A U.S. District Court judge sitting in the Northeastern Division of the Northern District of Alabama has found the Corporate Transparency Act (“CTA”) unconstitutional in a memorandum opinion. The opinion granted the plaintiffs, the National Small Business United (NSBU) and Isaac Winkles, an NSBU member, summary judgment motion based on its finding that the CTA is unconstitutional. The final judgment permanently enjoined the Secretary of the Treasury and other government defendants, as well as “any other agency or employee acting on behalf of the United States,” from enforcing the Corporate Transparency Act against the plaintiffs in the litigation.
The CTA requires nonexempt companies (domestic or foreign corporations, limited liability companies, and other entities formed or, in the case of foreign entities, registered to do business in any U.S. state or tribal jurisdiction) to disclose certain information, including about their beneficial owners, to the Financial Crimes Enforcement Network (FinCEN), part of the U.S. Treasury Department. Exempt firms include (among others) “large operating companies” with a presence in the U.S., entities with a class of securities registered under the Securities Exchange Act of 1934, as amended (or registered under the Investment Company Act of 1940, as amended, or the Investment Advisers Act of 1940, as amended), and controlled or wholly owned subsidiaries of certain exempt firms.
The Court’s opinion specifically holds that the U.S. Congress acted outside the scope of its constitutional power in enacting the CTA and was not authorized under the Commerce Clause, Congress’s taxing power, or the Necessary and Proper Clause. It also found it could not be justified as incidental to the exercise by Congress of its express legislative authority.
The U.S. Treasury Department has advised that it considers the District Court opinion to only apply to NSBU and Winkles and has indicated that it will still enforce CTA compliance. Failure to comply with the terms of the CTA can result in the imposition of substantial fines and penalties.
If your company is a nonexempt entity under the CTA and you have serious misgivings in providing beneficial ownership information about the company to the U.S. Treasury Department. Contact your business legal counsel to see if contesting the constitutionality of the CTA is right for your business.
The information presented is not intended to be, and does not constitute, “legal advice.” Because each situation varies, and only brief summary information is provided here, you should not use this information as a basis for action unless you have independently verified with your own counsel that it applies to your particular situation.
Leave a Reply