In Texas Top Cop Shop, Inc. v. Garland, No. 4:24-CV-478, slip op. (E.D. Tex. Dec. 3, 2024), a federal court in Texas issued a nationwide injunction against enforcement of the Corporate Transparency Act (CTA). The court determined that the Plaintiffs were likely to succeed on their constitutional challenges, concluding that Congress had exceeded its authority under its enumerated powers.
A.Enumerated Powers and Federalism
The court reiterated the fundamental principle that Congress is a government of enumerated powers under the Constitution (Art. I, § 8). Any federal legislation must derive from these powers and respect the Tenth Amendment, which reserves all other powers to the states.
B.Commerce Clause Analysis
The court examined whether the CTA could be justified under Congress’s authority to regulate commerce. It concluded that the CTA does not regulate existing commercial activities, channels, or instrumentalities of commerce but instead compels corporations to engage in a new activity (beneficial ownership reporting). The court likened this to the reasoning in NFIB v. Sebelius, where the Supreme Court held that Congress cannot regulate inactivity or compel activity under the Commerce Clause. The court rejected the government’s expansive interpretation of the Commerce Clause, noting the lack of a limiting principle and its potential to transform Congress’s commerce power into a general police power.
C. Taxing power analysis
The court evaluated whether the CTA could be upheld as an exercise of Congress’s authority to “lay and collect taxes” under Article I, § 8, cl. 1. The government argued that the CTA facilitates tax collection by requiring beneficial ownership disclosure, which could assist in detecting tax fraud and improving tax administration. However, the court rejected this justification, emphasizing that the CTA neither imposes a tax nor generates revenue, nor is it tied to any existing tax scheme.[1] The court concluded the CTA cannot be justified under Congress’s taxing power because it lacks the defining feature of a tax—raising revenue. Instead, the CTA is a regulatory measure aimed at corporate disclosures, which falls outside the scope of Congress’s constitutional authority under the taxing power.
D. Necessary and Proper Clause
The court rejected the CTA as an exercise of Congress’s Necessary and Proper Clause powers, emphasizing that: (i) The Necessary and Proper Clause must derive from and support an enumerated power; (ii) The CTA is not “narrow in scope” or “incidental” to any enumerated power, such as taxation or foreign affairs. Instead, it imposes broad federal mandates on corporations, encroaching on areas traditionally reserved to the states.
The court acknowledged that Congress possesses broader authority to regulate foreign commerce under the Commerce Clause and the Necessary and Proper Clause. In particular, Congress’s authority to regulate foreign commerce under the Commerce Clause is broader than its power over interstate commerce. However, the court found the CTA unconstitutional because its scope extends to purely domestic corporations. In particular, the court outlined three key points: (1) Congress’s broader foreign commerce power may justify regulating foreign corporations, such as those conducting business in the U.S; (2) Regulating purely domestic corporations intrudes on areas traditionally governed by the states. Domestic corporations, as “creatures of state law,” have historically been subject to state, not federal, oversight; (3) By targeting both foreign and domestic corporations, the CTA oversteps Congress’s constitutional authority and infringes on state sovereignty.
The court noted that “the CTA is a law enforcement tool, not an economic regulation,” emphasizing that Congress lacks a general police power, which is reserved to the states.”[2]
Being the CTA “a law enforcement tool—not an instrument calibrated to protect commerce; an exercise of police power, rather than a regulation of an activity which might impair commerce among the several states,” it is not supported by the Commerce Clause.
E.Tenth Amendment and State Sovereignty
The court emphasized that corporate governance and regulation have historically been within the states’ exclusive domain. It underscored that corporations are “creatures of state law” and that the CTA’s reporting requirements impose federal mandates on entities created under state law, infringing on state sovereignty.
In conclusion, the court’s reasoning aligns with federalism principles, as the court is careful to delineate the boundaries of federal and state authority
F.Other challenges
The court noted that it did not need to address the plaintiffs’ other challenges, including the First Amendment because it found the CTA unconstitutional based on the enumerated powers analysis, which leaves room for future challenges on free speech or related grounds.[3]
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[1] The court drew a key distinction: prior cases such as Sonzinsky v. United States and Helvering v. Mitchell upheld taxes with regulatory aspects because those statutes involved actual taxes that raised revenue while incidentally achieving regulatory goals. By contrast, the CTA is purely regulatory, imposing obligations on corporations without any corresponding tax. The court reasoned that accepting the government’s argument would dangerously expand Congress’s taxing power, allowing it to regulate any activity under the guise of aiding tax enforcement, even where no tax is involved.
[2] “[T]he Federal Government is not equipped with a federal police power to regulate all aspects of public life. That power belongs to the states alone. See Sebelius, 567 U.S. at 535 This distinction protects the liberty of individuals from “arbitrary power” (Bond v. United States, 564 U.S. 211, 222 (2011)).
[3] The court notes that Plaintiff have also challenged the CTA under other grounds, including the First Amendment but declines to address them because it found the CTA unconstitutional on Tenth Amendment grounds. “Having determined that the CTA is not justified by the Commerce Clause nor the Necessary and Proper Clause in conjunction with some enumerated power, the Court concludes that Plaintiffs have met their burden to show a substantial likelihood of success on the merits of their Tenth Amendment Challenge. Thus, the Court need not assess Plaintiffs’ as-applied challenges or their challenges under the First and Fourth Amendments.”
