Corporate Transparency Act (“CTA”) Declared Unconstitutional, But Compliance Still Required (For Now)
On March 1st, 2024, the US District Court for the Northern District of Alabama (the “Court”) ruled that the CTA, which requires beneficial ownership reporting to FinCEN by entities deemed “reporting companies”, was unconstitutional. The Court reasoned that the CTA converted traditionally local and state-specific matters (namely, legal entity formation and incorporation) into ones of federal enforcement and determined that the CTA was as such not a proper use of constitutionally vested authority under constitutionally provided taxing powers, the Commerce Clause, or the Necessary and Proper Clause.
Key takeaways from the Court’s decision are detailed below:
- The Court found that the CTA cannot be justified as necessary and proper to carry out Congressional foreign affairs powers under the Necessary and Proper Clause. The government argued that the CTA was rationally related to the implementation of a constitutionally enumerated power, but the court found that congressional regulation of domestic entities was not an authority derivative of Congressional foreign affairs powers, especially given that incorporation has traditionally been a state matter.
- With respect to the Commerce Clause, the government argued that the CTA was within the ambit of Congress to regulate interstate and foreign commerce. The Court addressed this argument in detail, concluding (i) the CTA does not regulate the channels and instrumentalities of commerce, (ii) the commerce clause does not permit the prophylactic regulation of individuals or entities not currently engaged in commerce out of concern for future possible actions taken by the same under the “substantial effects doctrine”, (iii) formation of entities through submission of documents to a Secretary of State does not implicate the Commerce Clause, and (iv) the CTA does not regulate the economic activities the Government attempts to curb but rather state legal entity incorporation, which is not an economic activity that substantially affects interstate commerce.
- The Court observed that the CTA is missing a “crucial component … of legislation” in that the CTA has no express jurisdictional element for valid legislation under the Commerce Clause.
The Court concluded that the CTA does not regulate commerce or serve an essential part of a comprehensive regulatory scheme and that the CTA is therefore unconstitutional.
Notwithstanding the foregoing, FinCEN has interpreted the decision to apply only to the parties before the Court, as evidenced by an official statement posted on the FinCEN website stating the same. The official position of FinCEN is that CTA compliance continues to be required. As of today’s date, FinCEN expects continued reporting as mandated under the CTA, and until that is not the case, we recommend that entities created in 2024 continue to file within the mandatory 90-day timeframe. Please note that an appeal of the Court’s decision is anticipated, which may change this guidance. We will keep you closely updated as events continue to unfold.
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This alert is intended to notify its readers of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.
