Pushback Against Corporate Transparency Act Filing Requirements Continues

Another case alleging that the Corporate Transparency Act’s beneficial ownership reporting requirements are unconstitutional has been filed — while cases in other jurisdictions continue forward. Meanwhile, lawmakers have proposed bills seeking to upend the law.

The Corporate Transparency Act was enacted in 2021 with the intention of combating money laundering, financing of terrorist activities, and tax evasion. It requires business entities to file beneficial ownership information about their owners, officers, and other control persons with Treasury’s Financial Crimes Enforcement Network (FinCEN). Initial reporting requirements went into effect this January, and existing businesses are generally required to file reports by January 1, 2025. However, many have raised concerns about the constitutionality of the reporting requirements and the stiff penalties for noncompliance — up to $10,000 in fines and up to two years imprisonment.

Litigation update.

On July 29, yet another case challenging the constitutionality of the Corporate Transparency Act was filed — this time in the US District Court for the District of Utah. (Taylor v. Yellen, No. 2:24-cv-00527) The case was brought by Utah business owner Phillip Taylor and the nonprofits The People Restored, Ranchers Cattlemen Action Legal Fund United Stockgrowers of America, and Utah OSR Land Cooperative. The plaintiffs’ complaint echoes those filed in other federal district courts that contend the Corporate Transparency Act violates plaintiffs’ Fourth Amendment rights against unreasonable search and seizure, privacy rights, and due process rights, and that Congress exceeded its authority in passing the law.

The Utah plaintiffs also claim the law violates their right to associate, noting that the nonprofit plaintiffs’ members “often have political opinions or statements that are not always in line with the mainstream politics” and that they “are concerned about or have experienced harassment or increased government oversight as a result of information being shared about those connected to or associated with their business.” And they allege the law unconstitutionally conscripts them by tasking them, “at the pain of jail time, with policing others and informing the government of information it desires.”

Meanwhile, in a case brought in the U.S. District Court for the Western District of Michigan, both sides have filed motions for summary judgment. (Small Business Association of Michigan v. Yellen, No. 1:24-cv-00314) The plaintiffs’ July 26 brief focuses on the Fourth amendment unlawful search and seizure argument, taking issue with the government’s stance that “the requirements for a warrant or a certain level of suspicion” apply only to searches that are “discretionary and often physical.”

The plaintiffs counter that a nondiscretionary search is not “transformed into a reasonable, Fourth-Amendment-compliant search merely because that same level of intrusion is applied to everyone.” And the plaintiffs take issue with the government’s position that “the Fourth Amendment distinguishes between the forcible disclosure of electronic data and the forcible disclosure of physical records.”

The Michigan plaintiffs’ brief also posits that the government inappropriately relies on a 1974 US Supreme Court case finding that Bank Secrecy Act reporting requirements were reasonable because they were “sufficiently described and limited in nature” and “sufficiently related to a tenable congressional determination as to improper use of transactions of that type in interstate commerce.” (California Bankers Association v. Shultz, 416 U.S. 21 (1974)) The reporting requirements in Shultz were much narrower, say the plaintiffs, and disclosure was only required when “there was already a level of individualized suspicion.” And Shultz involved reporting requirements imposed not on small businesses, but on banks, which were “already-heavily regulated entities,” the plaintiffs argue.

And oral arguments before the 11th U.S. Circuit Court of Appeals have been scheduled for late September in the case that is furthest along — National Small Business United v. Yellen. (No. 24-10736) In March, the U.S. District Court for the District of Alabama in that case found that the Corporate Transparency Act’s reporting requirements are unconstitutional (133 AFTR 2d 2024-885)

Legislative efforts.

Meanwhile, some lawmakers are pushing for changes the underlying statute. One common refrain is to delay the mandatory reporting deadline, allowing more time for FinCEN to educate small businesses about the requirements. Most recently, Congressman Zachary Nunn (R-IA) filed a bipartisan bill (H.R. 9278) to push the filing deadline back by one year for those defined as a “small business concern” under the Small Business Act.

“Small businesses across America need more time to learn about FinCEN’s costly and burdensome beneficial ownership reporting requirement” said co-sponsor Representative French Hill (R-AR). He added that “[e]xtending the deadline another full year will give small businesses time to file while we fight in Congress to save small businesses from the severe penalties for non-compliance.”

Nunn has taken jabs at the law before — most recently in an April bill (H.R. 7963) calling for FinCEN to submit quarterly reports to Congress on the number of companies submitting beneficial ownership reports. At a July hearing, Treasury Secretary Janet Yellen said 2.7 million businesses had filed to date — but Representative Ralph Norman (R-SC) pointed out “that’s kind of a low percentage” of the 32.6 million businesses that need to be educated about the law.

Nunn is also the House sponsor of bicameral legislation (S. 3625/H.R. 5119) that would remove the option for filing companies to state that they are unable to obtain or identify information regarding their ownership. He explained in a press release that this option, among other regulatory provisions, “deviated significantly from the bill passed by Congress” and “undermines the effectiveness of the law.”

Another approach to countering the reporting requirements, taken last month in a Republican-backed bill (H.R. 9045), is exempting certain types of businesses. That bill, introduced by Representative Richard McCormick (R-GA), would exempt homeowners associations under Code Sec. 528 from the reporting requirements. According to McCormick’s press release, the bill would “provid[e] relief to approximately 350,000 community associations across the United States.”