Client Alert: Corporate Transparency Act (CTA) Found Unconstitutional by Federal District Court
Date: March 4, 2024
On March 1, 2024, the U.S. District Court for the Northern District of Alabama in National Small Business United et al. v. Janet Yellen et. al., Case No. 5:22-cv-1448-LCB, held the Corporate Transparency Act (the “CTA”) to be unconstitutional. In this surprising decision, U.S. District Court Judge Liles C. Burke ruled “The CTA is unconstitutional because it cannot be justified as exercise of Congress’ enumerated powers.”
The Court’s holding asserts Congress lacks the authority to require companies to disclose personal beneficial owner information to the U.S. Treasury Department's criminal enforcement arm, the Financial Crimes Enforcement Network (FinCEN). The Court in so ruling, then permanently enjoined FinCEN from enforcing the CTA against the plaintiffs. Notably, the ruling applies narrowly to the plaintiffs in this case, leaving uncertainty regarding its implications for companies not a party to the litigation. It is anticipated Treasury will file an appeal to the U.S. Court of Appeals for the Eleventh Circuit.
A Quick Refresher
The CTA was enacted on January 1, 2021, as part of the National Defense Authorization Act for Fiscal Year 2021. The CTA is a federal anti-money laundering law intended to prevent money laundering and tax evasion by requiring many companies in the United States to report information about their beneficial owners, i.e., the individuals who ultimately own or control a company.
Additionally, while the CTA’s reach in terms of reporting companies is extensive, it does exempt 23 categories of companies. However, small and middle market companies generally do not meet any of the exemptions. The majority of the exemptions from the CTA are for larger companies that, notwithstanding the CTA, are already obligated to disclose similar beneficial ownership information as part of their corporate compliance obligations. Specifically, exempt entities, include, among others, companies that file reports with the U.S. Securities and Exchange Commission, governmental authorities, banks, credit unions, money service businesses, investment advisors, securities brokers and dealers, tax exempt entities under Section 501(c), insurance companies, state-licensed insurance producers, pooled investment vehicles, public utilities, inactive entities, subsidiaries of certain exempt entities, accounting firms, and large operating companies. Large operating companies are those employing more than 20 full-time employees in the U.S., which on a prior-year federal income tax return have reported gross receipts or sales in excess of $5 million and which have current operating activities and actual offices in the United States. Furthermore, the CTA also excludes sole proprietorships, trusts, some general partnerships, and other entities that would not otherwise obscure an individual’s identity.
As of January 1, 2024, companies are required to report their beneficial ownership to FinCEN by filing a Beneficial Ownership Report (or BOI). Companies existing before January 1, 2024, have until January 1, 2025, to submit their initial BOI. New companies incorporated between January 1, 2024, and January 1, 2025, must file within 90 days of their incorporation. Treasury estimates are that 32 million companies will be required to file BOIs. Please see our previous client alerts, Corporate Transparency Act Update: FinCEN Reporting and Compliance Begins in 2024 and A Primer on the Corporate Transparency Act: Highlights of Additional Requirements to Conduct Business for additional details and overviews of the CTA.
Moving forward
- As discussed above, Treasury is expected to quickly appeal this decision to the Eleventh Circuit Court of Appeals, indicating that the issue is not yet resolved.
- There are likely many more challenges to the CTA to come this year before other federal courts.
- National Small Business United’s declaring the CTA as unconstitutional effectively places BOI reporting in limbo.
- What are clients to do while the CTA’s constitutionality is resolved in the courts?
- Given that noncompliance with the CTA’s BOI reporting could potentially result in civil penalties of up to $500 a day and criminal penalties, including up to $10,000 in fines and/or imprisonment for up to two years, newly formed companies and their owners should continue to proceed with filing BOI reports with FinCEN.
- Companies formed before January 1, 2024, should consider deferring their BOI filings until later in 2024, but should consider continuing with necessary planning and gathering of requisite information for such filings, as it is uncertain when there will be final resolution on the constitutionality of CTA.
- It is possible that the CTA’s BOI reporting may remain in effect for companies engaged in activities that “affect commerce.”
- We will closely monitor and promptly inform you of any updates regarding the appeal and potential changes to CTA reporting obligations.
The information contained here is not intended to provide legal advice or opinion and should not be acted upon without consulting an attorney. Counsel should not be selected based on advertising materials, and we recommend that you conduct further investigation when seeking legal representation.