Twelve Angry Taxpayers: Why the Constitution Might Guarantee a Jury Trial for Accuracy and Fraud Penalties in Tax Cases After SEC v. Jarkesy
This article considers the current constitutional status of the Internal Revenue Code (I.R.C.) §6662 accuracy penalties and I.R.C. §6663 penalties (collectively, tax penalties). It has been widely assumed that taxpayers have no constitutional right to a jury where tax penalties are concerned. These penalties (and their successors) have been added to the underlying tax and collected using the same methods for more than 100 years. However, the summer of 2024 brought three cases that amount to a constitutional revolution in administrative law, and one of them — Securities and Exchange Commission v. Jarkesy, 603 U.S. 109 (2024) — threatens to upend tax procedure.[1]
Under Jarkesy, when a penalty is the kind of action that courts of law (and not equity) would have heard in the founding era, the U.S. usually can only collect that penalty by suing in an art. III court with a jury trial right. Jarkesy works no great change at step one. Instead, it narrows the “public rights” exception to art. III and the Seventh Amendment at step two.
The public rights exception remains “an area of frequently arcane distinctions and confusing precedents” that has yet to be “definitively explained.”[2] However, the Jarkesy Court clearly elevated founding era historical practice to the forefront of the public rights analysis. Taxation was the first recognized public rights exception, and it still qualifies after Jarkesy based on the historical record.[3] But perhaps surprisingly, a close examination of the historical record shows that tax penalties are different.
Before and after the American Revolution, tax penalties were collected by suit against the taxpayer, from the dawn of America until the Civil War. What’s more, depriving the founders of jury trials in tax penalty cases was one of the grievances that led them to revolt. If Jarkesy is to be taken seriously, courts will be hard-pressed to maintain the current status quo of administrative assessment and collection of penalties.
After outlining the new regulatory challenges that have arisen, with an eye to highlighting the new regulatory challenges the Court has made possible, this article proceeds through the tax penalty material in chronological order: 1) Through the history of tax penalty collections in the founding era and Civil War, with attention to deprivation of the right to jury trial in tax penalty cases specifically as an often overlooked grievance against the Crown; 2) through the first mention of the public rights exception in 1855 until its broadest scope as articulated in Atlas Roofing Co., Inc. v. Occupational Safety Comm’n, 430 U.S. 442 (1977); and 3) the narrowing of the doctrine, culminating in 2024’s Jarkesy, which substantially reforms and strengthens the rights to a jury trial and to an independent art. III judge.
Finally, the author suggests some possible responses to navigate the new reality.
Summer ‘24 and Beyond: A Host of New Substantive Challenges to Agency Action and a More Powerful Procedural Vehicle To Bring Them
The current Court has not been kind to precedents inconsistent with its originalist, textualist, and formalist approach to the Constitution.[4] In the March/April 2025 issue of The Florida Bar Journal, author Kristen Dobson discussed the death of Chevron U.S.A., Inc. v. NRDC, 467 U.S. 837 (1984), and the import of Jarkesy generally.[5] In the same issue, Jeffrey Wald gave us more insight into the Roberts Court’s judicial philosophy, showing why “it is historical practice — not the combined action of present-day state legislatures — that is likely to sway” any Eighth Amendment decision before the current Court.[6] Here, that historical approach informs the Court’s pursuit of a different constitutional value: the separation of the powers of each branch of government.
This structural value is at work in recent and pending cases at the Court. You probably studied Chevron, or at least noticed when its core teaching (judicial deference to agency interpretations of statutory ambiguity) was killed in Florida by constitutional amendment in 2018.[7] Loper Bright Enterprises v. Raimondo, 603 U.S. (2024), the dagger (or stake, if you like — this article is politically neutral) through Chevron’s heart at the national level, ends the practice of deferential review of agency interpretations of ambiguous statutes. Loper Bright is ultimately about interpreting a statute (the Administrative Procedure Act, or APA) rather than the Constitution. Nevertheless, the Court devotes an entire section of the opinion to the history of art. III, concluding that “the APA thus codifies for agency cases the unremarkable, yet elemental proposition reflected by judicial practice dating back to Marbury: that courts decide legal questions by applying their own judgment.”[8] The Court, thus, interpreted the APA consistently with art. III’s command that “the judicial power of the United States” remain with the judiciary.
Having eliminated implicit delegations of interpretive power that previously occurred whenever statutory ambiguity existed, the Court will also turn to explicit delegations. In this area, the Constitution requires that the “legislative Powers” described in §1, art. I remain “vested in” Congress. In FCC v. Consumers’ Research, 67 F.4th 773 (2023), the Court will decide whether to overrule the firmly established “intelligible principle” test for whether Congress’s statutes delegate legislative power to an agency.[9] In practice, requiring Congress to supply only an intelligible principle has not required much clarity, and no explicit delegation of authority has been overruled since 1935.[10] Specific possible outcomes from the Consumers’ Research decision are beyond the scope of this article, but the author would not be surprised if the Roberts Court reconsiders the intelligible principle test.
Those practicing in or watching this space might have assumed that older regulations would be insulated from challenge, but that did not hold true. In Corner Post, Inc. v. Bd. of Governors of Fed. Rsrv. Sys., 603 U.S. 799 (2024), the Court reversed seven of the 13 federal circuits, which had held that the APA’s statute of limitations begins to run when a regulation is promulgated. Under that approach, the time to challenge a regulation could expire well before an affected entity or individual existed. But after Corner Post, APA claims now accrue just like other claims: when a party is harmed.
