Corporate Transparency Act Declared Unconstitutional By Alabama Federal Court ' What Does This Mean For Your Company?

• Published date: 14 March 2024
• Law Firm: Winston & Strawn LLP
• Author: Mr Carl Fornaris, Elizabeth Ireland, Richard Weber and Courtney Coppage

On March 1, 2024, a federal judge in the U.S. District Court for the Northern District of Alabama held the Corporate Transparency Act (CTA) unconstitutional. The CTA and its implementing Rule (as explained here and here) require that most privately held corporations, limited liability companies, and similar entities formed or registered to do business in the United States report "beneficial ownership information" (BOI) to the U.S. Treasury Department's Financial Crimes Enforcement Network (FinCEN). These "reporting companies" (as defined in the implementing Rule) have the rest of this year to file initial BOI reports if they were formed or registered before January 1, 2024; ninety days to file if formed or registered in 2024; or thirty days to file if formed or registered on or after January 1, 2025.

In the decision, National Small Business United v. Yellen, the district court concluded as a matter of law that the CTA exceeded the Constitution's limits on congressional authority.¹The Treasury argued that seeking BOI is a "necessary and proper" exercise of three congressional powers'to oversee foreign affairs and national security, regulate commerce, and impose taxes'but the court was not convinced.²Instead, the court characterized the CTA as regulating incorporation, (1) a "purely internal affair[]" that is (2) not clearly economic or commercial in nature and (3) too incidental to tax administration.³

The court declared the CTA unconstitutional and permanently enjoined the Treasury and FinCEN from enforcing the CTA against the plaintiffs.^<4This means the CTA will remain in full effect except as to members of the National Small Business Association (NSBA) and, arguably, reporting companies in the Northern District of Alabama.

The injunction prevents the Treasury and FinCEN from enforcing the CTA only against "the Plaintiffs."⁵That includes members of the NSBA, as the plaintiff organization appeared before the court on their behalf.⁶Indeed, FinCEN has already announced that as of March 1, 2024, it has paused enforcement against NSBA members. For them, the injunction extends to activity outside of the Northern District of Alabama.⁷

Otherwise, by default, the CTA will remain law unless Congress chooses to amend or repeal it.⁸In declaring the statute unconstitutional, this district court decided not to enforce the CTA, but the effect of that decision depends on other courts' willingness to reach the same conclusion. The decision is not binding on any other...