Corporate Transparency Act ruled unconstitutional: What it means for Beneficial Ownership Reporting

A Federal District Court held that the Corporate Transparency Act is unconstitutional, stating it “exceeds the Constitution’s limits on Congress’ power."

In a 53-page opinion released late on Friday, March 1, 2024, U.S. District Court Judge Liles C. Burke granted summary judgment for the National Small Business Association (NSBA), ruling that the Corporate Transparency Act (CTA) is unconstitutional and permanently enjoining the government from enforcing the CTA against the plaintiff. 

In their lawsuit, filed in 2022, the NSBA contended that the CTA unfairly burdens small businesses by requiring them to divulge “highly personal” details to FinCEN. In addition, the NSBA argued that small businesses could face average costs of $8,000 in the first year of compliance (per court filings).

What the CTA judgment means for BOI reporting

At first glance, the summary judgment could be read as banning the Treasury and any other agency of the federal government from enforcing the CTA. However, the court's ruling prohibits CTA enforcement only against the NSBA itself and all of its members. 

The Treasury Department's Financial Crimes Enforcement Network made its interpretation of the ruling clear in a statement issued late Monday. FinCEN stated that the ruling applies to the plaintiffs, "Isaac Winkles, reporting companies for which Isaac Winkles is the beneficial owner or applicant, the National Small Business Association, and members of the National Small Business Association (as of March 1, 2024)." As such, those individuals and entities are not required to report beneficial ownership information to FinCEN at this time.

The March 1 judgment applies to 0.1%-0.2% of the small business owners FinCEN estimates are impacted by the Corporate Transparency Acts' Beneficial Ownership Information filing requirement. 

The ban on the CTA's enforcement is limited to the NSBA and its 60,000+ members — an estimated 40% of whom will be exempt from filing beneficial ownership information reports in any case due to falling under one of the 23 named exemptions or the large entity filing exemption. It appears that no more than 40,000 small businesses will be affected by the ruling compared to the over 30 million small businesses that FinCEN estimates will be required to file BOI reports in 2024.

Given the narrow nature of this summary judgment, unless the Treasury Department suspends enforcement of CTA for all 30+ million businesses that are obligated to file, CTA BOI reports will need to be filed by all of those tens of millions of businesses except for the less than 65,000 NSBA members to which the decision applies.

Next steps in the Corporate Transparency Act court case

As of now, there have been no public announcements regarding next steps. However, in conversations with two Treasury Department officials, it was made clear that the decision will be appealed and a stay of judgment request will be filed with the district court.

Stay of judgment: If the Treasury does appeal the district court's decision to the Eleventh Circuit Court of Appeals, it will also most likely request a stay of judgment while the appeal is processing. A stay of judgment is exactly what it sounds like — the decision is paused or "stayed" for a specific period of time, usually while the appeal process takes place. 

If the Treasury applies for a stay, and it is granted, the district court's order to cease enforcement of the CTA against the NSBA and its members would be lifted. If the stay isn't granted at the district court level, the Treasury will likely appeal that decision to the Eleventh Circuit Court of Appeals.

Appeal the decision: The Treasury is expected to appeal the summary judgment in its entirety to the Eleventh Circuit Appeals Court. The appeals court would then likely consider the district court's decision on its merits. Keep in mind, the district court did not consider the facts of the case, but instead the court issued a summary judgment ruling on the law.

No matter how the Eleventh Circuit Court of Appeals rules, this case is likely to ultimately end up being presented to the U.S. Supreme Court.

What the CTA ruling means for small businesses 

Not much has changed for most small businesses. The summary judgment applies to somewhere between 0.1% – 0.2% of the over 30 million firms that FinCEN estimates will be required to file initial BOI reports in 2024, based on the NSBA's membership as of March 1, 2024. 

As of this article's publication date, no other lawsuits against the CTA are in progress. While multiple organizations — such as the AICPA, the American Bar Association and the American Bankers Association — have all written letters requesting a year's delay in CTA enforcement, none have stated an interest in bringing a suit. Likewise, neither Congress nor the Treasury has entertained a delay beyond Jan. 1, 2024.

Given the extremely limited reach of the ruling, it's doubtful that the Treasury and its FinCEN arm will issue guidance universally suspending CTA enforcement while the appeals process plays out, beyond the FinCEN statement issued on March 4, 2024.

Many believe that all reporting companies facing CTA deadlines should seriously consider filing, even if the Federal District Court's ruling covers them. Businesses that fail to file in time to meet their CTA deadlines are betting on the NSBA prevailing in the courts. Meanwhile, if the UST prevails, these businesses will potentially face significant civil fines, interest, and penalties, as well as possible criminal penalties, including jail time. 

Choosing to file means potentially losing their filing fees and any cost incurred if they decide to use an advisor. However, filing provides peace of mind – staying in CTA compliance means there's no chance of facing more stringent financial and criminal penalties for failure to file.

Impact of the Corporate Transparency Act ruling on accounting firms

At this time, anyone previously required to file BOI reports under the CTA isn't affected by the summary judgment unless they were a current NSBA member as of March 1, 2024. 

However, plan to have an influx of client inquiries about the CTA and BOI reporting. The CTA and BOI reporting requirements have not been widely covered in mainstream media until now. CPAs should be prepared to field questions from clients about the CTA and provide advisory and compliance services if they choose to,  

Accounting firms should take note of the potential risks they face and guidance concerning the issuance of engagement letters and professional insurance coverage for the provision of CTA BOI reporting services, covered in this article discussing BOI liability insurance coverage. 

What's next for the CTA and BOI

Right now, it's a game of "hurry up and wait." Waiting for the appeals process to run its course, waiting for any additional guidance following this decision, waiting to see if Congress chooses to act. To be clear, Congressional action is unlikely at this time, given the laundry list of other items facing Congress, the fact that this is an election year, and Congress' unwillingness to do anything regarding CTA up until now. However, the mass media and social media attention CTA and BOI reporting is now getting as the result of the ruling in this case could create something of a groundswell to move Congress and/or the UST to action. 

Clearly, this all remains a moving target, and developments should be monitored closely. This article will be updated as developments come in.

This article was originally published in Accounting Today on March 5, 2024.