Introduction

Before examining the constitutionality of the Corporate Transparency Act, we need to know what the act is. The Corporate Transparency Act (CTA) is a federal law that, effective January 1, 2024, requires most small U.S. businesses to submit to the Financial Crimes Enforcement Network (FinCEN) of the United States Treasury Department the business’ name, street address, and EIN. Additionally, owners, organizers, and incorporators of such businesses must report to FinCEN their name, birthdate, home or business address, and driver’s license number or other identification number, such as from a passport (the CTA calls this personal information “beneficial owner information,” or BOI for short). An image of the document containing the person’s identification number must also be uploaded to FinCEN. Congress passed the CTA to make it easier for law enforcement, both in the U.S. and foreign, to investigate suspected terror funding, money laundering, and tax evasion, which are often conducted through shell companies.

Reporting Companies

Only so-called “reporting companies” must report this information to FinCEN. The CTA defines a reporting company as a corporation, limited liability company, or any other such entity created by filing a document with a secretary of state.[1] The definition also includes foreign business entities that are registered to do business in any state within the United States.[2] However, business entities with more than 20 full time employees in the United States, with more than $5 million in gross receipts, as reported on the entity’s prior year federal tax report, and with a physical office operating in the United States, are exempt from these reporting requirements.[3] But, because no company formed on or after January 1, 2024, will have filed a prior year federal tax report, all companies formed on or after that date, regardless of the number of employees they have, will not qualify for this size exemption, at least for the year in which they are formed, and will therefore be required to file this information with FinCEN.

Also generally exempt are certain companies regulated by the federal government, such as companies with stock traded on a public stock exchange, broker-dealers, banks, credit unions, investment companies, investment advisers, pooled investment vehicles, venture capital fund advisors, insurance companies, public accounting firms, public utilities, tax exempt organizations, certain subsidiaries wholly controlled by any such exempt entity, and inactive entities.[4]  An entity is inactive if it existed on or before January 1, 2020, is not engaged in active business, is not owned by a foreign person, has not experienced any change in ownership in the most recent 12 months, has not in the most recent 12 months sent or received funds greater than $1,000 through any financial account in which the entity had an interest, and does not otherwise own assets.[5] A reporting company that is not operational but that otherwise does not qualify as an inactive company must still comply with the filing requirements of the CTA until the reporting company is dissolved pursuant to the laws of the state where it was formed (the dissolution must be reported to FinCEN).

Beneficial Owners

Only so called “beneficial owners” are required to report their BOI to FinCEN. The definition of a beneficial owner is not limited to ownership of a reporting company. Instead, the definition includes any individual who, directly or indirectly, either (i) exercises substantial control over the reporting company or (ii) owns or controls at least 25% of the ownership interests of the reporting company.[6]

Substantial Control

The CTA’s definition of substantial control is broad and ambiguous. The definition includes individuals who exercise substantial control over a reporting company include (A) senior officers of the reporting company, (B) individuals with the authority to appoint or remove any senior officer or to appoint or remove a majority of the members of the board of directors, or similar body, and (C) individuals who have substantial control over important decisions made on behalf of the reporting company, including, but not limited to decisions related to: (1) the nature, scope, and attributes of the business, including the sale, lease, mortgage, or transfer of any principal assets of the reporting company, (2) the reorganization, dissolution, or merger of the reporting company, (3) the major expenses or investments, equity, significant borrowing, or operational budget approval of the reporting company, (4) the selection or termination of business lines or ventures, or geographic focus of the reporting company, (5) the compensation schemes of senior officers, (6) the authority to enter into or terminate contracts of the reporting company, or (7) the amendment of any substantial governance documents of the reporting company, including its articles of organization, operating agreement, articles of incorporation, bylaws, and the documents containing significant policies or procedures of the reporting company.[7]

