LEGAL THOUGHTS – Attorney’s Update Episode 5 on CTA Beneficial Ownership Information Filing Requirements

COLEMAN JACKSON, ATTORNEY & LEGAL COUNSEL | Transcription of Legal Thoughts        Posted on March 20, 2024

Topic: The Courts Have Begun to Weigh in on the Transparency Law

Welcome to Legal Thoughts!

Attorney Introduction:

My name is Coleman Jackson and I am an attorney at Coleman Jackson, P.C., a taxation, litigation and immigration law firm based in Dallas, Texas. In addition to myself, we have a Legal Assistant, Leiliane Godeiro, Law Clerks, Ayesha Jain and Mlaah Singh, and Admin Assistant, Michelle Gutierrez.

On today’s “Legal Thoughts” podcast, our Law Clerk, Mlaah Singh, will be interviewing me on the important topic concerning the fact that: “The Courts Have Begun to Weigh In on the Corporate Transparency Act.” For more information on the Corporate Transparency Act, please tune in to the first four episodes of this series.

The four parts are as follows:

1. An Overview of the Corporate Transparency Act
2. Beneficial Ownership Reports Under the Corporate Transparency Act
3. Corporate Transparency Act’s Penalties and Intersection with Federal Tax Law
4. Attorney’s Update on the CTA’s Beneficial Ownership Reporting Requirements

 

Hi everyone, my name is Mlaah Singh and I am a Law Clerk at the tax, business structuring, contracts, litigation and immigration law firm of Coleman Jackson, Professional Corporation. Our law firm is located at 6060 North Central Expressway, Suite 620, right here in Dallas, Texas.

• Good afternoon Attorney; thank you for agreeing to sit with me and update our Legal Thoughts podcast audience regarding the Corporate Transparency Act’s Beneficial Ownership Information Reporting Requirements for small and medium sized American businesses. Attorney you told me this morning something about a federal court in Alabama where the court said that the Corporate Transparency Act of 2021 is a violation of the U.S. Constitution. So, I think our Legal Thoughts Podcast audience need to know what this means. Attorney this is a perfect time to update our audience on the CTA and the beneficial ownership reporting requirements of the CTA since it seems like the Courts have began to weigh in here.

Interviewer Comments: Many in our audience might be thinking perhaps this Court ruling is telling  FinCEN to pause all CTA enforcement of the Beneficial Ownership Reporting requirements on small and medium size businesses nationwide. Or what other federal courts are ruling against the enforcement of the CTA.  Or what has the U.S.  Supreme Court said about FinCEN enforcement under the CTA. I mean our small business owners and quite frankly business owners and their employees need to know what is going on here. This is confusing to none lawyers.

I am going to begin with the question that I think is on the minds of most of our podcast audience:  Attorney Jackson, what does this Alabama Court’s ruling mean for small and medium sized businesses in America with respect to any obligation to file an initial beneficial ownership information report with the Financial Crimes Enforcement Network in 2024?

• Mlaah, this is certainly an excellent question to begin this Corporate Transparency Act update with because an Alabama federal District Court is (for now) the only Court, so far, who has weighed in on constitutionality of the Corporate Transparency Act’s Beneficial Ownership Reporting Requirement that requires all most all small businesses in America to file BOI reports with the Financial Crimes Enforcement Network beginning January 1, 2024.  The Alabama District Court in the Northern District of Alabama says that the Corporate Transparency Act of 2021 violates the U.S. Constitution.  Court ordered FinCEN to stop enforcing the CTA against the Plaintiff in the case.

• The Alabama Court’s ruling in the case, National Small Business United v. Yellen, No. 5:22-cv-0113 8 (N.D. Alabama) on March 1, 2024 enjoined FinCEN from enforcing the Corporate Transparency Act against the plaintiffs in the case– Isaac Winkles, reporting companies for which Isaac Winkles is the beneficial owner or applicant, the National Small Business Association, and members of the National Small Business Association effective March 1, 2024.  Those individuals and entities are not required to report beneficial ownership information to FinCEN at this time.

• The Alabama Court’s ruling has no affect on any other small business entities and individuals who are impacted by the Corporate Transparency Act of 2021. I expect other Courts throughout the United States to weigh in on the constitutionality of the Corporate Transparency Act in the next few weeks and months.  Ultimately the U.S. Supreme Court is likely to be asked to weigh in the question as to whether Congress exceeded its powers under the U.S. Constitution when enacting the Corporate Transparency Act of 2021.  Our audience should stay tune for further judicial decisions regarding the CTA.   Our law firm intends to publish updated podcasts and blogs as they are warranted on the CTA and FinCEN’s enforcement of the Beneficial Ownership Reporting Requirements effecting over 42 million small and medium sized business all over the United States.

