Riddle Aggregates, LLC v. Commissioner

Tax Court Rejects Jarkesy Challenge to Penalties

Riddle Aggregates, LLC, faced with a potential accuracy-related penalty tied to a disallowed $45 million charitable contribution deduction, attempted to leverage the Supreme Court's ruling in SEC v. Jarkesy to invalidate the assessment. The partnership argued that the imposition of penalties without a jury trial violated its Seventh Amendment rights. The Tax Court, in a decision by Judge Kerrigan, rejected this argument, holding firm on its authority to adjudicate penalties without a jury. The court ruled that the Seventh Amendment does not apply to suits against the sovereign and that tax penalties fall under the "public rights" exception. This decision follows the Tax Court's recent Silver Moss precedent, which similarly upheld the court's power in penalty cases.

The $45 Million Deduction & The Constitutional Argument

Following the Silver Moss precedent, the Tax Court once again faced a constitutional challenge regarding its authority to impose penalties without a jury trial, this time from Riddle Aggregates. The case centered on a $44,995,000 deduction claimed by Riddle Aggregates on its 2017 Form 1065, U.S. Return of Partnership Income, for a noncash charitable contribution. This contribution involved a conservation easement donated to the Atlantic Coast Conservancy, Inc. The IRS issued a Notice of Final Partnership Administrative Adjustment (FPAA) disallowing the deduction. Furthermore, the IRS determined an accuracy-related penalty under Section 6662.

Section 6662 imposes a penalty equal to 20% of the portion of an underpayment of tax attributable to several factors, including negligence or disregard of rules or regulations under § 6662(c) and substantial understatement of income tax under § 6662(d).

Ornstein-Schuler, LLC, the tax matters partner (petitioner) for Riddle Aggregates, initiated a partnership-level proceeding under the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) by filing a petition in Tax Court. TEFRA, before its repeal by the Bipartisan Budget Act of 2015, established unified proceedings to determine the tax treatment of partnership items at the entity level. The Petitioner then filed a Motion for Partial Summary Judgment, arguing that the accuracy-related penalty determined by the IRS was unassessable as a matter of law. The crux of their argument hinged on the Supreme Court's decision in SEC v. Jarkesy, 144 S. Ct. 2117 (2024). The Petitioner asserted that, under Jarkesy, the accuracy-related penalties were subject to the constitutional protections of the Seventh Amendment, which guarantees the right to a jury trial in suits at common law, and Article III, which requires judges in such suits to have life tenure and salary protection. Because the Tax Court does not offer jury trials and its judges are not Article III judges, the Petitioner maintained that the court could not authorize recovery of the penalties. The Petitioner requested the court grant summary judgment, deeming the accuracy-related penalties unassessable and redetermining them to be zero.

Analysis: You Can't Demand a Jury When You Sue the Sovereign

The Tax Court rejected the Petitioner's constitutional argument on multiple grounds, beginning with the fundamental principle of sovereign immunity. The court relied on its recent holding in Silver Moss Properties, LLC v. Commissioner, 165 T.C. No. 3 (2025). In Silver Moss, the Tax Court addressed a similar challenge to its authority to impose penalties without a jury trial, specifically regarding the civil fraud penalty under Section 6663(a). Section 6663(a) imposes a penalty if any part of an underpayment of tax required to be shown on a return is due to fraud. The Silver Moss court held that the Seventh Amendment, which guarantees the right to a jury trial in suits at common law, does not apply to suits against the sovereign. In other words, the United States government is immune from suit unless it consents to be sued.

The Tax Court in Silver Moss further reasoned that Congress had not consented to jury trials in cases arising under the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA). TEFRA established unified proceedings to determine the tax treatment of partnership items at the partnership level, and the present case arose in that context. The court in Riddle Aggregates saw no reason to revisit its holding in Silver Moss, finding that it fully resolved the Petitioner's claim.

The Tax Court highlighted a critical distinction often missed in these challenges: the Petitioner misunderstood the nature of its suit. The Petitioner argued as if the government were suing it to recover money damages, similar to the scenario in SEC v. Jarkesy, 144 S. Ct. 2117 (2024). However, the court emphasized that the Petitioner initiated the suit, seeking to prevent the government from assessing and collecting the tax and penalties it believed was due from the partners of Riddle Aggregates. Therefore, the analytical framework that the Petitioner advanced, based on cases where the government was the plaintiff, was inapplicable, and the authorities on which the Petitioner relied were inapposite.

