In re: Howard D. Juntoff

RECOMMENDED FOR PUBLICATION
File Name: 22b0001p.06
BANKRUPTCY APPELLATE PANEL
OF THE SIXTH CIRCUIT
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IN RE: HOWARD D. JUNTOFF;
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IN RE: GEORGE J. MCPHERSON and MELANIE A. │
MCPHERSON, │
Debtors. │ Nos. 21-8011/8012
___________________________________________ >
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INTERNAL REVENUE SERVICE, │
Creditor-Appellant, │
│
v. │
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HOWARD D. JUNTOFF (21-8011); GEORGE J. │
MCPHERSON and MELANIE A. MCPHERSON (21-8012), │
Debtors-Appellees. │
│
┘
On Appeal from the United States Bankruptcy Court
for the Northern District of Ohio at Cleveland.
Nos. 1:19-bk-17032 (21-8011); 1:20-bk-13035 (21-8012)—Arthur I. Harris, Judge.
Argued: February 2, 2022
Decided and Filed: March 21, 2022
Before: CROOM, DALES, and STOUT, Bankruptcy Appellate Panel Judges.
_________________
COUNSEL
ARGUED: Marie E. Wicks, UNITED STATES DEPARTMENT OF JUSTICE, Washington,
D.C., for Appellant. Marcel C. Duhamel, VORYS, SATER, SEYMOUR AND PEASE LLP,
Cleveland, Ohio, for Appellees. ON BRIEF: Marie E. Wicks, UNITED STATES
DEPARTMENT OF JUSTICE, Washington, D.C., for Appellant. Marcel C. Duhamel, VORYS,
SATER, SEYMOUR AND PEASE LLP, Cleveland, Ohio, Joseph M. Romano, THE ROMANO
LAW FIRM, Cleveland, Ohio, for Appellees.
STOUT, J., delivered the opinion of the court in which CROOM, J., joined. DALES,
C.J. (pp. 24–28), delivered a separate dissenting opinion.
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In re McPherson
_________________
OPINION
_________________
ALAN C. STOUT, Bankruptcy Appellate Panel Judge. In this consolidated appeal
arising from two separate Chapter 13 cases, Debtors/Appellees (collectively “Debtors”) objected
to priority unsecured claims that Creditor/Appellant United States of America on behalf of the
Internal Revenue Service (“IRS”) filed based on Debtors’ failure to pay the “shared
responsibility payment” (“SRP”) for failing to obtain health insurance as required under the
“individual mandate” within the Patient Protection and Affordable Care Act of 2010
(the “ACA”).1 The bankruptcy court sustained Debtors’ objections in both cases, determining
that the SRP is not “a tax on or measured by income or gross receipts” or “an excise tax on . . . a
transaction” entitled to priority treatment under either § 507(a)(8)(A) or (E).2 The IRS now
appeals the bankruptcy court’s decision. For the reasons stated below, the bankruptcy court’s
decision is REVERSED.
STATEMENT OF ISSUES ON APPEAL
The IRS raises several issues on appeal:
1. Whether the bankruptcy court erred in holding that the shared responsibility
payment is not entitled to priority treatment under § 507(a)(8)(A) as a tax on
or measured by income or gross receipts.
2. Whether the bankruptcy court erred in holding that the shared responsibility
payment is not entitled to priority treatment under § 507(a)(8)(E) as an
excise tax on a transaction.
3. Whether the bankruptcy court erred in sustaining the Debtors’ objection to
IRS Claim 8 (McPherson) and IRS Claim 3 (Juntoff).
(Br. of Appellant United States of America at 2, B.A.P. Case No. 21-8011, ECF No. 15 (“IRS
Br.”).)
1
26 U.S.C. § 5000A (Pub. L. No. 111-148, 124 Stat. 119) (Mar. 23, 2010), as modified by the subsequently
enacted Health Care and Education Reconciliation Act, Pub. L. No. 111-152, 124 Stat. 1029 (Mar. 30, 2010).
2
Unless otherwise indicated, all chapter and section references are to the Bankruptcy Code, 11 U.S.C.
§§ 101-1532.
Nos. 21-8011/8012 In re Juntoff Page 3
In re McPherson
JURISDICTIONAL STATEMENT
The Bankruptcy Appellate Panel of the Sixth Circuit has jurisdiction to decide these
consolidated appeals. The IRS initially elected to have the United States District Court for the
Northern District of Ohio hear the appeals. (Bankr. Case No. 19-17032, ECF No. 97; Bankr.
Case No. 20-13035, ECF No. 72). However, on June 16, 2021, the district court granted the
IRS’s motion (to which Debtors consented) to transfer the appeal to this Panel. (Bankr. Case No.
19-17032, ECF No. 118; Bankr. Case No. 20-13035, ECF No. 81). The United States District
Court for the Northern District of Ohio has authorized this Panel to hear and determine appeals
from the district’s bankruptcy court in accordance with 28 U.S.C. § 158(b)(6).
Under 28 U.S.C. § 158(a)(1), this Panel has jurisdiction to hear appeals “from final
judgments, orders, and decrees” issued by a bankruptcy court. “Orders in bankruptcy cases
qualify as ‘final’ when they definitively dispose of discrete disputes within the overarching
bankruptcy case.” Ritzen Grp., Inc. v. Jackson Masonry, LLC, 140 S. Ct. 582, 586 (2020) (citing
Bullard v. Blue Hills Bank, 575 U.S. 496, 501, 135 S. Ct. 1686, 1691 (2015)). An order
sustaining an objection to a creditor’s claim is a final order. In re Bowers, 506 B.R. 249, 251
(B.A.P. 6th Cir. 2013), aff’d, 759 F.3d 621 (6th Cir. 2014).
STANDARD OF REVIEW
This appeal solely presents issues of law, reviewed de novo. Mich. Unemployment Ins.
Agency v. Boyd (In re Albion Health Servs.), 360 B.R. 599, 601 (B.A.P. 6th Cir. 2007) (“An
order determining that a claim is not entitled to priority status is a question of law requiring de
novo review on appeal.”); see also Church Joint Venture, L.P. v. Blasingame (In re Blasingame),
986 F.3d 633, 638 (6th Cir. 2021) (stating a bankruptcy court’s legal conclusions are reviewed de
novo). “De novo review requires the Bankruptcy Appellate Panel to interpret statutes
independently of the determination of the bankruptcy court.” Rudnicki v. S. Coll. of Optometry
(In re Rudnicki), 228 B.R. 179, 180 (B.A.P. 6th Cir. 1999) (citing Nat’l City Bank v. Elliott (In re
Elliott), 214 B.R. 148, 149 (B.A.P. 6th Cir. 1997)); see also Plymouth Park Tax Servs., LLC v.
