Federal Court Rules the Corporate Transparency Act as Unconstitutional

Federal Court Rules the Corporate Transparency Act as Unconstitutional

In a recent ruling, an Alabama federal court declared the Corporate Transparency Act (CTA) as unconstitutional, casting doubt on the future of the legislation. The CTA, which came into effect in January 2021, mandated companies to disclose information about their beneficial owners in an effort to combat illicit activities such as money laundering, tax fraud, and terrorist financing. Violations of the law could result in fines of up to $10,000 and imprisonment for two years.

The White House had championed the CTA as a crucial tool for law enforcement agencies and national security to crack down on criminals and corrupt individuals exploiting the US financial system for illegal purposes. Treasury Secretary Janet Yellen stated that the rule would make it harder for illicit actors to hide their identities and launder money.

However, the U.S. District Court for the Northern District of Alabama declared the CTA unconstitutional in the case of National Small Business United v. Yellen. In a 53-page opinion, Judge Liles Burke acknowledged that the intentions behind the law were commendable but argued that the federal government’s reasoning was not supported by precedent.

The government presented three main arguments in court. Firstly, it claimed that Congress could enact the CTA under its foreign affairs power. Secondly, it argued that the CTA was necessary for taxing power. Lastly, it contended that the CTA was a proper tool under the Commerce Clause. However, Judge Burke opined that the CTA exceeded the constitutional limits on the legislative branch and did not meet the criteria of congressional powers in the Commerce Clause.

Despite ruling the CTA as unconstitutional, the court suggested that Congress could have drafted legislation that would have passed constitutional scrutiny. The court highlighted two cases from 1946 and 1974, demonstrating how Congress could have written the CTA to be constitutional.

The immediate legal fallout of this ruling is that the Treasury Department, the Financial Crimes Enforcement Network (FINCEN), and other federal agencies are prohibited from enforcing the CTA provisions against the plaintiffs in the case. However, legal analysts caution that this creates uncertainty regarding whether other parties must follow the CTA rules or face penalties from federal authorities.

While the future of the CTA remains uncertain, experts recommend that small businesses and reporting entities continue their compliance efforts as the CTA has not been entirely halted. The Treasury Department is expected to appeal the court’s decision to the U.S. Court of Appeals for the Eleventh Circuit. The outcome of the appeal and other potential legal cases will determine the fate of the CTA.

The small business community will closely monitor the litigation developments in the appeals process. For now, it is important for businesses to stay informed and prepared for any revisions or additions to the CTA that may arise in the future.