On March 1, 2024, Judge Liles C. Burke, U.S. District Court for the Northern District of Alabama (Northeastern Division) issued a 53-page memorandum opinion, declaring that the Corporate Transparency Act (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.” Judge Burke granted plaintiffs’ National Small Business United (NSBA) and Issac Winkles, an NSBA member and owner of two small businesses, motion for summary judgment. [Nat’l Small Bus. United v. Yellen, No. 5:22-cv-01448-LCB (N.D. Ala. 2022)].
Judge Burke finds that the U.S. government’s arguments that the CTA is within Congress’ broad powers to regulate commerce, oversee foreign affairs and national security, and impose taxes and related regulations are not supported by precedent.
The opinion does not reach the plaintiffs’ arguments that the CTA violates the First, Fourth, and Fifth Amendments of the U.S. Constitution.
In his decision Judge Burke observes that civil and criminal penalties apply to violations. He notes that the CTA applies to 32.6 million currently existing entities and 5 million new entities formed each year from 2025 to 2034.
The opinion finds that the plaintiffs have standing as Winkles is a regulated party and as a member of the NSBA, and that the NSBA has associational standing as a result.
Congress’ Power over Foreign Affairs and National Security
The CTA is not a proper use of the Congress’ power over foreign affairs and national security. The opinion states the CTA “convert[s] an astonishing amount of traditionally local … conduct into a matter for federal enforcement, and involve[s} a substantial extension of federal police resources. Accordingly, Judge Burke reasons that compliance with international standards may be good policy, but it is not enough to make the CTA “necessary” or “proper.”
The opinion finds that the Congress’ foreign affairs powers do not authorize the CTA. Those powers do not extend to purely internal affairs, especially in an arena traditionally left to the States (the authority to incorporate).
The opinion rules that the CTA does not regulate commerce on its face, have a jurisdictional hook, or serve as an essential part of a comprehensive regulatory scheme. Hence, the CTA is outside Congress’ power to regulate non-commercial, intrastate activity. In particular, the opinion underscores that the act of incorporation is not enough to invoke the Commerce power. “The plain text of the CTA does not regulate the quintessentially economic activities the Government asserts or require entities to engage in those activities to be regulated.”
Taxing Power & Necessary and Proper Clause
The opinion rules that although the relationship between disclosure provisions and the taxing power is “well recognized,” the cases on which the Government relies show that giving access to the CTA’s database for tax administration purposes is not sufficient to establish a close enough relationship here.
The decision by Judge Burke will certainly not be the last word. The Court has permanently enjoined the government from enforcing the CTA against the named plaintiffs and ordered a further hearing on the award of costs of litigation. As a result, enforcement of the CTA is likely to be paused for now. The March issue of the International Enforcement Law Reporter will have a more comprehensive discussion of the decision and its implications.