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Is the Corporate Transparency Act Unconstitutional? What Businesses Need to Know.

In a ruling dated March 1, 2024, a federal judge in the Northern District of Alabama ruled that the Corporate Transparency Act (CTA) [NTD: insert link to blog post on Final Rule] is unconstitutional.  Though the federal appeals process for that ruling could take months or years,  the important question facing business owners now is what should be done about pending BOI deadline in light of this court’s ruling?”

Behind the Federal Court Ruling

Two plaintiffs – Isaac Winkles, an individual small business owner, and National Small Business United (NSBU), an association of small business owners – filed a federal case challenging the authority of Congress to enact the CTA under the Interstate Commerce Clause of the Constitution claiming that the CTA was unconstitutional because Congress lacked jurisdiction to adopt the CTA.  

In a landmark decision, the court ruled that the CTA was unconstitutional, but its order was limited to Winkles and the NSBU.  The court order 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. 

How the Law Works

Congress may only pass a law if it falls within one of the enumerated powers expressly granted to Congress in the Constitution.  To make their challenge, the plaintiffs in this case sued the U.S. Treasury, which was the federal agency charged with implementing the CTA.  In response, the U.S. Treasury, through Treasury Secretary Janet Yellen, 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). Traditionally, the U.S. Supreme court has interpreted this provision to empower Congress to make laws regulating the conduct of U.S. national security and foreign affairs.

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.” In other words, the court reasoned that the process of forming a corporation is not an activity within the scope of Congress’ power to regulate national security and foreign affairs. 

The 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.  In Gonzalez v. Raich, the Supreme Court reasoned that an individual’s intrastate personal possession of marijuana impacted the interstate market for marijuana, which was within Congressional jurisdiction to regulate. 

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.”  

Next Steps in the Appellate Process

The Treasury has appealed the district court’s ruling to the 11th Circuit Court of Appeals.  The process of the appeal can take 12 months or more.  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?

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 January 1, 2025 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.  

Need Help?

The online filing services offered by FinCEN Report Company can help business owners and their professional advisors reach CTA deadlines.  The FinCEN Report system segregates and protects confidential personal information and allows professional advisors to see how a reporting company is designating beneficial owners.  Where helpful, those advisors can be empowered to provide advice on those designations.  When the reporting company has completed the process, and each beneficial owner has entered their personal data into the system, the reporting company itself can easily file its BOI report online.  For more information, or to request a demonstration, please visit fincenreport.com. We welcome the opportunity to help companies reach compliance.