A federal judge in Alabama ruled in favor of the National Small Business Association in finding that the requirements of the Corporate Transparency Act (CTA) constitute congressional overreach.
As the plaintiff in the case, the National Small Business Association alleged that the CTA wrongly required disclosure of extensive personal information and supporting documentation to verify company owners.
In the March ruling in the case of National Small Business United v. Yellen, U.S. District Judge Liles Burke writes, “Congress sometimes enacts smart laws that violate the Constitution. This case, which concerns the constitutionality of the Corporate Transparency Act, illustrates that principle.
The CTA went into effect on January 1 of this year. The Act is a bipartisan effort by the government to increase corporate transparency to reduce tax evasion and money laundering. An important feature of the CTA is the Beneficial Ownership information Report (BOI). Filed through FinCen, the BOI requires companies (unless exempted) to provide detailed ownership data. Some of the information required includes:
- Company legal name, trademark, U.S. street address, and jurisdiction of formation
- Company taxpayer identification number (TIN)
- Legal names, addresses, driver's license, date of birth, and passport images of owners
In response, the U.S. Treasury is complying with the order and the U.S. government filed its appeal in early March. While the Act went into effect at the first of the year, companies that existed prior to the enactment of the Act have until the first of next year to comply with the ruling. Given that, companies and their legal counsel continue to assess the Act, the ruling, and the litigation ahead.
In late April, five Senators filed an amicus brief arguing the Alabama court was mistaken in the ruling. While the court ruled that the CTA violates the Constitution, the amicus brief argues that enactment of the Act is well within the powers of Congress to curtail financial abuse and illegal activity in promotion of national security and global U.S. interests.
Part of the intent of the CTA is to pull the veil from anonymous shell companies that operate within the U.S. and abroad. The amicus brief (filed by Senators Reed, Warren, Waters, Whitehouse, and Wyden) comments, “Anonymous shell corporations harm the United States’ national security, foreign affairs, foreign and interstate commerce, and tax interests. Such shell companies often operate in multiple layers to hide their true owners and violations of key sanctions, money-laundering, and tax laws. Allowing illicit money to be hidden through corporate forms also undermines public safety and law enforcement efficacy on a national and international scale.”
The Tax Law Center at NYU also filed an amicus brief in support of the government appeal. The NYU Tax amicus brief adds a note on the important purpose of the CTA: “Enacted with broad bipartisan support, the CTA seeks to accomplish purposes that are undeniably important: preventing money laundering, terrorism financing, and tax fraud. These crimes are often carried out through shell companies and other entities designed to conceal the perpetrators’ identities. Because states generally don’t require these entities to identify who owns them, there was no repository with this information before the CTA’s enactment.”
Currently, FinCen is not enforcing the CTA against the plaintiffs to the federal action only. The litigation will remain ongoing for some time given the appeal and the likelihood of additional lawsuits challenging the ACT.
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