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Quarter 1, 2024: Corporate Transparency Act in Limbo

W&K Quarterly Newsletter - Q1, 2024

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Corporate Transparency Act in Limbo
By: Attorney James Rayment

As many business owners are now aware, in January 2024, a new Beneficial Ownership Information (BOI) report is required to be submitted to the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) to remain in compliance with the Corporate Transparency Act (CTA). This BOI report is required for all existing and newly formed entities which do not qualify for a limited number of exemptions. But recent rulings may cast doubt on the validity of this new law.

On March 1, 2024, a federal court in Alabama ruled in Nat’l Small Bus. United v. Yellen that the CTA is unconstitutional. The purpose of the CTA is to help combat money laundering schemes, terrorist activity, tax fraud and other illegal activities. The CTA was set to go into effect on January 1, 2024, and would require all “reporting companies” (i.e. LLCs and corporations) to file a report with the FinCEN containing information pertaining to (i) the reporting company, (ii) the beneficial ownership of the reporting company, and (iii) the company applicants.

The Plaintiffs in Nat’l Small Bus. United v. Yellen sought an injunction against enforcement of the CTA arguing that the “CTA’s mandatory disclosure requirements exceed Congress’ authority under Article I of the Constitution and violate the First, Fourth, Fifth, Ninth, and Tenth Amendments.” The Northern District of Alabama ultimately ruled in favor of the Plaintiffs finding that the “CTA exceeds the Constitution’s limits on the legislative branch and lacks a sufficient nexus to any enumerated power to be a necessary or proper means of achieving Congress’ policy goals…”

While business owners may have taken a collective sigh of relief in response to this ruling of unconstitutionality of the CTA, it is important to note that the injunction granted by the Court preventing enforcement of the CTA’s requirements only applies to the named Plaintiffs. This is because only the U.S. Supreme Court can invalidate acts of Congress and findings by the District Courts as to constitutionality and any injunctive relief granted by District Courts on constitutional grounds are only binding upon the parties to a particular lawsuit. Further, District Court decisions in one Circuit (in this case the Eleventh Circuit comprising of the Federal courts in Florida, Georgia, and Alabama) are not binding on other Circuit courts. While the ruling may serve as strong precedent when other non-Eleventh Circuit Courts take up the issue, this is not guaranteed because it is possible for Circuits to differ on their interpretations.

Given the uncertainty of the legality of the CTA following Nat’l Small Bus. United v. Yellen, it is likely that there will be additional developments as other Circuit courts address similar challenges. Our Firm will continue to monitor litigation and other developments concerning the CTA and will provide updates as they occur. If you have any questions concerning your business and its obligations under the CTA, please do not hesitate to contact Attorney James Rayment at [email protected].

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