On January 1, 2021, Congress enacted the Corporate Transparency Act (codified as 31 U.S.C. §5336) (“CTA”) within the larger National Defense Authorization Act (“NDAA”). The CTA imposed new reporting and disclosure requirements on approximately 25 million existing businesses across the United States, with initial reporting to begin on January 1, 2024 and due by no later than January 1, 2025. FinCEN has also estimated that 3.2 million new entities are created each year which are now required to report within 30 days of the entity’s formation. The stated purpose of the CTA is to prevent criminals from using companies for money laundering, corruption, tax evasion, drug trafficking, fraud, and other crimes. To meet its stated purpose, the CTA requires covered companies to report certain information including the identity of each individual “beneficial owner” of the entity by considering both ownership interest and control or authority over the company.
National Small Business United v. Yellen
Given the vast breadth of the CTA, it is not surprising that the law was challenged. In the matter National Small Business United v. Yellen, Case No. 5:22-cv-1448-LCB in the U.S. District Court for the Northern District of Alabama, the Plaintiff is an Ohio non-profit corporation which represents and protects the rights of small businesses across the United States. Co-Plaintiff Isaac Winkles is a member of the organization and an owner of two small businesses who would be subject to the CTA’s new reporting requirements. In the case, the Plaintiffs challenged Congress’ authority under the Constitution to impose such reporting requirements on such a large number of private and state-regulated companies.
The Court issued a Memorandum Opinion and Final Judgment on March 1, 2024 which recognized that the CTA’s definition of “substantial control” was vague and FinCEN’s regulations retained the vagueness through a catch-all covering any person who has “any other form of substantial control over the reporting company.” See 31 C.F.R. §1010.380(d)(1)(i)(D). Although the CTA required companies to report, the associated civil and criminal penalties for failing to file an accurate or complete Beneficial Owner Information Report were imposed upon “any person,” not on the entity itself. See 31 U.S.C. §5336(h).
With these and other issues in mind, the Court then considered the government’s arguments as to the source of constitutional authority for Congress’ enactment of the CTA. First, the government argued Congress has authority under its foreign affairs power because the CTA is based on Congress’ interest in national security and curbing foreign money laundering and other criminal foreign influences. The Court pointed out: “It is blackletter law that ‘[c]orporations are creatures of state law.’” Citing Cort v. Ash, 422 U.S. 66, 84 (1975). The Court disagreed that Congress’ Foreign Affairs powers justified the CTA’s regulation of “creatures of state law,” which regulation is ordinarily the purview of the States.
Second, the government argued that Congress has authority to enact the CTA through the Commerce Clause, which the government claimed was invoked by the very act of corporate formation itself. In a complex analysis, the Court considered whether Congress was permitted to regulate the channels and instrumentalities of commerce through the CTA, explaining that the Commerce Clause “allows Congress to regulate ‘commerce to the extent of forbidding and punishing the use of such commerce,’ but no further.” Citing Brooks v. U.S., 267 U.S. 432, 436 (1925). With the CTA, Congress was not “regulating the channels and instrumentalities of commerce” or seeking to “prevent their use for a specific purpose,” but instead purporting to “regulate an entire class just because some members of the class use the channels and instrumentalities of commerce.”
The Court also considered whether the CTA was permitted under Congress’ power to regulate “activities that have a substantial effect on interstate commerce,” concluding that “the connection between incorporation and criminal activity is far too attenuated to justify the CTA,” which, if allowed, would make Congress’ commerce powers “functionally limitless.” Instead, the CTA lacked an “express jurisdictional element” which would limit Congress’ reach to defined activities that have an explicit connection with or effect on interstate commerce. Thus, the Court disagreed that Congress’ Commerce Clause power justified the CTA, “[b]ecause the CTA does not regulate commerce on its face, contain a jurisdictional hook, or serve as an essential part of a comprehensive regulatory scheme.”
Third, the government argued that the CTA is a necessary and proper excise of Congress’ taxing power, since one of its purposes is to assist in efficient tax administration. The Court noted that the CTA’s civil penalties are not a tax, nor are they paid into the Treasury, nor are they variable, and they are not found in the Internal Revenue Code or enforced by the IRS. Rather, the CTA seeks to collect “useful” data and allow tax enforcement officials access to that data, which the Court found would be “unfettered legislative power” which would violate the Necessary and Proper Clause.
Thus, the Court’s March 1, 2024 judgment declared: “the Corporate Transparency Act is unconstitutional because it exceeds the Constitution’s limits on Congress’ power” and the U.S. government is “permanently enjoined from enforcing the Corporate Transparency Act against the Plaintiffs.” While the opinion is enforceable only as to the Plaintiffs named in the case, it indicates a broader pushback to the CTA’s intrusive requirements.
The government appealed the Court’s decision, and the Appellate Court has not yet ruled. Oral argument before the Eleventh Circuit Court of Appeals has been scheduled for late September 2024.
FinCEN’s Response to the Court’s Final Judgment
On March 11, 2024, FinCEN posted an “Alert” to its website, explaining that “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 also stated that “reporting companies are still required to comply with the law and file beneficial ownership reports as provided in FinCEN’s regulations.” In an August 8, 2024 press release, FinCEN claimed that the government has received “millions” of Beneficial Ownership Information Reports from companies in all 50 states since January 1, 2024.
Other Challenges to the CTA
In the meantime, other plaintiffs are challenging the CTA’s constitutionality across the United States, including pending cases such as: Robert J. Gargasz Co. v. Yellen, No. 1:23-cv-02468 (N.D.Ohio); Small Bus. Ass’n of Mich. V. Yellen, 1:24-cv-00314 (W.D. Mich.); and Taylor v. Yellen, No. 2:24-cv-00527 (D.C.Utah). There is also legislation introduced by Congressmen from Alabama and Ohio to repeal the CTA, which has been joined by Congressmen in many other states as well as dozens of business organizations across the U.S. House Bill 9278 was introduced on August 2, 2024 which would provide existing small businesses with an additional year to file beneficial ownership information. Joint bill S.3625/H.R.5119 was introduced beginning in mid-2023 which would revise the CTA to provide more certainty and additional time to report. House Bill 9045 was introduced on July 15, 2024 and would exempt community associations falling under Internal Revenue Code Section 528 from reporting under the CTA.
Take-Aways for CTA Reporting
Until legislation passes or the Eleventh Circuit or other Courts decide the constitutional challenges to the CTA, FinCEN has continued to express its determination to enforce the law. It is possible that the Eleventh Circuit may reverse the District Court of Alabama’s holding and find the CTA constitutional under one or more Congressional powers. However, given the growing pushback, it is also possible that other district courts will rule on this issue or legislation will pass limiting or repealing the CTA.
Until such time as the CTA is declared unconstitutional or repealed for all U.S. businesses, businesses should continue to report by timely filing initial, updated, and corrected Beneficial Owner Information Reports by their respective deadlines. For entities existing prior to January 1, 2024, the deadline to file is January 1, 2025, which means that these entities have the opportunity to wait to see if the Eleventh Circuit rules before their report is due. For new entities formed in 2024, the initial report is due within 90 days of the entity’s formation.
For assistance with determining company filing obligations under the CTA, or any other legal needs related to the creation, operation, compliance, or dissolution of entities, please contact one of the attorneys at Gensburg Calandriello & Kanter, P.C.
Sandra Mertens
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