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District Court Rules CTA Unconstitutional: An Introduction
On March 1, 2024, U.S. District Court Judge Liles C. Burke issued a ruling that declared the Corporate Transparency Act (CTA) unconstitutional. This ruling, emerging from the case of National Small Business Association (NSBA) v. Yellen, raises critical questions about the future of CTA reporting requirements. It is particularly noteworthy given that the Financial Crimes Enforcement Network (FinCEN) reported that approximately half a million reports had already been filed under the CTA by mid-February. At the outset of this summary, it is important to highlight that the only businesses currently affected by this verdict are those affiliated with the members of the NSBA.
The Corporate Transparency Act: An Overview
The CTA was designed to impose mandatory reporting obligations on certain domestic and foreign companies, requiring them to disclose personal information about their beneficial owners and company applicants to FinCEN.
Grounds for the Constitutional Challenge
Isaac Winkles, a small business proprietor, alongside the National Small Business Association (NSBA), an entity advocating for small business interests, initiated a legal challenge against the constitutionality of the CTA. Together, Winkles and the NSBA filed a lawsuit against the Treasury Department, Treasury Secretary Janet Yellen, and Acting Director of FinCEN Himamauli Das in their official roles. They contended that the CTA’s compulsory reporting obligations surpass the legislative powers granted to Congress under Article I of the Constitution and infringe upon the First, Fourth, Fifth, Ninth, and Tenth Amendments. This lawsuit was filed six weeks following the September 2022 issuance of the final reporting regulation. In the recently filed court case, it was noted that the Government cites three constitutional bases for Congress’ passage of the CTA:
- Its power over foreign affairs,
- Its authority derived from the Commerce Clause, and
- Its legitimate use of its taxing power.
The plaintiffs contested these justifications, and Judge Burke reflected their objections in his conclusion that the CTA unconstitutionally surpasses the powers explicitly allocated to Congress by the Constitution.
District Court Rules CTA Unconstitutional: What Are the Implications?
The court’s ruling has left many wondering about the ongoing obligations and how they apply to their entities under the CTA, given the uncertainty it introduces. In regards to the entities that are immediately affected, it extends to NSBA’s estimated 65,000 members, effectively prohibiting the government from applying the CTA’s reporting mandates to any member entity.
What Should Business Owners Do?
Despite the ruling, business owners with pending deadlines for Beneficial Ownership Information (BOI) reports under the CTA are advised to continue filing these reports when due, as entities associated with the NSBA members are the only parties directly affected by this ruling. Remember, companies formed in 2024 must file an initial BOI report within 90 days of formation, while entities formed prior to 2024 have until December 31, 2024, to file. Failing to file could result in civil penalties of $591 per day of non-compliance. 
Looking Ahead: The Appellate Process
It is anticipated that the government will appeal the court’s decision, but the court’s declaration will remain effective unless overturned by a granted ‘stay’. For a stay to be considered, the government needs to file a motion with the district court, which will assess:
- The appeal’s potential success,
- The irreparable harm the government might face without a stay,
- The effect of a stay on other involved parties, and
- Its alignment with public interest.
Should the district court deny the stay, the government has the option to seek one from the Eleventh Circuit Court of Appeals in Atlanta. The government has 60 days to file an appeal, and a decision on the stay could be made soon. However, based on past timelines for resolution, it is expected that the Court of Appeals could take more than nine months to resolve an appeal.
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