Analysis: Penalties Are Revenue, Not Punishment

The Tax Court further rejected the Jarkesy challenge by invoking the "public rights exception" to the Seventh Amendment. This doctrine holds that the right to a jury trial does not extend to cases involving "public rights," which are generally matters arising between the government and its citizens. The court reasoned that assessing and collecting tax penalties is a quintessential public right.

The court traced the historical treatment of accuracy-related penalties to demonstrate their nature as civil incidents of revenue collection, not as punitive measures requiring a jury trial. Citing Helvering v. Mitchell, 303 U.S. 391 (1938), the court noted that the Supreme Court had previously determined that penalties for negligence under the Revenue Act of 1928 were intended by Congress to be civil in nature. Section 6662(a) imposes a 20% accuracy-related penalty on underpayments, applicable to scenarios such as negligence, substantial understatements of income tax, and substantial valuation misstatements, as detailed in § 6662(b)(1), (2), and (3). Negligence, as defined by § 6662(c), includes any failure to make a reasonable attempt to comply with tax law provisions. A substantial understatement, according to § 6662(d), occurs when it exceeds the greater of 10% of the required tax or $5,000. Furthermore, § 6662(e) and (h) address substantial and gross valuation misstatements based on percentage errors in property value, with subsection (h) increasing the penalty for exceeding certain thresholds.

The court also highlighted that the Omnibus Budget Reconciliation Act of 1989 (OBRA 89) consolidated accuracy-related penalties into Section 6662, while moving the fraud penalty to its own Section 6663. This change, according to the House Report No. 101-386, aimed to streamline penalties related to tax return accuracy, including negligence, understatement, and valuation penalties, without altering their substantive nature. The court found no substantive changes to the negligence penalty's text throughout revenue law amendments, affirming its underlying purpose as a "civil incident of assessment and collection" as established in Mitchell. Referencing Little v. Commissioner, 106 F.3d 1445 (9th Cir. 1997), the court emphasized that accuracy-related penalties serve to deter noncompliance by imposing a financial risk, thus raising revenue.

Finally, the court rejected the Petitioner's argument that the Section 6662 penalty was comparable to the Foreign Bank and Financial Accounts (FBAR) penalty addressed in United States v. Schwarzbaum, 127 F.4th 259 (11th Cir. 2025). In Schwarzbaum, the Eleventh Circuit concluded that the FBAR penalty was a fine subject to the Eighth Amendment's excessive fine clause. The Tax Court distinguished Schwarzbaum by emphasizing its focus on the Eighth Amendment rather than the Seventh Amendment. The court reaffirmed the holding in Little, which characterized the negligence penalty under Section 6653 and the substantial understatement penalty under Section 6661 as remedial measures related to the government's interest in raising revenue, rather than punitive measures.

Impact: The Tax Court Shield Remains Intact

As the Tax Court concluded that the FBAR penalty was a fine subject to the Eighth Amendment's excessive fine clause, while distinguishing Schwarzbaum by emphasizing its focus on the Eighth Amendment rather than the Seventh Amendment, it reaffirmed the holding in Little, which characterized the negligence penalty under Section 6653 and the substantial understatement penalty under Section 6661 as remedial measures. The denial of the motion serves as a clear signal to taxpayers: attempts to leverage the Supreme Court's ruling in SEC v. Jarkesy to challenge Tax Court procedures or penalties face significant hurdles. Similar to Silver Moss Properties, LLC v. Commissioner, 165 T.C. No. 3 (2025), which dealt with accuracy-related penalties under Section 6662 (imposing a 20% penalty on underpayments due to negligence or substantial understatement of income tax), this case underscores the Tax Court's position that it can adjudicate standard tax penalties without a jury. The Tax Court is firmly establishing that its lack of a jury does not prevent it from adjudicating standard tax penalties.

The court explicitly stated it had considered all other arguments and found them without merit. Ultimately, the motion for partial summary judgment was denied, reinforcing the Tax Court's existing framework for resolving tax disputes.