While businesses and their law firms have been spending countless hours preparing to comply with the Corporate Transparency Act (the “CTA”), a recent decision from the U.S. District Court for the Northern District of Alabama has thrown the fate of the CTA into uncertainty by holding it to be an unconstitutional overreach of Congress’ regulatory powers.

Background

In 2021, Congress passed the CTA in an effort to curtail serious financial crimes such as money laundering and tax evasion and to better align the transparency rules applicable in the United States with the transparency rules of other countries. The CTA requires most entities formed or registered under state law, subject to certain exceptions, to file a disclosure, including certain beneficial ownership information with FinCEN, the Financial Crimes Enforcement Network of the United States Department of Treasury. Under the final FinCEN rule, entities formed as of or after January 1, 2024, have 90 days to make the requisite filing, while entities formed prior to January 1, 2024, have until January 1, 2025. Under the CTA, a willful failure to report or the willful filing of false or fraudulent information may result in serious civil and/or criminal penalties, including up to $10,000 in fines and two years in prison. Now, on the cusp of when filings would be due for entities formed on or after January 1, 2024, the U.S. District Court for the Northern District of Alabama has held that the CTA is unconstitutional.

Court Rules CTA Unconstitutional

In National Small Business United v. Yellen, the court ruled in favor of the plaintiffs, National Small Business United and Mr. Isaac Winkles, an owner of two small businesses, who alleged that the CTA’s mandatory disclosure requirements exceeded Congress’ authority. The court agreed, ultimately declaring the CTA unconstitutional for failing to fall within the bounds of the Commerce, Taxing, and Necessary and Proper Clauses of the United States Constitution. The court enjoined the Department of the Treasury and FinCEN from enforcing the CTA against the plaintiffs. While the government will almost surely request a pause on the injunction (and the ruling seems destined for review by the Eleventh Circuit Court of Appeals and possibly, by the Supreme Court), the following question likely springs to the forefront for businesses nationwide: Given this ruling, should we continue preparing to comply with the CTA?

Opponents of the CTA generally cite the undue burden imposed on otherwise law-abiding small businesses and their advisors to not only make the required initial filing, but also to update those filings indefinitely into the future for what, in many cases, are perceived to be minor and routine changes to the company, its ownership, or even personal data of the business, its owners or advisors.

It is important to note that, as it stands, the injunction only applies to the plaintiffs. FinCEN has seemingly taken a strong position on the issue with a notice stating that the government is not currently enforcing the CTA against the plaintiffs in the action. See Notice Regarding National Small Business United v. Yellen, No. 5:22-cv-01448 (N.D. Ala.) | FinCEN.gov. According to this release, the plaintiff group includes only the named individual plaintiff, Mr. Winkles, Mr. Winkles’ entities, and National Small Business United and its members who were members of the association on or before March 1, 2024. However, the ruling raises questions regarding whether other companies could use the ruling as a defense for failing to comply with the CTA’s filing requirements. For businesses formed prior to January 1, 2024, there is still some time to await a final decision on whether the case provides a defense to the CTA’s reporting requirements and get a better view of the landscape. However, businesses formed this year are no doubt eager to know whether there may be a way to avoid the CTA’s reporting requirements. It is noteworthy that another case challenging the CTA was filed in Ohio, Robert J. Gargasz Co., L.P.A. et al v. Secretary of the Treasury et al., which may be the first drip in a flood of such cases challenging the CTA.

What Does the Case Mean for Other Companies?

As the court issued an injunction only as it relates to the plaintiffs, it may be risky for companies to rely on the ruling to avoid compliance. Still, the ruling begs the question of whether it can be used by others as a defense to filing. For instance, could companies refusing to file a report use the ruling to establish a lack of willfulness and, therefore, avoid any penalties associated with a failure to file? Willfulness has been defined by the United States Supreme Court as “the voluntary, intentional violation of a known legal duty.” United States v. Pomponio, 429 U.S. 10 (1976). Given that one would not expect to need to make a filing in compliance with a law that a court has held unconstitutional, it would seem reasonable (i.e., not willful noncompliance) that the ruling could conceivably render the CTA toothless by giving businesses nationwide a legitimate and lawful reason not to comply.

As noted, this case seems destined for appeal, with a potentially long legal battle ahead. Should reporting companies continue to comply with the CTA until a final determination is reached to avoid any rushed filings or liabilities? In light of the discussion above, we believe that it is prudent for companies to continue to comply with the CTA until a final determination is reached following expected appeals and possible Congressional action, as well as further guidance on whether anyone other than the plaintiffs in the case can rely on the ruling. At this point in time, there is no way of knowing when the issue will be resolved.

These are just a few of the questions many will be contemplating as they assess the legal landscape surrounding the CTA. We will continue to provide information and analysis as the situation evolves. In the meantime, if you have any questions or concerns regarding your business’s compliance with the CTA, please contact your Dentons relationship lawyer.

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