Bowers (In re Bowers), 759 F.3d 621, 625 (6th Cir. 2014) (citation omitted) (“De novo review
Nos. 21-8011/8012 In re Juntoff Page 4
In re McPherson
requires the appellate court to determine the law at issue independently of the Bankruptcy
Court’s determination.”).
FACTS
No one disputes the facts underlying these appeals.
The ACA requires non-exempt individuals either to maintain a minimum level of health
insurance or to pay a “penalty.” 26 U.S.C. § 5000A. In tax years 2017 and 2018,3 the ACA
provided that non-exempt individuals who did not have “minimum essential coverage” for one or
more months had to make a “shared responsibility payment” with their annual federal tax
payment. 26 U.S.C. § 5000A(b)(1). The monthly SRP amount owed equaled 1/12 of the greater
of either a flat dollar amount or 2.5% of the taxpayer’s taxable income (for taxable years
beginning after 2015). 26 U.S.C. § 5000A(c)(2)(A), (B)(iii). Under paragraph (3) of subsection
(c), the amount used to compute the flat dollar amount in paragraph (2)(A) was $695. 26 U.S.C.
§ 5000A(c)(3) as amended by Pub. L. No. 111-152, § 1002, 124 Stat. 1029 (2010). If the
taxpayer’s income fell below a certain threshold, the flat dollar amount would be higher than
2.5% of the taxable income, and the SRP then would be the flat dollar amount and not a
percentage of the taxpayer’s income.
Despite the “individual mandate,” Debtors George and Melanie McPherson
(“McPhersons”) did not maintain health insurance for nine months of the year in 2017, and
Debtor Howard Juntoff (“Juntoff”) did not maintain health insurance in any month in 2018.
They also did not pay their SRP obligations. Debtors’ SRP liabilities are based on the number of
months during which they lacked health insurance.
Juntoff filed a bankruptcy petition under Chapter 13 in 2019, and the McPhersons filed a
Chapter 13 petition in 2020. In each case, the IRS filed, and subsequently amended, proofs of
claim reflecting Debtors’ failure to pay the SRP. In each case, the IRS’s last amended proof of
claim sought priority treatment as an “excise/income tax.”
3
Congress amended § 5000A to reduce the SRP to zero for tax years beginning after December 31, 2018.
Pub. L. No. 115-97, § 11081, 131 Stat. 2054, 2092 (2017). All ACA citations herein are to the pre-amendment
version.
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In re McPherson
More specifically, in the Juntoff case, IRS Proof of Claim 3-4 asserted that Juntoff’s
SRP-related liability for calendar year 2018 consisted of an SRP amount of $1,016, plus
prepetition interest of $26.39, for a total of $1,042.39. Juntoff self-reported his SRP on his 2018
Form 1040 individual income tax return as $1,016, which equaled 2.5% of his 2018 taxable
income of $40,629. Juntoff filed his 2018 Form 1040 under the single filing status, claiming the
standard deduction for single taxpayers of $12,000. Because Juntoff reported a single filing
status, his flat dollar amount option was $695. His adjusted gross income was $52,629.00, and
after subtracting the $12,000 standard deduction for single filing status (Juntoff did not claim any
tax-exempt interest or dependents), his taxable income was $40,629.00.4 Juntoff’s taxable
income of $40,629.00 multiplied by 2.5% equaled $1,015.73 for twelve months, consistent with
his self-reported SRP of $1,016. According to the 2018 Instructions, the National Average
Bronze Plan Premium insurance payment for one person was $3,396.5 Juntoff’s SRP amount,
therefore, resulted from first choosing the larger of $695 or $1,016 (which was $1,016), and then
selecting the lesser of $1,016 or $3,396, which yielded $1,016 as the SRP amount (not including
the pre-petition interest of $26.39).
In the McPherson case, IRS Proof of Claim 8-4 asserted that their SRP-related liability
for calendar year 2017 consisted of an SRP amount of $1,564, plus prepetition interest of
$136.70, for a total of $1,700.70. The McPhersons self-reported their SRP on their 2017 Form
1040 individual income tax return, and the amount of $1,564 equals the SRP flat dollar amount
for the nine months of 2017 during which they did not maintain minimum health insurance
coverage.6 The McPhersons filed their 2017 Form 1040 under the married filing jointly filing
status, claiming itemized deductions of $15,634, and claiming two dependents. Because the
McPhersons filed a joint return, their flat dollar amount option was $1,564, or $173.75 per month
4
See Instructions for Form 8965: Health Coverage Exemptions (and Instructions for Figuring Your Shared
Responsibility Payment), 2017 Instructions for Form 8965, IRS (Dec. 20, 2017), https://www.irs.gov/pub/irs-
prior/i8965--2017.pdf [https://perma.cc/HC73-V9H5] (“2017 Instructions”); 2018 Instructions for Form 8965,
IRS (Dec. 18, 2018), https://www.irs.gov/pub/irs-prior/i8965--2018.pdf [https://perma.cc/4KBE-PJHQ] (“2018
Instructions”).
5
See 2018 Instructions at 18.
6
According to information received from the IRS, the McPhersons held minimum health insurance for
three months of 2017; thus, their SRP amount derived from the nine months during which they lacked minimum
health insurance. (In re McPherson, Bankr. Case No. 20-13035, ECF No. 56, Exhibit B, IDRS Form 1095.)
Nos. 21-8011/8012 In re Juntoff Page 6
In re McPherson
for nine months, consistent with their self-reported SRP. Their adjusted gross income was
$74,073.00, minus the amount associated with the “married filing jointly” filing status of
$20,800,7 for a difference of $53,273.00. Multiplied by 2.5% and then divided by twelve, the
McPhersons’ monthly percentage income amount was $110.99. That monthly payment,
multiplied by nine, equaled $998.87 (rounded up to $999). According to the 2017 Instructions,
the National Average Bronze Plan Premium for 4 people was $13,056.8 The McPhersons’ SRP
amount, therefore, resulted from choosing the larger of $1,564 or $999 (which was $1,564), and
then selecting the lesser of $1,564 or $13,056, which yielded $1,564 as the SRP amount (not
including the prepetition interest of $136.70).
Debtors objected to the IRS’s claims in both cases, arguing that the SRP debt was not
entitled to priority treatment. Before the bankruptcy court ruled on these objections, it confirmed
a Chapter 13 plan in each case. The court confirmed the McPhersons’ Chapter 13 plan in
November 2020, which provided for payment in full of all allowed priority claims and projected
distributions to general unsecured creditors that would pay approximately 22% of their claims.
In March 2021, the court confirmed Juntoff’s second amended plan, which provided for payment
in full of all priority unsecured claims and no distributions to general unsecured claims. On
April 15, 2021, after multiple rounds of briefing and several hearings, the bankruptcy court
issued a consolidated memorandum opinion sustaining Appellees’ objections and entered a
consistent order in each case. The IRS timely appealed.
