On March 1, 2024, a federal district court in Alabama issued a memorandum opinion ruling on the constitutionality of the Corporate Transparency Act (CTA). The National Small Business Association and Isaac Winkles, an owner of small businesses in Alabama, sued the Treasury Department and its Secretary, Janet Yellen.  The CTA, which took effect on January 1, 2024, aims to prevent financial crimes such as money laundering, tax evasion, and financing of terrorism by requiring the disclosure of personal information by beneficial owners and company applicants of “reporting companies.” These entities include entities created by the filing of a document with a secretary of state, or formed under foreign law and registered to do business in the U.S.

The CTA is enforced by the Financial Crimes Enforcement Network (FinCEN) which is the Treasury Department’s criminal enforcement bureau. Failure to comply with the CTA exposes company stakeholders to civil and criminal penalties. Willful or knowing violations include the provision of false or fraudulent beneficial ownership information or failure to report such information.

The federal court held that the CTA is unconstitutional because it cannot be justified as a valid exercise of Congress’s powers. The Court noted that the CTA exceeds the limits imposed by the U.S. Constitution on Congress and the U.S. Government’s arguments are not supported by legal precedent. It was also ruled that the said law lacks sufficient nexus to an enumerated power granted to Congress to be a necessary or proper means of achieving its policy goals. As of March 11, 2024, the U.S. Government has appealed the judgment.

It bears emphasis that the decision was rendered by the federal court in Alabama and the ruling applies only to the parties in this particular case. Other than the plaintiffs, the law is still in force and effective as to other covered entities and individuals.

A copy of the memorandum opinion can be accessed here: Memorandum Opinion – #51 in National Small Business United v. Yellen (N.D. Ala., 5:22-cv-01448) – CourtListener.com

Thank you Richmund Sta. Lucia for this week’s Tax Tracker!