National Small Business United v. Yellen

National Small Business United v. Yellen

Case No. 5:22-cv-1448-LCB, United States District Court, Northern District of Alabama, Northeastern Division (March 1, 2024). Before Burke, J.

Relevant Facts

• The Corporate Transparency Act (CTA), enacted as part of the 2021 National Defense Authorization Act, requires most entities incorporated under state law to disclose beneficial owner and applicant information to FinCEN (Financial Crimes Enforcement Network), the Treasury Department's criminal enforcement division.

• The CTA was intended to prevent financial crimes including money laundering and tax evasion through shell corporations—entities with minimal employees, customers, business, or assets that can conceal ownership and money flows. 'Reporting companies' are defined as entities created by filing with a Secretary of State.

• Plaintiff National Small Business Association (NSBA), an Ohio nonprofit representing over 65,000 businesses, and co-plaintiff Christopher Winkles, an NSBA member who had formed Alabama entities, challenged the CTA as exceeding Congress's enumerated powers.

• FinCEN's existing 2016 Customer Due Diligence (CDD) rule already required covered financial institutions to identify and verify beneficial owners of entity customers, but the CTA imposed direct disclosure obligations on the entities themselves.

• The Government defended the CTA under Congress's foreign affairs and national security powers, the Commerce Clause, and the Taxing power via the Necessary and Proper Clause.

Legal Issues

• Whether the Corporate Transparency Act exceeds Congress's enumerated powers under the Constitution.

• Whether the CTA is a valid exercise of Congress's Foreign Affairs and National Security powers.

• Whether the CTA is a valid exercise of Congress's Commerce Clause authority.

• Whether the CTA is a valid exercise of Congress's Taxing power through the Necessary and Proper Clause.

Positions of the Parties

• The Government argued that the CTA falls within Congress's Foreign Affairs powers (combating money laundering and terrorism financing), the Commerce Clause (state entities frequently use interstate commerce channels, and anonymous corporate operations substantially affect commerce), and the Taxing power/Necessary and Proper Clause (beneficial ownership information needed for proper income reporting).

• The plaintiffs argued the CTA exceeds Congress's enumerated powers and violates federalism principles. Corporate formation is traditionally a state affair; the CTA does not regulate commerce on its face, contains no jurisdictional hook, and incorporation is not 'economic activity' under Commerce Clause jurisprudence. The causal chain from incorporation to illicit activity is too attenuated, and FinCEN's existing CDD rule already collects nearly identical information in a constitutionally acceptable manner.

Decision of the Court and Reasons

The court granted summary judgment for the plaintiffs and held the Corporate Transparency Act unconstitutional as exceeding Congress's enumerated powers.

On the Foreign Affairs power, the court held that corporate formation is an internal state affair within states' sovereign purview. Proposals for federal incorporation were rejected at the Constitutional Convention. The Necessary and Proper Clause cannot justify regulation of purely internal affairs merely because foreign actors participate in them.

On the Commerce Clause, the court rejected all three categories of authority. The CTA does not regulate channels or instrumentalities of commerce and makes no reference to commercial activity. Incorporation itself is 'in no sense an economic activity' under United States v. Lopez. The CTA lacks a jurisdictional hook limiting its reach to entities engaged in commerce—a critical omission since Congress knows how to include such language. The 'but-for causal chain' from incorporation to illicit activity is too attenuated under Morrison and Raich. The CTA is a single-subject, non-economic statute, not part of a comprehensive regulatory scheme.

On the Taxing power, the court held that the CTA's civil penalties do not constitute a 'tax' under NFIB v. Sebelius because they are not paid to the Treasury, have no income thresholds, are fixed rather than variable, and impose scienter requirements typical of punitive statutes. Providing tax officials access to beneficial ownership information is too attenuated a connection to justify exercise of the Necessary and Proper Clause.