DISCUSSION
I. Statutory Framework.
A Chapter 13 debtor must have a plan confirmed that, among other things, pays all claims
entitled to priority under § 507 in full, unless the claimholder consents to different treatment.
11 U.S.C. § 1322(a)(2). The IRS contends that Debtors must treat its claims as priority tax
claims in their chapter 13 plans in accordance with § 507(a)(8), which provides in pertinent part:
7
See 2017 Instructions at 16.
8
Id. at 17.
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In re McPherson
(a) The following expenses and claims have priority in the following order:
....
(8) Eighth, allowed unsecured claims of governmental units, only to the extent
that such claims are for—
(A) a tax on or measured by income or gross receipts for a taxable year
ending on or before the date of the filing of the petition . . . .
[or]
(E) an excise tax on—
(i) a transaction occurring before the date of the filing of the petition[.]
11 U.S.C. § 507(a)(8)(A), (E).9 A creditor’s tax claim that does not qualify for priority under
§ 507(a)(8) should be treated as a general unsecured claim. See, e.g., In re Albracht, 617 B.R.
851, 857 (Bankr. E.D.N.C. 2020) (holding portion of claim from SRP is not entitled to priority
and directing “[t]he portion of the Claim relating to the SRP . . . shall be removed from the
portion of the Claim entitled to priority and added to the general unsecured portion of the
Claim[.]”).
A party seeking priority treatment of its claim under § 507(a) has the burden of proof on
its entitlement to such treatment. Rockstone Capital LLC v. Metal, 508 B.R. 552, 559 (E.D.N.Y.
2014) (citing, inter alia, In re Micek, 473 B.R. 185, 188 (Bankr. E.D. Ky. 2012) (holding that the
claimant must establish entitlement to priority by a preponderance of the evidence)). When
considering whether a claim is entitled to priority, a court “must be mindful of the Bankruptcy
Code objective of securing equal distribution among creditors and ‘the complementary principle
that preferential treatment of a class of creditors is in order only when clearly authorized by
Congress.’” Albion Health Servs., 360 B.R. at 604 (quoting Howard Delivery Serv., Inc. v.
Zurich Am. Ins. Co., 547 U.S. 651, 655, 126 S. Ct. 2105, 2109 (2006)). However, “[i]t is
common for Congress to prefer Government creditors over private creditors[.]” Howard
Delivery, 547 U.S. at 666 (citing Travelers Prop. Cas. Corp. v. Birmingham-Nashville Express,
Inc. (In re Birmingham-Nashville Express, Inc.), 224 F.3d 511, 518 (6th Cir. 2000) (“It is quite
9
Both § 507(a)(8)(A) and (E) provide that the tax at issue must first become due within three years of the
petition date to qualify for priority treatment; the IRS’s exaction in each case satisfies this requirement.
Nos. 21-8011/8012 In re Juntoff Page 8
In re McPherson
common for Congress to provide better treatment in the Bankruptcy Code for government
creditors than is provided for private creditors.”)).
II. The SRP is a “Tax” for Purposes of § 507(a)(8).
The bankruptcy court did not determine whether the SRP is a tax eligible for priority
treatment under § 507(a)(8) or an ineligible penalty. Instead, the court focused its attention on
whether the SRP is the kind of tax entitled to priority treatment under the Bankruptcy Code
without determining whether or not the SRP is even a tax. Ultimately, the court held that
the SRP is not entitled to priority treatment under the Bankruptcy Code. In re Juntoff, Case No.
19-17032, Case No. 20-13035, 2021 WL 1522206, at *6 (Bankr. N.D. Ohio April 15, 2021)
(emphasis added) (“As explained more fully below, the Court holds that the shared responsibility
payment is neither “a tax on or measured by income or gross receipts” nor “an excise tax on . . . a
transaction” within the meaning of § 507(a)(8)(A) or (E) of the Bankruptcy Code, even assuming
it functions as a tax.”)
The parties’ appellate briefs do address the initial question—whether the SRP is a tax,
and present opposing arguments on this issue. The IRS contends that the Supreme Court already
held that the SRP is a tax in National Federation of Independent Business v. Sebelius, 567 U.S.
519, 566, 132 S. Ct. 2566, 2595 (2012), and, as such, that Sebelius is controlling. (IRS Br. at
13.) Alternatively, the IRS contends that applying Sixth Circuit precedent on how to assess
whether an exaction is a tax leads to the same conclusion. (Id. at 17.) Debtors contend that
Sebelius is non-binding, and that pertinent authority confirms that, under the Bankruptcy Code,
the SRP is a penalty imposed on any person who fails to buy health insurance and is not
otherwise exempt under a statutory exclusion, not a tax. (Br. of Appellees at 4, B.A.P. Case No.
21-8011, ECF No. 17 (“Debtors’ Br.”).)
A. The Sebelius Decision is not Binding as to Whether the IRS’s SRP-Related
Claims are Entitled to Priority Treatment under the Bankruptcy Code.
The Supreme Court has explained that a court should apply a “functional examination” to
determine whether an exaction in the Internal Revenue Code should be considered a tax entitled
to priority under § 507(a)(8). United States v. Reorganized CF&I Fabricators of Utah, Inc.,
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In re McPherson
518 U.S. 213, 224, 116 S. Ct. 2106, 2113 (1996). The Court in CF&I explained the “functional”
approach as follows:
Anderson and New York applied the same test in determining whether an exaction
was a tax under § 64(a) [of the Bankruptcy Act of 1898], or a penalty or debt: “a
tax is a pecuniary burden laid upon individuals or property for the purpose of
supporting the Government.” [New Jersey v. Anderson, 203 U.S. 483, 492, 27 S.
Ct. 137, 140 (1906)]; [United States v. New York, 315 U.S. 510, 515, 62 S. Ct.
712, 714 (1942)]; accord, [City of New York v. Feiring, 313 U.S. 283, 285, 61 S.
Ct. 1028, 1029 (1941)] (Ҥ 64 extends to those pecuniary burdens laid upon
individuals or their property . . . for the purpose of defraying the expenses of
government or of undertakings authorized by it”). Or, as the Court noted in a
somewhat different context, “[a] tax is an enforced contribution to provide for the
support of government; a penalty, as the word is here used, is an exaction imposed
by statute as punishment for an unlawful act.” United States v. La Franca,
282 U.S. 568, 572, 75 L. Ed. 551, 75 L. Ed. 551, 51 S. Ct. 278 (1931).
We take La Franca’s statement of the distinction to be sufficient for the decision
of this case; if the concept of penalty means anything, it means punishment for an
unlawful act or omission, and a punishment for an unlawful omission is what this
exaction is.
518 U.S. at 224.
More recently, when considering the ACA’s constitutionality in Sebelius, the Supreme
Court also applied a “functional approach” in reaching its conclusion that “the shared
responsibility payment may for constitutional purposes be considered a tax, not a penalty[.]”
