The Corporate Transparency Act ("CTA") is a landmark piece of legislation that went into effect on January 1, 2024. Under the CTA, millions of corporations, limited liability companies, and other entities are required to disclose their beneficial owners to the U.S. Treasury Department's criminal-enforcement bureau, the Financial Crimes Enforcement Network ("FinCEN").
In National Small Business United v. Yellen, the plaintiffs—National Small Business United d/b/a the National Small Business Association ("NSBA"), a nonprofit organization that represents the interests of small businesses and entrepreneurs, and one its members, Isaac Winkles—brought suit against the U.S. Treasury, Janet Yellen as secretary of the Treasury, and Himamauli Das as acting director of FinCEN, challenging the constitutionality of the CTA. On March 1, 2024, the U.S. District Court for the Northern District of Alabama issued its ruling in the case, finding in favor of the plaintiffs and prohibiting FinCEN from enforcing the CTA against them.1
This article will examine the court's ruling, its immediate impact on CTA reporting companies, and its broader implications for the CTA.
NATIONAL SMALL BUSINESS UNITED V. YELLEN
In its ruling in National Small Business United, the court found that the CTA, as currently drafted, exceeds the authority granted to Congress under the Constitution as it relates to each of Congress's powers (i) over foreign affairs and national security, (ii) under the Constitution's Commerce Clause, and (iii) over taxes. However, having found that the CTA is not within Congress's constitutional authority, the court declined to address the plaintiffs' additional arguments—that is, that the CTA also violates the First, Fourth, and Fifth Amendments.
With respect to Congress's powers over foreign affairs and national security, the defendants argued that the CTA is necessary in order to protect national security interests, by enabling law enforcement to counter money laundering, terrorist financing, and other illicit activities. The court rejected this argument, stating, among other things, that the congressional findings connecting the CTA to national security interests are not sufficient to conclude that "a regulation in the purely domestic arena of incorporation is . . . 'derivative of, and in service to' Congress' foreign affairs powers, especially in light of the States' historically exclusive governance of incorporation."2
With respect to Congress's powers under the Commerce Clause, the court found, in part, that the CTA is not a valid regulation of the "channels and instrumentalities" of interstate commerce, nor is it within Congress's power to regulate activities that have a substantial effect on interstate commerce, because the CTA, on its face, does not regulate entities that have engaged in interstate commerce. Rather, the CTA regulates entities upon their formation or registration to do business, regardless of whether or not they will engage in interstate commerce, and the act of formation or registration in and of itself is not an economic activity that affects interstate commerce.
Lastly, with respect to Congress's taxing power, the court rejected the defendants' argument that the CTA is necessary and proper to ensure the proper reporting and collection of taxes, finding that the relationship between such purposes and the CTA's disclosure requirements is too attenuated.
IMPACT ON REPORTING COMPANIES
The ruling in National Small Business United does not actually allow most entities affected by the CTA to refrain from complying with its requirements. Rather, the ruling is narrow in scope and applies only to the plaintiffs in the case, namely Isaac Winkles, the NSBA, and the NSBA's members as of March 1, 2024. As such, all other entities that are reporting companies under the CTA are still required to report their beneficial owners to FinCEN within the required deadlines (i.e., ninety days for entities formed or registered to do business in 2024, and thirty days for entities formed or registered thereafter), as affirmed by FinCEN in an alert published on its website shortly after the ruling.3 However, as a practical matter, entities in existence prior to the effective date of the CTA (which have until January 1, 2025, to file initial beneficial ownership reports with FinCEN) may want to consider postponing their filings until closer to the deadline while the legal challenges to the CTA continue to play out.
IMPLICATIONS FOR THE CTA
The defendants in National Small Business United filed a notice of appeal on March 11, 2024, appealing the district court's ruling to the U.S. Court of Appeals for the Eleventh Circuit. The appeals process is currently ongoing, with oral arguments scheduled for the week of September 16, 2024. While the ultimate impact of the case is thus still to be determined, the ruling has already had an impact on other legal challenges to the CTA.
In another case challenging the constitutionality of the CTA, Robert J. Gargasz Co. v. Yellen, the government defendants moved to hold that case in abeyance pending the outcome of the appeal in National Small Business United, on the grounds that the underlying issues in both cases are similar, which the court granted.4 Furthermore, following the ruling in National Small Business United, additional lawsuits have been filed challenging the constitutionality of the CTA; these cases include many of the same arguments that the court found persuasive in National Small Business United and piggyback off the plaintiffs' success. In one such case, Small Business Ass'n of Michigan v. Yellen, filed on March 26, 2024, plaintiff Small Business Association of Michigan argues that "because the CTA is triggered by the mere fact that an entity has been formed under state or tribal law, it applies to entities merely by virtue of their existence, not because they have engaged in any sort of commerce—interstate or otherwise."5 As such, the plaintiff argues that the CTA is not within Congress's power under the Commerce Clause and cites to National Small Business United as precedent for its argument.6 Thus, although the outcome in each of these actions is still uncertain, the ruling in National Small Business United called into question the constitutionality of the CTA and, depending on the outcome of these cases, may turn out to be the first domino to have fallen.
Lastly, in addition to the lawsuits challenging the CTA, legislation was recently introduced by Senator Tommy Tuberville (R-AL) and Representative Warren Davidson (R-OH) to repeal the CTA, posing additional uncertainty to the fate of the CTA in the wake of the ruling in National Small Business United.7
Footnotes
1. Nat'l Small Bus. United v. Yellen, No. 5:22-cv-01448-LCB, 2024 WL 899372 (N.D. Ala. Mar. 1, 2024). ↑
2. Id. at 9 (emphasis added). ↑
3. Press Release, FinCEN, Notice Regarding Nat'l Small Bus. United v. Yellen, No. 5:22-cv-01448 (N.D. Ala.) (Mar. 11, 2024). ↑
4. Order Staying Case, Robert J. Gargasz Co. v. Yellen, No. 1:23-cv-02468 (N.D. Ohio April 17, 2024). ↑
5. Complaint at para. 8, Small Bus. Ass'n of Mich. v. Yellen, 1:24-cv-00314 (W.D. Mich. Mar. 26, 2024). ↑
6. Id. ↑
7. Press Release, Sen. Tommy Tuberville, Tuberville Introduces Legislation to Repeal Corporate Transparency Act, Protect Small Businesses (May 9, 2024). ↑
Originally published by ABA's Business Law Today.
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