Riddle Aggregates, LLC v. Commissioner: Seventh Amendment Does Not Apply to TEFRA Partnership-Level Accuracy-Related Penalties

The $45 Million Deduction Dispute: Why the Tax Court Rejected a Jury Trial Demand

The stakes could not have been higher when the Tax Court denied a motion to dismiss a $45 million dispute over a conservation easement deduction; one that, if allowed, would have erased nearly $45 million in claimed charitable contributions, plus a 20% accuracy-related penalty under Section 6662 that could add another $9 million to the IRS’s tally. The novel legal question at the heart of the case was whether the Seventh Amendment’s guarantee of a jury trial applies to tax penalties assessed in partnership-level proceedings under the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA). The Tax Court ruled it does not, holding that the Seventh Amendment does not apply to suits against the sovereign and that the "public rights" exception covers Section 6662 penalties. The decision underscores the Tax Court’s broad authority over partnership-level tax disputes and signals a potential shift in how taxpayers may challenge IRS penalties in the future.

A Conservation Easement Gone Wrong: The Facts Behind the $45 Million Dispute

The dispute began with a single, audacious tax deduction; one that would soon spiral into a legal battle over $45 million and the very nature of partnership-level tax disputes. In 2017, Riddle Aggregates, LLC, a partnership based in Alabama, filed its U.S. Return of Partnership Income (Form 1065) claiming a noncash charitable contribution deduction of $44,995,000 for the donation of a conservation easement to Atlantic Coast Conservancy, Inc. The deduction, if allowed, would have slashed the partnership’s taxable income by nearly $45 million; a figure so large it immediately drew scrutiny from the IRS.

The conservation easement in question was no ordinary donation. It involved a perpetual restriction on the use of land to preserve conservation values, a transaction governed by Internal Revenue Code § 170(h), which permits taxpayers to claim a charitable deduction for qualified conservation contributions. But the scale of the deduction; nearly 90% of the partnership’s reported income for the year; raised immediate red flags. The IRS, already wary of abusive conservation easement schemes, issued a Notice of Final Partnership Administrative Adjustment (FPAA) in 2019, disallowing the entire deduction and asserting an accuracy-related penalty under § 6662(a). The penalty, which applies to underpayments of tax attributable to negligence, substantial understatement, or valuation misstatements, was calculated at 20% of the disallowed amount; a potential liability of $9 million on top of the denied deduction.

The partnership’s tax matters partner, Ornstein-Schuler, LLC, responded by filing a petition in the U.S. Tax Court, challenging the FPAA and setting the stage for a high-stakes legal confrontation. The IRS’s disallowance of the deduction and imposition of penalties were not merely routine adjustments; they represented a direct challenge to the partnership’s aggressive tax planning. The case would soon evolve into a broader dispute over whether penalties assessed in partnership-level proceedings under the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) could be subject to the Seventh Amendment’s guarantee of a jury trial; a question that would test the limits of the Tax Court’s authority and the IRS’s enforcement powers. But first, the facts had to be laid bare: a $45 million deduction, a disallowance, and a penalty that threatened to double the tax burden.

Jury Trial or No Trial? The Seventh Amendment Showdown

The stakes could not have been higher when Riddle Aggregates filed its motion in the Tax Court, arguing that the IRS’s proposed accuracy-related penalties; potentially adding tens of millions to the company’s tax bill; were unconstitutionally imposed without a jury trial. The case had already exposed a $45 million deduction dispute rooted in a conservation easement gone awry, but the legal battle now pivoted to a constitutional confrontation: whether the Seventh Amendment’s guarantee of a jury trial applied to penalties assessed in partnership-level proceedings under the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA). The IRS, facing a direct challenge to its enforcement authority, pushed back with historical and structural arguments designed to preserve the Tax Court’s exclusive jurisdiction over such penalties.