• So, Attorney Jackson for question number 2, what protections in the U.S. Constitution that might be violated by Congress in enacting the Corporate Transparency Act of 2021?

That, Mlaah, is a very important question. It goes directly to some of the Constitutional provisions that informed the legal analysis leading to the Alabama federal Court’s ruling that the Corporate Transparency Act violates the U.S. Constitution.  The Court did not decide this case on all of the Constitutional provisions that I am about to discuss here, but I think that Congress’s attempt to regulate most small and medium sized business in the United States under the Corporate Transparency Act could potentially violate most of the Constitutional protections afforded all Americans as follows:

• The U.S. Constitution Article 1, Section 8, Clause 3 (Commerce Clause) says, that ” The Congress shall have Power to regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes.”  Problem with the CTA seems to be that Congress impermissible attempt under the Corporate Transparency Act to regulate most small businesses throughout the United States, most of whom are likely to be engaged in only intrastate commerce.  It is extremely likely that this is an impermissible attempt to regulate small businesses engaged solely in local economic activity.

• In the 1787 Constitutional Convention, the framers of the Constitution discussed and decided not to give Congress the power to regulate business structuring; instead, they chose to leave business structuring to the several States.  The U.S. Constitution does not contain any enumerated clause that gives Congress the power to regulate small businesses in the U.S. Businesses are and have always been structured under State Business Structuring laws which differ from State to State.  The anti-commandeering doctrine is likely to prevent Congress from remedying this problem with the CTA by commandeering the State’s to enact or exercise State power to enforce the CTA.

• The U.S. Constitution Article 1, Section 8, Clause 1 gives Congress taxing powers; This provision reads as follows: “The Congress shall have Power to lay and collect Taxes, Duties, Imposts and Excises.”  The CTA does not appear to be a tax because U.S. federal tax laws are codified in 26 United States Code, which is commonly referred to as the Internal Revenue Code.  The Internal Revenue Service (IRS) is charged with the responsibility to administer and enforce the federal tax laws in the United States.  Whereas the Corporate Transparency Act is administered and enforced by the Financial Crimes Enforcement Network whose data base of small business owners and those with substantial control over them are to be made available to a broad range of federal, state and even international law enforcement agencies to combat money laundering, terrorist funding, tax fraud and other types of financial crimes.  Final. The CTA does not seem to be Congress exercising its taxing powers because the penalties under the CTA for filing inaccurate BOI reports or failure file BOI sounds more like fines rather than taxes and the criminal exposure of up to two years sound more like a criminal law provision than a tax law provision. These penalties under the CTA are not pursued by the IRS but by FinCEN.

• 4th Amendment to the U.S. Constitution says that “the right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures, shall not be violated, and no Warrants shall issue, but upon probable cause, supported by Oath or affirmation, and particularly describing the place to be searched, and the persons or things to be seized.”  The CTA seem to violate the 4th Amendment by penalizing businesses; their owners and those in substantial control of them for failure to file BOI reports with a law enforcement agency of the federal government without presenting evidence of probable cause consistent with common 4^th Amendment protections judicial precedence.

• 5th Amendment to the U.S. Constitution says that, “no person shall be compelled in any criminal case to be a witness against himself, nor deprived of life, liberty, or property, without due process of law…”  The CTA seem to violate the 5th Amendment as well because these BOI reports could subject filers to criminal proceedings based on required Beneficial Ownership information.

• First Amendment to the Constitution could also be violated by the CTA because it could interfere with small business owners formation of businesses and associations, partnerships or otherwise.  The Corporate Transparency Act could potentially cause some Americans not to start a new small business of their own all together when they learn that they have to report to FinCEN the types of personal data required by the Beneficial Ownership Information Reporting Requirements.

Our audience must keep in mind that the Alabama Court’s ruling on the Constitutionality of the Corporate Transparency Act is only the opinion of one Court and is only protecting a limited number of individuals and entities.  It is very likely many more courts will weigh in on the Constitutionality of the CTA in the weeks and months to come.  Impacted small businesses and those impacted by the CTA or think that they might be impacted by this law, should follow our podcasts and blogs.

 

Interviewer Comment: Thank you, Attorney. It seems as though several constitutional rights may be violated in Congress’ pursuit of Corporate Transparency! Largely, and as a recap for our listeners Attorney, its seems like you are telling our Legal Thoughts Podcast audience the First Amendment’s Freedom of Association Clause, the Fourth Amendment’s Probable Cause protections against unlawful searches and seizure, and the Fifth Amendment’s Self-Incrimination protections would all be sacrificed at the expense of FinCEN’s power designed to stop money laundering, terrorist financing, tax evasion and other financial crimes. Now, Mr. Jackson, I understand that a large argument that the United States District Court for the Northern District of Alabama has also raised concerns something about commerce and State government business structuring laws.

