(Author’s Note: Edited to reflect Statement from the Treasury.)
You knew it was coming: the U.S. Department of Justice and Treasury Department’s Financial Crimes Enforcement Network has formally notified the U.S. District Court of Northern Alabama that they will appeal the ruling in favor of NSBA’s lawsuit to strike down the Corporate Transparency Act (CTA).
The initial ruling resulted from a lawsuit filed by the National Small Business United (also known as the National Small Business Association, or NSBA) and Isaac Winkles. On March 1, 2024, U.S. District Judge Liles C. Burke of the Northern District of Alabama, Northeastern Division, found the CTA unconstitutional “because it exceeds the Constitution’s limits on Congress’ power.”
You can read the ruling here.
How far the ruling might apply became a huge talking point. On its face, the ruling bars the U.S. Treasury from enforcing the CTA against the named plaintiffs—including the 65,000-member NSBA— but does not enjoin enforcement against others.
After the ruling, FinCEN announced that they would only follow the U.S. District Court’s ruling in favor of NSBA’s lawsuit to strike down the Corporate Transparency Act (CTA) specifically for NSBA members.
In response, NSBA President and CEO Todd McCracken said in a statement, “FinCEN continues to demonstrate its disregard for the small-business community and complete tone deafness to the significant burdens and regulatory confusion the CTA places on law-abiding business owners throughout the country.”
“A federal court has declared the CTA unconstitutional,” McCracken continued. “Rather than suspend enforcement of the CTA for all, FinCEN has declared ‘full speed ahead’ on compliance for all but the plaintiffs in the case. When coupled with the fact that FinCEN put virtually no effort into informing the public about the obligations of small businesses under the CTA, FinCEN’s unwillingness to suspend enforcement shows a clear disregard of America’s small-business owners.”
McCracken emphasized, “FinCEN should immediately reverse course and suspend enforcement of the CTA for all until these issues are finally resolved.”
Despite the statement urging complete suspension of the CTA, the NSBA expected an appeal, and their lawyer, Thomas Lee of Hughes Hubbard & Reed, said that he expected to win on appeal.
Notice of Appeal
On March 11, 2024, the government formally filed a Notice of Appeal. A Notice of Appeal places the court and other parties on notice of the intent to appeal the order. You can read it here.
After a notice of appeal is filed, the clock starts running. The next step is for the government to file a brief, explaining why they are seeking a reversal. They’ll do so in the United States Court of Appeals for the Eleventh Circuit, based at the Elbert P. Tuttle U.S. Court of Appeals Building in Atlanta, Georgia.
The United States Court of Appeals for the Eleventh Judicial Circuit was established by Congress in 1981 and has jurisdiction over federal cases in Alabama, Florida, and Georgia. The circuit includes nine district courts, with each state divided into Northern, Middle, and Southern Districts. The March 1, 2024, ruling by U.S. District Judge Liles C. Burke was out of the Northern District of Alabama, Northeastern Division.
Importantly, in civil cases like this one, an appeal doesn’t typically put a stop to the original judgment—that means that the enjoinder barring Treasury from enforcing the CTA against the NSBA remains in place while the matter is pending.
A Treasury official said, in a statement, “The Treasury Department welcomes the filing of yesterday’s appeal in this critically important case. We believe the Corporate Transparency Act (CTA) plays a vital role in protecting the U.S. financial system, as well as people across the country, from illicit finance threats, and we strongly disagree with the district court’s ruling that the overwhelmingly bipartisan CTA is unconstitutional. Treasury looks forward to working with the Department of Justice on this appeal.”
The statement continued, “Tens of millions of companies are still required to report their beneficial ownership information under the CTA, despite the court’s injunction. Other than for the named plaintiffs and NSBA members as of March 1, 2024, there is no change to the reporting obligations for the vast majority of reporting companies, who are still required to comply with the law.”
That comma placement is intentional. Treasury confirmed it was their position that only members of the NSBA as of March 1, 2024, are included in the ruling.
Background
In 2021, Congress passed the Corporate Transparency Act—or CTA—as part of the National Defense Authorization Act for Fiscal Year 2021. The law requires certain companies to file reports that identify a company’s beneficial owners with FinCEN, the Financial Crimes Enforcement Network.
For purposes of the CTA, reporting companies can be domestic companies created under the laws of a state or Indian tribe or entities formed under the law of a foreign country registered to do business in any state or tribal jurisdiction. This can include limited partnerships, limited liability partnerships (LLPs), business trusts, LLCs (including SMLLCs), and corporations—typically, any entity you would register with the state.
On January 1, 2024, the Department of the Treasury officially began accepting beneficial ownership information reports. A reporting company created or registered to do business before January 1, 2024, will have until January 1, 2025, to file its initial report, while a reporting company created or registered on or after January 1, 2024, and before January 1, 2025, will have 90 calendar days after receiving notice of the company’s creation or registration to file its initial report. Reporting companies created or registered on or after January 1, 2025, will have 30 calendar days from actual or public notice that the company’s creation or registration is effective to file their initial reports with FinCEN.
On November 15, 2022, the NSBA and Winkles, an Alabama business owner, filed suit against Janet Yellen in her official capacity as the Secretary of the U.S. Department of the Treasury, the Treasury Department, and Himamauli Das, the Acting Director of FinCEN, which is charged with carrying out the CTA.
According to the complaint, the CTA’s reporting requirements will apply to approximately 32.6 million “reporting companies” in 2024 and an estimated 5 million additional companies annually. The complaint noted that the law’s purpose “is to enhance measures to combat financial crimes, such as money laundering and terrorism financing,” which it agreed are “admirable and important aims.” However, the NSBA charged that “while attempting to fight crime, the CTA imposes its heaviest burdens on law-abiding U.S. citizens and permanent residents.”
Specifically, the NSBA alleged that the federal government is claiming powers over entity formation that traditionally belong to the states. This, they argued, violates the 9th and 10th Amendments and constitutional principles of federalism.
Opinion and Order
On March 1, 2024, Judge Burke issued his opinion and order.
In his opinion, Judge Burke, a Trump appointee, wrote, “Congress sometimes enacts smart laws that violate the Constitution.” This case, he continued, “illustrates that principle.”
Judge Burke found that “the CTA exceeds the Constitution’s limits on the legislative branch and lacks a sufficient nexus to any enumerated power to be a necessary or proper means of achieving Congress’ policy goals” and granted the NSBA’s motion for summary judgment.
Response And Next Steps
According to a statement from the NSBA, “The federal government had no choice but to appeal. We are glad that it did, so that the Eleventh Circuit, which also has jurisdiction over Georgia and Florida, can now affirm the ruling we obtained from the Northern District of Alabama that the CTA is unconstitutional.”
The NSBA added, “FinCEN should immediately reverse course and suspend enforcement of the CTA for all until these issues are finally decided.”
That isn’t likely to happen. The NSBA hinted at as much, saying, “If Congress does not repeal the CTA, eventually the Supreme Court will need to address this issue as well and strike down the statute for the entire United States.”
What is certain, however, is that this matter is far from over. Stay tuned.
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