As May 29, 2024, marked the 150th day of life under the Corporate Transparency Act (CTA), it is time to reflect on where the CTA stands and what lies ahead for the critical remaining 216 days of 2024. The first five months have brought judicial and legislative challenges to the CTA and engendered a broad spectrum of questions about compliance—especially among those who are only now becoming aware that they need to respond to those requirements by the end of the year.
Background
The CTA is a new federal law that became effective on January 1, 2024. The CTA mandates that U.S. entities and foreign entities registered to do business in the United States (both newly formed/first registered and those in existence/first registered as of the effective date) are required to file a report with the U.S. Department of Treasury Financial Crimes Enforcement Network (FinCEN) disclosing their "beneficial owners"―unless the entity qualifies for one of the 23 limited exemptions under the CTA. These reports are generally due within 30 days of formation. However, there are two important exceptions. First, for reports for new entities formed (or foreign entities first registered) in 2024, there is a period of 90 days from formation/first registration to file. Second, U.S. entities that were in existence (and foreign entities first registered in the United States) as of January 1, 2024, (Pre-2024 Entities) must file their reports no later than January 1, 2025. There is no extension available for these due dates. Failure to timely file the required report with FinCEN (including all of its supporting documentation) can result in the imposition of significant penalties.
What to Expect Next, Especially for Pre-2024 Entities
According to FinCEN, less than 5 percent (or 2 million) of the expected 36 million CTA filings in 2024 had been made as of the end of April. Although FinCEN recently provided additional guidance, there are numerous questions that remain unanswered. The uncertainty surrounding the unanswered questions has caused some stakeholders with Pre-2024 Entities to defer their analysis and reporting in hopes that FinCEN will issue more definitive guidance before the reporting deadline. While there are still a number of unanswered questions and the existing guidance is in many instances vague and open to interpretation, it is not clear that any such additional guidance will be forthcoming.
As a result, unless there is definitive judicial or legislative action before year-end that halts the application of the CTA, we anticipate there will be a deluge of CTA filings in the second half of 2024, particularly in the fourth quarter, for Pre-2024 Entities. To avoid the anticipated year-end filing crunch for Pre-2024 Entities and the risk of triggering penalties, stakeholders and their advisers would be well served by commencing CTA compliance now. CTA compliance entails potentially time-consuming critical determinations as to (1) whether a Pre-2024 Entity qualifies for any of the 23 limited CTA exemptions, and (2) if not, who are all of the beneficial owners of that entity that must be disclosed, collection of requisite supporting documents from all beneficial owners and the preparation of the requisite report. Of course, you may still choose to wait until closer to the end of the year to file the prepared report with FinCEN―but do note that, as of June 1, there are only 214 days left to act. Those who wait until the last minute (or even the last month of the year) to start CTA compliance do so at their own risk.
Legal Challenges to the CTA
On March 1, 2024, the U.S. District Court for the Northern District of Alabama ruled that the CTA is unconstitutional in response to a lawsuit brought by the National Small Business Association (NSBA) and one of its individual members, Isaac Winkles. The lawsuit challenged the constitutionality of the CTA on various grounds, including that the CTA's reporting requirements exceed congressional authority under Article I of the U.S. Constitution and violate the First, Fourth, Fifth, Ninth and Tenth Amendments. In holding that the CTA is unconstitutional because it exceeds Congress' enumerated powers, the court rejected the government's arguments that the CTA is authorized under the Constitution's provisions concerning foreign affairs powers, taxing powers and the commerce clause. However, the court in this case remained silent regarding the plaintiffs' allegations that the CTA violates the specified amendments. The court enjoined the federal government from enforcing the CTA as to the plaintiffs in the case. However, this injunction does not extend beyond those plaintiffs and does not preclude application of the CTA in any other jurisdiction. The government has appealed the ruling to the United States Court of Appeals for the Eleventh Circuit, which has scheduled oral argument for the week of September 16, 2024.
As of now, there are two important takeaways from the Alabama case:
- The government has appealed the Alabama case and it is unclear whether a decision in that appeal will be made before the year-end due date for Pre-2024 Entities.
- FinCEN has issued a statement that it will comply with the court's injunction in the Alabama case, but only as to the specific named plaintiffs in the case and the members of the NSBA (as of March 1, 2024). As a result, according to FinCEN, the CTA remains in effect as to all other entities.
Two other lawsuits have been filed since the District Court ruling was issued in the Alabama case and are now pending before their respective courts. The first is Small Business Association of Michigan v. Yellen, filed on March 26, 2024, in which the congressional powers arguments made in the Alabama case are echoed, and,the plaintiffs assert violations of the Fourth Amendment (on the basis that the CTA constitutes an illegal search without a warrant) and the Fifth Amendment (on the basis that the CTA, a criminal statute, is unconstitutionally vague, particularly with respect to its substantial control test). The second is William Boyle v. Yellen, a case filed on March 15, 2024, in the Federal District Court of Maine that is similar to the Alabama case.
The U.S. Department of Justice filed two briefs on April 15, 2024. One was filed with the U.S. Court of Appeals for the Eleventh Circuit, asserting that the CTA is constitutional and that the District Court erred in the Alabama case. The other was filed with the U.S. District Court for the Western District of the Michigan in response to the arguments made by the plaintiffs in Small Business Association of Michigan v. Yellen. Three amicus briefs have been filed in the Alabama case, each recommending reversal of the decision in that case. In short, the two government briefs and the amicus briefs argued that Congress has sufficient legislative power to enact (and enforce) the CTA, which was created to combat the use of anonymous shell companies that threatened national security, interstate and foreign commerce and U.S. tax interests.
Further, on May 21, it was reported that attorneys general from 22 states issued an amicus brief to the Eleventh Circuit urging it to uphold the District Court ruling from the Alabama case. They claim the CTA crosses a line into what should be an issue decided by individual states, and bring to the front FinCEN's own prediction that the CTA will burden American small businesses collectively with 150 million hours and $30 billion in compliance efforts. And, among other arguments, they say the scope of the law is overly broad and punitive, forcing most businesses to prove they aren't laundering money while those that are illegally doing so will simply not comply with the statute. The states in the amicus brief filing were led by West Virginia and include Alabama, Arkansas, Florida, Georgia, Idaho, Iowa, Kansas, Kentucky, Louisiana, Mississippi, Missouri, Montana, Nebraska, Ohio, South Carolina, South Dakota, Tennessee, Texas, Utah, Virginia and Wyoming.
Legislative Proposals
On the legislative front, two CTA-related bills have been introduced this year: (1) the Small Business Red Tape Relief Act of 2024, to provide relief to entities covered by the CTA and requiring FinCEN to report to Congress on a quarterly basis the number of beneficial ownership information initial and updated reports filed with FinCEN; and (2) the Repealing Big Brother Overreach Act, which would repeal the CTA in its entirety. It is unclear whether either of these bills will gain traction in Congress this year given that so little legislative action is generally taken in an election year.
About Duane Morris
Duane Morris is actively monitoring developments regarding the CTA and issuing Alerts on the topic. Duane Morris will provide advice to clients related to CTA compliance only when explicitly engaged to do so in writing.
For More Information
If you have any questions about this Alert, please contact Thomas R. Schmuhl, Jocelyn Margolin Borowsky, Joel N. Ephross, Bruce H. Jurist, Hope P. Krebs, Lee J. Potter Jr., any of the attorneys in our Corporate Transparency Act Group, the attorney in the firm with whom you are regularly in contact, or Michael A. Gillen or any of the professionals in the Tax Accounting Group.
Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.