Can Jury Trial for IRS Penalty be Conditioned on Paying the Penalty First? – Houston Tax Attorneys

There have been a number of court cases that have considered whether various administrative agency determinations violate constitutional jury trial rights. These are often premised on the fundamental promise of American justice that courts should remain open to all.

The issue is presented when government agencies require substantial upfront payments before allowing judicial review. One can find themselves caught between accepting administrative determinations they believe are wrong or paying substantial sums just to be able to exercise their constitutional rights. At its extreme, one could argue that this situation could create a potential two-tiered system of justice where the wealthy can buy access to jury trials while others cannot.

The district court recently addressed this exact constitutional challenge in HDH Group, Inc. v. United States, No. 2:24-cv-00988 (W.D. Pa. Sept. 23, 2025). This court case involves an administrative determination by the IRS to impose penalties whether the action violates fundamental constitutional protections when the ability to get a jury trial requires a pre-payment of nearly $1 million.

Facts & Procedural History

The consultant in this case operated a captive insurance program between 2013 and 2018. In September 2015, the IRS began auditing the consultant. It ultimately made an administrative determination that the consultant had promoted an abusive tax shelter.

On November 13, 2023, the IRS assessed promoter penalties in excess of $7.5 million against the consultant. The penalties are intended for promoters of abusive tax shelters who make false or fraudulent statements about the tax benefits that participants will receive. The consultant paid approximately $989,000 of the penalties—representing at least 15 percent of the total assessed penalties as required by law—and filed a refund suit against the government to recover the payment to the IRS.

The IRS then began enforced collections, It issued notices in April 2024 indicating its intent to seize or levy the consultant’s property to collect the remaining unpaid penalties. The consultant filed an appeal from the notices of levy with the IRS.

The consultant’s legal strategy centered on the U.S. Supreme Court’s recent ruling in SEC v. Jarkesy. Specifically, the consultant argued that the IRS’s administrative assessment of fraud-based penalties violated the Seventh Amendment’s guarantee of a jury trial. The government countered with its own motion, seeking to reduce the unpaid penalties to judgment while defending the constitutionality of the tax code’s penalty assessment procedures.

About Section 6700 Promoter Penalties

Section 6700 of the tax code is one of the primary tools the government has for combating abusive tax shelter promotions. This penalty can be imposed on any person who organizes or assists in organizing partnerships, entities, investment plans, or other arrangements while making false or fraudulent statements about the tax benefits participants will receive.

The penalty can apply when someone both promotes a tax shelter and makes statements they know or have reason to know are false or fraudulent regarding the allowability of deductions, excludability of income, or securing of other tax benefits. Courts have interpreted this to require the government prove two elements: that the defendant was involved in an abusive tax shelter and that the defendant made statements about tax benefits that were false or fraudulent.

The financial impact can be substantial. For activities involving false statements about tax benefits, the penalty can be 50 percent of the gross income derived from the promotion. For gross valuation overstatements, the penalty is the lesser of $1,000 or 100 percent of the gross income per activity. This is in addition to other civil and criminal penalties, injunctions, and even being order to disgorge the fees earned for the work.

How Section 6700 Assessment Works

Section 6700 operates within the broader framework the IRS’s enforcement authority. Section 6201 authorizes and requires the Secretary of Treasury to make inquiries, determinations, and assessments of all taxes, including assessable penalties imposed by the tax code. This includes Section 6700 penalties.

The IRS can assess these penalties administratively without first obtaining court approval. Once assessed, the penalties become part of the individual’s account and are subject to standard collection procedures. Once the IRS sends the individual notice of the assessment and demand for payment, it can then generally move on to other collection actions if payment is not made. That is what happened in this case.

There are different procedures for challenging Section 6700 penalties. Unlike most other IRS penalties, the tax code provides a method for challenging Section 6700 penalties. This method includes meaningful judicial review. This is set out in Section 6703.