Sebelius, 567 U.S. at 565-66. The Sebelius Court cited CF&I and La Franca to support its
conclusion:
In distinguishing penalties from taxes, this Court has explained that “if the
concept of penalty means anything, it means punishment for an unlawful act or
omission.” United States v. Reorganized CF&I Fabricators of Utah, Inc.,
518 U.S. 213, 224, 116 S. Ct. 2106, 135 L. Ed. 2d 506 (1996); see also United
States v. La Franca, 282 U.S. 568, 572, 51 S. Ct. 278, 75 L. Ed. 551 (1931) (“[A]
penalty, as the word is here used, is an exaction imposed by statute as punishment
for an unlawful act”). While the individual mandate clearly aims to induce the
purchase of health insurance, it need not be read to declare that failing to do so is
unlawful. Neither the Act nor any other law attaches negative legal consequences
to not buying health insurance, beyond requiring a payment to the IRS.
Id. at 567-68.
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In re McPherson
The IRS contends that the Supreme Court in Sebelius reached “beyond 26 U.S.C.
§ 5000A’s characterization of the SRP as a ‘penalty’ and considered instead ‘its substance and
application’ to conclude that the SRP was a tax and a constitutional exercise of Congress’s
taxing authority.” (IRS Br. at 12 (citing Sebelius, 567 U.S. at 565).) The IRS posits that
Sebelius determined, notwithstanding the SRP’s “penalty” label in the Internal Revenue Code,
that the SRP did not operate as a penalty, but rather as a tax which citizens may lawfully choose
to pay in lieu of buying health insurance. (Id.) The IRS concludes that, because the Court
already decided that the SRP is a tax under a functional analysis, the Court’s analysis in Sebelius
is controlling. (Id. at 13).
Debtors contend that the IRS misconstrues Sebelius, in that whether the SRP is a tax for
constitutional purposes has no bearing on whether it is a tax for purposes of the Bankruptcy
Code’s priority scheme. (Debtors’ Br. at 4.) Debtors draw on other aspects of the Sebelius
opinion to distinguish the case, explaining that the Court perhaps reached a reasonable
interpretation of the ACA and the accompanying SRP, but “not necessarily the best
interpretation.” (Id. at 16-17 (footnotes omitted).)
The Panel agrees with Debtors that Sebelius is not dispositive on the tax/penalty question
based on the opinion’s context. Sebelius concerned whether Congress had the constitutional
authority to enact the ACA given its inclusion of the individual mandate and SRP. Before
reaching that issue, the Supreme Court first considered whether the Anti-Injunction Act,
26 U.S.C. § 7421(a), barred a review on the merits.10 The Supreme Court concluded that the
Anti-Injunction Act did not bar evaluation of the ACA’s constitutionality because Congress
called the SRP a penalty and not a tax, and the Anti-Injunction Act only applied to the review of
tax assessments. Sebelius, 567 U.S. at 543; see also id. at 564 (“It is up to Congress whether to
apply the Anti-Injunction Act to any particular statute, so it makes sense to be guided by
Congress’s choice of label on that question.”). After reaching this conclusion, the Court then
considered whether Congress could permissibly enact the ACA, including the individual
10
The Fourth Circuit had refused to assess the ACA’s constitutionality based on the Anti-Injunction Act
and the procedural posture of the case before that court. Liberty Univ., Inc. v. Geithner, 671 F.3d 391 (4th Cir.
2011).
Nos. 21-8011/8012 In re Juntoff Page 11
In re McPherson
mandate and SRP, under its taxing power. The Court performed a “functional examination” of
the SRP as a component of the individual mandate and concluded that Congress’ taxing power
afforded it the constitutional authority to enact these provisions. Id. at 561-74. In other words,
the Court determined that the SRP constituted a “penalty” for purposes of an Anti-Injunction Act
analysis and a “tax” under a constitutionality analysis.
To explain this dichotomy, the Sebelius Court clarified that the question presented on
constitutionality was not whether the SRP was better construed as a tax or a penalty, but rather
whether the SRP could possibly be construed as a tax to permit a finding that Congress had the
authority to enact the ACA. Id. at 562 (quoting Blodgett v. Holden, 275 U.S. 142, 148, 48 S. Ct.
105, 107 (1927) (Holmes, J., concurring) (“[T]he rule is settled that as between two possible
interpretations of a statute, by one of which it would be unconstitutional and by the other valid,
our plain duty is to adopt that which will save the Act.”)); see also Bradford v. United States,
Dep’t of the Treasury (In re Bradford), 534 B.R. 839, 854 (Bankr. M.D. Ga. 2015) (“[t]he
question before the [Sebelius] Court was whether it was ‘fairly possible’ to interpret the mandate
as merely a trigger for a tax payment (which would be sustainable under Congress’s taxing
power), rather than as an absolute command subject to criminal sanctions (which would render it
unsupportable under the taxing power).”).
This qualification in the Sebelius opinion undercuts the argument that the Sebelius Court
concluded that the SRP is a tax for present purposes, and that such conclusion binds this Panel.
With that said, as discussed below, the Sebelius decision does offer a distinction between a
penalty and a tax for purposes of priority under the Bankruptcy Code of which this Panel must
take heed.
B. The SRP is a “Tax” Under Sixth Circuit Authority.
To resolve whether an exaction is a “tax” or a “penalty” for purposes of the Bankruptcy
Code, the Sixth Circuit requires a court to “engag[e] in a ‘functional examination’ of the
applicable statutory scheme to determine whether it falls within the federal statutory definition.”
Rizzo v. Mich. Dep’t of Treasury (In re Rizzo), 741 F.3d 703, 705 (6th Cir. 2014) (citing CF&I,
Inc., 518 U.S. at 224). When performing the examination, “the statutory labels of the exaction
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In re McPherson
are not dispositive; the court must instead evaluate the statute’s ‘actual effects to determine
whether it functions as either a tax or else as some different kind of obligation.’” Id. (quoting
Boston Reg’l Med. Ctr., Inc. v. Mass. Div. of Health Care Fin. & Policy, 365 F.3d 51, 58 (1st
Cir. 2004)).
In the context of a priority analysis under § 507, the Panel in Albion Health Services
explained the Sixth Circuit’s “functional examination” test as follows:
Applying the principles articulated in Anderson and Feiring, other courts have
added glosses to the Supreme Court’s description of what exactions qualify as
‘taxes’ for priority purposes in the bankruptcy context. The Ninth Circuit set
forth a frequently cited four-prong test for determining whether a particular
exaction should be characterized as a tax for bankruptcy priority purposes:
(a) An involuntary pecuniary burden, regardless of name, laid upon
individuals or property;
(b) Imposed by, or under authority of the legislature;
(c) For public purposes, including the purposes of defraying expenses
of government or undertakings authorized by it;
(d) Under the police or taxing power of the state.
