SAN DIEGO, CALIFORNIA – In what promises to be the first of several legal challenges, a U.S. District Court has determined that the new Corporate Transparency Act (CTA) is excessive in its scope and unconstitutional. However, the U.S. Treasury and its Financial Crimes Enforcement Network (FinCEN) were quick to issue guidance that the Court’s ruling applies only to the parties involved in the litigation, and businesses of all sizes are still bound by the CTA’s reporting requirements.
The Corporate Transparency Act was originally enacted on January 1, 2021 and went into effect as of January 1, 2024. The federal law requires most small- and medium-sized business entities to file a report with the Department of the Treasury, through its FinCEN unit, concerning the beneficial ownership of those business entities.
The National Small Business Association (NSBA), a non-profit organization with 65,000 members across the country, sued the Treasury Department and requested a permanent injunction against enforcement of the CTA. On March 1, 2024, Judge Liles C. Burke from the U.S. District Court, Northern District of Alabama, issued a ruling that agreed with the NSBA. In his opinion, Judge Burke wrote that, “[because 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,” that the CTA is unconstitutional and that the NSBA was entitled to summary judgment.
The ruling surprised many in the business community. Many companies have already dedicated resources to compliance with the terms of CTA and its reporting requirements. However, many court watchers agreed that the grant of summary judgment to the NSBA and its request for a permanent injunction are likely limited only to the NSBA and its members for the time being. In fact, FinCEN released a statement that made clear that FinCEN’s interpretation is that the ruling only affects the plaintiffs in that case and does not prevent enforcement of the CTA otherwise.
What happens next is an open question. The Department of the Treasury may decide to appeal the decision to the Eleventh Circuit Court of Appeals. However, it is also likely that copycat lawsuits, similar to the one filed by the NSBA, will raise the same constitutionality issues in district courts across the country.
The CTA is a federal law which has several analogs at the state level. For instance, starting in December of 2024, businesses in New York will be required to comply with the LLC Transparency Act, which essentially requires those entities file similar beneficial owner reports to the State of New York. Regardless of the present disposition of the CTA, some entities may still have similar state law obligations to remain cognizant of.
While an expected appeal is pending and the future of CTA plays out in the courts, clients are encouraged to discuss their continued CTA compliance obligations with Klinedinst’s team of transactional and corporate attorneys. To learn more about the CTA, or to contact a member of the transaction team, please visit:
klinedinstlaw.com/practice/corporate-transparency-act
Please Note
This update on the CTA is provided as-is and does not constitute legal advice. The use of information from this article does not create any type of attorney-client relationship.
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