Corporate Transparency Act Unconstitutional, Judge Rules

Published: March 4, 2024

The much discussed and maligned Corporate Transparency Act (the “CTA”), which imposes strict requirements on small businesses to report the personal information of their beneficial owners identified as people who exercise “substantial control” over an entity and the professionals that help them prepare the reports, has been declared unconstitutional by U.S. District Court Judge Liles C. Burke of the United States District Court for the Northern District of Alabama.

Though this ruling does not currently relieve anyone outside of the Plaintiffs from their obligations under the CTA, we will continue to monitor any developments that may have wider reaching implications.

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In his written opinion, Judge Burke based his conclusion on the Constitution’s Commerce, Taxing, and Necessary and Proper Clauses, along with Congress’ foreign affairs and national security powers to come to his conclusion. However, he further references potential violations of the First, Fourth, and Fifth Amendments for requiring individuals to submit personal information for the purpose of law-enforcement.

The underlying case, National Small Business Association v. Yellen (Case No. 5:22-cv-01448) was brought by individual Plaintiff Isacc Winkles as well as the National Small Business Association (the “NSBA”). Judge Burke’s opinion focused on the standing of the Plaintiffs to bring the initial action as well as the constitutionality of the CTA itself. Winkles successfully argued that he was damaged by the requirement to provide his personal information and further should be allowed to bring a pre-enforcement challenge, as he intends to continue to operate existing or create new entities that would be subject to the CTA and would therefore be subject to felony prosecution for failing to comply. Winkles is a member of the NSBA, who joined Winkles’ suit on behalf of its other members, and Judge Burke ruled in favor of both Plaintiffs finding that they had standing to bring the action.

In arguing the constitutionality of the CTA, the main point of argument centered around the authority of Congress to enact the CTA at all, and whether there was a source of constitutional authority.

The Government in its defense offered three sources of authority: (1) the Congress’ foreign affairs powers (citing the motivating interests of curbing foreign money laundering and other foreign influence), (2) the Commerce Clause (arguing that the regulated entities broadly engage in or affect commerce), and (3) as the necessary and proper exercise of their taxing power (claiming that a purpose of the database is to assist efficient tax administration).  The Court ultimately decided the case without considering any of the claims brought by the Plaintiffs under the First, Fourth, and Fifth Amendments, deciding that the law is unconstitutional because it cannot be justified as an exercise of Congress’ enumerated powers.

In its Final Judgement the Court has enjoined the enforcement of the CTA against only the Plaintiffs, meaning that while it cannot be enforced against Winkles and the NCBA (and it is not clear if this applies to all members of the NCBA or just the organization itself), the CTA is still currently effective against other reporting companies.

What will happen next?

The matter is likely to be appealed to the U.S. Court of Appeals for the Eleventh Circuit and it is likely that such an appeal would seek a stay of the Court’s ruling. As the case develops it could inspire FinCEN to provide comments regarding the ongoing implementation and enforcement of the CTA as well as inspire other similar cases in other states and districts.