County Sanitation Dist. No. 2 v. Lorber Indus. of Cal., Inc. (In re Lorber Indus. of
Cal., Inc.), 675 F.2d 1062, 1066 (9th Cir. 1982).
The Sixth Circuit has criticized the Lorber test as insufficient in distinguishing
taxes from other types of payments owed the government, such as fees for service
or criminal or civil penalties. See Yoder v. Ohio Bureau of Workers’ Comp. (In re
Suburban Motor Freight, Inc.), 998 F.2d 338 (6th Cir. 1993) (“Suburban I”);
Ohio Bureau of Workers’ Comp. v. Yoder (In re Suburban Motor Freight, Inc.),
36 F.3d 484 (6th Cir. 1994) (“Suburban II”). The court noted that “the test, in
particular its ‘public purpose’ requirement, did not limit in any meaningful way
the circumstances under which government claims would be entitled to priority”
since “all money collected by the Government goes toward defraying its
expenses, and is used for public purposes.” Suburban II, 36 F.3d at 488. Thus,
“to say as a matter of definition that all taxes are collected for public purposes
does not allow the Government to say that all funds collected for public purposes
are taxes. . . .” Suburban I, 998 F.2d 338, 342 (6th Cir. 1993). While the Sixth
Circuit agreed that satisfaction of the Lorber test is necessary to qualify a claim
for priority treatment as an excise tax, it identified two additional factors that
refine the public purpose element: “(1) that the pecuniary obligation be
universally applicable to similarly situated entities; and (2) that according priority
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In re McPherson
treatment to the government claim not disadvantage private creditors with like
claims.” Suburban II, 36 F.3d at 488.
360 B.R. at 605-606. The parties agree that the Lorber/Suburban I/Suburban II cases (setting
forth the “Lorber/Suburban test”) provide the “functional examination” framework in this
Circuit.
Applying the Lorber/Suburban test, the IRS argues that the SRP is a tax:
The SRP is an involuntary pecuniary burden instituted by Congress for a public
purpose, that is, encouraging taxpayers to purchase minimum essential healthcare
coverage and reducing the cost of health insurance for the general public. See
Pub. L. No. 111-148, § 1501(a)(2)(H), 124 Stat. 119, 243 (2010) (stating that the
“shared responsibility” requirement of maintaining minimum essential coverage
will “lower health insurance premiums” by increasing the number of those
insured); see also Szczyporski, [531 F. Supp. 3d 934, 940 (E.D. Pa. 2021)].
Congress implemented the SRP as part of its taxing authority. Sebelius, 567 U.S.
at 574. Further, the SRP liability is “universally applicable to similarly situated
entities” because it is a payment that is required of all otherwise “applicable
individuals” who fit the criteria of 26 U.S.C. § 5000A and choose to not be
covered by health insurance for one or more months out of the year. 26 U.S.C.
§ 5000A(b)(1). And allowing the Internal Revenue Service’s claim for the SRP
liability to have priority status would not “disadvantage private creditors with like
claims” because there are no private creditors with like claims. See, e.g., In re
Jones, 610 B.R. 663, 667 (Bankr. D. Mont. 2019) (“[S]ince the SRP is strictly a
function of federal statute, a private creditor cannot be hypothesized who is
similarly situated to the IRS.”); see also Szczyporski, [531 F. Supp. 3d at 940]
(citing Jones, 610 B.R. at 667). Thus, the SRP meets all of the Sixth Circuit’s
requirements for treating an exaction as a tax in bankruptcy.
(IRS Br. at 16.)
Debtors challenge only one aspect of the IRS’s application of the Lorber/Suburban test.
Debtors do not dispute that the SRP is an involuntary pecuniary burden imposed on individuals
by Congress under its taxing authority for the public purposes of expanding health insurance and
defraying the costs of healthcare.11 The four Lorber elements are satisfied. Debtors also do not
11
Our colleague’s separate dissenting opinion (the “Dissent”) makes an argument that Debtors did not
make. It notes that the majority opinion in Sebelius states that the ACA “merely imposes a tax citizens may lawfully
choose to pay in lieu of buying health insurance” (Sebelius, 567 U.S. at 567), and contends that this statement
“undercuts the characterization of the SRP as an ‘involuntary exaction.’” (Dissent at 27.) That a taxpayer in 2017
or 2018 could opt to pay the SRP rather than maintain insurance does not render the SRP a “voluntary exaction.”
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dispute that according priority treatment to the IRS’s claim does not disadvantage private
creditors with like claims as the SRP operates purely as a federal statutory function such that no
private creditors similarly situated to the IRS can be envisioned. Jones, 610 B.R. at 667;
Szczyporski, 531 F. Supp. at 940. The sole disputed Lorber/Surburban element to consider for
purposes of finding the SRP to be a “tax,” then, is whether the SRP is a pecuniary obligation
universally applicable to similarly situated entities.
Debtors assert that the SRP is not universally applicable to similarly situated entities
because the Secretary of Health and Human Services (“HHS”), “a non-taxing authority,” was
delegated “broad discretion to grant hardship exemptions from the SRP” including for:
homelessness, eviction, foreclosure, utility shut-off notices, domestic violence,
the death of a family member, natural or human-caused disasters, bankruptcy
(within the last two years), unpaid medical expenses resulting in substantial debt,
expenses due to caring for an ill, disabled or aging family member and—
notably—any other hardship not listed. See generally Healthcare.gov Hardship
Instructions.
(Debtors’ Br. at 19-20.) Debtors argue it is difficult to see how the SRP is anything other than
discretionary given the “breadth” of these exemptions. (Id. at 20.)
The only authority that Debtors cite for the proposition that an exaction is not a
“universally applicable” tax if discretion in its collection applies is an out-of-circuit district court
decision related to Massachusetts’ workers’ compensation scheme. Workers’ Comp. Tr. Fund v.
Saunders, 234 B.R. 555, 565 (D. Mass. 1999). In Saunders, a debtor-entity failed to maintain
required workers’ compensation insurance. The state workers’ compensation trust fund thus
paid an injured worker’s claim and filed a priority claim in the debtor’s bankruptcy case to
recover the amount it paid on the worker’s claim. The bankruptcy court granted the Chapter 7
trustee’s objection to the claim’s priority treatment and the district court affirmed.
Rather, federal law imposed on non-exempt taxpayers an obligation to either maintain health insurance or pay the
SRP. The ACA “makes going without insurance just another thing the Government taxes, like buying gasoline or
earning income.” Sebelius, 567 U.S. at 563. Or, stated differently, the Court labeled the SRP “a burden that the
Federal Government imposes for an omission” (id. at 571); and a “voluntary act” is seldom a “burden” that a
government “imposes.” Certainly, the record does not reflect that Debtors considered it a “voluntary act” to pay an
exaction to the IRS totaling hundreds of additional dollars for the SRP.
