A two-part Tax Notes series by Gray Proctor examines the ongoing litigation in HDH Group Inc. v. United States, where the district court recently held that the partial payment and de novo review procedures for section 6700 tax shelter promoter penalties satisfy the Seventh Amendment.
In “HDH Group: Civil Bail and the Future of Penalty Refund Suits, Part 1,” Gray examines how the district court used English common law on the antiquated practice of civil bail as a historical analogue for prepayment requirements. In Part 2, Gray highlights the potential flaws in the district court’s historical analysis, how the court may have misinterpreted the FCC v. AT&T ruling in the government’s favor, and why the due process clause may be the missing piece of the timing puzzle.
The Seventh Amendment guarantees the right to a jury trial in suits at common law, while Article III extends judicial power to those disputes. The Supreme Court in SEC v. Jarkesy ruled that the Seventh Amendment entitles defendants to a jury trial when the Securities and Exchange Commission (SEC) seeks civil penalties for securities fraud, because fraud penalties are analogous to common-law suits for fraud.
Earlier this year, the Supreme Court clarified in FCC v. AT&T that “the Seventh Amendment attaches when legal rights are to be determined” and determined that AT&T’s rights had not been violated because they still retained the right to a de novo trial before any penalties could be collected.
In both cases, the Supreme Court relied, in part, on English and early American common law to determine what the drafters of the Constitution intended its text to mean.
After the AT&T decision, HDH Group argued that, unlike AT&T, it faced an immediately enforceable penalty. As Gray writes, “The court agreed with the government that HDH Group’s legal obligations remained unsettled, because the trial de novo could nullify the assessment” of penalties. But the court relied on its own historical analysis to conclude that the Founders would not have considered section 6703(c)’s 15% prepayment requirement unconstitutional. It found a historical analogy in the long-discarded practice of requiring security in exchange for the freedom of defendants in civil suits, i.e., civil bail.
Potential Flaws in the HDH Group analysis
“The HDH court assumed that AT&T was satisfied whenever there was a de novo jury trial of penalty. It minimized the other criterion: whether the agency’s order creates an obligation to pay. An assessment by the IRS does,” Gray explains. “Section 6703 allows the target to avoid a levy by prepaying an alternative obligation of 15 percent within 30 days, but the assessment has already occurred, and in the meantime the IRS can offset tax refunds to collect the remainder. … As with SEC penalties in SEC v. Jarkesy, a promoter penalty assessment is ‘immediately enforceable’ without any jury trial.”
In determining that IRS prepayment requirements were similar to civil bail, the court in HDH Group may have “overstated the historical analogy” to English common law. Civil bail was paid to the court or the sheriff, not to the plaintiff, and it was designed to secure the defendant’s presence, not to pay the judgment. What’s more, the due process clause may require a hearing before the government can collect any money.
Gray concludes by noting that because of its apparent flaws, “HDH may not withstand the test of time.”
Read the full series on Tax Notes
- HDH Group: Civil Bail and the Future of Penalty Refund Suits, Part 1
- HDH Group: Civil Bail and the Future of Penalty Refund Suits, Part 2
About Gray Proctor
Gray Proctor represents individuals and businesses in complex federal tax controversies, including IRS examinations, administrative appeals, collection matters, and tax litigation. His practice focuses on helping taxpayers resolve high-stakes disputes with the Internal Revenue Service and navigating emerging developments in tax procedure and enforcement.
