Corporate Transparency Act – Update Regarding Legal Challenges
On March 1, 2024, Judge Liles C. Burke, United States District Court Judge for the Northern District of Alabama, Northeastern Division, ruled that the Corporate Transparency Act (“CTA”) is unconstitutional as to the plaintiffs because the CTA exceeds the Constitution’s limits on Congress’ power.[1] Following this ruling, the United States Treasury Financial Crimes Enforcement Network (“FinCEN”) announced that it would seek an appeal, which is still pending at this time.
It is very important to note that this ruling was limited to the named plaintiffs only, and that the CTA is still enforceable against all non-exempt companies.
The Trial Court Ruling
After determining the parties had standing, Judge Burke reviewed the CTA in light of specific enumerated powers given to Congress through the Constitution, which included the following:(1) Foreign Affairs and National Security, (2) the Commerce Clause, and (3) Congress’ Taxing Power and the Necessary and Proper Clause. After analyzing the arguments presented by both sides, the Court ultimately decided that the CTA could not be justified under any of these powers.
- Foreign Affairs & National Security
The Government argued that under Congress’ extensive powers over foreign affairs and national security, and because the Executive Branch agreed with Congress about the necessity of the CTA in advancing the United States’ interest in national security and foreign affairs, the Court should defer to the political branches on matters of policy and foreign affairs. While the Court acknowledged the importance of judicial deference to the political branches in the area of foreign affairs,[2] the Court reasoned that because corporations are creatures of state law,[3] the CTA’s regulation of a purely domestic arena of incorporation cannot be established under Congress’ foreign affairs powers, as they do not extend to purely internal affairs.[4]
- Commerce Clause
The Government also argued that the CTA’s regulations fit well within the broad authority granted to Congress under the Commerce Clause. Specifically, the Government argued that the CTA’s regulations fit squarely within all three categories, which are: (1) the channels of interstate and foreign commerce, (2) the instrumentalities of, and things and persons in, interstate and foreign commerce, and (3) activities that have a substantial effect on interstate and foreign commerce.[5] The Court disagreed.
Combining its analysis of the first two categories, the Court used a plain text reading of the CTA to illustrate how the CTA does not regulate the channels and/or instruments of commerce, let alone commercial or economic activity.[6] Reviewing the case law specifically cited by the Government,[7] the Court systematically explained that in each case, the law that was upheld regulated entities or negotiable instruments that were actually in foreign and interstate commerce, which is something the Court decided the CTA does not do. Interestingly, the Court then briefly expounded on just how “easily” Congress could have made the CTA constitutional under the Commerce Clause.[8]
Addressing the third category, the Court first acknowledged that the substantial effects doctrine allows Congress to regulate purely intrastate, non-economic activity that: (1) has a substantial effect on interstate commerce in the aggregate, when (2) the regulation is in the service of a comprehensive statute that regulates commercial activity on its face, and (3) regulation of the non-economic, non-commercial activity is necessary to make the broader regulation effective.[9] But the Court again emphasized that the CTA does not regulate economic or commercial activity on its face.[10] Thus, the CTA also fell outside Congress’ power to regulate non-commercial intrastate activity.
- Taxing Power & Necessary and Proper Clause
Last, the Government argued that the CTA facilitates the collection of information crucial for tax administration, aiding in the accurate recording of taxable income. However, the Court ruled against this argument, deeming the connection between the CTA and taxing power as “weak” and expressed concerns about the potential expansion of federal authority. The Court highlighted that crafting a constitutional law merely requiring disclosure and granting tax officials access to such information could confer unfettered legislative power, which extends beyond the scope of the commerce power. Consequently, while the Government contended that the CTA’s provisions were “incidental” to the taxing power, the Court determined that such broadening of federal authority was not a proper means to achieve policy goals, emphasizing the need for a narrower legislative scope.
Response and Impact
Following the Court’s ruling, the current impact of the decision is confined to the named plaintiffs of the lawsuit, meaning other entities cannot use this ruling as grounds to evade compliance with the CTA.
On March 4, 2024, FinCEN issued a notice acknowledging the Court’s decision, stating that it will not enforce the CTA against the named plaintiffs. FinCEN updated its notice on March 11, 2024, to notify the public that the Department of Treasury had appealed the decision. FinCEN also clarified that, apart from the named plaintiffs, all other reporting companies must comply with the CTA.
- Appeal Still Pending at the U.S. Circuit Court of Appeals for the Eleventh Circuit.
The appeal from the Northern District of Alabama Federal Court is presently pending before the United States Court of Appeals for the Eleventh Circuit, with oral arguments scheduled to take place on September 27, 2024.[11] With the constitutionality of the CTA under scrutiny, at least a dozen amicus briefs have already been filed into the record.[12] Similar legal challenges emerging nationwide raises questions about the CTA’s broader applicability.
- Separate Suit Pending in the Eastern District of Texas.
A second suit was filed on May 28, 2024 challenging the constitutionality of the CTA in the United States District Court for the Eastern District of Texas, and a final decision in that case is still pending.[13] Similar to the Alabama lawsuit, the Texas plaintiffs requested an injunction prohibiting the enforcement of the CTA. The outcome of this case is important because whatever decision is made at the district court level will likely be appealed to the United States Court of Appeals for the Fifth Circuit, whose decision will set a legal precedent for federal courts here in Louisiana.
Conclusion
Despite the ongoing constitutional challenges to the CTA, it is important to note that the CTA is still enforceable against all non-exempt entities and those not a party to the referenced litigation. Every company should be identifying, compiling, and organizing all information that is necessary to file the required reports with FinCEN within the appropriate time provided under the CTA. Importantly, no extensions are allowed under the CTA at this time.
[1] Nat’l Small Bus. United v. Yellen, No. 5:22-cv-01448-LCB, 2024 WL 899372 (N.D. Ala. Mar. 1, 2024).
[2] Id. at 7.
[3] Id. at 8 citing Cort v. Ash, 422 U.S. 66, 84 (1975) (abrogated on other grounds).
[4] See Id. at 10.
[5] Id. citing United States vs. Morrison, 529, U.s. 598, 609 (2000).
[6] Id. at 11.
[7] See Id. at 11-13 (California Bankers Ass’n v. Shultz, 416 U.S. 21 (1974), and American Power & Light Co. v. Sec. & Exch. Comm’n, 329 U.S. 90 (1946)).
[8] See Id. at 13.
[9] Id. at 14.
[10] Id. at 17.
[11] National Small Business United, et al v. U.S. Department of the Treasury, et al, No. 24-10736 (11th. Cir.).
[12] See Id. Record as of August 2, 2024.
[13] Texas Top Cop Shop, Inc., et al., vs. Merrick Garland, et al., No. 4:24-cv-00478-ALM (E.D. Tx., 2024).
