Tax Court Rejects SCE’s Hail Mary Jarkesy Pass (8/21/25)

In Silver Moss Properties, LLC v. Commissioner, 165 T.C. ___, 1No. 3 (2025) (T.C. Dkt. No. 10646-21, here, at Entry # 109, GS [to come])), the Court acting as referee called out that Taxpayer’s Hail Mary pass* to avoid the civil fraud penalty. Since the Tax Court (or someone for it) has already stated the essence of the case in a Headnote, I just copy and paste it here:

           A partnership subject to the audit and litigation procedures of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), Pub. L. No. 97-248, 96 Stat. 324, donated a conservation easement and claimed a charitable contribution deduction under I.R.C. § 170. P, the tax matters partner, timely petitioned this Court challenging the IRS’s Notice of Final Partnership Administrative Adjustment. R later amended his Answer to assert a civil fraud penalty against the partnership under I.R.C. § 6663(a).

          P filed a Motion for Partial Summary Judgment, citing SEC v. Jarkesy, 144 S. Ct. 2117 (2024), and contending that this Court is barred from adjudicating the civil fraud penalty because U.S. Const. amend. VII guarantees a right to trial by jury in such actions, which is not an option in this Court.

          Held: U.S. Const. amend. VII does not apply to suits against the sovereign, and Congress has not otherwise consented to trial by jury in TEFRA partnership-level actions.

          Held, further, the “public rights” exception to U.S. Const. amend. VII applies to a civil fraud penalty under I.R.C. § 6663(a).

          Held, further, this Court may adjudicate an I.R.C. § 6663(a) civil fraud penalty.

This plaintiff in the case appears to be a Tax Matters Partner for an LLC taxed as a partnership, which appears to be the favored format for the flurry of bullshit Syndication Conservation Easement ("SCE") tax shelter cases plaguing the Tax Court now with wholly inappropriate drains on the Tax Court's , the IRS’s and the public fisc resources. I don't know if this particular case involves an abusive tax shelter, but it seems to have the same earmarks, including the same lawyers involved in some of the abusive shelter cases. 

 JAT Comments:

1. (Warning, this is a multi-paragraph comment #1): In this case, the IRS did not originally assert the civil fraud penalty, §6663, in its FPAA. The Court granted the IRS motion for leave to file the amended answer asserting the fraud penalty based on discovery from the petitioner. (See Docket entry # 37.) I presume that the FPAA originally asserted the 40%  gross overvaluation penalty. §6662(h), a penalty that is almost always finally applied by the Tax Court in these  SCE cases, if properly asserted, because well simple mathematics shows a gross overvaluation. So, the difference is 25% (which, like civil penalties, generally accrues interest from the date the return was due). Which means that the cost of playing the audit lottery can be more than the taxpayers (encouraged by the promoters who promoted bogus valuations and bogus legal opinions) counted on.

The lesson here is that taxpayers making a decision on how to litigate must consider whether, in the litigation, the IRS can raise a civil fraud penalty or even one of the enhanced accuracy -related penalties that the IRS has not asserted before. In Tax Court deficiency redetermination suits, the IRS can assert enhanced penalties that it has not previously asserted because the statute is open for the year(s) involved in the SNOD (acronym for statutory notice of deficiency). The same is true in partnership TEFRA cases as the partners in Silver Moss Properties, LLC now know (but perhaps had not factored into the litigation strategy). Of course, the next Hail Mary in this scenario is whether the IRS can sustain its clear and convincing burden of persuasion which is substantial but the sheer magnitude of the overvaluations in these SCE cases at least offers the possibility of sustaining the fraud penalty. (Were the promoters and taxpayers just incredibly stupid or fraudulent (maybe willfully stupid), that is the question?)

Of course, the partnership can try the partnership level defense for the civil penalties penalty (e.g., reasonable cause including reasonable reliance on tax advice), but whether or not the partnerships (here LLCs), but may not be able to sustain the defense at the partnership level. And there can be another partner-level Hail Mary Pass for the reasonable cause defense. Still this is risky business that must be factored into the decision to litigate and how to litigate.

2. Since a paragraph #1 invites some expectation of a paragraph #2, I offer here a teaser that I may or may not follow through on tomorrow. The issue is to be more specific about opportunities that might foreclose the IRS’s ability to come up with higher penalties after the litigation has commenced. Specifically, I want to address (maybe) the opportunity to foreclose affirmative assertions of greater tax or penalty liability in some refund or refund-equivalent suit. If I follow through with additional musings, I will address the traditional opportunity to file a timely claim for refund after the IRS has no practical ability to assert an additional tax or penalty liability within the normal statutes of limitation. Of course, the risk there is that, if fraud is involved, the IRS may still make assessments outside the normal statutes of limitations period that might otherwise apply. And, I will probably discuss a specific instance where I arranged for the IRS to assert a civil fraud penalty in a refund case where I discovered the fraud in defending a refund suit while with DOJ Tax Refund 2 (covering generally the then-South).

* Wikipedia, "Hail Mary pass" (last edited 7/24/25 and viewed 8/21/25),
https://en.wikipedia.org/wiki/Hail_Mary_pass