April 2, 2024 / Newsletters, Publications
A Federal District Court Declares the Corporate Transparency Act Unconstitutional
Case Summary
The plaintiffs, National Small Business United (dba National Small Business Association “NSBA”), and Isaac Winkles, an NSBA member, filed suit in November of 2022, alleging that the mandatory beneficial ownership disclosure requirements under the Corporate Transparency Act (“CTA”) exceeded Congress’ authority under Article I of the Constitution and infringed upon individual constitutional rights in violation of the First, Fourth, and Fifth Amendments [for a review of the CTA filing requirements, please review our Client Alert “The Corporate Transparency Act & Entity Reporting Requirements: What You Need to Know” here].On March 1, 2024, the United States District Court for the Northern District of Alabama granted summary judgment for the Plaintiffs and declared the CTA unconstitutional.
Limited Impact of the Ruling
This ruling only applies to the named plaintiffs which include the members of the NSBA effective as of March 1, 2024, the date of the ruling. The Court did not issue a national injunction, but rather enjoined the Department of the Treasury and FinCEN from applying the CTA to the named plaintiffs, and thus the CTA reporting requirements remain in effect for all other reporting companies and their beneficial owners (as these terms are defined in the CTA). To further clarify the impact of the ruling, the Financial Crimes Enforcement Network (“FinCEN”) issued a Notice on March 4, 2024, which clarified the scope of the ruling and reiterated the government’s authority to continue enforcing the CTA against nonparties.
Department of Justice Appeal
On March 11, 2024, the Department of Justice, on behalf of the Department of the Treasury, filed a Notice of Appeal indicating that it is appealing the Court’s ruling to the United States Court of Appeals for the Eleventh Circuit. It remains unclear whether the appeal will be heard before the end of the year, at which time beneficial ownership reports for entities formed on or after January 1, 2024, become due. In the interim, it is possible that Congress may act independently to amend the statute or modify the filing deadline pending adjudication of the issue. If Congress does not so act, it is possible that the case will make its way to the Supreme Court, a process which might take years.
Given the significant civil and criminal penalties associated with a failure to comply, during the interim period while the issue of the constitutionality of the CTA is litigated in the federal court system, clients (who were not members of the NSBA as of March 1, 2024) are encouraged to comply with the beneficial ownership disclosure requirements under the CTA until this court case (and any future court cases related to the constitutionality of the CTA) is settled.