On March 1, the US District Court in Northern Alabama ruled that the “Corporate Transparency Act is unconstitutional because it exceeds the Constitution’s limits on Congress’ power.” It’s not clear what effect this ruling is going to have on other parties and other jurisdictions.
Congress passed the 2021 National Defense Authorization Act which included a bill called the Corporate Transparency Act (“CTA”). The CTA requires most entities incorporated under State law to disclose personal stakeholder information to the Treasury Department’s criminal enforcement arm.
There are two dozen exemptions, mostly for entities that are otherwise regulated. Many private fund managers have been trying to figure out how the exemptions apply. There is still some uncertainty on these exemptions. For example, registered investment advisers are exempt and private funds listed on Form ADV are exempt. Subsidiaries can be exempt, but FinCEN Seems to want to keep that exemption very narrow.
L. 6. Does a subsidiary whose ownership interests are partially controlled by an exempt entity qualify for the subsidiary exemption?
No. If an exempt entity controls some but not all of the ownership interests of the subsidiary, the subsidiary does not qualify. To qualify, a subsidiary’s ownership interests must be fully, 100 percent owned or controlled by an exempt entity.
A subsidiary whose ownership interests are controlled or wholly owned, directly or indirectly, by certain exempt entities is exempt from the BOI reporting requirements. In this context, control of ownership interests means that the exempt entity entirely controls all of the ownership interests in the reporting company, in the same way that an exempt entity must wholly own all of a subsidiary’s ownership interests for the exemption to apply.
[Issued January 12, 2024] https://www.fincen.gov/boi-faqs#L_6
Back to the case…
The Government argued that it has three sources of constitutional authority for enactment of the CTA. First, the Government argues that Congress has the power to enact the CTA under its foreign affairs powers. The CTA comes from the government’s interest in curbing foreign money laundering and other bad foreign money influences. The second sources is the Commerce Clause authority. Because many entities engage in activities that qualify as or affect “commerce,” the act of corporate formation itself is enough to invoke Congress’ Commerce Clause powers. Third, the Government argued that the CTA is a necessary and proper exercise of Congress’ taxing power, because one purpose of the FinCEN database created by the CTA is to assist in efficient tax administration.
The Court didn’t agree with any of these three arguments.
So now what?
Unless you are Isaac Winkles or the National Small Business Association, the court’s ruling does not apply to you. I suppose if you are in Alabama, you could argue that it might cover you. For the rest of us, who have created a new non-exempt entity in 2024, I think we still have to make that filing it 90 days.
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