The CTA – Still in Effect, Despite Alabama Court Questioning Constitutionality

On March 1^st, Federal District Judge Liles C. Burke of the Northern District of Alabama issued an opinion in the case of NSBU v. Yellen finding that the Corporate Transparency Act (the “CTA”) is unconstitutional . In that published opinion, the court held the CTA exceeded Congress’s (1) Foreign Affairs Powers, (2) Commerce Powers, and (3) Taxing Powers under the Constitution.

The CTA, passed in 2021, requires certain businesses to report their Beneficial Ownership information into a database managed by the Treasury Department’s Financial Crimes Enforcement Network (“FinCen”). The intended purpose of the CTA was to “prevent financial crimes like money laundering and tax evasion … through shell corporations.”

In ruling the CTA unconstitutional, Judge Burke held that the CTA was not authorized under Congress’s foreign affairs powers because, on the surface, the CTA’s focus on filings with the Secretary of State extends to purely state internal affairs.  As such, Judge Burke stated that the CTA did not have any foreign affairs implication. Additionally, the CTA failed to meet the constitutionality of the Commerce Clause because even engaging in the “near certainty of future conduct” of commerce for any entity filed was insufficient. After all, many business entities are formed, and the company may never conduct business. The Court further held that the CTA’s filing activity was not a “facial regulation of commercial activity” and the “connection between incorporation and criminal activity is far too attenuated to justify the CTA.”[i] Judge Burke also held that the CTA failed under Congress’s Taxing Power because the potentially severe penalties for violating the CTA were not tied to any IRS Code or enforcement regulation by the IRS. In ruling as such, the court concluded there were other means to tax corporations than through the CTA, and it would a be a “substantial expansion of federal authority” to permit Congress to use its taxing power through “collecting ‘useful’ data.”

While the court’s decision in NSBU v. Yellen was comprehensive, the ruling only enjoins the Department of the Treasury and FinCen from enforcing the CTA against the individual plaintiff in the action and members of the NSBA. FinCen published a notice on March 4^th confirming this and stated that only “(t)hose individuals and entities are not required to report beneficial ownership information to FinCEN at this time.”

It is likely the Department of the Treasury will appeal the court’s decision in NSBU. Therefore, those who may be Beneficial Owners of entities that qualify as Reporting Companies should stay informed on further developments on the CTA and FinCen’s actions. Although business owners of entities formed before January 1^st, 2024, have the entirety of this calendar year to comply, they should consider discussing CTA compliance with their attorneys. For those entities which have been formed in 2024 which are required to file, the filing is required within 90 days of formation. Despite NSBU’s ruling the CTA’s requirements remain a when not if requirement for most business owners.