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In re McPherson
The district court agreed that the claim was not entitled to priority based on the language
of the state’s workers’ compensation statute, which provided that a state agency “‘may seek
recovery from the uninsured employer for an amount equal to the amount paid on behalf of the
claimant under this chapter, plus any necessary and reasonable attorney fees.’” Id. at 565(quoting Mass. Gen. Laws ch. 152, § 65(8)). The court held that the statute afforded broad
discretion to a state agency sufficient to render it not “universally applicable” because it “allows
for different treatment among the members of the class of uninsured employers for whom the
[trust fund] pays claims, depending on how the commissioner of DIA exercises his discretion—
that is, whether he elects or declines to pursue a particular uninsured employer for whom WCTF
has paid a claim.” Id. In other words, the state statute granted, and did not constrain in any way,
the exercise of the agency’s discretion in seeking to collect this exaction; the DIA commissioner
could choose which specific uninsured employers to pursue or leave alone without any statutory
guidance.
In contrast to the statutory language at issue in Saunders, Debtors offer only a vague
reference to the Healthcare.gov website to support their argument that hardship exemptions
render the SRP a discretionary exaction that is not universally applicable. Debtors do not explain
how they reach the conclusion that the ACA grants HHS “broad discretion” to grant hardship
exemptions. While § 5000A(e) provides for five categories of exemptions from the SRP—
including for taxpayers with income below the filing threshold, for members of Indian tribes, and
for taxpayers with “hardships” as determined by the Secretary of Health and Human Services—
the statutory language itself does not afford “broad discretion” to HHS to determine when such a
hardship exists.12 In fact, a federal regulation provides substantive standards regarding taxpayer
12
The statute provides:
(e) Exemptions. No penalty shall be imposed under subsection (a) with respect to—
(5) Hardships. Any applicable individual who for any month is determined by the
Secretary of Health and Human Services under section 1311(d)(4)(H) to have suffered
a hardship with respect to the capability to obtain coverage under a qualified health
plan.
26 U.S.C. § 5000A(e)(5). The reference to section 1311(d)(4)(H) is a reference to the Public Law version of the
ACA, Pub. L. No. 111-148. Section 1311 of the ACA creates and delegates authority and obligations to health
insurance exchanges. Section 1311(d)(4)(H) provides that an exchange must grant certifications that individuals are
exempt from responsibility for paying the SRP. This portion of the Public Law is codified at 42 U.S.C.
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eligibility for a hardship exemption and thereby limits agency “discretion.” See 45 CFR
155.605(d). The Panel finds Saunders inapposite.
Moreover, the Panel concludes that “universality” is considered at the point at which the
exaction is levied. Put another way, the exaction is universally applicable to all persons who are
in a position to be subject to the exaction, not including those individuals to whom an exemption
would apply. See, e.g., In re Carpenter, 519 B.R. 811, 818 (Bankr. D. Mont. 2014) (citation
omitted) (finding “the obligation at issue meets the two additional elements articulated by the
Suburban I Court . . . in that the particular assessment is universally applicable to similarly
situated officers in that all officers who are responsible for paying the taxes, interest and
penalties of corporations are liable for such taxes, interest and penalties.”); see also Bos. Reg’l
Med. Ctr., Inc. v. Mass. Div. of Health Care Fin. & Policy (In re Bos. Reg’l Med. Ctr., Inc.),
365 F.3d 51, 62 (1st Cir. 2004) (citations omitted) (applying Lorber/Suburban test and
concluding “universality” is satisfied when those subject to the exaction at issue (acute care
hospitals) were “subject to the same rules” such that “acute hospitals with the same financial
profiles in any given year will have the same liability”). In this instance, “[t]he ‘similarly
situated persons’ to whom the SRP is ‘universally applicable’ are those who are liable for the tax
based on their income levels, their status as an ‘applicable individual,’ and their decision to pay
the SRP rather than maintain health insurance for at least one month of the applicable year.”
(Reply Br. of Appellant United States of America at 5, B.A.P. Case No. 21-8011, ECF No. 18
(“Reply Br.”).) In other words, Debtors’ argument improperly focuses on the exceptions rather
than the generally applicable rule of liability.
In the Dissent, our colleague raises slightly different concerns regarding the
“universality” factor, concluding that the SRP does not meet the Sixth Circuit’s criteria for a
“universally applicable” tax in Suburban I and Suburban II. A careful review of those cases
confirms that the SRP is a tax under the Lorber/Suburban test.
§ 18031(d)(4)(H), and this statute also does not clearly confer discretion on the exchanges in granting exemption
certifications.
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In re McPherson
In Suburban I, the Sixth Circuit considered whether unpaid workers’ compensation
insurance premiums owed to the Ohio Bureau of Workers’ Compensation constituted fees13 or
taxes.14 The circuit court concluded that the premiums were more akin to taxes for purposes of
the Bankruptcy Code’s priority scheme because Ohio’s workers’ compensation system was
mandatory for every employer in the state and employers were required either to participate or
self-insure. Suburban I, 998 F.2d at 342. The court explained:
In the case at bar, we recognize the public purpose of the workers’ compensation
premiums in the proper context in holding that they are entitled to priority
in bankruptcy; since the Ohio system is centralized and universal,
“injured employees . . . depend upon the financial soundness of the [Workers’
Compensation] Fund . . . .” [ ]. If the State had an optional participation
program, or allowed employers to purchase private liability insurance, it would be
unfair and without statutory justification to call state-collected premiums “taxes”
and put the Bureau ahead in line while leaving unpaid private insurers to languish
along with the rest of the unsecured creditors.
Id. (citation omitted). Based on this reasoning, the Sixth Circuit considered the unpaid workers’
compensation premium akin to an excise tax entitled to priority treatment under the Bankruptcy
Code.
In Suburban II, the assessment at issue did not concern insurance premiums; rather, the
claim for which the Ohio Bureau of Workers’ Compensation sought priority treatment in
bankruptcy concerned the reimbursement of payments made from Ohio’s workers’ compensation
surplus fund to workers’ compensation claimants, occasioned by the debtor’s failure to pay
13
The Sixth Circuit cited Supreme Court precedent for the definition of a “fee,” explaining “[t]he Court has
defined ‘fees’ for bankruptcy purposes as monies being paid to the Government ‘incident to a voluntary act’ such as
applying to the bar or obtaining a broadcast license, since such payments ‘bestow[ ] a benefit on the applicant, not
shared by other members of society.” Suburban I, 998 F.2d at 339-40 (quoting Nat’l Cable Television Ass’n, Inc. v.
United States, 415 U.S. 336, 340-41, 94 S. Ct. 1146, 1149 (1974)); see also United States v. River Coal Co., Inc.,
748 F.2d 1103, 1106 (6th Cir. 1984) (“the chief distinction is that a tax is an exaction for public purposes while a fee
relates to an individual privilege or benefit to the payer.”). No party contends in this appeal that the SRP should be
considered a fee as an exaction for an individual privilege or benefit bestowed on Debtors.
