Federal Court Rules Corporate Transparency Act Unconstitutional - Do You Still Need to File BOI?

The CorporateTransparency Act (CTA), created and implemented by the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN), became effective January 1, 2024. The CTA aims to enhance corporate transparency in an effort to prevent and combat illicit financial activities, such as money laundering and tax evasion, discouraging the use of shell corporations as a tool to disguise and move illicit funds. The CTA implements reporting requirements for limited liability companies (LLCs), corporations, and other business entities that have never had to report such information previously, with harsh penalties for non-compliance.

From inception, the CTA sparked debate and controversy across the country, as evidenced by the hundreds of conflicting comments submitted during the preliminary drafting and review phase among business owners, lawyers, CPAs, and other professional groups, many claiming the CTA was too invasive, unmanageable, difficult to enforce, and, ultimately, ineffectual.

Now, in National Small Business United v. Janet Yellen, a Northern District of Alabama Federal Judge ruled on March 1, 2024, that the CTA was unconstitutional. Citing privacy concerns, and a myriad of legal reasoning and precedent around the scope of Congress’s power, the Court concluded:

“The CTA exceeds the Constitution’s limits on the legislative branch and lacks a sufficient nexus to any enumerated power to be a necessary or proper means of achieving Congress’ policy goals…the Corporate Transparency Act is unconstitutional because it cannot be justified as an exercise of Congress’ enumerated powers.”

U.S. District Judge Liles C. Burke Permanently Blocked The U.S. Department Of The Treasury From Enforcing The Law Against The Suit's Plaintiffs, The National Small Business Association And One Of Its Members, Business Owner Isaac Winkles, And Granted Their Summary Judgment Motion.

"Even in the pursuit of sensible and praiseworthy ends, Congress sometimes enacts smart laws that violate the Constitution," Judge Burks said. "This case, which concerns the constitutionality of the Corporate Transparency Act, illustrates that principle."

Judge Burke said in his opinion that Congress' foreign affairs powers do not justify the CTA's regulation of corporate entities that otherwise fall under the purview of states.

And while the government alleged that the CTA brings the U.S. into compliance with international standards for anti-money laundering and fighting terrorism financing, the judge said that interpretation of the Constitution's Necessary and Proper Clause "would sanction almost any exercise of congressional power given the existence of a relevant international standard."

"Read that way, the Necessary and Proper Clause would give Congress carte blanche to do as it pleases, allowing it to 'reach beyond the natural limit of its authority and draw within its regulatory scope those who otherwise would be outside of it,'" the judge said, quoting the 2012 U.S. Supreme Court decision in National Federation of Independent Business v. Sebelius.

The judge also rejected the government's argument that the Commerce Clause justifies the CTA, saying that Congress cannot regulate an entire class "just because some members of the class use the channels and instrumentalities of commerce."

Among other things, he also said the CTA lacks a jurisdictional hook and is not an essential part of a comprehensive regulatory scheme, leaving it outside the scope of Congress' power to regulate "non-commercial, intrastate activity."

The Treasury Department's Financial Crimes Enforcement Network made its interpretation of the ruling clear in a statement issued by FinCEN stated that the ruling applies (ONLY) to the plaintiffs.

"Those Individuals And Entities Are Not Required To Report Beneficial Ownership Information To FinCEN
At This Time."

Do You Still Need To File Your BOI Report? 

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Sources:

Law360