Federal Court Declared the Corporate Transparency Act Unconstitutional: Now What?

At a Glance

• On Friday, March 1, 2024, the U.S. District Court for the Northern District of Alabama declared the Corporate Transparency Act (CTA) “unconstitutional because it cannot be justified as an exercise of Congress’ enumerated powers.” The court’s final declaratory judgment enjoins the Department of the Treasury and the Financial Crimes Enforcement Network (FinCEN) from enforcing the CTA against the plaintiffs in National Small Business United v. Yellen.
• FinCEN’s response to the case stated that it will comply with the court’s order as to the plaintiffs. FinCEN did not comment on the effect of the ruling more broadly, thereby implying the CTA’s continued enforceability as to all other individuals and entities.
• Because no national injunction is in effect and it is likely that FinCEN will appeal the ruling, parties not implicated or involved in the case would be better off complying with the CTA, particularly entities registered or formed in 2024, as the timeline for reporting (90 days) is likely to be much shorter than the time it will take the case to go through the judicial system.

On Friday, March 1, 2024, the U.S. District Court for the Northern District of Alabama declared the Corporate Transparency Act (CTA) “unconstitutional because it cannot be justified as an exercise of Congress’ enumerated powers.”¹ The court’s opinion goes on to state that the CTA “exceeds the Constitution’s limits on the legislative branch and lacks a sufficient nexus to any enumerated power to be a necessary or proper means of achieving Congress’ policy goals …”²

As discussed in our previous alert regarding the CTA, the CTA is a new federal law designed to combat money laundering, tax evasion and other illicit financial activities by requiring “reporting companies” to disclose beneficial ownership information about their “beneficial owners” to FinCEN. Deadlines for reporting are much shorter (90 days) for reporting companies formed or registered in 2024 as compared to reporting companies existing or registered prior to January 1, 2024 — those entities have until January 1, 2025, to file initial reports. Penalties for willful noncompliance with the CTA range from civil penalties of up to $500 per day that the violation continues and fines of up to $10,000 or imprisonment for up to two years (or both).

The case, styled National Small Business United, et. al v. Yellen, et. al., No. 5:22-cv-01448 (N.D. Ala.), was brought by the National Small Business Association (NSBA) and Isaac Winkles, a business owner and member of NSBA, an organization comprised of 65,000 small businesses. NSBA and Winkles principally assert that the CTA violates Winkles’ First, Fourth and Fifth Amendment rights and imposes undue burden on small businesses that is beyond the government’s constitutional authority. In granting a final declaratory judgment permanently enjoining the Department of the Treasury and FinCEN from enforcing the CTA against Winkles and the members of NSBA, the court did not address the First, Fourth and Fifth Amendment claims.

On March 4, 2024, FinCEN, in its responsive press release, narrowly interpreted the case stating, “the government is not currently enforcing the Corporate Transparency Act against the plaintiffs in that action: Isaac Winkles, reporting companies for which Isaac Winkles is the beneficial owner or applicant, the National Small Business Association, and members of the National Small Business Association (as of March 1, 2024).” However, FinCEN’s response omitted its view on the continued enforceability of the CTA as to reporting companies who were not plaintiffs or members of NSBA, implying that it continues to view the CTA as enforceable as to all such companies. Moreover, FinCEN’s response seems to establish a March 1, 2024, cutoff date with respect to members of NSBA; therefore, it seems FinCEN is planning to enforce the CTA against members of NSBA who become members after that date.

It is very likely that the government will appeal the ruling to the federal circuit court. While it may be tempting to await a final outcome to comply with the CTA, in the absence of a national injunction and pending the outcome of an appeal, if any, reporting companies not implicated or involved in the case would be better off continuing to comply with the CTA, particularly with regard to newly formed or registered entities which have a shorter compliance period as compared to entities existing or registered prior to January 2024.