In our previous blog, we covered what the Corporate Transparency Act (CTA)[1] is, and what it means for your company. As expected, there has been an update to the CTA that our firm believes is important to communicate to our clients and community.
On March 4th, 2024, the Financial Crimes Enforcement Network (FinCEN) issued a statement regarding National Small Business United v. Yellen[2], where an Alabama federal judge blocked the enforcement of the CTA on the basis that it is unconstitutional because it exceeds Congress’ power. The case was filed by Isaac Winkles, a business owner in Alabama, and the National Small Business Association (NSBA).[3]
The Court’s Reasoning
Judge Liles C. Burke, while understanding the sensibility of the CTA, also concludes that, “the wisdom of a policy is no guarantee of its constitutionality. Indeed, even in the pursuit of sensible and praiseworthy ends, Congress sometimes enacts smart laws that violate the Constitution.”
The Judge rejected the government’s arguments that the CTA was justified through Congress’ power to regulate commerce, foreign affairs and national security, and levy and regulate taxes. His reasoning was that—despite the CTA’s noble goals of detecting, preventing, and punishing terrorism funding, money laundering, narcotic sales, sex trafficking, and other criminal conduct— “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.”
However, while the CTA may be unconstitutional, Congress could have “easily … written the CTA to pass constitutional muster. For instance, … imposing the CTA’s disclosure requirements on State entities as soon as they engaged in commerce, or from prohibiting the use of interstate commerce to launder money, ‘evade taxes, hide . . . illicit wealth, and defraud employees and customers.’” This is referred to as a “jurisdictional hook,” which “might limit its reach to a discrete set of [activities] that additionally have an explicit connection with or effect on interstate commerce” and “precludes any serious challenge to the constitutionality of [a] statute as beyond the Commerce power, because it guarantees ‘a legitimate nexus with interstate commerce.”
What Does This Mean For Your Business?
Reporting companies formed prior to January 1, 2024, already have until January 1, 2025, to file the beneficial ownership information (BOI) report with FinCEN[4]; and reporting companies formed in 2024 have 90 calendar days from formation to file the initial BOI report[5].
However, this ruling currently only affects members of the NSBA as they are not required to file the BOI report with FinCEN. Entities formed after January 1, 2024, are still required to file the initial BOI report within 90 days of formation.
Note that this decision will likely be appealed to the 11th Circuit Court of Appeals in Alabama, and ultimately appealed again to the Supreme Court. While entities created after January 1, 2024, can attempt to circumvent filing the BOI report by waiting for a final decision in the case, unfortunately this process will likely take more than 90 days. Entities created after January 1, 2024, will risk noncompliance with the CTA if they choose to wait for the outcome. Additionally, if the government loses the case, it could redraft the CTA with virtually the same requirements but addressing the constitutional concerns.
The CTA is complex and ever-changing. If you need legal advice on how your organization should handle the CTA, contact us.
[1] https://www.smr-law.com/insights/corporate-transparency-act/
[2] No. 5:22-cv-01448 (N.D. Ala.)
[3] https://www.guidestar.org/profile/53-0233266
[4] 31 C.F.R. NDAA §6403(b)(1)(B); 31 C.F.R. §1010.380(a)(1)(iii).
[5] https://www.fincen.gov/news/news-releases/fincen-extends-deadline-companies-created-or-registered-2024-file-beneficial
