Corporate Transparency Act Held Unconstitutional

A U.S. District Court judge sitting in the Northeastern Division of the Northern District of Alabama found the Corporate Transparency Act (affectionately referred to in short form as the CTA) unconstitutional as detailed in a memorandum opinion issued on Friday.  The opinion granted the plaintiffs, the National Small Business United (NSBU) and Isaac Winkles, an NSBA member, their summary judgment motion on this basis.  The accompanying final judgment permanently enjoined the Secretary of the Treasury and other government defendants, as well as "any other agency or employee acting on behalf of the United States," from enforcing the Corporate Transparency Act against the plaintiffs in the litigation.

Many of us business law profs--and all of our business law practice brethren--have been following the CTA, endeavoring to gain a more comprehensive understanding of its provisions and fashioning advice on compliance.  The CTA, enacted in 2021 and effective as of January 1, 2024, requires nonexempt companies (domestic or foreign corporations, limited liability companies, and other entities formed or, in the case of foreign entities, registered to do business in any U.S. state or tribal jurisdiction) to disclose certain information, including about their beneficial owners, to the Financial Crimes Enforcement Network (FinCEN), part of the U.S. Treasury Department.  Exempt firms include (among others) “large operating companies” with a presence in the U.S., entities with a class of securities registered under the Securities Exchange Act of 1934, as amended (or registered under the Investment Company Act of 1940, as amended, or the Investment Advisers Act of 1940, as amended), and controlled or wholly owned subsidiaries of certain exempt firms.

The March 1 memorandum opinion specifically holds that the U.S. Congress acted outside the scope of its constitutional power in enacting the CTA.  In holding the CTA unconstitutional, the court found that the congressional enactment of the CTA was not authorized under the Commerce Clause, Congress's taxing power, or the Necessary and Proper Clause and could not be justified as incidental to the exercise by Congress of its express legislative authority.  As to the Commerce Clause--which has been interpreted broadly in many contexts--the court noted that "the CTA does not regulate economic or commercial activity on its face."  The court also found that the CTA does not have a substantial effect on interstate commerce.  In essence, the court finds the CTA analogous to incorporation--a state entity structure and governance matter and not a matter of interstate commerce.

It will be interesting to see if there is any reaction at the federal level or any fallout in other federal trial courts.  The memorandum opinion is well written and easy to follow.  Having said that, although I am no constitutional law scholar, it seems that the court's reasoning is subject to attack on a number of points.  I will continue to keep my ear to the ground on this.