Earlier this month, a federal judge in Alabama declared the Corporate Transparency Act unconstitutional and granted the plaintiffs summary judgment challenging enforcement of the far-reaching law, which took effect this year. For many Americans this raises the question, “What the hell is the Corporate Transparency Act? Does it affect me?” The quick answer is that this is a big problem, and if you own an incorporated business, you will likely continue to suffer from its intrusive requirements even after the ruling.
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Significant regulatory impact in a small package
“When Congress passed the National Defense Authorization Act of 2021, it included a bill called the Corporate Transparency Act (‘CTA’). Although the CTA made up just over 21 pages of the NDAA’s nearly 1,500 total pages, the law packs a significant regulatory contribution punch, requiring most entities formed under state law to disclose the personal information of interested parties to the criminal law enforcement arm of the Treasury Department,” Judge Liles C. Burke of the United States District Court for the Northeastern Division of the Northern District of Alabama.
Large businesses are exempt; the law applies to businesses with 20 or fewer employees.
Justifications for the law laid out in early versions of the legislation invoked a long list of alleged financial horrors including money laundering and tax evasion. The word terrorism it also appears, of course, because this has been the lazy default justification for legislation for more than 20 years. Basically, the law is aimed at anything that might result in a modicum of financial privacy.
To that end, the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN) has established an online reporting system through which business owners “are required to report information to FinCEN about individuals who ultimately own or control them.” FinCEN began compiling reports for such “beneficial ownership information” (BOI) on January 1, 2024 with a compliance deadline of January 1, 2025, or 30 days after creation for companies registered after that date.
A regulation with a nasty sting
Is there a penalty in case of non-compliance? Of course there is. According to FinCEN, “a person who willfully violates BOI reporting requirements may be subject to civil penalties of up to $500 for each day that the violation continues. That person may also be subject to criminal penalties of up to two years in prison and one fine of up to $10,000.”
This could be a problem for those many Americans who have founded corporations or limited liability companies to make a living, but fail to keep track of the federal government’s diligent efforts to eliminate the scourge of terrorist money launderers from the retail storefronts and Etsy sellers. I received an alert from reader Rick Wakefield, who forwarded a memo from his accountant. I looked through my email and found a similar note from my accountant, dated two days before Christmas. Another accountant I work with told me that she was waiting for the outcome of a lawsuit against the law.
Entrepreneurs react
That litigation came in the form of National Small Business United v. Yellenlaunched by the National Small Business Association and NSBA member Isaac Winkles against the federal government.
“The CTA will create a complicated reporting process for small businesses that rarely have compliance teams or attorneys on staff,” the organization argues. The group adds that the feds already have the relevant information provided through bank due diligence rules, and the law adds a new level of DC-based complexity. “The CTA sets the stage for a federal takeover of entity formation and self-governing practices.”
Importantly, the plaintiffs have argued that the reporting requirement is worse than cumbersome and is unconstitutional. They say this allows the federal government to usurp roles reserved for states, imposes unreasonable searches and seizures, and invents vague terms like “beneficial owners” that are not normally used by businesses or state agencies.
Judge Burke agreed. In dismantling government claims that the CTA is justified as an exercise of federal authority over foreign policy, national security, and taxing power; and pursuant to the Commerce Clause and the Necessary and Convenient Clause; he slapped Congress in the face for sloppy drafting that doesn’t even hint at a claim to a constitutional basis.
The law cannot be justified by the Constitution
“The text of the CTA is missing a crucial component of valid substantive effects legislation,” Burke wrote. “It has no express jurisdictional element that limits its scope to a distinct set of jurisdictions [activities] which further have an explicit connection to or effect on interstate commerce.'”
“These jurisdictional phrases are so common,” he commented, marveling at the oversight, “that, for purposes of statutory interpretation, courts assume that ‘Congress uses various modifiers of the word ‘commerce’ in designing and enforcing its statutes. ‘ “
Accordingly, he concluded, “the Corporate Transparency Act is unconstitutional because it cannot be justified as an exercise of Congress’s enumerated powers. This conclusion makes it unnecessary to decide whether the CTA violates the First, Fourth, and Fifth Amendments.”
This is good news, but so far only for plaintiffs National Small Business United v. Yellen.
Unconstitutional, but still enforced
“The government is not currently enforcing the Corporate Transparency Act against the plaintiffs in this action: Isaac Winkles, the reporting companies of which Isaac Winkles is the beneficial owner or claimant, the National Small Business Association, and members of the National Small Business Association (as of March 1, 2024),” FinCEN admits. “Such individuals and entities are not required to report beneficial ownership information to FinCEN at this time.”
This means that the unconstitutional law is still applied against all those who were not parties to the dispute.
“Coupled with the fact that FinCEN has made virtually no effort to inform the public about small business obligations under the CTA, FinCEN’s reluctance to suspend enforcement shows a clear disregard for America’s small business owners,” it warns NSBA President and CEO Todd McCracken. . “FinCEN should immediately reverse course and suspend CTA enforcement for everyone until these issues are finally resolved.”
The American Institute of CPAs also called for a stay of execution following the court’s decision. It had previously raised concerns, saying “many remain essentially unaware of their reporting obligations”.
For now, though, despite the federal court’s finding that Congress lacks the constitutional authority to impose “beneficial ownership information” reporting requirements on the country’s business owners, the rule remains in effect, expiring on January 1. . with an accountant and spread the word to those who have not yet heard of this dangerous regulatory burden.