The petitioner’s arguments hinged on two pillars. First, it invoked SEC v. Jarkesy (2024), where the Supreme Court held that the Seventh Amendment guarantees a jury trial when the government seeks civil penalties for fraud-like conduct; precisely the type of penalties at issue here under Section 6662, which imposes a 20% penalty on underpayments due to negligence, substantial understatements, or valuation misstatements. The petitioner contended that accuracy-related penalties, particularly those tied to negligence or misstatements, were indistinguishable from common-law fraud claims and thus required a jury trial. Second, it argued that Tax Court judges, as non-Article III judges serving 15-year terms, lacked the constitutional authority to impose such penalties, which the petitioner claimed were punitive in nature and not merely remedial. Finally, the petitioner asserted that the penalties were not assessable as a matter of law, arguing that the IRS’s administrative imposition of them violated due process.

The IRS countered with a trio of defenses rooted in long-standing precedent. It argued that the Seventh Amendment does not apply to suits against the sovereign, particularly in tax enforcement actions where Congress has not explicitly consented to jury trials. The agency pointed to the Tax Court’s longstanding practice of adjudicating penalties without juries, noting that the court’s judges; though not Article III; were empowered by Congress to resolve tax disputes. The IRS also invoked the "public rights" exception to the Seventh Amendment, citing Silver Moss Properties, LLC v. Commissioner (2025) and Helvering v. Mitchell (1938), which held that tax penalties, as part of a regulatory scheme for revenue collection, fall outside the jury trial guarantee. The agency emphasized that the penalties at issue were not punitive but rather corrective measures designed to ensure accurate tax reporting, and thus did not trigger the Seventh Amendment’s protections.

Why the Tax Court Said No to Jury Trials for Tax Penalties

The Tax Court’s ruling in Riddle Aggregates, LLC v. Commissioner (2026) reaffirmed its long-standing authority to adjudicate accuracy-related penalties under § 6662 without a jury trial, rejecting the petitioner’s argument that the Seventh Amendment required one. The court grounded its decision in three pillars of constitutional and statutory law: the sovereign immunity doctrine, Congress’s refusal to consent to jury trials in TEFRA partnership-level actions, and the “public rights” exception to the Seventh Amendment.

First, the court reiterated that the Seventh Amendment does not apply to suits against the sovereign; the U.S. government; because the amendment’s jury trial guarantee is limited to disputes between private parties. This principle traces back to the Founders’ intent to prevent government overreach in private litigation, not to constrain the sovereign’s power to collect taxes through administrative or judicial means. The court cited Silver Moss Properties, LLC v. Commissioner (2025), which held that the Tax Court, as a forum for resolving disputes with the IRS, operates within this sovereign immunity framework. The petitioner’s attempt to analogize tax penalties to private fraud claims under SEC v. Jarkesy (2024) fell flat because Jarkesy addressed enforcement actions initiated by the government seeking monetary penalties in a forum where the government was the plaintiff; not in a case where the taxpayer, as the plaintiff, sought to invalidate the government’s penalty authority.

Second, the court emphasized that Congress has not consented to jury trials in TEFRA partnership-level actions, a procedural regime designed to streamline tax disputes involving partnerships. Under TEFRA (now largely superseded by the Bipartisan Budget Act of 2015’s centralized partnership audit regime), the IRS issues a single Notice of Final Partnership Administrative Adjustment (FPAA) that binds all partners. The court noted that neither TEFRA nor its successor statute provides for jury trials in these partnership-level proceedings, and that the legislative history reflects no intent to incorporate such a right. This procedural posture distinguishes tax disputes from traditional civil actions where jury trials are guaranteed.

Third, the court applied the “public rights” exception to the Seventh Amendment, holding that § 6662 penalties; which include negligence, substantial understatement, and valuation misstatement penalties; fall outside the jury trial guarantee because they are civil incidents of tax assessment and collection. The court traced the lineage of these penalties to the Revenue Act of 1926, which first introduced negligence penalties as part of a broader effort to ensure accurate tax reporting. The Supreme Court’s decision in Helvering v. Mitchell (1938) cemented this principle, holding that penalties under the Revenue Act of 1928 were not punitive but remedial, designed to enforce compliance with the tax laws. The Tax Court in Riddle Aggregates extended this reasoning to § 6662, noting that Congress consolidated these penalties in 1989 to streamline their application but did not alter their underlying purpose: to deter noncompliance and ensure revenue collection.