In addition to enabling substantive challenges based on new constitutional cases, Corner Post applies to procedural challenges (for example, to lack of notice and comment procedures). Tax regulations are particularly vulnerable to procedural challenges. The government consistently argued that tax regulations were not subject to the APA until losing that war in 2011’s Mayo Foundation for Medical Education and Research v. United States, 562 U.S. 44 (2011). [11] After Mayo, the Government has often argued that it complied with the APA even though it didn’t believe it had to. Courts have not always agreed.[12]
It is against this extraordinarily new landscape that we turn to the final case of the Summer ‘24 administrative law trilogy. Jarkesy holds that the SEC’s fraud penalty cannot be decided at the agency level. Instead, the SEC must sue in a federal district court, where both an art. III judge and a jury are available. As we’ll see, Jarkesy gets there by tightening up the “public rights” exception to two constitutional procedural rights: 1) art. III, §1, which vests the “judicial power of the United States” in life-appointed judges with salary protection; and 2) the Seventh Amendment, which guarantees a jury trial “in suits at common law.”
Before Jarkesy, the exception had been generous. After Jarkesy, we stand admonished that “the exception is, after all, an exception”[13] to the text of the Constitution. Unsurprisingly, the Roberts Court dislikes judicially-created exceptions to the text of the Constitution. Expediency is not enough; instead, the exception requires a contemporaneous historical tradition of nonjury procedures.[14]
When we examine that founding era history, we find the U.S. suing taxpayers in art. III jury trial forums to collect tax penalties until the Civil War. This history was largely irrelevant before Jarkesy. Afterward, it imperils our current system of assessing penalties and collecting them as additions to the underlying tax.
1776-1862: Jury Trials for Monetary Tax Penalties From Independence Through the Civil War
The conventional account of American independence — or at least the one the author learned from Schoolhouse Rock! — proves inadequate where tax penalties are concerned.[15] Jarkesy itself teaches us that the slogan “no taxation without representation” included representation on juries when the British Crown sought to collect tax penalties by suing the taxpayer.
In footnote four, the Jarkesy majority cites, “Administrative Penalties and the Civil Jury: The Supreme Court’s Assault on the Seventh Amendment.”[16] You wouldn’t know it from the title, but this article has quite a lot to show us about the history of tax penalties. Author Roger Kirst argues that there is no founding era precedent for monetary tax penalties to be collected as additions to tax, with no judicial involvement necessary. Additional research confirms this account of early American tax penalty procedure.
Where the underlying tax is concerned, founding era practice appears to mirror the status quo. “The typical [18th]-century collection procedure allowed the collector to seize or distrain the property of the tax debtor and then to sell the property to obtain the money to satisfy the taxes; the method was nonjudicial and did not involve the courts at any stage from assessment to collection.”[17] However, the same cannot be said for tax penalties.
Penalties were, as a matter of historical fact, sued for and recovered in America under the 17th century Navigation Acts.[18] As relations deteriorated with the colonies, Britain imposed more taxes and penalties but still collected monetary penalties by suing the alleged violator. Over time, as colonial juries nullified laws they considered unjust, the British Crown dispensed with juries.[19]
Thus, the Sugar Act of 1764 provides that penalties must be sued for and recovered, maintaining the right of jury trial in Great Britain but now depriving it to the American colonists.[20] The infamous Stamp Act of 1765 (the first direct internal tax on the colonies) similarly required the British Crown to sue to recover penalties, but again gave jurisdiction to juryless courts of vice admiralty.[21] In response, the American colonists adopted the Declaration of Rights and Grievances during the Stamp Act Congress. They accused King George III of “extending the Jurisdiction of the Courts of Admiralty, beyond its Ancient limits,” in order to “Subvert the Rights, and liberties of the Colonists.”[22]
That early American tradition of jury trial for tax penalties continued through the founding era into the first years of the Civil War, with the most common procedural vehicle for penalty collection being an “action in debt.”[23] There are fewer examples than one might expect, though: “Between 1789 and 1862, Congress filled the federal fisc mainly through external taxes, in the form of tariffs, or customs duties, imposed on imported goods.”[24] Indeed, there were no internal taxes in force at all from 1802 to 1813, or from 1817 to 1861.[25] But when they existed, the U.S. was obliged to sue in federal court to recover the associated penalties.[26] In these suits, the taxpayer had the right to a jury.[27]
When internal taxes resumed in 1861, the tradition of tax penalty recovery at common law remained unbroken. The first American income tax, the Act of August 5, 1861, mandated that “all fines, penalties, and forfeitures…shall and may be sued for and recovered” in federal court.[28] It was not until 1862 that Congress began to blur the statutory distinction between fines and penalties, with a 50% additional tax for failure to make a return.[29]
The Confederacy expanded administrative penalty collections in an income tax passed in 1863, which imposed administrative penalties for failure to file returns and for filing false or fraudulent returns.[30] The next year, the Revenue Act of 1864 included a fraud penalty by which the assessor could add 100% to the tax, though Congress did not denominate it a penalty.[31] Three years later, in the Revenue Act of 1867, Congress referred to the fraud penalty as a penalty and allowed the government to assess and collect it without suit.[32] Nearly 160 years later, we treat all accuracy penalties as additions to tax, to be assessed without a jury and collected summarily, with prepayment review in Tax Court only by the grace of Congress.
