Big news on the legal front!

The U.S. District Court for Northern Alabama has just ruled that the Federal Corporate Transparency Act ("CTA") is unconstitutional. This ruling came as a result of a lawsuit by National Small Business United, a trade group of over 40,000 members.

Summary:

  • The Federal District Court for the Northern District of Alabama has ruled the CTA unconstitutional
  • The result is that the plaintiffs in the case – National Small Business United and an individual – will be exempt from CTA requirements while the judgment is in place
  • Individuals other than the plaintiffs should continue to comply with CTA

On with the analysis . . .

The Court's rationale is that the legislation cannot be justified as an exercise of Congress' enumerated powers under the U.S. Constitution. Does this mean that you can just ignore the filing requirements under the CTA?

Well, you can if you are a member of National Small Business United or a named plaintiff in that case. The U.S. Treasury Department has just issued a release indicating that it will not enforce the CTA against any of the named plaintiffs for so long as the judgment is in place. Of course, it is highly likely that the U.S. Department of Justice will appeal the ruling.

So, it's not clear how long the Treasury Department will exempt the plaintiffs from compliance.

However, if you're not one of the named plaintiffs – or a member of National Small Business United – you and your company aren't subject to the judgment. So, a failure to file under the CTA could attract the $500 per day penalty for non-filers. The most conservative course would be to make the required filings.

Here's our rationale.

The precedents of the U.S. Supreme Court grant Congress the power to regulate (1) interstate commerce channels, (2) people and things in interstate commerce and (3) activities that substantially affect interstate commerce. This is indeed a broad grant of powers in an economy so intertwined with interstate commerce.

Our analysis is that this judgment will likely be overturned on appeal to the Federal Appeals Court for the 11th Circuit or, failing that, at the U.S. Supreme Court. . Activities of most corporations and other legal entities involve aspects of interstate commerce within the purview of U.S. Supreme Court precedents.

So, for now, compliance is the most prudent course of action.

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