In Short
A federal judge in Alabama has held that the federal Corporate Transparency Act (the CTA) is unconstitutional. However, the judge’s ruling only applies to the parties in that case, and the CTA could still be upheld on appeal or after additional litigation. As things stand, it appears the Secretary of the Treasury will continue to enforce the CTA, and Minnesota business owners should remain prepared to comply with it.
CTA Recap
In recent months, FMJ attorneys have highlighted the broad impact that the CTA’s reporting requirements will have on businesses in Minnesota and across the United States. As we have explained elsewhere, the CTA requires the beneficial owners of corporations, limited liability companies, and other legal entities to report personal information about themselves to the U.S. Department of the Treasury. In passing the CTA, Congress’ stated policy goal was to detect and prevent the use of “shell companies” for money laundering, terrorism or other illegal activity.
The CTA is notable for its breadth. Its reporting requirements apply to a broad swath of business entities, whether or not the entities or their owners have any tie whatsoever to any illegal activity. If you follow the news, you likely know that when Congress passes sweeping new legislation or a federal agency issues an important new regulation, those new laws face challenges in the courts with increasing frequency.
The NSBA v. Yellen Lawsuit
The CTA is no exception. On Friday, March 1, 2024, a federal judge in the Northern District of Alabama held that the CTA is unconstitutional.
In that lawsuit, two plaintiffs – the National Small Business Association (an Ohio non-profit) and one of its members (a small business owner) – sued the Secretary of the Treasury over the constitutionality of the CTA. The judge decided the case in the plaintiffs’ favor.
The case turned on Article I of the U.S. Constitution. The judge held that in passing the CTA, Congress exceeded its constitutional authority to regulate the business entities affected by the legislation, nearly all of which are created under state law. In defense of the CTA, the federal government reminded the Court of the anti-terrorism and anti-money laundering goals of the law, arguing the CTA was a proper exercise of Congress’ authority to oversee foreign affairs and national security, regulate commerce, and impose taxes. Unpersuaded, the judge issued an order barring the Secretary of the Treasury from enforcing the law against the two plaintiffs in the case.
What Happens Next?
At present, the impact of the court’s ruling is limited. The court’s order specifies that its injunction – i.e., the part of the ruling that bars the Secretary of the Treasury from enforcing the CTA – only applies to the two plaintiffs in the case. As a result, it appears for now that the Secretary can and will continue to enforce the CTA against everyone else. For these reasons, Minnesota businesses that have been making preparations to comply with the law should continue to do so.
The March 1 ruling will almost certainly not be the courts’ final word on the matter. We expect the federal government to appeal the ruling, and we would not be surprised if the ruling inspires additional lawsuits from like-minded plaintiffs. With all of that potential litigation yet to come, it is not yet clear whether this limited ruling on the constitutionality of the CTA will stand. FMJ will continue to monitor the CTA, and we will prepare updates as new events unfold.
If you have questions about the implications of this decision on your company’s Corporate Transparency Act compliance, FMJ attorneys are here to assist. Please contact Pat Shriver at pat.shriver@fmjlaw.com, Rob Fafinski at fafinski.robertiii@fmjlaw.com, or Brad Hutter at brad.hutter@fmjlaw.com with your questions.
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