Somehow, the Supreme Court has never had to decide directly whether this new arrangement violates the Constitution.
1855-1978: The Expansion of the Public Rights Exception From Core Sovereign Powers To Encompass All Statutory Rights
The Seventh Amendment guarantees a jury trial for all “suits at common law.” Suits at common law also trigger Art. III’s guarantee of an independent, life-tenured judge with salary protection.[33] At the same time, it is generally accepted that there are exceptions for matters of “public rights,” which the Supreme Court freely acknowledges still have not been well-defined.[34]
Tax is the most commonly offered example of the public rights exception, as well as the first. As it turns out, there are only two public rights cases that deal with taxation, and neither address penalties. Moreover, as discussed later, they may not even be public rights cases anymore after Jarkesy. For now, let’s ignore this complication and proceed as though these cases continue to form the doctrinal basis for the public rights exception.
Murray’s Lessee v. Hoboken Land & Improvement Co., 59 U.S. 272 (1856), introduced the term “public rights” in 1855.[35] In Murray’s Lessee, the defendant obtained title to land by auction after the government seized the land through a distress warrant.[36] The plaintiff, a customs collector, was $1,374,119.65 short after an audit, triggering the seizure.[37] The Court concluded that using “summary means to compel these officers…to pay such balances of the public money as may be in their hands” did not “differ in principle” from historically available remedies and, therefore, was constitutional.[38] Murray’s Lessee did not address a taxpayer’s relationship with the state, nor did it use “public rights” to direct a suit at law to an administrative forum.[39]
The only other public rights case to address taxation is 1931’s Phillips v. Commissioner, 283 U.S. 589 (1931). Phillips concerned summary adjudication of transferee liability for corporate taxes. The challenged statute subjected shareholders who receive assets of a dissolved corporation to unpaid corporate taxes “in the same manner as that of any delinquent taxpayer.”[40] Before the law was passed, transferee liability had to be established “by bill in equity or action at law.”[41] The taxpayer asserted that the new statute was unconstitutional “because it does not provide for a judicial determination of the transferee’s liability at the outset.”[42]
The Phillips Court disagreed. The Constitution did not guarantee an art. III jury forum because the law was designed solely “to collect the revenue.”[43] As the Court explained, the “right of the United States to collect its internal revenue by summary administrative proceedings has long been settled.”[44] The Court rejected the argument that Murray’s Lessee turned on narrow grounds “peculiar [to the] relationship of a collector of revenue to his government.”[45] Instead, the “need of the government promptly to secure its revenue” was the animating principle behind the tax exception.[46]
The Court purported to apply the public rights exception in a series of other 20th century cases as well. It did not require juries for certain matters related to sovereign powers, or to admiralty: penalties for transporting aliens with contagious diseases into the country[47]; additional import tariffs for traders using unfair competition methods;[48] and workers’ compensation payments for seamen.[49] However, in 1978, the Court moved beyond that sovereignty-based reasoning in Atlas Roofing.[50]
In Atlas Roofing, the Court upheld administrative imposition of OSHA penalties, detailed building code types of regulations with penalties that apply regardless of a legally cognizable harm, “whether or not an employee is injured or killed as a result of the condition.”[51] The Court recognized that that previous public rights cases dealt with “the exercise of sovereign powers that are inherently in the exclusive domain of the Federal Government and critical to its very existence.”[52] However, the Court did not believe that precedent confined the public rights exception to those areas.[53] The Court created a broad new exception for “cases in which the Government sues in its sovereign capacity to enforce public rights created by statutes within the power of Congress to enact.”[54]
The broad Atlas Roofing doctrine is now just as dead as Chevron, and all of the earlier public rights cases may have become collateral damage.
1978-2024: After Years of Decline, Jarkesy Recasts Atlas Roofing and Other Public Rights Cases
The Atlas Roofing decision was heavily criticized.[55] It would come to represent the high-water mark of nonjury procedures. After Atlas, the Court refused to apply the public rights exception to related claims in bankruptcy cases,[56] or to civil penalties under the Environmental Protection Act.[57] Indeed, by 1989 Justice White (author of the majority opinion in Atlas Roofing) lamented in dissent that the opinion had been overruled.[58]
Then came Jarkesy. The Jarkesy majority claims to stop short of overruling Atlas Roofing, but it may as well have.[59] Jarkesy distinguishes Atlas Roofing and the other public rights cases into oblivion (or at least into dicta) by concluding that they were not “suits at common law” in the first place, and, therefore, not within the text of the Constitution’s guarantees of a jury and impartial judge.
It remains to be seen how or even whether the older cases still inform the modern discussion of the public rights exception for tax. Murray’s Lessee teaches us that history matters, and Jarkesy preserves and amplifies this teaching. But Phillips, which the majority did not address in Jarkesy, recasts the exception as turning on “the need of the government promptly to secure its revenues.”[60] Courts will have to harmonize these precedents, and the Court has left itself plenty of room to modify the public rights exception doctrine the next time the issue arises.
Under the Jarkesy opinion as written, though, the assessment process for penalties under I.R.C. §§6662 and 6663 is in trouble.
