Federal Court in Alabama Rules Corporate Transparency Act Unconstitutional, Setting Up Potential Supreme Court Showdown
On March 1, 2024, Judge Liles C. Burke of the U.S. District Court for the Northern District of Alabama ruled the Corporate Transparency Act unconstitutional. The National Small Business Association (the “NSBA”), an advocacy group representing the interests of small business owners across the United States, and Isaac Winkles, a small business owner, filed a complaint back in 2022 seeking to have the CTA ruled unconstitutional, which eventually led to this ruling.
The million dollar question quickly became: Does this mean I don’t have to comply with the filing requirements of the Corporate Transparency Act?
Although many articles were quickly written with headlines implying or even directly stating that the result of this ruling was that business owners no longer needed to worry about the CTA, the authors of these articles lack an understanding of the meaning of the court’s ruling. Judge Burke theoretically could have issued a nationwide injunction against enforcement of the CTA, which would in fact have put it on hold. But his ruling instead enjoined enforcement of the CTA only against the plaintiffs in the case, and therefore, at the moment the CTA remains enforceable against everyone else.
Shortly after the ruling was handed down, FinCEN issued a notice confirming that (i) it will continue to implement the CTA as required by Congress, while complying with the court’s order, and (ii) for so long as the court’s order remains in effect, it will not seek to enforce the CTA against Mr. Winkles and those that were members of the NSBA as of the date of the ruling.
FinCEN and the U.S. Department of Justice have since filed a notice of appeal with the district court that they will appeal the decision to the 11th Circuit Court of Appeals. However the 11th Circuit rules, the case is then likely to be appealed to the U.S. Supreme Court. The Supreme Court would not be obligated to hear the case, but given the significance of the CTA and its wide ranging effects on business owners across the country, most seem to think they would elect to take it on.
The remaining question therefore is: Where does this leave business owners while the NSBA litigation process plays out?
As described above, the ruling in the NSBA case applies only to the plaintiffs in the case, and the CTA therefore remains enforceable against everyone else. Business owners with entities formed/registered to do business in the U.S. prior to 2024, which entities have until the end of 2024 to file, might elect to wait until closer to the end of the year to file, in hopes that there is further movement on this case (or others that may be brought) prior to the end of the year. We will note that from litigators we have talked to, the appeals process typically moves at a pace that makes further movement on this case prior to the end of the year unlikely. Of course, the federal government could always decide to suspend enforcement of the CTA more broadly until the appeals process has run its course, but given the notice it released shortly after the ruling in the NSBA case, this appears unlikely.
Business owners with entities formed in 2024 have only 90 days from formation to comply with the CTA’s filing requirements. The prudent move for such business owners, so as not to risk incurring penalties for failing to comply with the CTA, is to continue to timely file their BOI reports.