CORPORATE TRANSPARENCY ACT
National Small Business United v. Yellen
Date: March 1, 2024
Issue: Whether the Corporate Transparency Act is unconstitutional.
Case Summary: An Alabama federal district court held that the Corporate Transparency Act is unconstitutional because it exceeds Congress’ enumerated powers.
The CTA requires companies doing business in the United States to report information about the individuals who ultimately control or own them. The Financial Crimes Enforcement Network (FinCEN) issued a final rule in 2022 implementing the CTA. The act requires over 32 million entities to disclose their beneficial ownership to FinCEN. The CTA was intended to provide law enforcement with information to detect, prevent, and punish terrorism, money laundering and other misconduct through business entities. The CTA was scheduled to go into effect on January 1, 2024.
The National Small Business Association (NSBA) sued FinCEN and the Treasury Department (collectively the government), alleging the CTA’s mandatory disclosure requirements exceeded Congress’ authority under Article I of the Constitution, and violate the First, Fourth, Fifth, Ninth and Tenth Amendments. The government contended the CTA is authorized by: the government’s foreign affairs and national security powers, the Necessary and Proper Clause Interstate Commerce Clause; Foreign Commerce Clause; and the government’s taxing authority.
Judge Liles Burke of the Northern District of Alabama, ruled the CTA is unconstitutional. At the outset, the court concluded NSBA has associational standing to sue FinCEN. The court then turned to the constitutional claims.
First, the court ruled CTA is not authorized by Congress’ foreign affairs powers. According to the government, in enacting the CTA, Congress concluded collecting beneficial ownership information is needed to protect vital United States national security interests. However, the court emphasized incorporation is an internal affair, and corporations are typically creatures of state law. The court concluded the CTA is not authorized by Congress’ foreign affairs powers, because those powers do not extend to purely internal affairs especially in an area traditionally left to the states.
Second, the court ruled the CTA does not fall under the Commerce Clause’s authority. The court reasoned the CTA does not regulate the channels and instrumentalities of commerce or prevent their use for a specific purpose, and thus it cannot be justified as a valid regulation of those channels. The government also argued that the CTA has a substantial effect on interstate and foreign commerce. The government explained the CTA is within Congress’ commerce power because Congress rationally concluded the ability of certain legal entities to withhold beneficial ownership and applicant information impacts interstate commerce. However, the court emphasized the CTA is not a facial regulation of commercial activity. Because the CTA does not regulate commerce on its face or serve as an essential part of a comprehensive regulatory scheme, it falls outside Congress’ power to regulate non-commercial, intrastate activity.
Finally, the court ruled the government’s taxing authority does not authorize the CTA. The government argued the collection of beneficial ownership information is necessary and proper to ensure taxable income is appropriately reported. The court recognized the relationship between the taxing power and the CTA’s disclosure requirements. However, the court explained the Government did not prove that there was a “sufficiently close” relationship. In the court’s view, it would be a “substantial expansion of federal authority to permit Congress to bring its taxing power to bear just by collecting useful data and allowing tax-enforcement officials access to that data.”
The court’s decision applies to only NSBA members. Other than NSBA members, reporting companies are still required to comply with the CTA and file beneficial ownership reports as provided in FinCEN’s regulations.
Bottom Line: On March 11, the Justice Department, on behalf of the Treasury Department and FinCEN, filed a Notice of Appeal in the Eleventh Circuit.
Documents: Opinion
