Federal Court Rules CTA is Unconstitutional
You may have seen the recent headlines, describing how one federal court ruled that the CTA is unconstitutional. In a ruling dated March 1, 2024, a federal judge in the Northern District of Alabama ruled that the CTA was unconstitutional. That is not the end of the story, however. The federal appeals process can take months or years. The more difficult question is, “What should business owners do with pending BOI deadline in light of this court’s ruling?”
Reason for the Court to Rule the CTA is Unconstitutional
The plaintiffs in this case were Isaac Winkles, an individual small business owner, and National Small Business United (NSBU), an association of small business owners. Winkles and NSBU claimed that the CTA was unconstitutional because the Congress lacked jurisdiction to adopt the CTA.
Constitution’s Necessary and Proper Clause
Congress may only pass a law if it falls within one of the enumerated powers expressly granted to Congress in the Constitution. The U.S. Treasury (which, as the federal agency delegated the job of enforcing the CTA was the proper party to defend its constitutionality) argued that the law was within Congress’ power to regulate national security and foreign affairs. The Constitution empowers Congress “to make all Laws which shall be necessary and proper for carrying into Execution the foregoing Powers” including the power to manage national security and foreign affairs. U.S. Const. art 1, Sec. 8.
In its briefs, Treasury argued that “Congress concluded that collecting beneficial ownership information is needed to . . . protect vital United States national security interests” by preventing money laundering and terrorist financing.
The judge, following plaintiffs’ urging, disagreed. The court’s opinion stated that Congress’ authority over foreign affairs and national security does not “extend to purely internal affairs, especially in an arena traditionally left to the states.”
Constitution’s Interstate Commerce Clause
The other potential avenue for Congressional jurisdiction was through the Constitution’s “interstate commerce clause,” which empowers Congress to adopt laws “to regulate Commerce with foreign Nations, and among the several States.” U.S. Const. art. 1, Sec. 8, cl. 3. The commerce clause has been interpreted by the U.S. Supreme court may times to empower Congress to regulate purely intrastate activity that affects the flow of interstate commerce. In its briefs, Treasury argued that “Congress rationally concluded that the ability of certain legal entities to withhold beneficial ownership and applicant information, taken in the aggregate, substantially affects interstate commerce.”
For example, in Gonzalez v. Raich, the Supreme Court upheld a federal law that criminalized the possession of marijuana, even when applied to an individual who owned a single marijuana plant that the parties agreed was solely for personal, intrastate use, and not for sale
The judge in NSBU v. Yellen distinguished Gonzalez v. Raich, and other cases, to conclude that the act of forming a corporation is “in no sense an economic activity that might, through repetition elsewhere, substantially affect any sort of interstate commerce.”
The Court’s Order Applies to the NSBU Plaintiffs, But Not to Anyone Else
Although the court ruled that the CTA was unconstitutional, its order was limited to Winkles and the NSBU. The court ordered prohibited the Treasury to enforce the CTA against the Plaintiffs. The court did not, however, prohibit the Treasury from implementing the CTA in general or enforcing it against anyone other than Winkles and the NSBU.
As a result, as far as everyone else is concerned, the CTA remains in effect.
Next Steps in the Appellate Process
The Treasury will almost certainly appeal the district court’s ruling to the 11th Circuit Court of Appeals. The process of the appeal can take 6 to 12 months. Depending on the outcome, further litigation might follow, perhaps including an appeal to the U.S. Supreme Court. As a result, it is unlikely that we will hear the final word on this matter for months or years.
What Should Business Owners Do With Pending Filing Deadlines Under the CTA?
Business owners who have pending deadlines to file BOI reports under the CTA should continue to file BOI reports when they are due.
Companies formed during 2024 must file an initial BOI report within 90 days after the date of formation. Entities formed during January 2024, for example, will meet their 90-day deadlines during April.
Companies formed prior to 2024 will have through December 31, 2024 to file an initial report.
Companies facing these deadlines will be making a risky decision if they decline to file in the hope that the court’s ruling in NSBU v. Yellen stands.
Any company that fails to file before its deadline will be at risk of prosecution if the ruling in NSBU v. Yellen in reversed or modified. Companies that fail to file on time are at risk of a $500 per day fine. A willful failure to file can be punished as a felony with up to two years in prison.
Companies that file on time, however, will only lose some time and expense if the CTA is ultimately determined to be unconstitutional.
Consequently, companies formed during 2024 should continue to plan to file their initial BOI reports within 90 days of the date of formation. Companies formed before 2024 should still plan to file before December 31, 2024.
The Constitutional Future of the Corporate Transparency Act
Although one court has ruled that the CTA is unconstitutional, that ruling only affects the parties to that case. Everyone else remains subject to this new law, until the appellate process plays out. The appellate
process will probably take many months. As a result, companies with pending CTA deadlines should continue to file as the law requires.
The online filing services offered by FinCEN Report Company can help business owners and their professional advisors. The FinCEN Report system segregates confidential personal information, so that individuals cannot access each other’s personal data. The system allows professional advisors to see how the reporting company is designating beneficial owners. Where helpful, those advisors are thereby empowered to provide advice on those designations. When the reporting company has completed the process, and each beneficial owner has input their personal data into the system, the reporting company itself can file its BOI report online. For more information, or to request a demonstration, please visit www.fincenreport.com