Substantial control also includes any individual, including “a trustee of a trust or similar arrangement,” who, directly or indirectly, exercises substantial control over a reporting company through: (1) “[b]oard representation”, (2) ownership of a majority of the company’s voting rights, (3) rights related to any “financing arrangement or interest in a company,” (4) control over any intermediary that exercises substantial control over the company, (5) “[a]rrangements or financial or business relationships…with other individuals or entities acting as nominees,” or (6) “any other contract, arrangement, understanding, relationship, or otherwise.”[8]

Ownership Interest

An individual who lacks substantial control over a reporting company is still a beneficial owner if the individual owns or controls at least 25% of the ownership interests of the reporting company.[9] The definition of an ownership interest provided by the regulations is expansive and includes the ownership of “[a]ny equity, stock, or similar instrument;” any “preorganization certificate or subscription;” or any “transferable share of, or voting trust certificate or certificate of deposit for, an equity security, interest in a joint venture, or certificate of interest in a business trust.”[10] The definition also includes any capital or profit interest in an entity, certain convertible instruments and warrants; certain options to buy or sell certain ownership interests; and “a[n]y other instrument, contract, arrangement, understanding, relationship, or mechanism used to establish ownership.”[11]

An individual may, directly or indirectly, own or control an ownership interest of a reporting company through any contract or understanding, including through the joint ownership of an undivided interest in such ownership interest; through another individual “acting as a nominee, intermediary, custodian, or agent on behalf of such individual;” or, as to a trust or similar arrangement that holds an ownership interest in a reporting company: a trustee of a trust with the authority to dispose of trust assets, a beneficiary of a trust who is the sole permissible recipient of income and principle from the trust, or who has the right to demand a distribution of substantially all the assets from the trust, or a grantor or settler who has the right to revoke a trust or to otherwise withdraw the assets of a trust.[12]

Applicants

Lastly, “applicants” must also provide their BOI to FinCEN. The CTA defines an applicant as any “individual” who filed with any state the document that created a domestic reporting company and the individual who filed the document that first registered a foreign reporting company with any state.[13] If more than one individual is “involved in the filing of the document,”[14] then the applicant is the individual who is “primarily responsible for directing or controlling the filing.”[15] As such, applicants are, for example, the organizers of limited liability companies and incorporators of corporations.

Initial Report

Each reporting company formed on or after January 1, 2024, must file an initial report within 30 days after the formation of the reporting company, and each reporting company created before January 1, 2024, shall file an initial report no later than January 1, 2025.[16] The initial report must contain the above reporting company information and the BOI for each beneficial owner and applicant. Additionally, any change to information filed with FinCEN must be reported to FinCEN within 30 days after the date on which the change occurs,[17] and any inaccurate information filed with FinCEN must be corrected within 30 days after the date on which the reporting company becomes aware of the inaccuracy.[18] The safe harbor provisions of the CTA apply only if said 30 days occurs within 90 days after the date on which the inaccurate information was reported.[19]

Access to Beneficial Owner Information

FinCEN may disclose information provided under the CTA to any federal agency engaged in a national security, intelligence, or law enforcement activity; to any state, local, or tribal law enforcement agency, if a court has authorized access to the information in relation to a criminal or civil investigation; to a federal agency on behalf of a law enforcement agency, prosecutor, or judge of a foreign country; to a financial institution, with the consent of the reporting company; and to federal regulators.[20] Such disclosures may be made only upon a request to FinCEN and only pursuant to the protocols described in the CTA and related regulations.[21]

Penalties

Reporting Violations

The circumstances under which an individual can be penalized for reporting violations are ambiguous. For example, the CTA states that any “person” that provides false or incomplete beneficial owner information to FinCEN, shall “be liable to the United States for a civil penalty of not more than $500 for each day that the violation continues,” or imprisonment of not more than two years, or both.[22] (Such fines are capped at $10,000.)[23] The regulations define a “person” as “any individual, reporting company, or other entity”[24] and seem to state that a person can be penalized if the reporting company fails to file an initial report and if such person either “causes” the failure or is a senior officer of the reporting company. Therefore, it seems that senior officers of a reporting company can be penalized for failing to file an initial report. But the liability of all other individuals for a reporting company’s failure to file an initial report is unclear, as neither the CTA nor its regulations affirmatively obligate any individual to file an initial report.

