UPDATE
FinCEN issues clarification on March 4th.
On March 1, 2024, in the U.S. District Court for the Northern District of Alabama, Judge Liles Burke struck down the Corporate Transparency Act, which would have required most entities under State law to not only disclose personal stakeholder information to the U.S. Treasury but in some instances, personal information of individuals assisting with filing the formation application as well.
The Corporate Transparency Act
In 2021, Congress passed the National Defense Authorization Act which included a bill called the Corporate Transparency Act (“CTA”). The CTA went into effect on January 1, 2024. The CTA aimed to prevent financial crimes such as money laundering and tax evasion through shell corporations (legal entities with no or minimal employees, customers, businesses, or assets). Under the CTA, certain entities formed before January 1, 2024, were required to disclose the identity and personal information of any “beneficial owners” to the Financial Crimes Enforcement Network (“FinCEN”), the Treasury Department’s criminal-enforcement bureau. For certain entities formed after January 1, 2024, the reporting required to FinCEN included not only the “beneficial owners” but also any person filing an application to form the company under state law. Failure to comply with the CTA reporting requirements carries potential serious civil penalties and even criminal penalties for willful violations.
The National Small Business Association Lawsuit
The National Small Business Association (“NSBA”), a company representing over 65,000 businesses across the country, filed a lawsuit in the U.S. District Court for the Northern District of Alabama alleging that the CTA disclosure requirements exceeded Congress’ legislative authority. The lawsuit filed posed the question of whether the Constitution gives Congress the power to regulate those entities and their stakeholders once they obtain a formal corporate status from a State. The Government argued the CTA is within Congress’s broad powers to regulate commerce, oversee foreign affairs and national security, and impose taxes and related regulations.
The Ruling
However, in his memorandum opinion, Judge Burke held the Government’s arguments are not supported by precedent, and found 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.” Recognizing that “Congress sometimes enacts smart laws that violate the Constitution”, Judge Burke found the CTA to be unconstitutional since it was not within Congress’ enumerated powers and granted the Plaintiffs’ motion for summary judgment and denied the Government’s motion to dismiss and alternative cross-motion for summary judgment.
Conclusion
While the ruling is considered a victory for the NSBA and entities affected by the CTA, we anticipate the Government will appeal the ruling. Meaning, that the final decision on the CTA and the reporting requirements thereunder may not be decided for quite some time.
Christian & Small will continue to monitor this case and any appeal until a final decision is rendered on what is or is not required by our clients under the Corporate Tran
Gaby Ruiz Atkisson is an associate in the Birmingham office and represents clients in the areas of Insurance (first-party and liability matters), Product Liability, General Liability, and Transportation.
J. Jack Kubiszyn primarily focuses his practice on general real estate matters for national clients, while also representing developers, borrowers, and lenders in commercial real estate loan transactions – including landlord and tenants in leasing matters.
About Christian & Small
Christian & Small LLP represents a diverse clientele throughout Alabama, the Southeast, and the nation with clients ranging from individuals and closely held businesses to Fortune 500 corporations. By matching highly experienced lawyers with specific client needs, Christian & Small develops innovative, effective, and efficient solutions for clients. With offices in Birmingham, metro-Jackson, Mississippi, and the Alabama Gulf Coast, Christian & Small focuses on the areas of litigation and business, is a member of the International Society of Primerus Law Firms, and is a Mansfield Rule™ Participating Law Firm. Our corporate social responsibility program is focused on education, and diversity is one of Christian & Small’s core values.
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