Megan L. Brackney, Victor Suthammanont, Gray Proctor, and Andy Weiner co-wrote an article for Tax Notes titled “Can [Tax] Promoter Penalties be ‘Excessive Fines’ Under the Eighth Amendment?”
The article is the third in a series considering the constitutional problems with the tax shelter promoter penalties of IRC § 6700. The prior articles addressed taxpayers’ right to a jury trial under the Seventh Amendment and their rights under the due process clause in promoter penalty cases. In this article, Megan, Victor, Gray, and Andy explore how the Eighth Amendment’s protections against excessive fines might apply to tax promoter penalties under § 6700(a)(2)(A).
The legal standard is not completely clear, and it remains to be seen whether the Supreme Court would apply the excessive fines clause to a civil case unrelated to criminal conduct, but the authors believe it is highly likely. Less certain is whether courts will borrow the “grossly disproportionate” standard from the cruel and unusual punishment clause. The authors argue that, for excessive fines, mere disproportionality is sufficient, andthe gross disproportionality standard is too stringent. Another unresolved question is whether courts must take the promoter’s ability to pay into account. Practitioners should be sensitive to these threshold questions and consider preserving any novel constitutional arguments.
Whatever the standard for an excessive fines claim turns out to be, overzealous enforcement of the tax promoter penalty is subject to Eighth Amendment challenge. Section 6700(a)(2) penalties are financially onerous, at 50% of the gross income from the promoter activities. The IRS has imposed these penalties separately against both individuals and entities involved in the transaction, placing staggering amounts at stake. At the same time, there is no requirement that the Treasury or the taxpayer suffer any loss from the promoter’s activities. Further, penalties can extend to tangential participants including anyone connected to the activity, including legal advisors, appraisers, and even document preparers.
The severity and broad reach of the penalties means that, as applied to individuals, the Government’s enforcement actions could violate the excessive fines clause.
You can learn more about tax promoter penalties and challenges under the excessive fines clause by reading the complete article here.
About Megan
Megan is a tax controversy attorney with a distinguished track record of delivering exceptional results for clients facing complicated and difficult tax issues. Megan is the Chair of the American Bar Association Section of Taxation. She is also a frequent speaker and contributor to local and national conferences on taxation, ethics in tax practice, IRS penalties, and civil tax controversy.
About Victor
Victor served for a decade as a securities enforcement attorney in the U.S. Securities and Exchange Commission, including as a Senior Trial Counsel and as the Enforcement Counsel to Chair Gary Gensler. Prior to his extensive experience in the SEC’s Division of Enforcement, Victor represented and advised clients in private practice in complex commercial disputes and litigations, as well as in internal and governmental investigations.
About Gray
Gray is an experienced and accomplished appellate advocate who represents clients facing both civil and criminal penalties. He also maintains a trial support practice focusing on dispositive motions and other key issues upon which an appeal might follow.
About Andy
Andy focuses his practice on tax controversies, both civil and criminal, at all stages of the administrative and judicial process. A former U.S. Department of Justice attorney, he has argued approximately 50 tax cases in U.S. courts of appeals. He is a Forbes contributing columnist on tax controversy and tax policy and a frequent writer and speaker on tax issues. He is also a fellow of the American College of Tax Counsel.