14
The Sixth Circuit also cited Supreme Court precedent for the definition of “taxes” as “‘those pecuniary
burdens laid upon individuals or their property, regardless of consent, for the purpose of defraying the expenses of
government or of undertakings authorized by it.’” Suburban I, 998 F.2d at 339 (quoting City of New York v.
Feiring, 313 U.S. 283, 285, 61 S. Ct. 1028, 1029 (1941)). The SRP readily fits into this definition to the extent the
federal government (in 2017 and 2018) imposed a pecuniary burden on individuals to encourage taxpayers to obtain
individual health insurance and to defray the costs resulting from those who fail to do so.
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workers’ compensation fund premiums to the state and its failure to pay claims filed when it was
a self-insured employer. The government sought to broaden the holding in Suburban I, granting
priority treatment to its claim for unpaid workers’ compensation premiums, to cover its claim for
reimbursement of claims payments to the debtor’s workers. Suburban II, 36 F.3d at 487-88. The
Sixth Circuit declined to do so for two reasons. First, the court found that the “benefit” the
government bestowed by paying claims filed by the debtor’s injured workers did not inure to the
general public welfare; rather the demand for reimbursement (but not the claim for the premium
payment) amounted to “a penalty discretely imposed due to [the debtor’s] disregard of its
statutory obligations.” Id. at 488-89. Second, to the extent the debtor was self-insured for a
period and maintained bonding accordingly, when the government paid worker claims and
sought reimbursement thereof, the government was similarly situated in bankruptcy to the
bonding company that paid on a worker’s claim and filed a claim for subrogation. That private
creditor would be disadvantaged if the state received priority for its like claim. Id. at 489.
In this case, the SRP is analogous to the premiums employers owe in the Ohio workers’
compensation system. The SRP derives from a centralized and universal government system
(the ACA) which mandates that all applicable individuals must maintain health insurance. While
applicable individuals were required to procure their own private health insurance, and only had
to pay the SRP if they did not, this is not a meaningful distinction from the Ohio scheme given
the context. As in Suburban I, the government does not “compete” with private insurers for the
SRP. Indeed, like the Ohio system in Suburban I, if a debtor fails to obtain health insurance
(akin to the self-insurance option in the Ohio system) and thereby owes the SRP to the federal
government (akin to the premium owed to the state government in Suburban I), and the
government files a bankruptcy claim for the SRP amount in a debtor’s case owing to non-
payment, the government will never be put “ahead in line” of similarly-situated “unpaid private
insurers” as no such private insurer exists under the federal scheme. As a result, the SRP
resembles the unpaid insurance premium found to be akin to a tax in Suburban I and not the
downstream claim for reimbursement found to be a penalty in Suburban II. While the Dissent
directs attention to the use of the term “default” in Suburban II, its focus is misplaced and misses
the forest for the trees.
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In re McPherson
Returning to Debtors’ arguments, Debtors contend that other aspects of the SRP render it
a “penalty.” They posit that Congress prohibited the IRS from using traditional tax collection
and enforcement tools for nonpayment. (Debtors’ Br. at 19 (citing 26 U.S.C. §§ 5000A(g)(2)).)
And, without citation to authority, Debtors contend that the broad hardship exemptions evidence
an intent to subordinate—not prioritize—the SRP relative to general unsecured creditors, since
no other “tax” functions in this manner. (Id. at 20.) Because these arguments are unrelated to
the factors that the Sixth Circuit has held this Panel must apply, the arguments do not assist the
analysis. In addition, Debtors’ citations to the Sebelius dissent (567 U.S. at 663-66) and another
bankruptcy court’s characterization of the SRP as “a regulatory penalty against individuals who
fail to abide by the individual mandate insurance requirement” (Albracht, 617 B.R. at 854) are
unavailing as neither the dissenting minority in Sebelius nor the bankruptcy court in Albracht
were bound to apply the Lorber/Suburban test.
More fundamentally, however, the Panel must consider the Lorber/Suburban test in light
of Supreme Court authority that distinguishes between a tax and a penalty. In 1931, the Court
explained that a penalty “is an exaction imposed by statute as punishment for an unlawful act.”
La Franca, 282 U.S. at 572. In 1996, in analyzing whether an exaction constituted a tax or a
penalty for purposes of the Bankruptcy Code’s priority scheme, the Court wrote that “if the
concept of penalty means anything, it means punishment for an unlawful act or omission.”
CF&I, 518 U.S. at 224. And, in 2012, when considering the constitutionality of the SRP as a tax
and not a penalty, the Court reiterated these prior holdings and explained:
[w]hile the individual mandate clearly aims to induce the purchase of health
insurance, it need not be read to declare that failing to do so is unlawful. Neither
the Act nor any other law attaches negative legal consequences to not buying
health insurance, beyond requiring a payment to the IRS. The Government agrees
with that reading, confirming that if someone chooses to pay rather than obtain
health insurance, they have fully complied with the law.
Sebelius, 567 U.S. at 567-68. The Panel cannot ignore that the Supreme Court already has
explained that a penalty is “punishment for an unlawful act or omission” and that not purchasing
insurance in compliance with the individual mandate did not constitute an unlawful act or
omission. Notwithstanding the Panel’s satisfaction that the six Lorber/Suburban elements have
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In re McPherson
each been satisfied for purposes of finding the SRP to be a “tax,” we are equally convinced that
the SRP cannot be a “penalty” under clear Supreme Court precedent.
II. The SRP is a Tax “Measured by Income.”
Section 507(a)(8)(A) grants priority for certain prepetition income and gross receipts
taxes due within the three-year period before the petition date. More specifically as it pertains
here, a governmental unit’s claim is entitled to priority “only to the extent that [it is for] a tax on
or measured by income. . . .” 11 U.S.C. § 507(a)(8)(A)(i). The Bankruptcy Code does not
clarify what it means for a tax to be “on or measured by income,” nor have the Supreme Court or
the Sixth Circuit written on the issue. And, as one bankruptcy court explained, “[t]he legislative
history on this aspect of § 507(a)(7)(A) is scant and does not elucidate the meaning of this
phrase.” In re O.P.M. Leasing Services, Inc., 60 B.R. 679, 680 (Bankr. S.D.N.Y. 1986).
The bankruptcy court concluded that the SRP is not a tax on or measured by income.
