Alabama judge finds the Corporate Transparency Act unconstitutional, DOJ quickly appeals

Courts Alabama Corporate Transparency Act Constitution Congress FinCEN Department of Treasury

On March 1, the federal district court in the Northern District of Alabama entered a final declaratory judgment concluding that the Corporate Transparency Act (CTA) is unconstitutional. The plaintiffs, including a non-profit small business association consisting of more than 60,000 small business members as well as an individual small business owner, sued the Treasury Department, Secretary Janet Yellen, and FinCEN Acting Director Himamauli Das in their official capacities, alleging that the CTA’s mandatory disclosure requirements violate the First, Fourth, Fifth, Ninth, and Tenth Amendments and exceed Congress’s authority under Article I of the Constitution.

Corporations, LLCs, or other similar entities that are either “(i) created by the filing of a document with a secretary of state… or (ii) formed under the law of a foreign country and registered to do business in the United States” are required to provide certain beneficial ownership information, as well as disclose any related changes to FinCEN under the CTA, excluding exempt entities. The CTA was passed in 2021 as part of the National Defense Authorization Act and required most entities incorporated under state law to disclose beneficial ownership information to FinCEN to prevent financial crimes often committed through shell corporations. In September 2022, FinCEN issued a final rule implementing the CTA, which went into effect on January 1 of this year, and required currently existing entities and five million new entities formed each year from 2025 to 2034 to disclose the identity and information of any “beneficial owner” to FinCEN (see Orrick Insight here).

According to the court, the CTA exceeds the Constitution’s limits on Congress’s power and does not have a strong enough connection to any of Congress’s listed powers to be considered a necessary or appropriate way to reach Congress’s policy objectives. The court rejected the government’s claims that the CTA is covered by various constitutional provisions, including the Commerce Clause, Taxing Clause, Necessary and Proper Clause, and Congress’s powers related to foreign affairs and national security.

The judgment permanently enjoined the Department of the Treasury and FinCEN from enforcing the CTA against the plaintiffs and as a result they are not required to report beneficial ownership information to FinCEN at this time. The order does not ban enforcement of the CTA and its beneficial ownership disclosure requirements to FinCEN generally.

On March 11, the U.S. Department of Justice filed a notice of appeal to the U.S. Court of Appeals for the Eleventh Circuit after U.S. District Judge Liles C. Burke’s March 1 ruling.