Corporate Transparency Act: Challenged in Court and Congress
The Corporate Transparency Act, enacted in 2021 and the subject of Herbein blogs Additional business financial reporting requirements on the horizon and New Beneficial Ownership Reporting for Closely Held Businesses has been challenged in court, and is the focus of legislative efforts to repeal the law.
Federal court holds the Corporate Transparency Act (CTA) unconstitutional
On March 1, a federal district judge in Alabama ruled that the beneficial ownership information (BOI) reporting required under the Corporate Transparency Act (CTA) is an unconstitutional exercise of Congress’ enumerated powers.
The judge granted summary judgment to the plaintiffs in the case of National Small Business United d/b/a the National Small Business Association, et al v. Janet Yellen, Case No. 5:22-cv-1448-LCB. The plaintiffs, the National Small Business Association (“NSBA”), argued that the CTA’s disclosure requirements exceed Congress’ authority under Article I of the Constitution and violate the First, Fourth, Fifth, Ninth, and Tenth Amendments. Regarding the Fourth Amendment violation, the NSBA stated in its brief that “the Fourth Amendment reflected the Framers' judgment that any claimed governmental need to make law enforcement easier cannot justify suspicion-less searches of the citizenry," and alleged that the CTA is being used as "a workaround to the Fourth Amendment's warrant requirement to fight financial crimes more efficiently.”
In a separate order, the judge enjoined FinCEN from enforcing the BOI against the plaintiffs. FinCEN announced they will comply with the court’s order and not enforce BOI reporting against entities that are members of the National Small Business Association (NSBA) as of March 1, 2024.
This original court decision technically only applied to the over 65,000 members of the NSBA and therefore, other companies could not rely on the decision to avoid complying with the CTA.
On March 11, 2024 the U.S. Treasury’s Financial Crimes Enforcement Network (FinCen) published Alert: Notice Regarding National Small Business Network v. Yellen, No. 5:22-cv-01448 (N.D.Ala.), confirming that “Other than the particular individuals and entities subject to the court’s injunction, as specified below, reporting companies are still required to comply with the law and file beneficial ownership reports as provided in FinCEN’s regulations.”
Government appeal
As expected, also on March 11, 2024, FinCen filed an appeal with the Eleventh Circuit of Appeals.
The NSBA alleged that the CTA’s reporting requirements obligate US citizens and residents to report sensitive personal information, in violation of their constitutional rights. In their appellate brief, attorneys for the NSBA contend that the district court correctly found that the CTA exceeds Congress’ Article I powers. They also argue that, in the alternate, the Eleventh Circuit should enjoin enforcement of the CTA because it violates the Fourth Amendment’s protections against unreasonable searches and seizures. The district court failed to reach that argument in its March decision, finding it sufficient that the CTA did not fall within Congress’ “enumerated powers.”
Several groups, including the Financial Accountability and Corporate Transparency (FACT) Coalition and a group of lawmakers have filed amicus curie briefs urging the Eleventh Circuit to overrule the lower court decision, and rule that the CTA is constitutional. In its brief the FACT Coalition argued that “the circuit court must reverse the lower court decision. Congress was clearly within its powers to enact this vital financial safeguard, as was made clear in briefs from Congress and from subject matter experts. Legitimate small businesses often publish this information because they want their customers to know where to find them and how to work with them. Information filed under the CTA is routine, easy for the business owners to obtain, and hardly incriminatory, despite what the association’s brief claims.”
Other pending court challenges and proposed legislation
Cases challenging the constitutionality of the CTA have also been filed in Maine and Michigan federal district courts.
In addition, Representative Warren Davidson (R-OH) introduced a bill (HR 8147) to repeal the CTA in late April. And Senator Tommy Tuberville (R-AL) followed with a Senate bill (S 4297) on May 9.
In a press release, the bill authors say the CTA is specifically targeting small business owners. They take issue with penalties for noncompliance — “up to two years of jail time and fines of up to $10,000 per violation.”
FinCEN “is violating the personal privacy of American business owners by forcing them to disclose sensitive information,” said Davidson. “Congress must ensure that the federal government fits within the Constitution.”
What to do now?
Fortunately, most companies can take a wait-and-see approach to the CTA litigation because, for entities established before January 1, 2024, the required BOI reporting date is not until January 1, 2025.
For entities established on or after January 1, 2024, they only have 90 days from creation under state law to file an initial BOI report.
Therefore, entities that were not members of the National Small Business Association as of March 1 will need to decide whether to 1) move forward with filing the BOI report or 2) hope another court or Congress provides relief to the BOI filing requirements. Otherwise, they could face civil or criminal late filing penalties under the current BOI rules.
We will continue to monitor the status of the appeals case in the Eleventh Circuit and the potential legislative challenges to the CTA - and will provide timely updates as appropriate.
Also, as indicated in our prior posts, the CTA is not a part of the tax code, the assessment and application of many of the requirements set forth in the regulations, including but not limited to the determination of beneficial ownership interest, necessitate the need for legal guidance and direction. Since we are not attorneys, our firm is not able to provide you with any legal determination as to whether an exemption applies to the nature of your entity or whether legal relationships constitute beneficial ownership.
We strongly encourage you to reach out as soon as possible to legal counsel with expertise in this area to assist your organization with the steps you need to take to ensure compliance with the CTA, if applicable.
Article Contributed by Barry Groebel