Furthermore, neither the CTA nor its regulations provide clear directions on how to submit information to FinCEN. For example, the CTA merely states that the information shall be submitted to FinCEN in accordance with Treasury regulations.[25] But those regulations merely state that each report “shall be filed with FinCEN in the form and manner that FinCEN shall prescribe in the forms and instructions for such report.”[26] The regulations do not provide those forms or instructions, nor do they provide any directions on where or how to access the forms and instructions, much less even a website address where the forms and instructions can be accessed and submitted. Apparently, Congress and the Treasury Department assume that an individual possessing an interest in a reporting company will hunt for the forms and instructions online and eventually navigate their way to the above referenced website, where the information may be submitted.

Disclosure Violations

Any person who knowingly discloses or knowingly uses information reported under the CTA in any manner except as permitted by the CTA shall be fined $500 for each day that the violation continues, up to $250,000, imprisoned for not more than five years, or both. If such disclosure or use also violates another law of the United States or is part of a pattern of any illegal activity involving more than $100,000 in a 12-month period, then such fines shall not exceed $500,000, or the person shall be imprisoned for not more than 10 years, or both.[27]

Constitutionality of the Corporate Transparency Act

Two lawsuits have been filed in federal court challenging the constitutionality of the Corporate Transparency Act. In the first case, the federal court for the Northern District of Alabama, on March 1, 2024, ruled that Congress lacks the constitutional power to enact the CTA and enjoined the Treasury Department from enforcing the act.[28] However, that judgment applies only to the parties to that lawsuit and does not apply nationwide. The Treasury Department has appealed the judgment, which is pending before the Eleventh Circuit Court of Appeals.[29] The second lawsuit, filed March 15, 2024, also challenges the constitutionality of the Corporate Transparency Act. The parties are seeking summary judgment.

National Small Business United v. Janet Yellen

The first case challenging the constitutionality of the Corporate Transparency Act, was filed on November 15, 2022, by the National Small Business United and one of its members. They are suing the Treasury Department, its secretary, Janet Yellen, and the acting director of FinCEN, Himamauli Das, claiming that Congress lacks the constitutional power to require small businesses to comply with the CTA and that it violates various amendments to the United States Constitution.[30] The United States Department of Justice, representing the defendants, asserts that Congress’s power to enact the CTA is derived from its (i) foreign affairs and national security powers, (ii) Commerce Clause powers, and (iii) power of taxation. Liles C. Burke, United States Judge for the Northern District of Alabama, disagreed.[31] Accordingly, on March 1, 2024, he permanently enjoined the defendants from enforcing the CTA on the grounds that the CTA exceeds Congress’s constitutional powers.

Foreign Affairs and National Security Powers

In its first argument, the Justice Department claimed that collecting the company and beneficial owner information required under the CTA was necessary to prevent foreign entities from harming the national security interests of the United States through the use of shell companies formed within the United States.[32] But, said Judge Liles, at a fundamental level  the United States is a dual republic, wherein certain powers belong exclusively to the states. The formation of business entities is one of those reserved powers, he said. Although the CTA does not seek to directly regulate this state power, he said, requiring owners of such businesses to report company information and beneficial owner information to the executive branch of the federal government pursuant to the national security powers of Congress is too much of a reach into this space reserved to the states.