Question Number Three:

So, Mr. Jackson, my third question is one:  Does the Federal Government have the power to interfere with business structuring and intrastate commerce? Can you identify and explain which provisions are concerned when detailing these questions?

Attorney Answer: Coleman Jackson

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  The Commerce Clause of 1887, Article 1, Section 8 of the U.S. Constitution, gives Congress the power to regulate commerce with foreign nations, amongst the several States, and with the Indian Tribes.  Let me put this in context.  The consensus of historians agree that economic issues were one of the major concerns in holding the Constitutional Convention to begin with.  Under the Articles of Confederation the federal government  was weak in terms of economic regulatory powers whereas the States were powerful with respect to regulating Commerce.  This led to trade wars between the states where border states imposed levies, taxes and duties on goods traveling to inbound States. This lead to trade wars and retaliation amongst the States. Under the Articles of Confederation the various States entered commercial agreements directly with foreign nations and the Indian Tribes.  The framers of the Constitution favored the United States speaking with one voice in trade agreements with foreign nations and Indian Tribes. Historical consensus is that the Commerce Clause was designed to promote free trade.  Most historians agree that the Commerce Clause was put into the U.S. Constitution to solve these problems.  So, I think this historical context with respect to what problem its designed to fix is helpful when trying to determine whether Congress exceeded its Constitutional powers when enacting the Corporate Transparency Act.

• Article 1, Section 8, Clause 3 of the United States Constitution gives Congress the power to regulate Commerce with foreign nations, amongst the several States and with the Indian Tribes. Most Supreme Court jurisprudence on the Commerce Clause has involved the dormant Commerce Clause because Congress has exercised its positive or affirmative power under the Commerce Clause very rarely.  The U.S. Supreme Court has ruled that Congress’ power under the Commerce clause is expansive but has limits.  SCOTUS is likely to weigh in eventually to decide whether Congress has exceeded its power under the Commerce Clause in enacting the Corporate Transparency Act.  It  seems like Congress is attempting to regulate the majority of small and medium sized businesses in the United States using the Commerce Clause.  The U.S. Constitution does not expressly give Congress the power to regulate business entities in the United States.  In fact businesses are structured under the several States business organizational laws throughout the United States.  That is the way its always been and nothing in the U.S. Constitution seem to give this power to the U.S. Congress.

• Apparently the federal government created the Corporate Transparency Act on the assumption that Congress has the power to regulate small and medium sized business perhaps under the Commerce Clause, the Taxing Clause or some other Constitutional provision. However, the Alabama federal court heard these arguments put forth by the government and found a difference between power to regulate interstate commerce and intrastate commerce. The Alabama court also found that there was no enumerated provisions in the U.S. Constitution that gives the federal government power over the State’s to set up business structuring laws. Perhaps if left in tact, the Corporate Transparency Act could, at least to a certain extent, cause some businesses structure and form in accordance with FinCEN’s expectations, which is likely to give the federal government power to alter business structuring laws all over the country. As I said before, and I think its worth repeating and emphasizing :   Business structuring has been, up to now, left to the State government to determine, decipher, and regulate.  The Corporate Transparency Act may change that if permitted to stand.

Interviewer Comment: I can certainly see how these federal intrusions into State business structuring laws might create a lot of confusion for those desiring to own and operate their own businesses. Its also likely to increase the costs and expense of starting, operating and managing a small and medium sized business in America. This Alabama court may be the first of many court decisions on Congress power to regulate intrastate economic activity and small businesses all over our country. Attorney your explanation on various Constitutional protections might be called into question by the CTA seems to be how you’ve explained the arguments of the United States District Court for the Northern District of Alabama. Our Legal Thoughts Podcast audience needs to stay tune because this might not be the only court who weighs in the Corporate Transparency Act.

Question Number 4 for Attorney Coleman Jackson:

Attorney, for the small to medium sized business owners tuning into our Legal Thoughts Podcast, can you detail specific examples of how the Corporate Transparency Act could both negatively and positively affect business owners? What exactly would be expected of business owners in filling out Beneficial Ownership Reports and what is at stake for business owners who may get the short end of the stick?