Under Section 6703(c)(1)

Under Section 6703(c)(1), if within 30 days after notice and demand of any Section 6700 penalty, the individual pays not less than 15 percent of the penalty amount, the individual may file a claim for refund of the amount paid. More specially, under Section 6703(c)(2), the individual may pay 15 percent of the penalty, file a claim for refund, and if the claim is denied, file an action in federal district court for refund within 30 days of the claim denial. This creates an administrative process within the IRS for reviewing the penalty assessment without requiring 100% of the penalty to be paid up front. Most other refund claims require 100% payment up front before suit can be filed.

These district court proceedings operate under different …

These district court proceedings operate under different rules than typical administrative penalty appeals. With these proceedings, the burden of proof shifts to the government under Section 6703(a). The government then has to establish liability for the penalty from scratch. The court conducts a de novo review, meaning it owes no deference whatsoever to the IRS’s administrative findings. Most importantly for this case, jury trials are available in these refund actions.

What Did the Supreme Court Decide in Jarkesy?

To understand the dispute in this case, we have to consider the Jarkesy case. The Supreme Court’s 2024 decision in SEC v. Jarkesy changed the administrative process for penalty assessments. The case involved the SEC’s practice of seeking civil penalties for securities fraud through internal administrative proceedings rather than federal court litigation and how this lines up with the Seventh Amendment. The Seventh Amendment ensures the right to a jury trial.

Jarkesy established a two-part test for determining when administrative penalties violate the Seventh Amendment. First, courts must determine whether the penalty implicates the Seventh Amendment by examining whether the underlying claim resembles common law causes of action or seeks legal rather than equitable remedies. Second, if the Seventh Amendment applies, courts must consider whether the penalty falls under the “public rights exception” that allows Congress to assign certain matters to administrative agencies.

The U.S. Supreme Court found that securities fraud penalties implicated the Seventh Amendment because they targeted the same conduct as common law fraud and sought civil penalties—a punitive remedy designed to deter wrongdoing rather than compensate victims. The Court emphasized that these penalties were “a type of remedy at common law that could only be enforced in courts of law.”

The Supreme Court then rejected the argument that securit…

The Supreme Court then rejected the argument that securities fraud penalties fell under the public rights exception. The Court explained that fraud claims involve private rights that “historically could have been determined exclusively by [the executive and legislative] branches” and must be adjudicated in Article III courts with jury trial protections.

Section 6700 and the Seventh Amendment

This brings us to the question in this case. Does Section 6700 penalty assessed administratively, which requires a substantial up front payment before one can get to court, implicates the Seventh Amendment?

The Court concluded that Section 6700 penalties do just that under Jarkesy‘s first prong. Like the securities fraud provisions in Jarkesy, Section 6700 targets conduct that closely mirrors common law fraud. Section 6700 requires proof that a defendant made statements “which the person knows or has reason to know is false or fraudulent as to any material matter.” This language deliberately incorporates common law fraud terminology and concepts. The essential elements—false statements about material matters made with knowledge or reason to know of their falsity—directly parallel traditional fraud claims that have been resolved by juries for centuries.

The remedy analysis also supports Jarkesy‘s application. Section 6700’s penalties are explicitly punitive, calculated as a percentage of the promoter’s gross income from the abusive activity. Like the SEC’s civil penalties, these sanctions are designed to punish and deter wrongdoing rather than compensate victims or restore the status quo. The court found that Section 6700’s close relationship with common law fraud and its punitive monetary penalties clearly implicated the Seventh Amendment under Jarkesy‘s framework. Congress deliberately used “fraud” and other common law terms of art in the statutory formulation of the Section 6700 penalty.

Why the Constitutional Challenge Failed

Despite finding that Section 6700 penalties implicate the Seventh Amendment, the court rejected the consultant’s constitutional challenge on a fundamental procedural ground. The court concluded that the consultant had not actually been deprived of its right to a jury trial because the tax code’s refund procedure provides that protection.

The Court emphasized the difference between Section 6700’s enforcement mechanism and the administrative penalty systems struck down in other post-Jarkesy cases. In securities fraud cases, OSHA violations, and similar regulatory penalty schemes, administrative law judges make liability determinations that receive only deferential appellate review. The penalized party never gets a true jury trial on the question of liability.