• Jarkesy Step One: The “Suit at Common Law” Threshold for the Constitutional Rights to a Jury and an Art. III Judge — Jarkesy reiterates that, when determining whether a penalty action is a “suit at common law” for constitutional purposes, courts must determine whether an analogous suit would have been heard at law or in equity if brought in the founding era.[61] Courts are to analyze the remedy and the other characteristics of the penalty, with the remedy being “the ‘more important’ consideration.”[62]
Equitable remedies generally restore or preserve legal relationships through coercive measures other than a judgment for damages.[63] Monetary remedies are the traditional hallmark of damages at law, and indicate a suit at common law unless the recovery corresponds precisely to some equitable theory of recovery.[64] Equitable monetary relief, in turn, is limited to “restoring the status quo and ordering the return of that which rightfully belongs” to the injured party, unlike the generally compensatory awards available on the law side of the courts.[65]
Thus, in the context of the SEC’s fraud penalty, the Jarkesy Court explained that “[w]hat determines whether a monetary remedy is legal is if it is designed to punish or deter the wrongdoer or, on the other hand, solely to ‘restore the status quo.’”[66] A “civil sanction that cannot fairly be said solely to serve a remedial purpose, but rather can only be explained as also serving either retributive or deterrent purposes, is punishment.”[67]
Like the fraud penalty in Jarkesy, tax penalties serve the functions of deterrence and punishment,[68] imposing monetary sanctions on those who would otherwise play the “audit lottery” without fear of consequence if caught.[69] Like the SEC penalties at issue in Jarkesy, higher penalty tiers are reserved for conduct deemed more blameworthy, either because of the nature and magnitude of the understatement, or (for I.R.C. §6663) intent to deceive.[70] These penalties may restore the status quo incidentally depending on how the funds collected are spent, but the additions to tax do not solely or even primarily serve that purpose in tax collection.[71]
In fact, the commissioner forbids IRS employees from considering these factors, explaining that while penalties incidentally “serve to bring additional resources into the Treasury and indirectly fund enforcement costs[,] these results are not reasons for creating or imposing penalties.”[72] The Internal Revenue Manual directs IRS employees that penalties should “[b]e severe enough to deter noncompliance”; “[e]ncourage noncompliant taxpayers to comply”; “[b]e objectively proportioned to the offense”; and “[b]e used as an opportunity to educate taxpayers and encourage their future compliance.”[73] These are deterrent goals, not remedial ones.
Apart from serving purposes not recognized at equity, the penalties in I.R.C. §§6662 and 6663 do not correspond to any recovery a court could award in the exercise of its equitable powers. An equitable remedy would vary based on the taxpayer’s gain, and be limited to ensuring that no unjust enrichment occurs.[74] Unjust enrichment arising from failure to pay a fair tax liability is remedied by payment of the underlying tax debt, with interest. There is no permissible theory of equitable recovery that leads to an award of an additional 20%, 40%, or 75% besides.[75]
The nature of the cause of action is merely a secondary consideration; nevertheless, tax penalties satisfy this criteria. When a cause of action is analogous to a recognized suit at common law, it is also protected by the Seventh Amendment and art. III.[76] The test is whether there is a close relationship to a historical suit at law, not whether the overlap is identical.[77]
If satisfying the analogy test requires more than simply observing that all monetary penalties are analogous to the action in debt through which founding era penalties were collected, tax penalties offer many other grounds of similarity to fraud and negligence.[78] It was enough for the Jarkesy Court that common-law fraud and the SEC-enforced regulatory penalty “target the same basic conduct: misrepresenting or concealing material facts.”[79] The similar relationship between fraud at common law and in I.R.C. §6663 is obvious. Similarly, the various §6662(b) penalty criteria target failure to take reasonable care to discharge the duty to calculate and pay the correct amount of taxes, and unreasonableness is the basic wrong that a negligence suit addresses. The elements of the penalty are at least superficially similar to negligence.
However, the penalty triggers are only half of the story, because reasonable cause can save the taxpayer who acts in good faith and exercises “ordinary business care and prudence.”[80] The reasonable cause defense further infuses tax penalties with the character of common-law negligence. So, unlike Atlas Roofing and the sanctions imposed in other “public rights” cases described in Jarkesy, accuracy penalties in I.R.C. §§6662 and 6663 need to be matters of public right to be constitutional, because they are suits at common law at step one according to both the remedy and analogy tests.
• Jarkesy Step Two: Historicity as the Primary or Sole Test for the Public Rights Exception — There can be no question that Jarkesy narrows the public rights exception. The Jarkesy Court reminds us that the doctrine “is, after all, an exception” with “no textual basis in the Constitution.”[81] Jarkesy also states clearly (and for the first time in a majority opinion) that “the presumption is in favor of [art.] III courts” at step two’s public rights analysis.[82] Jarkesy also rejects the notion that practical considerations can guide the inquiry.[83] Instead, the public rights exception applies only to claims that “historically could have been determined exclusively by the executive and legislative branches.”[84]
Rather than overruling the older cases, Jarkesy turned them into dicta, at least where public rights are concerned. According to the majority, cases from the seminal Murray’s Lessee to the modern Atlas Roofing did not involve suits at common law in the first place.[85] Thus, those earlier Courts had no business defining the contours of the public rights exception, which remains “an area of frequently arcane distinctions and confusing precedents” that has yet to be “definitively explained.”[86] The Jarkesy Court did not mention Phillips, however. The “need to promptly collect revenues” may still be a guiding principle where taxation is concerned.[87] On the other hand, taxes have never been collected as suits at common law, leaving Phillips as vulnerable as Murray’s Lessee and the other cases that Jarkesy recasts as decided on the suit at common law ground.
