The Corporate Transparency Act is unconstitutional – For some, and for now

On March 1, 2024, the United States District Court for the Northern District of Alabama found that the Corporate Transparency Act (CTA) is unconstitutional because it exceeds Congress’ legislative power.¹ The 53-page opinion is broadly worded, but—for now—enforcement of the CTA is only enjoined against the plaintiffs in this case, not the general population. Moreover, the ruling will likely be appealed, leaving the future of the CTA, even in respect of the plaintiffs, uncertain. 

As covered here and here, the CTA requires certain business entities (reporting companies) to file a report with the Financial Crimes Enforcement Network (FinCEN) identifying their beneficial owners.² The law, which took effect at the beginning of this year, also requires reporting companies to file updated reports with FinCEN whenever their beneficial ownership information (BOI) changes. Willfully failing to file an initial or updated BOI report, or willfully providing—or attempting to provide—false or incomplete BOI initial or updated reports carries significant penalties, including fines and potential prison time. 

According to the federal district court, the CTA exceeds the US Constitution’s limits on congressional legislative power. The decision arose in a lawsuit filed by the National Small Business Association (NSBA) and an individual NSBA member seeking an injunction against FinCEN’s enforcement of the CTA. The government argued that several sources of constitutional authority supported Congress’s power to enact the CTA, namely: its authority to regulate interstate commerce under the Commerce Clause, and its ability under the Necessary and Proper Clause to enact laws necessary and proper to the exercise of other enumerated powers (here, taxation, and foreign affairs and national security). The Court, however, rejected each of these arguments, and granted summary judgment in favor of the plaintiffs. 

As noted above, however, this ruling is not the end of the story. 

• First, it is highly likely that the government will appeal this ruling and seek a stay (or a “pause”) on the order while the appeal is pending. This would mean that the law would remain in effect, status quo ante, until the appeal is decided.
• Second, the decision may inspire similar lawsuits brought in other federal courts, potentially leading to a circuit split in authority and setting the stage for an appeal to the United States Supreme Court.
• Third, the entry of judgment in this case specifically enjoins FinCEN from enforcing the CTA against the NSBA and the individual plaintiff, not against the general population. It is likely that the decision also applies to NSBA’s members as well, as the Court specifically held that NSBA had associational standing, i.e., the right to bring suit on behalf of its members when its members would otherwise have the ability to sue on their own. 

In view of the foregoing, reporting companies subject to the CTA, out of an abundance of caution, should probably continue to comply with their reporting requirements, pending further developments. Likewise, companies should watch closely as this litigation and possibly others develop. 

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If you have any questions about this Legal Briefing, please feel free to contact any of the attorneys listed or the Eversheds Sutherland attorney with whom you regularly work.

_{1 Memorandum Opinion and Final Judgment, Nat’l Small Bus. Ass’n v. Yellen, No. 5:22-cv-1448 (N.D. Al. Mar. 3, 2024), ECF Nos. 51-52. 
2 31 C.F.R. § 1010.380.}