Section 6703’s refund procedure operates differently. Once the individual paid the required 15 percent and filed its refund action, it obtained a completely fresh proceeding in federal district court. The IRS must prove the individual’s liability de novo in that proceeding without any deference to the administrative assessment. And the individual can demand a jury trial on all factual issues relating to whether it actually violated Section 6700.

The Court stressed that this situation contrasted with the defendants in Atlas Roofing, Jarkesy, and recent Third Circuit decisions like Axalta and Sun Valley. In those cases, administrative agencies made final liability determinations that courts could only review for substantial evidence or similar deferential standards. The defendants never received the full Article III court adjudication with jury trial rights that the Seventh Amendment requires.

This presumes that the consultant can actually pay the he…

This presumes that the consultant can actually pay the hefty penalty, which he could and did in this case. The Court did not consider or address what happens if the person, like the consultant in this case, cannot afford to pay the hefty penalty up front.

The Takeaway

The court’s decision clarifies that administrative penalty assessments can survive Seventh Amendment challenges even after Jarkesy. To do so, they have to include adequate procedural protections for obtaining jury trials. The court concluded that the tax code’s refund procedure accomplishes this by allowing penalized parties to obtain complete de novo judicial review in federal district court where the government bears the burden of proving liability to a jury.

This distinction between administrative assessment and ultimate liability determination is the focus for this constitutional analysis. While agencies may continue assessing penalties administratively for efficiency purposes, constitutional violations occur only when parties cannot ultimately obtain jury trials on liability questions. The court here said that the tax code for 6700 penalties avoids this problem by treating administrative assessments as provisional determinations subject to full judicial review upon payment of a portion of the penalty.

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Stephan Dorsey

Stephan is the sports journalist for the Maple Grove Report.

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Do You Report Stock an Employer Mistakenly Gave You to the IRS? – Houston Tax Attorneys

When your employer deposits 100,000 shares of stock into your brokerage account after you’ve left the company, and you believe it was done in error, do you have taxable income? And what do you do in this case?

If the amount is taxable to you as compensation, then when do you report it? Should you report it in the year that you received it? Should you do so even if you do not believe that you are entitled to keep the shares? Can you wait to report it once the time period for the company to get the shares back expires?

The court addressed these questions in Feige v. Commissioner, T.C. Memo. 2025-88 (2025). The case provides an opportunity to consider how an employee should address situations where an employer makes a mistake as to the amount of type of compensation to avoid paying more in tax.

Facts & Procedural History

The taxpayer was employed by a U.S. subsidiary of an Australian corporation from February 2010 through November 5, 2014. As part of her compensation package, she participated in her employer’s Performance Rights Plan. This Plan allowed her to receive stock as compensation for services.

In July 2013, the taxpayer accepted an additional allocation of 400,000 rights under a four-year vesting schedule. 100,000 shares were to vest each December from 2013 through 2016.

The taxpayer’s employment terminated on November 5, 2014. The separation agreement said that all unvested performance rights would be forfeited. Despite this provision, on December 3, 2014, the employer transferred 100,000 shares of company stock to the taxpayer’s brokerage account–shares that would have vested on December 21, 2014, had she remained employed.

The taxpayer discovered the share transfer in January 2015. She attempted to contact company employees about what she believed was an error, but the employees she reached had also separated from the company. She never provided written notice to the employer about the disputed transfer, as required under the Performance Rights Plan. At the end of January 2015, she received a Form W-2 from her former employer reporting $75,660 as compensation from the exercise of nonstatutory stock options.

The taxpayer and her husband did not file their 2014 tax return. The IRS prepared a substitute for return and issued a Notice of Deficiency in 2020, determining a deficiency of $88,856 plus various penalties. The taxpayer challenged the assessment in the U.S. Tax Court.

Section 83 and Property Transferred for Services

To understand the timing aspects of this case, we have to start with Section 83 of the tax code.