Attorney Answer: Coleman Jackson

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  Mlaah that is an excellent question; but I think the threshold question is whether the Courts will strike down the Corporate Transparency Act like the Alabama Court. This is why I have repeatedly stated in our Legal Thoughts Podcast and Blogs and verbally to small business owners; that we must wait until the Courts weigh in as to whether small and medium sized businesses will have to file Beneficial Ownership Information Reports with FinCEN.  The Courts will answer this question in time.  This is the practice of law and every small business and individual impacted by the CTA should seek legal counseling on this.  This is the practice of law and whether and how anyone should comply with the CTA in any way is a legal question.  Lawyers will continue to monitor as the Courts weigh in on this and advise their clients accordingly.  This could be a State by State or Circuit Court by Circuit Court determination on the Constitutionality of the CTA.  And it is very likely Mlaah that the U.S. Supreme Court will ultimately decide the Constitutionally of the CTA and its BOI reporting requirement.  Affected small businesses must comply with the law; but the Courts will guide us as to what the law is.  That is how law works in America.  The Courts with jurisdiction of you will tell you what your rights and obligations are under the Corporate Transparency Act.

• Mlaah you have asked some very inciteful questions during this entire podcast series on the Corporate Transparency Act. So I don’t want you or anyone in our audience to think your question here does not deserve a complete answer.  I started with the uncertainty as to whether the CTA violates the protections in the Constitution because that is indeed the threshold question determining whether the CTA is going to have any impact on small and medium sized businesses.  If its ruled unconstitutional in the Courts, especially, the U.S. Supreme Court, the CTA is likely to have limited or no impact on small and medium sized businesses.

• But as for your questions regarding the likely impact of the CTA; if allowed to stand by the Courts, it will have tremendous impacts and costly ramifications for small businesses. It will also impact estate planning, asset protection planning, elder law planning as well as foreign and domestic businesses structured under State business structuring laws and businesses doing business under those State laws anywhere in the United States.  Keep in mind, the CTA is about transparency.  Many estate plans and asset protection plans are about secrecy where the wealthy shield their identities and ownership interests through various kinds of trusts and other planning vehicles.  The CTA could require hundreds even thousands of individual beneficial ownership reports from a single trust or estate plan, for example.  The criminal exposure is also attention grabbing with a potential two years in federal prison upon conviction of violating the CTA and the $500 per day civil fine is definitely attention grabbing as well.  The Corporate Transparency Act has very sharp teeth.  These consequences are all attention grabbing and should give our audience a clear eyed understanding of why its important that they stay tuned and follow the Court developments and consult attorneys and counselors regarding the Corporate Transparency Act and the developments of FinCEN’s enforcement of the CTA.  I have throughout placed the emphasis on the fact that the CTA is a new law.  Advising anyone about the CTA is the practice of law and none lawyers are not equipped to advise anyone whether they should or should not comply with the CTA.  Affected businesses and individuals need to comply with the law as the Courts say what the law is or is not.

Attorney, thank you for sitting with me today in our 5th podcast on this emerging news that the “Courts Have Begun to Weigh In on the Corporate Transparency Act” I surely hope our audience will benefit from this update in our Legal Thoughts series on the Corporate Transparency Act of 2021, and stay up to date with us as the Corporate Transparency Act and its impact on small and medium sized business all over our country moves through the federal judiciary.  Folks, stay tune to Legal Thoughts Podcasts!

Our audience can send us inquires at www.cjacksonlaw.com if they have questions or wish to comment on our podcasts in this series or any of our Legal Thoughts podcasts, blogs, or Law Watch Videos posted on our U-tube Channel.

• Our listeners who want to hear more podcasts like this one please subscribe to our Legal Thoughts Podcast on Apple Podcast, Google Podcast, Spotify or wherever you listen to your podcast. Everybody take care! And come back in about two weeks, for more taxation, business structuring, contracts litigation and immigration Legal Thoughts from Coleman Jackson, P.C., located right here in Dallas, Texas at 6060 North Central Expressway, Suite 620, Dallas, Texas 75206.
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ATTORNEY’S CLOSING REMARKS:

• This is the end of “LEGAL THOUGHTS” for now, thank you all for giving us your ear today as we updated our Legal Thoughts Podcast Episodes 1, 2, 3 and 4 on the Corporate Transparency Act’s (CTA) Beneficial Ownership Information Reporting Requirements on America’s small and medium sized businesses.

Our listeners should stay tuned for possible future Legal Thoughts podcast updates, corrections and explanatory comments as the Corporate Transparency Act is enforced by FinCEN and the Courts weigh in with respect to the Constitutional validity of Congress attempt to regulate the majority of the small and medium sized businesses in America.

Until next time, take care.

If you want to see or hear more taxation, business structuring and contracts litigation and immigration LEGAL THOUGHTS from Coleman Jackson, P.C.  Subscribe to our Legal Thoughts Podcast on Apple Podcast, Google Podcast, Spotify or wherever you listen to your podcast.  Stay tuned!  We are here in Dallas, Texas and want to inform, educate and encourage our communities on topics dealing with taxation, litigation and immigration.  Until next time, take care.