Kostelanetz attorneys Todd Welty, Andrew Weiner, and Gray Proctor recently penned an article titled “Jarkesy, Originalism, and the Future of Tax Penalties” for Tax Notes that explores the consequences for IRS tax enforcement of the U.S. Supreme Court’s 2024 decision in SEC v. Jarkesy.
Todd, Andy, and Gray authored the firm’s amicus brief on behalf of the Center for Taxpayer Rights (CTR) and the National Taxpayers Union (NTU), arguing in support of the petitioners in Hirsch v. United States Tax Court. The petitioners filed a petition for mandamus in the Eleventh Circuit, demanding a jury trial, but the Tax Court has rejected any Seventh Amendment challenge to current penalty procedures. The brief addresses the weaknesses in the Tax Court's reasoning in Silver Moss and urges the Supreme Court to settle and clarify the applicability of the Seventh Amendment right to a jury trial to tax penalties.
In Jarkesy, the Supreme Court ruled that the Seventh Amendment entitles defendants to a jury trial when the SEC seeks civil penalties for securities fraud. As the article notes, “The decision applied a two-step test: first, whether the penalty is a suit at common law under the Seventh Amendment, and second, whether the matter involves one of the judicially created “public rights” exceptions that are exempt from the Seventh Amendment while still being within its textual guarantee.”
Todd, Andy, and Gray note that those looking for clarity from the courts can learn three lessons from Jarkesy. These lessons also stem from the fact that the Supreme Court has leaned heavily toward originalism as its mainstream philosophy of interpretation.
As they write, “The first lesson is that making sense of English legal history can be difficult. The kinds of tax penalties we see vary greatly over the course of English history. … The result is that tax penalties are not governed by any well-established tradition. Instead, they are the outcome of a continual negotiation of legislative and executive power, with no independent judiciary to referee the dispute. Under Jarkesy, this kind of historical record is insufficient.”
They noted in their second lesson that some English practices did not become part of the American tradition that was enshrined in the Constitution by the framers.
The trio state, “Starting with the Navigation Act of 1660, tax penalties were enforced at common law, with a share of the penalty recovery going to the official or informer who brought the suit. That continued until the Sugar Act of 1764 and the infamous Stamp Act of 1765, which retained the framework of suing for penalties but transferred jurisdiction to juryless courts of vice admiralty in addition to the common-law courts. This is commonly understood to be one of the provocations that gave rise to the colonies’ rebellion. It’s difficult to square this history with a vision of the Seventh Amendment that excludes tax penalties.”
The third lesson concerns how the courts will view the role of post-enactment practices in interpreting the Constitution. Historically, the imposition of tax penalties dates back more than a century, but the SEC’s power to decide fraud claims was only granted a little more than a decade ago with the passage of the Dodd-Frank Act. As the article states, “The general interest in stability and fulfilling settled expectations is strong here. But many jurists would give little, if any, weight to that factor. … [I]n constitutional law, many jurists believe it’s more important to reach the answer the framers would have reached. Practices that first appear two generations after American independence may be too remote to matter.”
Todd, Andy, and Gray also explain how they have used the Jarkesy decision to argue on behalf of clients who want to see the decision applied to various tax enforcement penalties.
And Gray’s arguments, which he laid out in an article on Jarkesy for the Florida Bar Journal last year, have been used by others seeking to influence the courts. That foundational article on Jarkesy and tax penalties was cited by two amicus parties in Hirsch, the Cato Institute and the Americans for Prosperity Foundation.
Read the full article here.
About Todd Welty
Todd has extensive experience in resolving civil tax matters at all stages of a tax dispute, including IRS examinations, fast-track appeals, administrative appeals, post-appeals mediation, and, if necessary, litigation in the U.S. Tax Court, the U.S. Court of Federal Claims, U.S. district courts, and U.S. Courts of Appeal.
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 briefed and argued approximately 50 tax cases in the U.S. courts of appeals. He is regent of the American College of Tax Counsel for the D.C. Circuit and a frequent writer and speaker on tax issues. He is also an adjunct professor at American University Washington College of Law.
About Gray
Gray is an experienced and accomplished appellate advocate who represents clients facing both civil and criminal tax penalties. He is board-certified as an expert in appellate practice by the Florida Bar Association, and accepts cases in a wide variety of disputes in addition to tax.
