Maryland Business Litigation Lawyer BlogIn fall 2021, Silverman Thompson filed suit in federal court in Pennsylvania on behalf of a provider of inmate communication services for prisons. The suit alleged that just as Silverman Thompson’s client was about to finalize a contract with a county prison, the incumbent service provider and business rival used illegal, anti-competitive tactics to scuttle the deal and secure a renewal of its contract with the prison. After extensive preliminary motions practice, the district court dismissed the complaint for failure to state a claim, but gave Silverman Thompson’s client the opportunity to amend. Confident in its claims as drafted by Silverman Thompson, the client elected to stand on the complaint and appealed the dismissal to the U.S. Court of Appeals for the Third Circuit.
Articles Tagged with Corporate law
Case Ruling the Corporate Transparency Act Unconstitutional
What is the Corporate Transparency Act?
In 2021, Congress passed the Corporate Transparency Act (CTA) as part of the sprawling National Defense Authorization Act.[1] The law, which took effect January 1, 2024, “packs a significant regulatory punch, requiring most entities incorporated under State law to disclose personal stakeholder information to the Treasury Department’s criminal enforcement arm.”[2] Entities covered by the law include, with some exceptions, corporations, limited liability companies, and similar entities created in the United States by filing documentation with the secretary of state or similar office, or formed under foreign law and registered to do business in the United States.[3] Failure to report can result in both civil and criminal penalties.[4]
Case Ruling the Corporate Transparency Act Unconstitutional
On March 1, 2024, a federal judge in Alabama ruled that the CTA is unconstitutional. The lawsuit, brought by the National Small Business Association (“NSBA”) and one if its members, argued that the CTA exceeded Congress’s enumerated powers and violated the First, Fourth, and Fifth Amendments.[5] The Government defended the law’s constitutionality on various grounds, but the court sided with the challengers.
The court first rejected the Government’s argument that the disclosures required by the CTA were needed to protect vital national security interests and thus fell within Congress’ power over foreign affairs and national security. The court acknowledged the great deference entitled to Congress in these areas, but reasoned that corporations are “creatures of state law,” and Congress’ foreign affairs powers “do not extend to purely internal affairs, especially in an arena traditionally left to the States.”[6]
The court next addressed Congress’s power to enact the CTA under the Commerce Clause. The law could not be upheld as a valid regulation of the channels and instrumentalities of interstate commerce, as the Government argued, because the CTA by its plain text “doesn’t regulate the channels and instrumentalities of commerce or prevent their use for a specific purpose.” The CTA simply mandates that covered entities report information to the Treasury Department without any reference to “commerce” or channels or instrumentalities of commerce.[7] The law also could not be upheld under Congress’ power to regulate intrastate activity having “substantial effects” on interstate commerce because “the CTA does not regulate commerce on its face, contain a jurisdictional hook, or serve as an essential part of a comprehensive regulatory scheme.”[8]
The court finally rejected Congress’s taxing power as a valid basis for the law. The Government argued that because the required information is necessary to ensure appropriate reporting of taxable income, and Treasury officers and employees have access to the information for tax purposes, the CTA was a necessary and proper exercise of Congress’s taxing powers. But, as the court explained, the Government’s theory would allow Congress to “craft a constitutional law [by] simply impos[ing] a disclosure requirement and giv[ing] tax officials access to the information.”
Because the law could not be justified as “an exercise of Congress’s enumerated powers,” the court found it unnecessary to decide whether the CTA violates the First, Fourth, and Fifth Amendments.[9]
Future of the Corporate Transparency Act
The decision has been appealed and exempts only the plaintiffs in the case from the CTA’s reporting requirement. Those requirements thus remain in effect for other covered entities across the United States.
The business litigation group at Silverman Thompson offers free consultations at 800.385.2243. If you have any questions regarding the Corporate Transparency Act and your business, reach out to Bill Sinclair, at 410.385.9116.