In an order issued on March 1, 2024, the Federal District Court for the Northern District of Alabama held that the Corporate Transparency Act violates the U.S. Constitution. Congress had enacted the Corporate Transparency Act (CTA) in 2021 as part of the National Defense Authorization Act requiring certain business entities to disclose information related to their owners. The CTA required “corporations,” “LLCs,” or other “similar entit[ies],” (a number of entities, such as banks and insurance companies, were exempted) to disclose to the Financial Crimes Enforcement Network (FinCEN) the identities of their “beneficial owners.” The CTA defined “beneficial owners” as individuals who “exercised substantial control” over the entity or owned “not less than 25 percent” of an interest in the entity. These disclosures included the beneficial owner’s full name, date of birth, current address, and either a driver’s license, ID card, or passport number. The CTA also imposed criminal and civil liability on individuals who provided false information or failed to report complete and updated information in their disclosures to FinCEN. As the District Court summarized, “The ultimate result of this statutory scheme is that tens of millions of Americans must either disclose their personal information to FinCEN through State registered entities, or risk years of prison time and thousands of dollars in civil and criminal fines.”
In a separate March 1 opinion, the District Court considered three constitutional justifications for the CTA as offered by the government. It rejected all three. First, the Court rejected the government’s argument that the CTA was constitutional under Congress’ foreign affairs and national security powers because “those powers do not extend to purely internal affairs, especially in an arena traditionally left to the States . . . .” For the same reason, “international standards or agreements” could not “confer power on Congress” it had not otherwise been granted by the Constitution. Second, the District Court found that the CTA faired no better under the Constitution’s Commerce Clause because the act did not “regulate commerce on its face” nor include a jurisdictional grant allowing Congress to “regulate non-commercial, intrastate activity . . . .” Finally, the District Court found the CTA invalid under Congress’ taxing powers because the CTA’s monetary, civil penalties were “not a tax” and the collection of “useful data” for tax-enforcement purposes was too attenuated. Having considered all of these grounds, the District Court enjoined enforcement of the CTA.
While the CTA is enjoined in this case, FinCEN has announced only that it “is not currently enforcing the [CTA] against the plaintiffs in that action . . . .” This ruling also does not effect certain states’ transparency laws that may still have similar reporting requirements to the CTA. For example, New York’s LLC Transparency Act, which requires the disclosure of certain personally identifiable information of beneficial owners of LLCs, is set to take effect on December 21, 2024. Like the CTA, the New York LLC Transparency Act also requires the disclosure of a beneficial owner’s “(1) full legal name; (2) date of birth; (3) current business street address; and (4) a unique identifying number from an acceptable identification document . . . .”
National Small Business United v. Yellen, No. 5:22-cv-01448 (N.D. Ala. March 1, 2024) available at https://s-corp.org/wp-content/uploads/2024/03/051.-Memorandum-Opinion.pdf
New York LLC Transparency Act, available at https://legislation.nysenate.gov/pdf/bills/2023/S995B
Financial Crimes Enforcement Network, Notice Regarding National Small Business United v. Yellen, No. 5:22-cv-01448 (N.D. Ala.) available at https://www.fincen.gov/news/news-releases/notice-regarding-national-small-business-united-v-yellen-no-522-cv-01448-nd-ala