Tax Court: No Right to Jury Trial in TEFRA Partnership-Level Proceedings

(Parker Tax Publishing September 2025)

The Tax Court held that the right to a jury trial under the Seventh Amendment to the U.S. Constitution does not apply to lawsuits against the government, and Congress has not otherwise consented to trial by jury in TEFRA partnership-level proceedings. The court therefore denied a partnership's motion for summary judgment contending that the Tax Court was barred from adjudicating a civil fraud penalty asserted against the partnership by the IRS in Notice of Final Partnership Administrative Adjustment. Silver Moss Properties, LLC v. Comm'r, 165 T.C. No. 3 (2025).

Background

Silver Moss Properties, LLC (Silver Moss) is a partnership subject to the audit and litigation procedures of the Tax Equity and Fiscal Responsibility Act of 1982 TEFRA). In 2017, Silver Moss donated a conservation easement and claimed a charitable contribution deduction under Code Sec. 170. The IRS issued a Notice of Final Partnership Administrative Adjustment (FPAA) in large part disallowing the deduction attributable to the easement.

Silver Moss's tax matters partner filed a petition with the Tax Court alleging that the IRS erred in its determination that the charitable contribution did not satisfy all of the requirements of Code Sec. 170. The IRS filed an Answer, which it later amended to assert a civil fraud penalty under Code Sec. 6663(a). Under Code Sec. 6663(a), a penalty applies to an underpayment with fraudulent intent to evade taxes owed.

Silver Moss filed a Motion for Partial Summary Judgment. Citing SEC v. Jarkesy, 144 S.Ct. 2117 (2024), Silver Moss argued that the Code Sec. 6663(a) fraud penalty could not apply as a matter of law because, under the Seventh Amendment to the U.S. Constitution, a court cannot adjudicate a common law fraud penalty without providing an opportunity for a trial by jury. There is no right or mechanism to a trial by jury in either the Tax Court or the Court of Federal Claims, and under Code Sec. 1346 a jury trial is not available in district court for TEFRA partnership-level actions.

The IRS responded that the United States had not waived sovereign immunity and that the penalty proceeding fell with the "public rights" exception to the Seventh Amendment's right to trial by jury. Under the public rights exception, jury trials are required in actions that are analogous to suits at common law, but Congress can assign the adjudication of public rights to an administrative agency absent a jury without violating the Seventh Amendment. In Jarkesy, the Supreme Court held that the Securities and Exchange Commission's adjudication of a civil fraud penalty for purported securities law violations without a jury trial violated the Seventh Amendment. However; the Court also recognized the collection of revenue as a quintessential public right (meaning a right belonging to a sovereign, not a private citizen).

Analysis

The Tax Court held that the Seventh Amendment does not apply to lawsuits against the federal government, and Congress has not otherwise consented to trial by jury in TEFRA partnership-level actions. The court explained that TEFRA authorized the IRS to initiate proceedings at the partnership level to adjust partnership items, and partnerships could challenge the resulting FPAA in the Tax Court, the Court of Federal Claims, or a district court. However, while TEFRA permitted partnerships to seek judicial review of an FPAA, including the applicability of penalties, it did not confer a right to a jury trial.

The court further held that the public rights exception to the Seventh Amendment applies to civil fraud penalties under Code Sec. 6663(a). The court noted that the civil action in Jarkesy involved purported fraud upon private individuals, not the federal government. Even without the SEC enforcement action, a private litigant affected by securities fraud could pursue a fraud action against an investment manager for material misrepresentations. Statutory claims like those at issue in Jarkesy, the court explained, are modeled after causes of action traditionally available to private parties at common law. The court found that these simply are not comparable to Code Sec. 6663(a), which contemplates fraud upon the federal government. No private litigant can bring a statutory civil tax fraud penalty on the government's behalf; therefore, the court concluded that the imposition and collection of this penalty falls squarely within the public rights exception.

For a discussion of civil fraud penalties, see Parker Tax ¶262,125.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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