Court finds Corporate Transparency Act unconstitutional
The case was filed in November 2022 by the National Small Business Association (NSBA) and an individual that owns two small businesses and is a member of the NSBA. The lawsuit claimed the CTA is unconstitutional and sought an injunction against Janet Yellen, in her official capacity as the Secretary of the United States Department of the Treasury, the United States Department of the Treasury, and Himamauli Das, in his official capacity as Acting Director of the FinCEN. The decision from the court was in response to the plaintiffs’ motion for summary judgment.
The crux of the court’s decision rested on federalism grounds, with the court explaining that, historically, the act of incorporation or formation of an entity was legislated under state law, and, as a consequence, the CTA exceeds Congress’s power to legislate under the Constitution. In connection with the court’s conclusion that the CTA is unconstitutional, the court granted the plaintiffs’ requested injunction, prohibiting the enforcement of the CTA against the individual plaintiff (his two businesses) and members of the NSBA. Notably, the injunction was limited to the parties in the lawsuit, and a nationwide injunction was not issued.
FinCEN responded to the decision by posting an alert titled “Notice Regarding National Small Business United v. Yellen, No. 5:22-cv-01448 (N.D. Ala.).” In this alert FinCEN stated that the Justice Department, on behalf of the Department of the Treasury, filed a Notice of Appeal to the decision. FinCEN also stated that while the litigation is ongoing (until the appeal process is resolved), FinCEN will continue to implement the CTA while also complying with the court’s order. This means that the CTA and its reporting requirements will still be enforced against all other “reporting companies” (as defined by the CTA).
It is also important to note that FinCEN stated in its alert that it is not currently enforcing the CTA against “members of the National Small Business Association (as of March 1, 2024).” (Emphasis added). Therefore, FinCEN is taking the position that the CTA will apply to a person who became a member of the NSBA after March 1, 2024 (the date of the court’s decision).
As mentioned above, the Department of Justice is appealing the decision from this case. Further, there is no guarantee that a different court hearing this argument or a similar argument for a differently situated plaintiff will arrive at the same decision. Thus, the decision in National Small Business United d/b/a National Small Business Association v. Yellen, will not determine the ultimate viability of the CTA, although it does complicate its future. Absent Congress’s revisiting and amending the CTA, the CTA’s future will be determined by the appeal and how any future cases play out in other courts. For now, “reporting companies” should continue to comply with the CTA.
Notably, the CTA will face its second constitutional challenge in the Western District of Michigan, where the Small Business Association of Michigan, the Chaldean American Chamber of Commerce and other plaintiffs filed a complaint on March 26, 2024.
At the state level, New York has enacted its own legislation that is largely based on the CTA, the New York LLC Transparency Act (NYLLCTA), and other states are contemplating enacting similar legislation. The decision in in National Small Business United d/b/a National Small Business Association v. Yellen, and the rationale behind the decision, will not have an impact on any legislation passed at the state level, and thus, will not impact the NYLLCTA or similar legislation that is passed by other states.