Commerce Clause Powers

In its second argument, the Justice Department claimed that the CTA is within Congress’s commerce clause powers.[33] The Commerce Clause of the United States Constitution empowers Congress to regulate: (i) the channels of foreign and interstate commerce, (ii) the instrumentalities, things, and persons in foreign and interstate commerce, and (iii) activities that have a substantial effect on foreign and interstate commerce.[34] Channels of commerce include interstate transportation routes such as highways, railroads, waterways, airspace, telecommunications networks, and the national securities markets.[35] Instrumentalities of commerce include the people and things that move in the channels of commerce, such as vehicles, airplanes, boats, and telecommunications devices.[36]

Judge Liles acknowledges that some, if not most, reporting companies likely use channels of interstate and even foreign commerce. But that use, he said, is not what is regulated by the CTA.[37] Instead, he said, the CTA simply mandates the submission of information to FinCEN, regardless of whether the reporting company uses any channel of interstate or foreign commerce.[38] Thus, the CTA’s downfall, said Judge Liles, is that it does not limit its application to business entities using channels of interstate or foreign commerce. Congress could have remedied this defect, he said, by making the CTA’s reporting requirements applicable only to businesses engaged in interstate or foreign commerce.[39]

Judge Liles additionally acknowledged that, in some cases, purely intrastate activities can have a substantial effect on interstate commerce, if that activity is similar enough to other activities that significantly affect interstate commerce. But, he said, incorporation, which is always an intrastate activity “is ‘in no sense an economic activity that might, through repetition elsewhere, substantially affect any sort of interstate commerce.’”[40] In fact, Judge Liles reiterated, the CTA, on its face, regulates neither “economic [n]or commercial activity.”[41]

Power of Taxation

In its final argument, the Justice Department claimed that the CTA was necessary and proper to the enforcement of Congress’s taxing powers. The United States Constitution empowers Congress to collect taxes, duties, and imposts.[42] Additionally, the 16^th Amendment to the Constitution, ratified on February 3, 1913, empowers Congress to collect taxes on incomes, from whatever source it is derived. However, Judge Liles said that the CTA is not within Congress’s taxing powers, as the link between Congress’s taxing powers and the collection of information pursuant to the CTA is too remote. “It would be a ‘substantial expansion of federal authority,’ he said, “to permit Congress to bring its taxing power to bear just by collecting ‘useful’ data and allowing tax enforcement officials access to that data.”[43]

Because, said Judge Liles, Congress lacks the power to enact the CTA, he did not need to examine the constitutionality of the Corporate Transparency Act in relation to possible violations of constitutional rights.

William Boyle v. Janet Yellen

The second case challenging the constitutionality of the Corporate Transparency Act was filed on March 15, 2024, in the federal District Court for the State of Maine.[44] In that case, William Boyle is seeking to enjoin United States Treasury Secretary, Janet Yellen; the United States Treasury Department; and the acting Director of FinCEN, Himamauli Das, from enforcing the CTA on the grounds that it exceeds Congress’s Article I powers and violates the 9^th and 10^th Amendments to the United States Constitution.[45] William Boyle is a resident of the State of Maine, and he is the majority owner of two limited liability companies formed under the laws of the State of Maine. Mr. Boyle claims that defendants lack the authority to enforce the CTA against him on the grounds that both limited liability companies’ sole business is the ownership of real estate in the State of Maine and that neither limited liability company participates in interstate commerce sufficient to empower Congress to mandate that he comply with the CTA. The parties have filed motions for summary judgment. The case might be decided by early autumn of 2024.

This article is for general informational purposes only, and it is not intended as legal advice. You should consult an attorney sufficiently familiar with the CTA for advice on your rights and obligations under the act.

Michael John Sewell provides representation on real estate and business law matters. Please contact Michael at (314) 942-3232 or at michael@sewelllaw.net to discuss your litigation or other legal matters.

The choice of a lawyer is an important decision and should not be based solely upon advertisements.

© 2024 Sewell Law, LC

[1] 31 USC 5336(a)(11); 31 CFR Part 1010, section 1010.380(c)(1)(i).

[2] 31 CFR Part 1010, section 1010.380(c)(1)(ii).

[3] 31 USC 5336(a)(11)(B)(xxi); 31 CFR Part 1010, section 1010.380(c)(2)(xxi).

[4] 31 USC 5336(a)(11)(B); 31 CFR Part 1010, section 1010.380(c)(2).

