CTA Declared Unconstitutional in Alabama Case – What You Need to Know

Posted on Mar 7, 2024 by Kamden Crawford

At the beginning of the new year, the Corporate Transparency Act (“CTA”) went into effect, burdening 32 million businesses to submit certain beneficial ownership information (“BOI”) in reports filed with the Financial Crimes Enforcement Network (“FinCEN”). You can find a detailed summary of the CTA and BOI reporting requirements here. Many affected parties have voiced concerns about the reporting requirements and have pushed back against them. Among the dissenting voices is the National Small Business Association (“NSBA”) who took legal action. On March 1, 2024, the U.S. District Court for the Northern District of Alabama delivered a final declaratory judgment ruling that the CTA is unconstitutional and unenforceable against the plaintiff.

But before you celebrate, there’s a catch. Despite this seemingly favorable decision for closely held businesses, the scope of the decision remains limited. Those covered by the CTA must continue to comply with BOI reporting requirements.

Here’s a closer look at the case:

The NSBA initiated legal proceedings against the Treasury Department in November of 2022 alleging that the CTA exceeds Congress’s power and infringes on several constitutional amendments. Through summary judgment, the court sided with the NSBA, agreeing that the CTA exceeds Congress’s power. The court rejected the government’s argument that the CTA is within Congress’s authority under its foreign affairs powers, taxing powers, and powers under the Commerce Clause. However, left undecided was whether the CTA violated any constitutional amendments.

Shortly after, FinCEN issued a notice stating that it will continue to comply with the court’s order for as long as it is in effect and will not enforce the CTA against the plaintiffs.

Does the decision imply that reporting is no longer necessary?

Not quite. Despite marking a significant setback for the CTA and BOI reporting, the decision is limited and reporting is still required. Firstly, the decision solely bars the enforcement of the CTA against the plaintiffs, implying that non-NSBA-affiliated businesses still need to file. Secondly, FinCEN indirectly signaled the continued enforcement of the CTA against non-parties by stating its non-enforcement against the plaintiffs alone. Additionally, any state laws resembling the CTA remain unaffected.

Moving forward, litigation is expected to persist as the government is likely to appeal, with other parties potentially following suit against the CTA. This leaves the future of the new rule and its requirements uncertain. In the meantime, all companies not affiliated with the NSBA and not exempt under the CTA remain subject to BOI reporting requirements.

We will continue to closely monitor developments regarding the CTA and its requirements. Feel free to reach out to us if you have any questions or would like more information.