Section 83 deals with tax on property transferred in connection with the performance of services. Under Section 83(a), when property is transferred to a taxpayer for services, the excess of the property’s fair market value over any amount paid for it is included in gross income in the first year the taxpayer’s rights in the property are either transferable or not subject to a substantial risk of forfeiture.

The rules define property broadly to include stocks and other assets, but explicitly excludes money or unfunded promises to pay. The timing of income recognition depends on two key factors. First, whether the property is transferable–meaning the recipient can sell, assign, or pledge their interest without restriction. Second, whether there’s a substantial risk of forfeiture–which exists only if the rights are conditioned on future performance of substantial services or the occurrence of a condition related to the transfer’s purpose.

When an employer transfers stock to an employee, courts generally find the transfer is in connection with services if governed by an employment agreement. This connection exists whether the transfer relates to past, present, or future services. The analysis focuses on the substance of the transaction rather than its form or the parties’ characterization.

What Makes Property “Treasure Trove” Under Tax Law?

In this case, the taxpayer cited the “treasure trove” cases as a defense. This is a timing defense.

The concept of treasure trove in tax law stems from the broad definition of gross income in Section 61. The case of Cesarini v. United States established that found property constitutes taxable income, but with an important timing rule–the income isn’t recognized until the finder has undisputed possession under state law.

In Cesarini, the taxpayers purchased a used piano at auction and seven years later discovered cash hidden inside. The court held that this found property wasn’t taxable until all potential claims under state law expired. The reasoning centered on the uncertainty of ownership–multiple unknown parties might have valid claims to found property, and taxing the finder before establishing clear title would be premature.

Under this doctrine, found property has several defining characteristics. The property must be discovered rather than transferred through a known transaction. The finder typically has no knowledge of the property’s origin or rightful owner. Multiple unknown parties might have competing claims. State law determines when the finder’s possession becomes undisputed, usually after a statutory limitations period expires.

The tax consequences of this classification can be significant. Income recognition is deferred until ownership disputes are resolved, which might take years depending on state law. And also, the character of the income is ordinary income under Section 61, not compensation under specific provisions like Section 83.

Can Stock Transferred by an Employer Ever Be Found Property?

The taxpayer argued that the 100,000 shares were found property because she wasn’t entitled to them under her separation agreement. She contended that, like the cash found in Cesarini, the shares weren’t includible in income until Alaska’s three-year statute of limitations for recovery expired. Under her theory, she knew the transfer was erroneous, making the shares subject to her former employer’s ongoing claim under Alaska law governing defective transfers of securities.

The U.S. Tax Court rejected this creative argument for several reasons. Unlike Cesarini, where the piano buyers had no idea who owned the hidden cash, the taxpayer knew exactly who transferred the shares–her former employer. The shares weren’t “discovered” property with unknown origins; they were deliberately transferred through the company’s stock plan. Only two parties could possibly claim the shares: the taxpayer and her former employer. This wasn’t a situation where multiple unknown claimants might emerge.

The court emphasized that treating employer-transferred stock as found property would conflict with Section 83’s specific rules for property transferred for services. Treasury Regulation § 1.61-2(d)(6)(i) explicitly provides that Section 83 governs stock transfers after June 30, 1969, superseding Section 61’s general income rules when inconsistent. As the more specific provision, the court said that Section 83 controls over Section 61’s general principles regarding found property.

When Does Mistakenly Transferred Stock Become Taxable?

Even if the employer transferred the shares by mistake, the U.S. Tax Court held that the taxpayer had taxable income in 2014. The court’s analysis focused on whether the shares were transferable and whether they were subject to a substantial risk of forfeiture – the two tests under Section 83.

Regarding transferability, the court found the taxpayer had complete ownership and control. She could sell, assign, or pledge the shares without restriction. No provision in the separation agreement or Performance Rights Plan prevented her from transacting in the shares. The employer never attempted to recover them in the months and years following the transfer. Any transferee from the taxpayer wouldn’t face a risk of having to return the shares.

On the substantial risk of forfeiture issue, the court noted that the taxpayer’s separation was complete before the share transfer. She wasn’t required to perform any future services to keep the shares. The separation agreement contained no ongoing obligations, non-compete provisions, or clawback conditions. The shares were transferred after the seven-day revocation period expired, making the separation final.

