CTA Update: Unconstitutional but Still Enforceable
On March 1, 2024, the federal district court for the Northern District of Alabama ruled the Corporate Transparency Act (“CTA”) unconstitutional after granting summary judgment in favor of the National Small Business Association (“NSBA”) and its members. The Court held Congress exceeded its enumerated powers under the U.S. Constitution. Specifically, the Court rejected the government’s argument that Congress had constitutional authority to enact the CTA under its (i) foreign affairs power, (ii) commerce clause power, and (iii) taxing power. What’s unique is the scope of this judgment limits the Financial Crimes Enforcement Network (“FinCEN”), an arm of the U.S. Department of Treasury, from enforcing the CTA only against NSBA. Therefore, the other 32 million entities (“Reporting Companies”) FinCEN estimates are impacted by the CTA will still be subject to its reporting requirements.
Whether this ruling leads to the CTA’s eventual demise is still unknown. Although, uncertainty is nothing new to the CTA. The law itself leaves many questions unanswered with regard to its reporting requirements, which, if done improperly, can lead to severe civil and/or criminal penalties. FinCEN has been stingy with issuing further guidance since it became effective on January 1, 2024 (“Effective Date”), so it’s no surprise they gave a generic public response to this ruling. It’s expected the government will appeal the decision to the Eleventh Circuit, with a chance it makes its way in front of the U.S. Supreme Court. However, the appeals process will likely take some time, which leaves the public stuck waiting before it can expect clear answers.
As of now, it’s best to wait and see how this all plays out. Waiting works well for Reporting Companies created before the Effective Date since they have until the end of 2024 to file their initial reports with FinCEN. On the other hand, Reporting Companies created on or after the Effective Date will find waiting to be more difficult since they only have 90-days from to file their BOI Reports with FinCEN. These newer entities will essentially need to ignore this District Court’s ruling for now and continue operating with the mindset the CTA is here to stay.
We will continue to monitor any updates or guidance released on the CTA. Please contact our Corporate team with any questions you may have.
