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The constitutionality of the Corporate Transparency Act (CTA) has recently come under fire in an Alabama federal court. But until that contest is taken up in other jurisdictions or settled by the U.S. Supreme Court, all affected businesses—apart from the plaintiffs in that case—still face considerable civil and criminal penalties for noncompliance.

On March 1, 2024, Judge Liles Burke of the U.S. District Court for the Northern District of Alabama issued a potentially broad ruling with a decidedly narrow application. In National Small Business United, et al. v. Janet Yellen, Case No. 5:22-cv-1448-LCB, 2024 WL 899372 (N.D. Ala. Mar. 1, 2024) (“NSBU”), the Court held that the CTA is unconstitutional and exceeds the limits on Congress’s power, but ordered the enforcement of the CTA’s disclosure requirements solely with respect to the plaintiffs in that case.

Although the Complaint filed in NSBU challenged the CTA’s mandatory disclosure requirements as (i) exceeding Congress’s grant of authority under Article I of the U.S. Constitution; and (ii) violating rights protected by the First, Fourth, Fifth, Ninth and Tenth Amendments, the court limited its holding to Article I and confined that holding to the question of whether “the Constitution give[s] Congress the power to regulate those millions of entities and their stakeholders the moment they obtain a formal corporate status from a state[.]”  Id. at *1.  The Court’s answer to that specific question was that the CTA “is unconstitutional because it cannot be justified as an exercise of Congress’s enumerated powers,” id. at *21, specifically Congress’s foreign affairs powers, the Commerce Clause and Congress’s taxing power.

The Court’s Article I decision has four parts. First, the Court held that “Congress’s Foreign Affairs powers” did not “justify the CTA’s regulation of ‘creatures of state law,’ which are ordinarily within the sovereign purview of the States.”  NSBU, 2024 WL 899372, at *8 (internal citation omitted).  Second, the Court concluded the CTA was not authorized under the Commerce Clause because “the CTA doesn’t regulate the channels and instrumentalities of commerce or prevent their use for a specific purpose.”  Id. at *13.  Third, to the extent the CTA could be defended as regulating activity with a substantial effect on interstate commerce, the Court reasoned that “the CTA does not regulate commerce on its face, contain a jurisdictional hook” identifying activities related to interstate commerce, “or serve as an essential part of a comprehensive regulatory scheme,” and so “it falls outside Congress’s power to regulate non-commercial, intrastate activity.” Id. at *18, 20.  Fourth, the court held the CTA’s objectives were too far removed from Congress’s taxing powers, and that upholding the CTA on this basis would mean that “[a]ll Congress would have to do to craft a Constitutional law is simply impose a disclosure requirement and give tax officials access to the information.”  Id. at 21.  These four determinations provide an implied answer to the original question: No, the Constitution does not grant Congress the power to regulate entities and their stakeholders the moment they obtain a formal corporate status from a state.  The Court ordered the U.S. Department of the Treasury and the Financial Crimes Enforcement Network (FinCEN) from enforcing it against the plaintiffs of that case.

If you are confused as to how such a broad conclusion can have such a limited application, a straightforward reason suggests itself. Historically, the Commerce Clause has been favorably applied to the federal government, and few decisions of the U.S. Supreme Court have denied Congress’s powers invoked under that provision. The strongest way to assert that the Commerce Clause does not apply, then, is to narrowly consider how the CTA applies to companies not yet engaged in interstate commerce, namely, the moment they are formed under a state’s laws. Once businesses start transacting in commerce, the Constitutional question becomes murkier.

NSBU’s effects are only beginning to trickle upward and outward. FinCEN has uploaded a notice reporting that the decision was appealed on March 11, 2024, and that “[w]hile this litigation is ongoing, FinCEN will continue to implement the Corporate Transparency Act as required by Congress, while complying with the court’s order.”

Businesses hoping the appeal of NSBU will cause the downfall of the CTA should not invest in this outcome. Judge Burke’s decision offers a tantalizingly narrow basis to uphold it. An appellate court may agree that Congress cannot impose the CTA’s disclosure requirements on businesses the moment they are formed, without curtailing its enforcement against businesses engaged in commerce.

There is another way the CTA may be overturned: copycat lawsuits, inspired by NSBU, may emerge throughout the United States. If a federal court elsewhere decides the CTA is unconstitutional on a broader basis not decided by Judge Burke, the CTA’s disclosure requirements could conceivably be dismantled. Nevertheless, challenges to the CTA are nascent and underdeveloped at this time. As a result, it is imprudent for businesses affected by the CTA to “wait and see” before complying with the CTA.

The CTA is a complex regulation that carries penalties for noncompliance. Parsons Behle & Latimer attorneys are well-acquainted with the CTA and are able to assist with registration and ongoing compliance required under the CTA through our customized interface. We have developed an integrated registration process and a dedicated team to assist clients in compliance and maintenance with the CTA. To discuss obtaining guidance for your organization send an email to [email protected].

1. The CTA is codified at 31 U.S.C. § 5336, with implementing regulations codified at 31 C.F.R. § 1010.380.
2. The affected plaintiffs include members of the National Small Business Association as of March 1, 2024, the date of the decision. Small businesses cannot obtain the protections of this ruling if they now join the National Small Business Association.