Federal Judge Holds that the Corporate Transparency Act Is Unconstitutional

A federal judge in the Northern District of Alabama recently held that the Corporate Transparency Act was unconstitutional because it exceeded Congress’s authority under the Constitution.

In 2021, Congress passed the Corporate Transparency Act (CTA) to prevent money laundering, serious tax fraud, the financing of terrorism, and other, similar illicit activities.  The CTA applies to corporations, LLCs, and other entities 1) created by filing documents with a secretary of state or a similar office; or 2) formed under the law of a foreign country and registered to do business in the United States (Reporting Companies).  Under the CTA, Reporting Companies are required to disclose the identity and certain information for certain individuals who 1) exercise substantial control over the reporting company; or 2) own or control at least 25% of the Reporting Company’s ownership interests.  Similar reporting requirements exist for individuals who file an application with a secretary of state or register the Reporting Company to do business in the country.  It is estimated that the CTA applies to approximately 32.6 million currently-existing entities. 

In 2022, a small business advocacy group sued the United States Department of the Treasury alleging that the CTA’s disclosure requirements exceeded Congress’s constitutional authority.  The federal judge agreed and entered summary judgment against the government.  The federal judge held that the CTA exceeded Congress’s powers over foreign affairs and national security finding that the power to govern the formation of entities is reserved for the States.

The federal judge also held that the CTA exceeded Congress’s powers under the Commerce Cause because it did not regulate economic activity.  The CTA is a federal reporting requirement that is only triggered when an entity is formed or registered.  As a result, the federal judge found that it did not regulate channels or instrumentalities of commerce or activities having a substantial effect on interstate or foreign commerce.  The federal judge rejected the Government’s argument that the CTA was designed to prevent illicit, commercial, or economic activity because the connection between formation and/or registration and such activities was attenuated.  The federal judge noted that the CTA could have overcome its constitutional shortfalls in connection with this power if it had applied to Reporting Companies engaging in commerce, or if it had prohibited the use of interstate commerce to launder money or evade taxes.

Lastly, the federal judge held that the CTA exceeded Congress’s power to levy taxes.  The Government had argued that the CTA was necessary and proper to ensure taxable income was properly reported.  While the relationship between disclosure requirements and the power to tax has been sufficient to overcome constitutional challenges, the federal judge found that access to the CTA’s database for tax administration purposes did not establish a sufficiently-close relationship.

WBK’s previous coverage of the CTA can be found here.