Conclusion
With Jarkesy — i.e., history — and possibly Phillips — i.e., the need to promptly collect revenues — as the remaining guideposts for the public rights exception for taxation, it’s hard to root for the status quo in tax penalty collection. The historical record is damning, and nothing shows that tax penalties themselves need to be collected administratively to promote compliance even if Phillips remains law.[88] The Roberts Court certainly has not been receptive to practical considerations, further undermining the Phillips rationale in future cases.
Striking down the penalty assessment procedural statutes[89] would be a huge change, but the consequence follows directly from Jarkesy. The government’s only existing procedural vehicle appears to be the general penalty statute under 28 U.S.C. §2461, which generally carries a five-year statute of limitations.[90] Will there be a deluge of penalty cases under this or some new statute? If so, the courts and Congress have ways to cope. Specialized staff attorney positions, magistrate judgeships, or even art. III judgeships directed at adjudicating penalties could arise. Specialized rules of court (think Fed. R. Pen. Coll.) could help streamline penalty collection in tax and other areas.
Perhaps more interesting are the consequences for tax compliance overall. Will taxpayers feel emboldened without the threat of assessable accuracy penalties? Or will taxpayer morale and compliance increase because of a greater sense of overall fairness?[91] Either way, the results will tell us something important about the American taxpayer.
[1] A possibility not explored in this article is whether tax penalties would become entirely unenforceable if found partially unconstitutional. See, e.g., Nat’l Fed’n of Indep. Bus. v. Sebelius, 567 U.S. 519, 648 (2012) (Scalia, J., dissenting on issue of severability). The author assumes they would be.
[2] Jarkesy, 603 U.S. at 130-31.
[3] Because neither the British Crown nor the American colonies collected taxes by suit at common law, however, it is unclear whether taxes need any public rights exception at step two. They may well fall out of the analysis at step one instead. The author does not attempt to treat the issue in any depth here.
[4] See generally Elizabeth Beske, Litigating the Separation of Powers, 73 Ala. L. Rev. 823, 824-25 (2022) (describing the “increasingly formalist Roberts Court:” “In marked contrast to its predecessors, the Roberts Court has carved a clear and confident role for itself in adjudicating separation-of-powers disputes”).
[5] Kristen Bond Dobson, The Death of Chevron: What Loper Bright Means for the Future of Administrative Law, 99 Fla. B. J. 22 (Mar./Apr. 2025).
[6] Jeffrey Wald, Has SCOTUS Evolved Beyond the Evolving Standards of Decency? 99 Fla. B. J. 8 (Mar./Apr. 2025).
[7] Fla. Const., art. V, §21.
[8] Loper Bright Enterprises v. Raimondo, 603 U.S. 369, 391-92 (2024).
[9] No. 24-354.
[10] See A.L.A. Schechter Poultry Corp. v. United States, 295 U.S. 495, 551 (1935).
[11] “We are not inclined to carve out an approach to administrative review good for tax law only. To the contrary, we have expressly ‘recognized the importance of maintaining a uniform approach to judicial review of administrative action’” (quoting Dickinson v. Zurko, 527 U.S. 150, 154 (1999)).
[12] E.g., Mann Construction Inc. v. United States, 27 F.4th 1138 (6th Cir. 2022); Hewitt v. Commissioner, 21 F.4th 1336 (11th Cir. 2021); Liberty Global Inc. v. United States, No. 1:20-cv-03501 (D. Colo. Apr. 4, 2022); CIC Services LLC v. IRS, No. 3:17-cv-00110 (E.D. Tenn. Mar. 21, 2022); Valley Park Ranch LLC v. Commissioner, 162 T.C. No. 6 (2024); Green Valley Investors LLC v. Commissioner, 159 T.C. No. 5 (2022).
[13] Jarkesy, 603 U.S. at 131 (emphasis in original).
[14] “[E]ffects like increasing efficiency and reducing public costs are not enough to trigger the exception.” Id. at 140 (citation omitted).
[15] The episode “No More Kings” (Schoolhouse Rock! 1975), illustrates the extent of the author’s formal education on the topic: “He taxed their property, he didn’t give them any choice. And back in England, he didn’t give them any voice. That’s called taxation without representation, and it’s not fair. But when the colonies complained, the King said ‘I don’t care.’”
[16] Roger Kirst, Administrative Penalties and the Civil Jury: The Supreme Court’s Assault on the Seventh Amendment, 126 U. Pa. L. Rev. 1281 (1978).
[17] Id. at 1294-95.
[18] The Navigation Act of 1660 provided for a share of the forfeiture of offending ships and cargo to those who “sue for the same in any court of record, by bill, information, plaint, or other action,” as did the Acts of 1663 and 1696 (“An Act for preventing Frauds and regulating Abuses in the Plantation Trade.”); see generally C.J. Hendry Co. v. Moore, 318 U.S. 133, 138-40 (1943).
[19] The royal governor of Massachusetts, Francis Bernard, complained that a “[c]ustom house officer has no chance with a Jury, let his Cause be what it will.” Governor Francis Bernard to Lords of Trade (Aug. 2, 1761), reprinted in Josiah Quincy, Jr., Reports of Cases Argued and Adjudged in the Superior Court of Judicature of the Province of Massachusetts Bay, Between 1761 and 1772, at 557 (Boston 1865). Another royal governor complained that “a trial by jury here is only trying one illicit trader by his fellows, or at least by his well-wishers.” Governor William Shirley, quoted in Stephen Botein, Early American Law and Society 57 (1983).
