Corporate Transparency Act Case Wrongly Decided, Say Lawmakers

Five lawmakers have submitted an amicus brief arguing that an Alabama federal district court wrongly found the Corporate Transparency Act (CTA) — under which legal entities are required to submit beneficial ownership information (BOI) — exceeded Congress’ constitutional authority.

The CTA, intended to combat money-laundering, financing of terrorist activities, and tax evasion, requires certain business entities to file information about their owners, officers, and other control persons with Treasury’s Financial Crimes Enforcement Network (FinCEN). The law passed as part of the National Defense Authorization Act for Fiscal Year 2021, and initial reporting requirements went into effect January 1, 2024.

However, despite its worthy intentions, the CTA has not been without opposition. The National Small Business Association and its member, Isaac Winkles, challenged the law in Alabama district court, arguing the CTA’s burden would “fall substantially and disproportionately on privately-owned small businesses and non-commercial organizations” and that the information disclosure requirements — with criminal sanctions for those who fail to comply — violate the Fourth, Fifth, and Ninth amendments. The plaintiffs raised privacy and due process concerns.

And in March, the district court sided with the National Small Business Association, rejecting the government’s arguments that Congress has authority under its foreign affairs, commerce, and tax powers to enact the CTA. (National Small Business United (DC AL 3/1/2024) 133 AFTR 2d 2024-885) The decision means that National Small Business Association members are not subject to BOI reporting requirements at this time, though all other business entities still must comply with them. The case is now on appeal before the Eleventh Circuit.

The American Institute of Certified Public Accountants has since urged FinCEN to delay all enforcement, saying the Alabama decision is leading to confusion. Meanwhile, the Small Business Association of Michigan has also filed suit challenging the CTA’s constitutionality.

In the amicus brief, Senators Sheldon Whitehouse (D-RI), Ron Wyden (D-OR), Elizabeth Warren (D-MA), and Jack Reed (D-RI), and Representative Maxine Waters (D-CA) contend that Congress’ enactment of the CTA is a “routine exercise of core authorities” under Article I of the Constitution. The congressional record shows that over two million corporations and limited liability companies are formed in the US annually and that some of these are used to “facilitate illicit activity” including terrorism, “abuse the American financial system,” and evade taxes. Collecting BOI is “necessary to protect national security and promote U.S. interests abroad, regulate interstate and international commerce, and facilitate tax collection,” the lawmakers conclude.

“The CTA is narrowly tailored to help law enforcement and national security officials identify the real owners of shady American shell companies,” Whitehouse told Checkpoint. “This aberrant decision issued by a lone district judge in Alabama disregarded more than a decade of painstaking bipartisan congressional deliberation and is based on an extraordinarily narrow view of Congress’ powers. Our brief makes clear that Congress was exercising its core constitutional lawmaking role when enacting the CTA to boost transparency in business ownership and better protect Americans’ national security and public safety.”

The lawmakers’ amicus brief is not alone; other groups also have come out in support of the government, arguing the CTA is within Congress’ authority. The Financial Accountability and Corporate Transparency (FACT) Coalition, Transparency International, and small business organization Main Street Alliance jointly submitted an amicus brief arguing that the “CTA’s reporting requirements are neither unusual, nor unprecedented” and that the reporting requirements will protect small businesses from “from unfair and fraudulent competition” at “minimal” cost.

FACT’s Zorka Milin told Checkpoint, “We applaud the lawmakers for making a strong stand for Congress’ constitutional powers to protect the US financial system from terrorists, drug traffickers, tax cheats and other criminals who routinely use anonymous shell companies. The district court’s second-guessing of Congress was out of line, and we expect the lower court decision to be reversed on appeal.”

NYU’s Tax Law Center submitted an amicus brief focusing on how the CTA will help the IRS shrink the tax reporting gap, “better trace ownership of income,” and “uncover tax fraud and evasion.” Congress’ tax power “can be effective only if the IRS can identify who is responsible for paying tax on particular income (which, for business income, is often the individual owners, at their individual rates, rather than the entity itself),” the brief argues. It points to existing information-gathering tools under Code Sec. 6011(a) and Code Sec. 7602(a)(2) that give the IRS authority to require taxpayers to include certain information with their returns and to summon people who have information about delinquent taxpayers. And the expected impact of the CTA, says the brief, is more efficient audits and an increase in “voluntary compliance” with tax laws.

Thalia Spinrad, a Tax Law and Policy Fellow NYU’s Tax Law Center, reflected on the amici briefs in support of the government, saying “[w]hat we’re seeing the briefs explain is that the district court’s decision was severely flawed on many fronts, including tax, where Congress’ authority to pass laws that encourage taxpayers to comply with their tax obligations and that root out tax evasion is well-established.”

Thomas Lee, an attorney for the National Small Business Association, agreed that “fighting money laundering and terrorism financing are important US national interests.” However, he told Checkpoint that “nothing in the Constitution gives Congress the power to create a digital mug book of millions of ordinary Americans who have done nothing wrong other than set up entities under state law for innocent and legitimate reasons.”