On March 1, 2024, Judge Liles Burke of the U.S. District Court in Huntsville, Alabama, held that the Corporate Transparency Act — and the beneficial ownership information reporting mandate it includes — is unconstitutional, because it exceeds the powers granted to Congress by the Constitution.
The National Small Business Association and its member, small-business owner Isaac Winkles, brought the lawsuit challenging the CTA, represented by Hughes Hubbard & Reed special counsel Thomas Lee and partner Terence Healy, with co-counsel John Neiman of Maynard Nexsen.
The CTA, enacted in late 2020, added a filing burden on small businesses of fewer than 20 employees to disclose BOI to the Treasury's Financial Crimes Enforcement Network, FinCEN. Failure to comply — intentional or not — could result in up to $10,000 in fines and up to two years in prison.
"In our view, Judge Burke correctly ruled that, while well-intentioned, the CTA exceeds the powers given to Congress by the Constitution. This was a high-stakes constitutional litigation involving an unprecedented federal statute with broad potential impact," said Lee. "The Small Business Association brought the only challenge to the law, though many others also criticized it. We are delighted with the outcome."
Judge Burke quoted Justice Antonin Scalia who remarked that federal judges should have a rubber stamp that reads "Stupid but constitutional." The inverse is also true, according to Burke — the wisdom of a policy is no guarantee of its constitutionality. This case, which concerns the constitutionality of the Corporate Transparency Act, illustrates this, according to the judge.
"When Congress passed the 2021 National Defense Authorization Act, it included a bill called the Corporate Transparency Act," he wrote in his opinion. "Although the CTA made up just over 21 pages of the NDAA's nearly 1,500-page total, the law packs a significant regulatory punch, requiring most entities incorporated under state law to disclose personal stakeholder information to the Treasury Department's criminal enforcement arm."
The broad aim of the requirement — to prevent financial crimes like money laundering and tax evasion — is a worthy goal, according to Burke. Every year, states grant formal status to millions of entities, he observed. "This case presents a deceptively simple question: Does the Constitution give Congress the power to regulate those millions of entities and their stakeholders the moment they obtain a formal corporate status from a state? The government thinks so. While it acknowledges that Congress can exercise only the powers granted to it, the government says that the CTA is within Congress' broad powers to regulate commerce, oversee foreign affairs and national security, and impose taxes and related regulations."
Those arguments are not supported by precedent, Burke held: "Because 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, the plaintiffs [the National Small Business Association] are entitled to judgment as a matter of law."
Rather than clear up the playing field, however, the decision is limited to members of the association, raising the possibility of multiple lawsuits by other plaintiffs.
"The decision applies to members of the association throughout the country," according to HHR's Lee. "Our preference is that other interested parties join our litigation rather than bring multiple suits. Current entities have until the end of the year to file anyway."
"It's another confusing act of something that already has a lot of people confused," said Roger Harris, president of Padgett Business Services. "We can register a lot of businesses, but whether the law will be effective in accomplishing the goal of stopping or catching people using businesses to launder money, we'll just have to wait a few years to find out."
"I can't imagine the CTA will go away entirely," said Kevin Henderson, founding partner of SMB Law Group. "If it is upheld by other courts, they'll find some way to tweak it so it passes muster. Previously formed companies can wait and see, but newly formed companies that are not members of the National Small Business Association don't have that luxury — they will have to comply with the CTA as it is today."