[20] Section 40 of the Sugar Act gives jurisdiction to “any of his Majesty’s courts of record at Westminster, or in the court of Exchequer in Scotland,” when a penalty is incurred in Great Britain. Section 41, however, denies colonists the right to a jury trial by giving courts of admiralty and vice-admiralty jurisdiction for “all sums of money imposed as penalties or forfeitures…paid, incurred, or recovered, in any of the British colonies or plantations in America.” For a historical explanation for denying the colonists the right to a jury, see Edmund Morgan & Helen Morgan, The Stamp Act Crisis: Prologue to Revolution, 24-25 (3d ed. 1953) (“More important, once a violation had been detected it should be prosecuted in the admiralty courts. These courts, operating without juries, had been deciding maritime cases in the colonies since 1697, but their jurisdiction in some colonies had been contested by the common-law courts, and in others the judges had fallen under the influence of local merchants. As a result, smugglers had frequently been acquitted by sympathetic judges or juries….”).
[21] Section 58 of the Stamp Act provides: “All sums of money imposed as forfeitures or penalties shall and may be prosecuted, sued for, and recovered, in any court of record, or in any court of admiralty.” (cleaned up).
[22] Resolutions of the Stamp Act Congress (1765); see also Kirst, Administrative Penalties at 1296 (“The absence of a jury [for cases heard in courts of Vice-Admiralty] was one of the major complaints voiced by the colonists.”).
[23] See, e.g., Caleb Nelson, The Constitutionality of Civil Forfeiture, 125 Yale L. J. 2446, 2518 (2016) (citing cases in nn. 249-251 and 261).
[24] Bryan Camp, A History of Tax Regulation Prior to the Administrative Procedure Act, 63 Duke L. J. 1673, 1685 (2014).
[25] Commissioner v. Leyman’s Est., 344 F.2d 763, 770 (6th Cir. 1965), vacated sub nom. Est. of Leyman v. Commissioner, 383 U.S. 832, 86 S. Ct. 1236 (1966).
[26] E.g., Act of January 18, 1815, Ch. 22, §21, 3 Stat. 180, 185-186 (duties on various goods, wares, and merchandise, manufactured within the U.S.); Act of December 21, 1814, §21, 3 Stat. 157 (penalties for violations related to duties and licensing of spirits distilled in the U.S.); Section 89 of the Act of July 6, 1797 (providing all fines, penalties and forfeitures incurred upon a tax on commercial paper “shall be sued for and recovered in the name of the United States…in any circuit or district court of the United States, or in any court…of the said states….”); see also The Margaret, 22 U.S. 421 (1824) (describing “shall and may be sued for” language in Ch. 128 of the Revenue Act of March 2, 1799); Keene v. United States, 9 U.S. 304, 305-06 (1809); see generally Ann Woolhandler, Judicial Deference to Administrative Action — A Revisionist History, 43 Admin. L. Rev. 197, 207 (1991).
[27] Leyman’s Est., 344 F.2d at 767 (citing An Act to establish the Judicial Courts of the United States, Ch. 20, §§9 and 12, 1 Stat. 73 (1789)); see also Kirst, Administrative Penalties at 1296 (explaining that there “are no early federal precedents establishing that Congress cannot use the tax collection procedure to collect a penalty, because Congress never tried to do so”).
[28] 12 Stat. 312.
[29] Act of July 1, 1862, Ch. 119, §§11 and 92, 12 Stat. 432, 435, 474 (1862) (imposing additional tax of 50% for failure to make return).
[30] Tax Act of April 24, 1863, §§8 (false returns) and 10 (refusal to file) (Ex. 30).
[31] See Internal Revenue Act of June 30, 1864, Ch. 173, §§14 and 41, 13 Stat. 223, 226, 239 (1864).
[32] See Revenue Act of March 2, 1867, Ch. 169, §§3, 8, 13, 15 Stat. 471, 471-72, 473, 477-80 (1867).
[33] Stern v. Marshall, 564 U.S. 462, 484 (2011) (“When a suit is made of ‘the stuff of the traditional actions at common law tried by the courts at Westminster in 1789,’ and is brought within the bounds of federal jurisdiction, the responsibility for deciding that suit rests with Article III judges in Article III courts.”).
[34] Jarkesy, 603 U.S. at 131 (“The Court “has not ‘definitively explained’ the distinction between public and private rights,” and we do not claim to do so today.” (quoting Oil States Energy Services, LLC v. Greene’s Energy Group, LLC, 584 U.S. 325, 334 (2018)).
[35] Murray v. Hoboken Land & Imp. Co., 59 U.S. 272 (1855); see N. Pipeline Const. Co. v. Marathon Pipe Line Co., 458 U.S. 50, 67 (1982) (“The ‘public rights’ doctrine was first set forth in Murray’s Lessee”).
[36] Murray’s Lessee, 59 U.S. at 274.
[37] Id. at 275.
[38] Id. at 281-82.
