Court Holds the Corporate Transparency Act Is Unconstitutional: A Victory for Limited Government and the Right to Privacy
Earlier this month, a federal district court judge issued a preliminary injunction against the enforcement of the Corporate Transparency Act (CTA), a law that requires new corporations to disclose the identities of their beneficial owners. Challengers argued in Texas Top Cop Shop v. Garland that Congress had no power to pass such a law, and the court agreed. This decision is a rare example of a court limiting Congress to the exercise of its enumerated powers, and it is a victory for the right to privacy.
The government’s primary justification for the CTA rested on the Commerce Clause. While the CTA does not regulate the channels or instruments of commerce—two of the main ways Congress regulates under the Commerce Clause—the government argued that the CTA’s requirements target economic activity that, when aggregated, has a substantial effect on interstate commerce. Yet the Supreme Court’s precedents in cases like United States v. Lopez (1995) and NFIB v. Sebelius (2012) make clear that Congress’s power under the Commerce Clause does not extend to the regulation of noneconomic activity. Simply creating a small business or holding shares in a corporation does not constitute “economic activity” in the sense required to trigger Congress’s regulatory authority under this clause.
The government next invoked the Necessary and Proper Clause, claiming that the CTA is a means to implement Congress’s authority under the Foreign Commerce Clause and the tax power. However, the Necessary and Proper Clause does not grant independent authority; it only enables Congress to execute its other constitutional powers. The Supreme Court’s ruling in Bond v. United States (2014) is instructive. In that case, the Court rejected the federal government’s attempt to use an international chemical weapons treaty to prosecute a local poisoning, emphasizing that such foreign affairs authority cannot—without constitutional warrant—override areas traditionally reserved to the states. Similarly, the CTA’s regulation of shareholder disclosures intrudes into a domain—corporate governance—historically regulated by the states.
Finally, the government argued that the CTA is justified under the Taxing Clause, claiming that the disclosure of beneficial ownership would aid in detecting tax fraud and ensuring compliance with federal tax laws. While it is true that Congress has broad power to impose taxes and enforce tax laws, the Taxing Clause does not authorize pure regulatory measures just because they might incidentally help with tax enforcement. The distinction is crucial: a tax with incidental regulatory effects is permissible, but a regulation with incidental tax benefits is not. The CTA’s primary purpose is regulatory—to enforce transparency in corporate ownership—and any incidental benefits to tax enforcement do not save it from constitutional infirmity.
Judge Mazzant’s preliminary injunction blocking the CTA’s enforcement reaffirms the importance of state sovereignty and the limits of federal authority.
The CTA’s reporting requirements represent a direct challenge to state authority over corporate governance. For centuries, states have regulated the formation and operation of corporations within their borders. The CTA disrupts this balance by imposing a one-size-fits-all federal mandate. Judge Mazzant’s ruling protects the traditional role of states as laboratories of democracy, preserving their ability to tailor corporate laws to local needs.
Besides the lack of constitutional authority, as a matter of policy, the CTA’s requirements also raise significant privacy concerns. The government cannot be trusted to prevent leaks of the sensitive information it is trying to collect.
For instance, in Americans For Prosperity Foundation v. Bonta, California required nonprofits to disclose their donors to the state—promising privacy of the donors’ identities—but then it posted the names and addresses of over a thousand organizations’ donors on the state’s website. California said this was a mistake and that it wouldn’t happen again, but the district court in this case found a “pervasive, recurring pattern” of such leaks. Leaks are likely to facilitate the kinds of harassment campaigns that occur far too often in our society today.
Texas Top Cop Shop, Inc. v. Garland is a resounding affirmation of the Constitution’s protections against federal overreach. The CTA, however well-intentioned, violates fundamental principles of federalism and individual liberty. Judge Mazzant’s ruling demonstrates the enduring importance of constitutional limits on government power and evokes the significance of two landmark Supreme Court rulings, Alabama v. NAACP (1958) and AFPF v. Bonta (2021).
Read more at The Federalist Society