A federal district court judge recently ruled that the Corporate Transparency Act (CTA) is unconstitutional because it exceeds the Constitution’s limits on Congress’ power (see March 1, 2024 ruling by U.S. District Judge Liles C. Burke, Northern District of Alabama, Northeastern Division, finding in favor of the plaintiffs’ (National Small Business United, et al. “NSBU”) motion for summary judgment, and against the U.S. Treasury (Defendants)). FinCEN was permanently enjoined from enforcing the CTA against the plaintiffs in that case. It is currently unclear as to the implications of this ruling for the business community at large. Although persuasive in similar cases brought against Treasury outside of the Northern District of Alabama, this ruling will not be precedential, meaning that other judicial forums may rule differently on the issues presented in this case. Further, the U.S. Department of Justice has already filed an appeal of the ruling on behalf of U.S. Treasury with the Eleventh Circuit Court of Appeals. Because this case only included questions of law and was decided on summary judgment based solely on dispositive motions by the parties, an appeals court will have de novo review of this case (including the plaintiff’s unaddressed claims based on the First, Fourth, and Fifth Amendments to the Constitution). That is, the appeals court will decide all issues in the case, as if the case was being heard for the first time.
FinCEN, in response to the ruling, issued a March 4, 2024 press release (updated March 11, 2024, “to reflect that a Notice of Appeal has been filed regarding this case.”), stating the following. “FinCEN will continue to implement the Corporate Transparency Act as required by Congress, while complying with the court’s order. FinCEN will comply with the court’s order “for as long as it remains in effect.” FinCEN is currently and will continue enforcing the CTA against all persons “other than the particular individuals and entities subject to the court’s injunction” (i.e., the plaintiffs in that case). “[R]eporting companies are still required to comply with the law and file beneficial ownership reports as provided in FinCEN’s regulations.”
“[A]t this time,” FinCEN is not requiring beneficial ownership information reporting from those members of NSBA who were members as of March 1, 2024 (i.e., future and past members of NSBA are not included in this reporting deferral).
It bears noting that the position stated by FinCEN does not extend to the beneficial owners of members of NSBA, only to the NSBA members themselves. If a beneficial owner of a business entity member of NSBA is also a beneficial owner of a business entity that is not a member, that beneficial owner will not be excluded from FinCEN’s enforcement of the CTA’s reporting obligations through the non-member business entity. Also, if an individual is a member of NSBA, then that individual would be excluded from reporting into the FinCEN beneficial ownership secure system (BOSS) database, but the reporting companies to which that individual is a beneficial owner (whether by ownership or control) would not be excluded. This means that those reporting companies (if not an NSBA member s of March 1, 2024) would remain required to report their other beneficial owners into the BOSS. This will be disappointing news to persons that have multiple business entities in their portfolio, but where not all of those entities are members of NSBA as of March 1, 2024.
The CTA is a seismic shift in the beneficial owner reporting regimes in the United States, disturbing long-established norms. Beginning Jan. 1, 2024, tens of millions of unwitting U.S. business entities, and their beneficial owners, became subject to FinCEN’s reporting obligations under the CTA designed to identify nefarious actors hiding behind the “corporate veil” (or more probably, to disturb such actors’ relationships with U.S. third parties that historically wittingly or unwittingly facilitated their activity). The present district court ruling, rather than clarifying the enforceability of the CTA, has muddied the waters as to the Act’s applicability to and enforcement against the U.S. business community. As stated above, the district court, having found the CTA unconstitutional, enjoined FinCEN’s enforcement of the CTA’s reporting requirements and FinCEN’s enforcement activity only as to the plaintiffs in that case. FinCEN’s position on this matter is clear: business as usual except with regard to those specific plaintiffs.
Business owners and management should continue to monitor further developments in the ever-evolving CTA space and should continue to meet any impending filing deadlines under the CTA. In particular, business entities formed in 2024 will need to continue to adhere to their 90-day post-formation CTA filing obligations, while business entities in existence prior to 2024 may wish to defer their CTA filing until later in the year, to be informed by any subsequent developments in the appeals process.
With this, and other Corporate Transparency Act new developments, occurring almost daily, now is the time to discuss the Corporate Transparency Act with your legal team for guidance.