[39] See Richard Lorren Jolly, The Administrative State’s Jury Problem, 98 Wash. L. Rev. 1187, 1208 (2023) (“If Murray’s Lessee does not appear to be on point as to congressional authority to direct regulatory disputes to juryless tribunals — that is because it is not. It is merely a statement about the procedural vehicle of distress warrants and sovereign immunity.”); Kirst, Administrative Penalties at 1305 (“Murray’s Lessee was upheld against the constitutional challenge because there was a clear, definite, and limited history that a particular procedure had existed prior to the constitution…a public official, in accepting the office and trust, accepted the historical procedure for protecting the government revenue, but an ordinary citizen cannot be said to have relinquished the constitutional protection afforded by [art.] III courts and the [S]eventh [A]mendment.”).
[40] Phillips, 283 U.S. at 592.
[41] Id.
[42] Id. at 593.
[43] Id. at 594.
[44] Id.
[45] Id. at 596.
[46] Id.
[47] Oceanic Steam Nav. Co. v. Stranahan, 214 U.S. 320, 334 (1909) (placing immigration alongside tariffs, “internal revenue, taxation, and other subjects” as matters “exclusively within [Congress’s] control, 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”).
[48] Ex parte Bakelite Corp., 279 U.S. 438, 446 (1929).
[49] Crowell v. Benson, 285 U.S. 22, 51 (1932).
[50] Atlas Roofing, 430 U.S. at 442.
[51] Id. at 445.
[52] Id.
[53] Id.
[54] Id. at 450.
[55] The Jarkesy decision sets forth instances in which “[c]ommentators writing comprehensively on [art.] III and agency adjudication have often simply ignored the case” while others “have offered nothing but a variety of criticisms.” 603 U.S. at 138 n.4.
[56] Stern, 564 U.S. 462; Granfinanciera, S.A. v. Nordberg, 492 U.S. 33, (1989); Marathon Pipe Line Co., 458 U.S. 50.
[57] Tull v. United States, 481 U.S. 412 (1987).
[58] Granfinanciera, 492 U.S. at 79 (White, J., dissenting) (“Perhaps…Atlas Roofing is no longer good law after today›s decision.”).
[59] Jarkesy, 603 U.S. at 138.
[60] Phillips, 283 U.S. at 596. Whether Phillips is still a public rights case is beyond the scope of this article; however, the author notes the similarity transferee liability bears to “tracing” and other equitable remedies directed to property or specific funds. Thus, the Phillips decision seems vulnerable to being recast as not addressing a “suit at common law” at step one, just like the other cases Jarkesy called out by name.
[61] Id. at 2128 (“[T]he right is not limited to the common-law forms of action recognized when the Seventh Amendment was ratified….the Framers used the term ‘common law’ in the Amendment in contradistinction to equity, and admiralty, and maritime jurisprudence.”); see Pernell v. Southall Realty, 416 U.S. 363, 370 (1974) (“[W]here an action is simply for the recovery…of a money judgment, the action is one at law.”).
[62] Id. at 2129 (citing Tull v. United States, 481 U.S. 412, 422 (1987)).
[63] See generally Samuel L. Bray, The System of Equitable Remedies, 63 UCLA L. Rev. 530, 541-42 (2016) (describing common equitable monetary remedies in current use as “a cluster of restitutionary remedies: accounting for profits, constructive trust, equitable lien, subrogation, and equitable rescission”, in contrast to both nonmonetary equitable remedies such as “injunction, specific performance, reformation, quiet title” and to legal remedies such as “damages”).
[64] Jarkesy at 2129 (“While monetary relief can be legal or equitable, money damages are the prototypical common law remedy.” (citing Mertens v. Hewitt Assocs., 508 U.S. 248, 255 (1993))).
[65] Tull, 481 U.S. at 424 (quoting Porter v. Warner Holding Co., 328 U.S. 395, 402 (1946)); see generally Samuel L. Bray, The System of Equitable Remedies, 63 UCLA L. Rev. at 541-42 (describing common equitable monetary remedies in current use as “a cluster of restitutionary remedies: accounting for profits, constructive trust, equitable lien, subrogation, and equitable rescission”, in contrast to both nonmonetary equitable remedies such as “injunction, specific performance, reformation, quiet title” and to legal remedies such as “damages”).
[66] Jarkesy, 603 U.S. at 123.
[67] Id. (quoting Austin v. United States, 509 U.S. 602, 610 (1993)).
[68] See, e.g., Helvering v. Mitchell, 303 U.S. 391, 399 (1938) (“To ensure full and honest disclosure, to discourage fraudulent attempts to evade the tax, Congress imposes sanctions.”); Helwig v. United States, 188 U.S. 605, 610-11 (1903) (surtax on undervaluation of imported goods is a “penalty” for jurisdictional purposes because it is intended to punish and “operates as a warning to importers to be careful and to be honest…which is efficacious only by reason of the resulting imposition of the ‘further sum,’ in addition to the duties, provided for by the statute”).
[69] S. Rep. No. 494 (Vol. 1), 97th Cong., 2d Sess., 272-73 (1982), reprinted in 1982 U.S. Code Cong. & Admin. News 1019-1020 (“The audit lottery is played by taxpayers who take questionable (although non-negligent) positions not amounting to fraud or negligence on their returns in the hope that they will not be audited….[I]n the event that the questionable position is not detected, the taxpayer will have achieved an absolute reduction in tax without cost or risk.”).
