On Friday, March 1, the U.S. District Court for the Northern District of Alabama declared the Corporate Transparency Act (CTA) and the new Beneficial Ownership Information (BOI) Reporting Requirements unconstitutional in the case of National Small Business United v. Yellen. In a 53-page ruling (the “March 1 Ruling”), Judge Liles C. Burke determined that the CTA goes beyond Congress’ legislative authority as outlined in the Constitution.
On Monday, March 4, FinCEN responded to the ruling and included the following statement:
“FinCEN will comply with the court’s order for as long as it remains in effect. As a result, the government is not currently enforcing the Corporate Transparency Act against the plaintiffs in that action: Isaac Winkles, reporting companies for which Isaac Winkles is the beneficial owner or applicant, the National Small Business Association, and members of the National Small Business Association (as of March 1, 2024). Those individuals and entities are not required to report beneficial ownership information to FinCEN at this time.”
While not explicitly stated, the FinCEN statement confirms that FinCEN intends to continue to enforce the current rules on all other Reporting Companies that are not part of the plaintiff group (which comprises approximately 65-thousand-member organizations out of the nearly 40 million estimated Reporting Companies in 2024).
What Happens Next?
On March 11, 2024, the U.S. government appealed the District Court of Alabama’s ruling to the United States Court of Appeals for the Eleventh Circuit. It is expected that the U.S. government will request a “stay” on the injunction rendered by the March 1 Ruling, thereby maintaining the full force and effect of the CTA until after the appeals processes have been concluded.
The timing of any final decision from the U.S. Court of Appeals for the Eleventh Circuit is uncertain. In 2023, the median time for the Eleventh Circuit to resolve a case was over 9 months. It is also quite possible that the decision rendered there is further appealed to the U.S. Supreme Court, where it is less likely to be overturned based on the composition of the Court justices.
Outlook for Businesses
There is reasonable consensus in the CTA legal community that there are weaknesses to the conclusions reached in the March 1 Ruling. While no prediction is made on the outcome of an appeal, businesses are generally guided to adopt FinCEN’s narrow interpretation of the March 1 Ruling. Business owners and their advisors are advised to exercise discretion and proceed with the assumption that all companies outside the plaintiff group must adhere to the existing CTA/BOI rules. It is recommended to anticipate active enforcement of non-compliance by FinCEN, potentially leading to civil and criminal penalties, until or unless notified otherwise.
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