The US District Court for the Northern District of Alabama has held that the Corporate Transparency Act (CTA) is unconstitutional. The court found that the CTA exceeds the Constitution’s limits on the legislative branch and lacks a sufficient nexus to any enumerated Congressional power to be a necessary and proper means of achieving the worthy policy goals behind the CTA.
The CTA was adopted to combat money laundering and the engagement of other illicit activities through anonymously owned entities. It became effective January 1, 2024, and applies to newly formed and already existing US entities and foreign entities doing business in the United States. It has significant implications for most domestic and foreign businesses that fall within the definition of a Reporting Company under the CTA.
The CTA requires all Reporting Companies to begin providing a bureau of the US Department of the Treasury information about their Beneficial Owners and, for Reporting Companies formed on or after January 1, 2024, information about their Company Applicants.
The court recognized that Congress had a legitimate aim to prevent financial crimes like money laundering and tax evasion, which are sometimes committed through shell companies. However, the court noted that the CTA would apply to millions of entities that can and do serve any lawful purpose. The government argued that the CTA is within Congress’s broad powers to regulate commerce, oversee foreign affairs and national security, and impose taxes and related regulations.
In granting summary judgment, the court decided 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’ legitimate policy goals. It found the CTA was unconstitutional and could not be enforced against the plaintiffs in the case, Isaac Winkles and the National Small Business Association.
The government will likely appeal this decision. There are pending cases in other states on this issue. It will take some time for the courts to sort through the issues. In disagreements among the Federal Circuit Courts, the US Supreme Court may ultimately decide the issue.
It is also possible that Congress could enact changes to the CTA that would provide a more precise nexus to the enumerated authority of Congress.
What does this mean for the many reporting companies that believe they must report the required information?
The Alabama decision itself is relatively narrow in its application. The government has issued a release stating that as long as the Alabama Court’s order remains in effect, it will not enforce the CTA against Isaac Winkles, Reporting Companies for which Isaac Winkles is the Beneficial Owner or Company Applicant, the National Small Business Association, or members of the National Small Business Association (as of March 1, 2024).
The easy answer, as it applies to Reporting Companies formed before 2024 (and that are therefore not required to report their information to FinCEN until the end of 2024), is that you may want to wait to allow the courts to wrestle with the constitutionality of the CTA. For Reporting Companies formed in 2024 (which must comply with the CTA within 90 days from the date of formation), continued compliance with the CTA until a definitive resolution is the best course.