The court found circumstantial evidence that the employer’s board might have accelerated the vesting under its discretionary authority in the Performance Rights Plan. Section 6.3 gave the board “absolute discretion” to waive performance conditions for a “Qualifying Event,” which included termination. The timing of the transfer–after separation but before the scheduled vesting date–suggested board action rather than error.

Why Did the Court Reject Alaska Securities Law Arguments?

The taxpayer also argued that Alaska securities law prevented her from having complete dominion over the shares. She cited Alaska Statute §45.08.202, which governs defective transfers of investment securities. Under her interpretation, because she knew the transfer might be defective, she couldn’t transact in the shares without potential liability to her former employer.

The court found this argument misaligned with the facts. Alaska’s securities laws address situations where someone receives securities through genuinely defective transfers – forged endorsements, unauthorized transactions, or theft. They don’t create automatic restrictions on securities received from your employer through established compensation channels, even if you question your entitlement.

Furthermore, the court noted that the taxpayer’s subjective belief about the transfer’s validity didn’t create an actual legal impediment to transferability. Section 83 looks at objective restrictions on transfer, not the recipient’s concerns about potential claims. If subjective doubts could defer taxation, employees could manipulate the timing of income recognition simply by questioning their entitlement to compensation.

The absence of any actual attempt by the employer to recover the shares over several years demonstrated that no real restriction existed. The company’s issuance of a Form W-2 treating the transfer as compensation further evidenced its intent to transfer ownership. These facts distinguished the taxpayer’s situation from cases involving genuinely disputed ownership where competing claims are actually asserted.

What Happens When You Dispute Income Reported on Form W-2?

The court’s analysis also touched on an important procedural issue that often gets overlooked in compensation disputes. Section 6201(d) provides a special rule when taxpayers dispute income reported on information returns like Form W-2. If a taxpayer asserts a reasonable dispute about income reported on an information return and has fully cooperated with the IRS, the burden shifts to the IRS to produce reasonable and probative information about the deficiency beyond just the information return itself.

In this case, the taxpayer disputed the $75,660 reported on her Form W-2, noting that her brokerage statement showed the shares were worth only $68,670 when transferred. She argued this created a reasonable dispute that should have shifted the burden to the IRS under Section 6201(d).

The court rejected this argument as the taxpayer didn’t file a tax return for 2014 until 2021, after the IRS had already prepared a substitute for return. The court explained that failing to file a return constitutes a failure to cooperate with the IRS as required under Section 6201(d). As the court stated, “As a nonfiler, [the taxpayer] plainly did not bring her dispute over any item of income to the attention of the IRS within a reasonable period of time as contemplated by the terms and legislative history of section 6201(d).”

This holding reinforces a key principle for tax litigation: disputing reported income requires more than just disagreeing with the amount. Taxpayers must file returns and formally raise their disputes to preserve procedural advantages. The failure to file eliminates any chance of shifting the burden to the IRS, leaving taxpayers to prove that the IRS’s determinations are wrong.

The Takeaway

This case explains what employees are to do when their employer makes mistakes regarding employee compensation. When the taxpayer discovers the mistake, they should act to document efforts to correct the mistake. And when the mistake results in higher compensation reported to the IRS on a Form W-2, as in this case, the taxpayer should file a tax return to dispute the higher amount. Filing the tax return serves two purposes. First, it can shift the burden to the IRS under Section 6201(d) if the taxpayer asserts a reasonable dispute about the reported income and cooperates with the IRS. Without filing, as this case demonstrates, taxpayers lose this procedural advantage entirely. Second, filing starts the statute of limitations running for the IRS to challenge the amount, rather than leaving the tax year open indefinitely. These procedural steps can go a long way in helping the taxpayer eventually correct the mistake and avoid paying more tax than required. The lesson is clear: when faced with disputed compensation, filing a return that challenges the reported amount is always better than not filing at all, even if you believe the income was reported in error.