Corporate Transparency Act Still in Place, but Uncertain After Court Setback

By Eric Weld, MassLandlords, Inc.

Only two months after the Corporate Transparency Act (CTA) went into effect, a court challenge to its constitutionality may render the law’s future uncertain. In the meantime, Massachusetts landlords must still comply.

The U.S. Department of the Treasury, which includes the Financial Crimes Enforcement Network (FinCEN), recently came up short in an Alabama court case that deemed the Corporate Transparency Act (CTA) unconstitutional. While the plaintiffs in the case are not required to submit business information under the CTA, other business entities, including landlord corporations in Massachusetts, still must comply with the law. Image: cc by-sa AgnosticPreachersKid Wikimedia commons.

For now, the CTA legally requires all corporate entities (except plaintiffs in a recent Alabama case), including real estate businesses such as LLCs, to submit ownership beneficiary information to the Financial Crimes Enforcement Network (FinCEN). FinCEN is an agency of the United States Treasury.

The CTA was established as a measure to increase transparency among business entities and combat money laundering, tax evasion and other financial crimes.

If you are an owner or part owner of a Limited Liability Corporation, or a trust, you are considered a beneficiary and subject to the law’s reporting requirement.

The CTA became effective on Jan. 1, 2024. Any business entity established before that date must submit a Beneficial Ownership Information (BOI) report by Jan. 1, 2025. Businesses begun after Jan. 1, 2024, are allowed only 90 days to submit a BOI. Penalties for not complying with the CTA requirement include fines of up to $10,000, and possibility of imprisonment.

Alabama Court: CTA is Unconstitutional

On March 1, 2024, the federal district court in the Northern District of Alabama, Northeastern Division, ruled that the CTA exceeded the bounds of the U.S. Constitution in the case National Small Business United et al. v. Yellen et. al. The district court ruling was decided by U.S. District Judge Liles C. Burke. The listed defendant is Janet Yellen, U.S. Secretary of the Treasury.

The court declared that the law “cannot be justified as an exercise of Congress’ enumerated powers.” The decision further explains that the CTA’s reporting requirements exceed constitutional limits on the legislative branch of the U.S. Congress, “and lacks a sufficient nexus to any enumerated power to be a necessary or proper means of achieving Congress’ policy goals.”

Under the ruling, FinCEN and the Department of the Treasury are disallowed to require the case’s plaintiffs to disclose corporate beneficiaries. FinCEN, in a March 4, 2024, press release responding to the Alabama district court decision, stated that it will refrain from enforcing the BOI requirement for the case’s plaintiffs. It is implied – and safest to assume – that the CTA reporting requirement still applies for all other business beneficiaries.

The lawsuit challenging the CTA was filed by National Small Business Association (NSBA) and Isaac Winkles, a member of the business group. NSBA is an advocacy group with more than 65,000 members nationwide that lobbies for fair business taxes, laws and regulations on behalf of its members.

CTA Decision in Appeal

It’s difficult to project the future of the CTA in light of the NSBA case ruling. The law was originally passed in 2021 with overwhelming bipartisan support. Both the U.S. House of Representatives and Senate amassed a two-thirds vote to override a veto of the law’s passage by then-President Donald J. Trump. Several trade and advocacy groups – including the Main Street Alliance, Financial Accountability and Corporate Transparency (FACT) and Transparency International U.S. – also supported the law by filing amicus briefs in support of the CTA in the National Small Business United v. Yellen case.

The Department of the Treasury was quick to appeal the district court ruling. On March 11, 2024, only 10 days after the Alabama decision, the treasury filed with the U.S. Court of Appeals for the Eleventh Circuit. The court has granted expedited treatment to the appeal, but it could take more than a year to receive a decision. If the Eleventh Circuit decision holds up in appeal, it could muddy the definitions of who is required to report to FinCEN. For now, the court decision only applies to plaintiffs in the case: NSBA members as of March 1, 2024. If the appeals court agrees with the district court’s decision, the case could head to the U.S. Supreme Court.

We will continue watching the course of the CTA in court, and keep readers informed. Meanwhile, real estate business and trust beneficiaries should take seriously the legal obligation to submit required information. Penalties for not doing so are potentially extreme.