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Federal Judge Rules Corporate Transparency Act Unconstitutional

A federal judge in Alabama has ruled that the Corporate Transparency Act, which took effect on January 1, is unconstitutional. U.S. District Judge Liles Burke made the ruling on March 8, stating that the landmark U.S. anti-money laundering law was unconstitutional because Congress exceeded its powers by enacting it.

The decision by Judge Burke voids any regulatory rulemaking based on the act, which mandates certain legal entities, including LLCs, to report Beneficial Ownership Information to the Financial Crimes Enforcement Network. The ruling labeled the act as “congressional overreach” and stated that it cannot be justified as an exercise of Congress’ enumerated powers.

The government contended that the Corporate Transparency Act falls within Congress’ authority to regulate commerce, oversee foreign affairs and national security, and impose taxes and related regulations. However, Judge Burke disagreed, asserting that the act surpasses the limits set by the Constitution on the legislative branch.

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Challenges for Small Businesses

The Corporate Transparency Act expanded the reporting requirements to include millions of businesses with fewer than 20 employees and less than $5 million in annual sales. The National Small Business Association filed a lawsuit in November 2022 to challenge the new reporting mandate, arguing that it violated the Constitution and placed undue burdens on small firms.

The lawsuit also contended that the reporting rule infringed on privacy and free-speech protections, as well as encroached on states’ rights. Despite the ruling in favor of the National Small Business Association, non-member companies must still adhere to the reporting requirements outlined in the act.

The wisdom of a policy is no guarantee of its constitutionality,ÔÇØ Burke wrote in his opinion.

While the judge’s decision currently only impacts NFIB member companies, the U.S. Treasury Department is expected to appeal the ruling, setting the stage for further legal proceedings.

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