The court rejected the petitioner’s argument that the penalties were punitive, citing Little v. Commissioner (1997), which characterized accuracy-related penalties as purely revenue-raising measures. The court also distinguished United States v. Schwarzbaum (2025), a case involving the FBAR penalty under the Bank Secrecy Act, which the Eleventh Circuit held was subject to the Eighth Amendment’s excessive fines clause. The court noted that Schwarzbaum addressed a different constitutional provision and a distinct statutory scheme, making it inapplicable to the Seventh Amendment analysis here.

In sum, the Tax Court’s ruling reaffirms its authority to adjudicate tax penalties without a jury, reinforcing the historical and constitutional basis for its jurisdiction. The decision underscores that accuracy-related penalties under § 6662 are not punitive but regulatory, designed to ensure compliance with the tax laws; a quintessential public right exempt from the Seventh Amendment’s jury trial guarantee.

What This Ruling Means for Taxpayers and the IRS

The Tax Court’s decision in Moss Properties, LLC marks a pivotal reinforcement of its jurisdictional authority over partnership-level tax disputes, particularly in matters involving accuracy-related penalties under § 6662. For taxpayers, the ruling underscores an immutable procedural reality: no jury trial exists in TEFRA or BBA partnership-level proceedings, even when penalties are at stake. This is not a procedural footnote; it is a structural limitation that shapes litigation strategy for high-stakes tax disputes.

The court’s reaffirmation of its non-jury jurisdiction rests on the "public rights" exception to the Seventh Amendment, a doctrine that has long insulated tax enforcement from constitutional challenges. § 6662 penalties, despite their punitive appearance, are treated as regulatory tools designed to enforce compliance with the tax laws, not as punitive measures akin to common-law torts. This distinction is critical: the Tax Court’s role in adjudicating these penalties is not an usurpation of judicial power but a constitutionally sanctioned exercise of congressional authority under Article I, § 8. The IRS’s ability to assess and litigate these penalties administratively; without jury interference; remains unassailable under this framework.

The ruling also casts a long shadow over future challenges to tax penalties, particularly in the wake of SEC v. Jarkesy (2024). While Jarkesy cast doubt on the constitutionality of administrative adjudication for legal claims seeking punitive penalties, the Tax Court has firmly distinguished its proceedings. Accuracy-related penalties under § 6662 are not "punitive" in the constitutional sense; they are corrective measures tied to the regulatory scheme of tax compliance. This distinction may deter taxpayers from mounting Jarkesy-style challenges in tax cases, as the public rights exception remains a robust bulwark against Seventh Amendment arguments.

For the IRS, the decision is a green light to continue its aggressive administrative enforcement posture. The court’s ruling eliminates a potential litigation tactic; demanding a jury trial for penalties; and reinforces the agency’s ability to assess and litigate penalties without the procedural hurdles of a jury trial. This is particularly consequential in cases involving syndicated conservation easements or high-net-worth partnerships, where penalties can dwarf the underlying tax liability. The IRS’s partnership-level audit regime (CPAR), established by the Bipartisan Budget Act of 2015, now operates with even greater certainty: penalties assessed in these proceedings are final unless successfully challenged in Tax Court, and jury trials are off the table.

The broader implications are clear. Taxpayers cannot rely on Seventh Amendment arguments to derail penalty proceedings in partnership-level cases, and the Tax Court’s authority to adjudicate these matters without a jury is entrenched. For practitioners, the lesson is twofold: avoid procedural detours that hinge on jury trial rights, and focus litigation strategy on substantive defenses; such as reasonable cause under § 6664(c); rather than constitutional challenges. The IRS, meanwhile, gains a powerful tool to streamline penalty enforcement, secure in the knowledge that its administrative determinations will be reviewed by a specialized tribunal without the unpredictability of a jury. In the high-stakes world of tax litigation, this ruling is a decisive win for the Tax Court’s institutional authority and a warning to taxpayers seeking to exploit procedural loopholes.