A panel of U.S. Tax Court judges ruled recently that the Internal Revenue Service's (IRS) assertion of the section 6663(a) civil fraud penalty did not trigger the Seventh Amendment right to a jury trial, denying the taxpayer's motion for partial summary judgment on the issue. Silver Moss Props. v. Commissioner, 165 T.C. No. 3 (2025). The taxpayer — a partnership challenging the disallowance of its charitable deduction related to a syndicated conservation easement transaction — and the Center for Taxpayer Rights (as amicus curiae) argued that the Supreme Court's recent decision in SEC v. Jarkesy, 144 S. Ct. 2117 (2024) barred the Tax Court from hearing the section 6663(a) issue because the taxpayer would not have the option for a jury trial in Tax Court. The Tax Court panel disagreed, holding that sovereign immunity and the public rights exception to the Seventh Amendment allowed it to adjudicate the issue without a jury and that Jarkesy is distinguishable.

In Jarkesy, the Supreme Court held that the Securities and Exchange Commission's (SEC) decision to assert civil securities fraud penalties "in-house" violated the Seventh Amendment because the penalties were akin to common law fraud and did not fall within the public rights exception to the Seventh Amendment. Based on the Supreme Court's ruling, if the SEC desires to pursue civil securities fraud penalties, it must do so in a forum in which jury trials are available. However, Jarkesy left open the question of its application to other types of penalties asserted by other governmental agencies, including IRS assertion of the section 6663(a) civil tax fraud penalty in U.S. Tax Court proceedings.

The Tax Court first addressed the issue of sovereign immunity, emphasizing that "[t]he United States, as sovereign, is immune from suit unless it consents to be sued." Congress did give such consent for Tax Equity and Fiscal Responsibility Act (TEFRA) partnership-level proceedings, but the terms of its consent did not include trial by jury. And the fact that the civil fraud penalty was brought first in the IRS's amended Answer does not extend the bounds of Congress's limited waiver under Supreme Court precedent. Indeed, key to the Tax Court's holding on the sovereign immunity issue was McElreth v. United States, 102 U.S. 426 (1880), wherein the Supreme Court held that Congress "may restrict the jurisdiction of [a] court to a consideration of only certain classes of claims against the United States" and that "Congress, by the act in question, informs the claimant that if he avails himself of the privilege of suing the government in the special court organized for that purpose, he may be met with a… counter-claim… upon which judgment may go against him, without the intervention of a jury." Id. at 440. Therefore, the Tax Court held that without explicit assent by Congress, the IRS could not be faced with a jury in the adjudication of civil tax fraud penalties in the Tax Court or the Court of Federal Claims.

The Tax Court also held that even if the taxpayer's Seventh Amendment argument cleared the sovereign immunity hurdle, it would be tripped up by the longstanding public rights exception to the Seventh Amendment. The Tax Court explained that "Congress cannot strip the parties of their constitutional right to a trial by jury in traditional legal claims involving private rights of action" and that conversely "[p]ublic rights constitute actions that historically could have been determined by the executive and legislative branches alone, even where they were presented in such form that the judicial power was capable of acting on them" (internal quotations omitted). The question, then, is whether asserting a challenge to a civil tax fraud penalty is a public right or a private right. 

Jarkesy addressed the same question with respect to civil securities fraud penalties, and as the Tax Court here in Silver Moss noted, "[t]he majority, concurrence, and dissent in Jarkesy all recognized the collection of revenue as a quintessential public right." The remaining question here, then, was whether this characterization of "the collection of revenue" applied similarly to the assertion of revenue-related penalties. In answering this, the Tax Court conducted a similar analysis to the Supreme Court in Jarkesy and reached the opposite conclusion with respect to this type of civil fraud penalty.

This analysis primarily consisted of considerations of legislative and judicial history. The Tax Court first pointed out that penalties were assessed by local tax commissioners in England pursuant to the Land Tax Act of 1692. In the United States, the original penalties in the Revenue Act of 1862 "were assessed and collected administratively," which the Tax Court described as part of "our federal income tax system['s]… lengthy tradition of administratively imposed and collected penalties." The Tax Court also quoted the Supreme Court's opinion in Oceanic Steam Navigation Co. v. Stranahan, 214 U.S. 320 (1909), where it stated that "as to internal revenue, taxation and other subjects," it was within Congress's competency "to impose appropriate obligations and sanction their enforcement by reasonable money penalties, giving to executive officers the power to enforce such penalties without the necessity of invoking the judicial power." Id. at 339.

Ultimately, the Tax Court drew a distinction in that "[t]he civil action in Jarkesy involved purported fraud upon private individuals, not the federal government" and concluded that "[s]tatutory claims like those at issue in Jarkesy are modeled after causes of action traditionally available to private parties at common law" (private rights) which "simply are not comparable to section 6663(a), which contemplates fraud upon the federal government" (public rights).

The amicus brief from the Center for Taxpayer Rights made a strong case that the Tax Court did not adopt but which will surely be re-argued on appeal before the same courts that decided Jarkesy against the government: the Fifth Circuit and then perhaps the Supreme Court. The outcome of a Silver Moss appeal is difficult to predict because of the importance of legislative history (which Judge Harold Leventhal famously compared to "looking over a crowd and picking out your friends") to this analysis and consideration of centuries-old laws and practices. 

At least for now, taxpayers should not expect any change to the status quo with respect to jury trials for tax penalties, but it will be worth keeping an eye on the likely appeal of Silver Moss in addition to any similar cases arising from other agencies' actions.

For more information, please contact:

George A. Hani, ghani@milchev.com, 202-626-5953

Tyler C. Jackson, tjackson@milchev.com, 202-626-5820

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