Challenging the Constitutionality of the Corporate Transparency Act
Commerce Clause problems are clear
I. Statement of the Case
The Corporate Transparency Act (CTA), enacted in 2021, imposes federal reporting requirements on corporations, limited liability companies (LLCs), and similar entities to disclose their beneficial ownership information to the Financial Crimes Enforcement Network (FinCEN). The Act's scope extends broadly, encompassing entities that operate solely within state boundaries and do not engage in interstate commerce. This brief contends that the CTA exceeds Congress’s authority under the Commerce Clause and infringes upon the Tenth Amendment by encroaching on state sovereignty.
II. Questions Presented
Does the CTA violate the Commerce Clause by regulating purely local, non-commercial entities that lack a substantial connection to interstate commerce?
Does the CTA contravene the Tenth Amendment by intruding into areas traditionally reserved to the states, such as corporate governance and regulation?
III. Argument
A. The CTA Exceeds Congress’s Commerce Clause Authority
The Commerce Clause grants Congress the power “[t]o regulate Commerce… among the several States” (U.S. Const. art. I, § 8, cl. 3). However, the Supreme Court has consistently affirmed that this authority is not without limits and does not extend to purely local or non-commercial activities unless they substantially affect interstate commerce.
The Entities Regulated by the CTA Often Have No Connection to Interstate Commerce
The CTA imposes reporting obligations on nearly all small businesses, including many that operate exclusively within a single state and whose activities lack any direct or substantial impact on interstate commerce.
For instance:
A family-owned LLC managing property entirely within one state is subject to CTA reporting requirements, despite its lack of involvement in interstate trade or commerce.
Nonprofit entities and dormant LLCs with no revenue or employees are nonetheless required to disclose their beneficial ownership information.
Such entities fail to meet the requisite nexus to interstate commerce as articulated in Supreme Court precedent:
United States v. Lopez, 514 U.S. 549, 558–59 (1995): The Court invalidated the Gun-Free School Zones Act, emphasizing that Congress may not regulate activity that is neither economic in nature nor has a substantial effect on interstate commerce. Similarly, the CTA governs non-economic activities, such as mere entity formation, which bear no connection to commerce.
United States v. Morrison, 529 U.S. 598, 617 (2000): The Court struck down provisions of the Violence Against Women Act, reaffirming that Congress cannot regulate purely local, non-commercial activities based solely on their purported aggregate effect on interstate commerce.
Improper Reliance on the Aggregation Principle
Supporters of the CTA may invoke the aggregation principle from Wickard v. Filburn, 317 U.S. 111 (1942), arguing that even small, local entities may collectively influence interstate commerce. However, such reasoning is misplaced:
In Wickard, the regulation of wheat production was directly tied to economic activity with clear implications for interstate markets.
By contrast, the CTA targets entities such as dormant LLCs or family trusts holding personal assets, which engage in no economic activity and have no plausible aggregate effect on interstate commerce.
Without a demonstrable connection between the regulated activity and interstate commerce, the aggregation principle fails to provide a constitutional foundation for the CTA.
National Federation of Independent Business v. Sebelius, 567 U.S. 519, 557 (2012): Chief Justice Roberts emphasized that the Commerce Clause does not empower Congress to compel individuals to participate in commerce. Similarly, the CTA compels disclosures from entities not engaged in commerce, thereby exceeding constitutional limits.
B. The CTA Violates the Tenth Amendment
The Tenth Amendment reserves to the states all powers not delegated to the federal government. Corporate governance, including entity registration and disclosure requirements, has long been within the exclusive purview of state law. By imposing federal mandates on corporations and LLCs, the CTA infringes upon state sovereignty.
Federal Overreach Into State Regulation of Corporations
Corporate governance and regulation have historically been matters for state governments:
United States v. E.C. Knight Co., 156 U.S. 1 (1895): The Court held that manufacturing is a local activity beyond the reach of federal regulation under the Commerce Clause, even when it indirectly affects interstate commerce.
Hammer v. Dagenhart, 247 U.S. 251, 276 (1918): The Court invalidated federal child labor laws, affirming that production was a matter for state regulation. Similarly, corporate transparency and governance are properly reserved to the states.
The CTA disrupts this framework by preempting state corporate laws and imposing a federal reporting regime on local entities. For example:
Delaware, renowned for its business-friendly corporate statutes, has its own transparency and registration requirements. The CTA undermines this regulatory balance by subjecting state-chartered entities to federal oversight.
Erosion of the Federal-State Balance
The Supreme Court has consistently highlighted the importance of preserving the balance of power between federal and state governments:
Printz v. United States, 521 U.S. 898, 935 (1997): The Court invalidated federal laws compelling state officials to implement federal gun regulations, reaffirming that the federal government cannot commandeer state processes.
Likewise, the CTA commandeers state regulatory frameworks, overriding local authority with a one-size-fits-all federal mandate.
C. The CTA Lacks a Limiting Principle
If Congress is permitted to regulate purely local entities that engage in no commerce, there is no meaningful limit to its power under the Commerce Clause.
Gonzales v. Raich, 545 U.S. 1, 58 (2005) (O’Connor, J., dissenting): Justice O’Connor warned that unrestricted use of the Commerce Clause obliterates the distinction between federal and state powers.
The CTA exemplifies this overreach, as it imposes federal reporting requirements on dormant LLCs, local nonprofits, and other non-commercial entities without any discernible connection to interstate commerce.
IV. Conclusion
The Corporate Transparency Act constitutes an unconstitutional expansion of federal power under the Commerce Clause. It impermissibly regulates purely local and non-commercial entities, encroaches upon state sovereignty, and undermines the Tenth Amendment. Accordingly, this Court should hold the CTA unconstitutional as applied to entities lacking a substantial nexus to interstate commerce.