[5] 31 USC 5336(a)(11)(B); 31 CFR Part 1010, section 1010.380(c)(2)(xxiii).

[6] 31 USC 5336(a)(3); 31 CFR Part 1010, section 1010.380(d).

[7] 31 CFR Part 1010, section 1010.380(d)(1)(i).

[8] 31 CFR Part 1010, section 1010.380(d)(1)(ii).

[9] 31 USC 5336(a)(3); 31 CFR Part 1010, section 1010.380(d).

[10] 31 CFR Part 1010, section 1010.380(d)(2)(i)(A).

[11] 31 CFR Part 1010, section 1010.380(d)(2)(i)(B) through (E).

[12] 31 CFR Part 1010, section 1010.380(d)(2)(ii).

[13] 31 USC 5336(a)(2); 31 CFR Part 1010, section 1010.380(e).

[14] The Act does not define the term “involved”.

[15] 31 CFR Part 1010, section 1010.380(e)(3).

[16] 31 CFR Part 1010, section 1010.380(a)(1).

[17] 31 CFR Part 1010, section 1010.380(b)(2)(i).

[18] 31 CFR Part 1010, section 1010.380(b)(3).

[19] 31 CFR Part 1010, section 1010.380(a)(3).

[20] 31 USC 5336(c)(2)(B).

[21] 31 USC 5336(c)(2)(B)(i). (The regulations published so far do not appear to include such protocols.)

[22] 31 USC 5336(h)(1); 31 USC 5336(h)(3)(A); 31 CFR Part 1010, section 1010.380(g).

[23] 31 USC 5336(h)(1); 31 USC 5336(h)(3)(A)(ii);

[24] 31 CFR Part 1010, section 1010.380(g)(1).

[25] 31 USC 5336(b)(1)(A).

[26] 31 CFR Part 1010, section 1010.380(b)

[27] 31 USC 5336(h)(3)(B).

[28] National Small Business United v. Janet Yellen, et al., 5:22-cv-01448-LCB, United States District Court for the Northern District of Alabama (2022), filed November 15, 2022.

[29] Appeal No. 24-10736-JJ, Eleventh Circuit Court of Appeals.

[30] National Small Business United v. Janet Yellen, et al., 5:22-cv-01448-LCB, United States District Court for the Northern District of Alabama (2022).

[31] National Small Business United v. Janet Yellen, et al., 5:22-cv-01448-LCB, United States District Court for the Northern District of Alabama (2022), Memorandum Opinion, March 1, 2024, Doc. 51.

[32] Id.

[33] National Small Business United v. Janet Yellen, et al., 5:22-cv-01448-LCB, United States District Court for the Northern District of Alabama (2022), Memorandum Opinion, March 1, 2024, Doc. 51, at p. 26-27.

[34] National Small Business United v. Janet Yellen, et al., 5:22-cv-01448-LCB, United States District Court for the Northern District of Alabama (2022), Memorandum Opinion, March 1, 2024, Doc. 51, at p. 26, citing United States v. Morrison, 529 U.S. 598, 609 (2000).

[35] Id. at p. 27.

[36] Id.

[37] Id. at p. 28-31.

[38] Id. at p. 27-28.

[39] Id. at p. 32-33.

[40] Id. at p. 40, citing United States v. Lopez, 514 U.S. 549, 567 (1995).

[41] National Small Business United v. Janet Yellen, et al., 5:22-cv-01448-LCB, United States District Court for the Northern District of Alabama (2022), Memorandum Opinion, March 1, 2024, Doc. 51, at p. 43.

[42] Section 8 of Article I of the United States Constitution.

[43] National Small Business United v. Janet Yellen, et al., 5:22-cv-01448-LCB, United States District Court for the Northern District of Alabama (2022), Memorandum Opinion, March 1, 2024, Doc. 51, at p. 52.

[44] Boyle v. Yellen, 2:24-cv-00081-LEW, United States District Court for the State of Maine, Complaint filed March 15, 2024, Document 1.

[45] Id.