recommend that companies continue to monitor changes in ownership and implement the appropriate procedures to ensure compliance with reporting standards and relevant filing deadlines under the CTA. For a reporting company created or registered to do business before January 1, 2024, the deadline to file is January 1, 2025, whereas a company created or registered on or after January 1, 2024, and before January 1, 2025, will have 90 calendar days after receiving notice of the company's creation or registration to file its initial report. For additional details on the BOI reporting requirements please refer to the following FinCEN FAQ.

Footnotes

1. See Nat'l Small Bus. United v. Yellen, No. 22-cv-1448 (N.D. Ala. Mar. 1, 2024).

2. See Robert J. Gargasz Co., LPA v. Yellen, No. 1:23-cv-02468 (N.D. Ohio Dec. 29, 2023).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.