[70] Compare 26 U.S.C. §§6662 and 6663 with 5 U.S.C. §78 u(d)(3); see id. at §78 u(d)(3)(iii)(bb) (reserving highest tier for violations that “directly or indirectly resulted in substantial losses or created a significant risk of substantial losses to other persons”).
[71] E.g., March 31, 1988 Joint Committee on Taxation report, “Description of Tax Penalties,” at 20 (“[I]n addition to having a deterrent effect, penalties can also be viewed as providing a just punishment for socially undesirable behavior, compensation to the Government for the cost of audit and detection, and an additional source of revenue for the Government.”); Executive Task Force for the Commissioner’s Penalty Study, IRS, Report on Civil Tax Penalties at 19 (1989) (explaining “[c]ivil tax penalties should exist for the purpose of encouraging voluntary compliance and not for other purposes, such as the raising of revenue”); H.R. Conf. Rep. 101-386, at 661 (1989) (concluding that “IRS should develop a policy statement emphasizing that civil tax penalties exist for the purpose of encouraging voluntary compliance”).
[72] I.R.M. §20.1.1.2.1.
[73] I.R.M. §20.1.1.2.1(8).
[74] See, e.g., Liu v. Sec. & Exch. Comm’n, 591 U.S. 71, 79-80 (2020) (explaining foundational principle of equity that a wrongdoer should not profit from his wrong; accordingly, remedies that divest “a wrongdoer’s net unlawful profits” accruing on account of the wrongdoing are “a mainstay of equity courts”); City of Monterey v. Del Monte Dunes at Monterey, Ltd., 526 U.S. 687, 710-11 (1999) (explaining that “just compensation is, like ordinary money damages, a compensatory remedy” and not an equitable one because “the question is what has the owner lost, not what has the taker gained”) (citation omitted).
[75] For example, there is no theory of equity that would let the IRS average enforcement costs across delinquent taxpayers and spread those out pro rata.
[76] Jarkesy, 144 S. Ct. at 2130 (“The close relationship between the causes of action in this case and common law fraud confirms that conclusion [based on the remedy analysis].”).
[77] Id. at 2131.
[78] “Actions by the [g]overnment to recover civil penalties under statutory provisions therefore historically have been viewed as one type of action in debt requiring trial by jury.” Tull, 481 U.S. at 418-19; see also Caleb Nelson, The Constitutionality of Civil Forfeiture, 125 Yale L. J. 2446, 2518 (2016) (citing cases in nn.249-251 & 261).
[79] Jarkesy, 603 U.S. at 125.
[80] See Crimi v. Commissioner, T.C. Memo. 2013-51, at *35 (explaining that reasonable cause requires “ordinary business care and prudence”).
[81] Id. at 2134 (emphasis in original) (observing that Murray’s Lessee, the seminal case on the general public rights exception for taxation, “took pains to justify the application of the exception…by explaining that it flowed from centuries-old rules concerning revenue collection by a sovereign”).
[82] Jarkesy, 603 U.S. at 132.
[83] Id. at 132 and 140 (explaining that “effects like increasing efficiency and reducing public costs are not enough to trigger the exception”).
[84] Id. at 128 (cleaned up).
[85] Id. at 137-38 (“The cases that Atlas Roofing relied upon…were not suits at common law or in the nature of such suits.”) (cleaned up); Id. at 140 (“The novel claims in Atlas Roofing had never been brought in an Article III court.”).
[86] Id. at 130-31.
[87] Phillips, 283 U.S. at 596.
[88] See Jarkesy, 144 S. Ct. at 2146-47 (Gorsuch, J., concurring) (explaining that the taxation exception arises from “ancient practical considerations” such as the “‘[i]mperative necessity’ of tax collection for a functional state”); Kirst, Administrative Penalties at 1295 (“The often-stated reason for allowing nonjudicial collection of taxes was the absolute necessity that the government be able to collect quickly the revenue needed for operating…. Fines and penalties need not be collected so quickly because the purpose of the fine or penalty is to control conduct or punish offenses and only more incidentally to raise revenue.”).
[89] E.g., I.R.C. §6201(a) (“The Secretary is authorized and required to make the inquiries, determinations, and assessments of all taxes (including…additions to the tax, and assessable penalties).”); I.R.C. §6671(a) (“The penalties and liabilities provided by this subchapter shall be paid upon notice and demand by the Secretary, and shall be assessed and collected in the same manner as taxes.”).
[90] 28 U.S.C. §2462.
[91] See, e.g., Kristen Underhill, When Extrinsic Incentives Displace Intrinsic Motivation: Designing Legal Carrots and Sticks to Confront the Challenge of Motivational Crowding-Out, 33 Yale J. on Reg. 213 (2016) (explaining phenomena whereby harsh or unfair sanctions reduce intrinsic motivation to comply with a regulatory scheme).
Gray Proctor is a board certified appellate specialist. He practices tax, white collar criminal defense, and administrative law as counsel in the Atlanta office of Kostelanetz LLP, a boutique tax controversy and white collar defense firm. Proctor also maintains a Florida-centric criminal and civil practice. He graduated from Vanderbilt Law School in 2007.
Special thanks to Macdonald Norman, Jay Nanavati, Andrew Weiner, and Todd Welty at Kostelanetz; David Foster at Kirkland & Ellis, LLP; and Tiernan Kane and Nathaniel Pollock at SouthBank Legal.
This column is submitted on behalf of the Tax Section, Mark Scott, chair, and Charlotte A. Erdmann, editor.
