FEDERAL COURT STRIKES DOWN CORPORATE TRANSPARENCY ACT AS UNCONSTITUTIONAL
Federal Court Strikes Down the Corporate Transparency Act as Unconstitutional
March 4, 2024
On March 1, 2024, the federal judge presiding over the lone case testing the validity of the Corporate Transparency Act (CTA) struck down the CTA as unconstitutional. As our recent Client Update has explained, Congress imposed mandatory reporting obligations on certain companies operating in the United States, in an effort to combat financial crime. This reporting has grown to be quite burdensome on small business owners, so this news is welcome. Nevertheless, it is unclear at this point whether the US government will appeal the ruling. More than 32.5 million existing entities are expected to be subject to the CTA, and approximately 5 million new entities are expected to join that number each year. By mid-February, approximately a half million reports had been filed under the CTA according to FinCEN.
The CTA’s enforceability is now in doubt. In National Small Business United d/b/a National Small Business Association v. Yellen, the Honorable Liles C. Burke of the United States District Court for the Northern District of Alabama held that the CTA exceeded Congress’s authority to regulate interstate commerce, and that the CTA was not necessary to the proper exercise of Congress’ power to regulate foreign affairs or its taxing power. The Court issued a declaratory judgment—stating that the CTA is unconstitutional—and enjoined the federal government from enforcing the CTA’s reporting requirements against the plaintiffs in that litigation. A nationwide injunction, which would have raised its own enforceability concerns, was not included in the Court’s ruling.
What the Decision Means for Entities Subject to the CTA
The Court’s decision creates uncertainty on entities’ ongoing obligations under the CTA. Although the Court purported to limit its injunction to the parties in the litigation before it, the lead plaintiff in the suit is the National Small Business Association (NSBA). In its opinion, the Court held that the NSBA had associational standing to sue on behalf of its members. Based on precedent, this means the Court’s injunction likely benefits all of the NSBA’s over 65,000 members. If so, the government is prevented from enforcing the CTA’s reporting requirements against any entity that is a member of the NSBA. Regardless of membership in the NSBA, however, the Court’s declaratory judgment that the CTA is unconstitutional also raises serious doubts about the government’s ability to enforce the CTA’s reporting requirements. This could amount to a de facto moratorium on CTA enforcement, depending on the government’s view of the decision.
What To Do Now
The government will likely appeal this decision, but the Court’s injunction and declaration will remain in effect unless a stay is granted. To receive a stay, the government will first likely need to file a motion in the district court, which will consider (1) how likely it is that the government will succeed on appeal; (2) whether the government will be irreparably harmed without a stay; (3) whether a stay will injure other parties interested in the litigation; and (4) whether a stay would benefit the public interest. If the district court denies a stay, the government will be able to seek a stay from the Atlanta-based United States Court of Appeals for the Eleventh Circuit.
The government has 60 days to appeal, though it will likely file its appeal sooner given the grant of an injunction and decision’s far-reaching consequences. The grant or denial of stay should be resolved in the coming weeks, but the timing of any final decision from the Court of Appeals is uncertain. In 2023, the median time for the Eleventh Circuit to resolve a case was over 9 months. However, the key deadline by which tens of millions of companies otherwise must file their initial report under the CTA is January 1, 2025.
We will continue to monitor all developments. For those of you that have already engaged our firm for assistance with filing the initial FinCEN BOI reports for your existing entities, this work will be placed on hold until the summer and possibly later. For those that have not yet heard from us, we will be sending out letters with our recommended approach and offer of service in May or June, assuming there is no active nationwide injunction. Once engaged, we may hold the work if it appears that the law will be permanently enjoined. For those with new entities created in 2024, we will monitor the developments in this case, but may be forced to file the reports due to the shorter deadline for compliance. We would expect interim guidance from the government to avoid placing businesses in this predicament.