Juntoff, 2021 WL 1522206, at *8-11. The court stated that, while the ACA provides that the
SRP is calculated using a formula that takes into consideration the taxpayer’s income,
“[c]alculation of the shared responsibility payment depends on a complicated formula for which
income is at most one of many factors to be considered” and “income [does not] come into play
for everyone subject to the” SRP, such as the McPhersons (who paid a flat amount rather than a
portion of their income). Id. at *9-10. Based on these premises, the court reasoned: “To the
extent that the income plays a role in determining whether one is exempt from the shared
responsibility payment, it would be no more correct to say that the shared responsibility payment
is measured by income than it would be to say that the shared responsibility payment is measured
by membership in an Indian Tribe or any other criteria justifying an exemption under the
statute.” Id. at *10. Finally, the court distinguished other cases holding that the SRP is a tax
entitled to priority under § 507(a)(8)(A), finding they “do not appear to have applied the standard
of tight construction under Howard Delivery [547 U.S. 651].” Id. (citing In re Szczyporski,
531 F. Supp. 3d 934 (E.D. Pa. 2021) and Matter of Cousins, 601 B.R. 609 (Bankr. E.D. La.
2019)).
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In re McPherson
While Debtors’ argument on appeal essentially echoes the bankruptcy court’s analysis,
the IRS contends that the bankruptcy court erred by interpreting § 507(a)(8)(A) too narrowly in
finding it is intended to apply only to traditional income taxes. The IRS argues that
§ 507(a)(8)(A) includes two categories—taxes “on” income and taxes “measured by” income—
and Subsection (A), therefore, covers a broad array of taxes that are not limited to the narrower
group of solely income taxes. (IRS Br. at 22 (citing In re Williams, 173 B.R. 459, 463 (Bankr.
E.D.N.Y. 1994), aff’d, 188 B.R. 331 (E.D.N.Y. 1995), and In re Greektown Holdings, LLC, No.
08-53104, 2013 WL 2285763, at *4 (Bankr. E.D. Mich. May 16, 2013) (citing Williams).) The
IRS avers that the SRP is both a tax “on” and “measured by” income and cites two cases to
explain when a tax can be deemed to be on or measured by income or gross receipts, In re
O.P.M. Leasing Servs., Inc., 60 B.R. 679, and Raiman v. State Bd. of Equalization (In re
Raiman), 172 B.R. 933 (B.A.P. 9th Cir. 1994).
In O.P.M., the bankruptcy court concluded that Texas’s franchise tax as applied to
corporations doing business in and outside of Texas was a capital-based exaction apportioned by
gross receipts (earned in Texas as a percentage of overall receipts) but measured by capital,
because the percentage of gross receipts earned in Texas would be multiplied by the amount of
the entity’s capital to calculate the tax owed—subject to a minimum tax. 60 B.R. at 682-83.
Thus, the state’s tax claim was not entitled to priority treatment under § 507(a)(7)15 because
unpaid franchise taxes under the Texas statute were not taxes “on or measured by income or
gross receipts.” The court explained:
The mere mention of gross receipts in the [statutory] formula does not
automatically activate § 507(a)(7)(A) and accord the State priority status. The
State, however, makes precisely such an argument, ascribing an extraordinarily
broad meaning to the word “measure” to encompass the word “allocate.” This
interpretation would emasculate the words of § 507(a)(7)(A), and would render
the strict construction of the § 507(a)(7)(A) priority statute meaningless. The
gross receipts ratio has no impact on the measurement of the tax as it relates to
capital, and thus the tax in actuality is not on or measured by gross receipts.
15
Congress renumbered subpart § 507(a)(7) as § 507(a)(8) in the Bankruptcy Reform Act of 1994 (Pub. L.
No. 103-394, 108 Stat. 4106 (Oct. 22, 1994)).
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In re McPherson
Id. at 682. The IRS contends that O.P.M. supports its argument because, similar to the
conclusion in O.P.M. that the tax at issue was “measured by” capital even though a flat rate
could apply, calculating the SRP also requires choosing between a flat rate or a percentage of the
taxpayer’s taxable income, making the SRP a tax “measured by income.”
In Raiman, 172 B.R. 933. the appellate panel decided that a California sales tax statute on
personal property retailers constituted a tax on or measured by gross receipts for purposes of
§ 507(a)(7)(A). The debtor argued that “the tax assessment was not on ‘gross receipts’ since a
taxpayer is allowed to make certain exclusions from her total receipts. In other words, Debtor
insists that in order to be afforded priority pursuant to Section 507(a)(7)(A) . . . the tax must be
one which is measured by all receipts received by a taxpayer, without any items or transactions
excluded.” Id. at 937. The court disagreed, finding no reason to believe “that Congress intended
the term ‘gross receipts’ to have a strict federal definition rigidly limited to those situations
where a tax is imposed on total receipts without exclusion.” Id. at 939. Rather, the court
concluded, “the California tax is in a true sense ‘measured by’ gross receipts. That is, the
amount of the taxpayer’s total receipts is an integral initial component of the formula with
reference to which the amount of the tax is determined, and not merely a method of apportioning
liability for a tax already calculated in some other fashion.” Id. at 939-40. The IRS contends
that, as in Raiman, the SRP is a tax under the plain language of § 507(a)(8)(A) because a
taxpayer’s income is an integral initial component of the formula to determine their SRP
liability.
The Panel agrees that the SRP is a tax “measured by” income. As the Supreme Court
explained in Sebelius, the SRP is “calculated as a percentage of household income, subject to a
floor based on a specified dollar amount and a ceiling based on the average annual premium the
individual would have to pay for qualifying private health insurance.” 567 U.S. at 539. While
certain taxpayers are exempted from having to pay the SRP, all non-exempt taxpayers (i.e., all
those facing tax liability) have their SRP payment calculated using a formula that measures the
tax in part by consideration of their income. And, while a taxpayer may be obligated to pay a
flat amount rather than a percentage of their income, making that determination requires a
taxpayer to input their income into a calculation. Stated differently, it is impossible to discern a
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In re McPherson
non-exempt taxpayer’s liability for the SRP without factoring their income into the analysis,
making the SRP a tax “measured by” the taxpayer’s income. See also In re Miller, 634 B.R.
641, 645 (Bankr. M.D. Ga. 2021) (internal citations omitted) (“The calculation of a taxpayer’s
SRP is either a flat fee or a percent of an individual’s income, whichever is greater. . . . The flat
fee [] is paid only when it is higher than the percentage that would be paid out of an individual’s
income. Therefore, even the flat fee is measured by a taxpayer’s income to quantify his or her
responsibility.”).
Section 507(a)(8)(A) does not require that the tax be calculated solely or primarily by
measuring income. While the Panel recognizes that Howard Delivery, 547 U.S. 651, requires
that we “tightly construe” the priority classes, we reject the contention that Congress intended
the phrase “measured by income” to require that a tax must be “measured by income only” to fit
in § 507(a)(8)(A). As such, the discussion in Raiman on how to interpret Congress’s intent
regarding the phrase “gross revenue” is instructive.16
CONCLUSION
For these reasons, the Panel concludes that the bankruptcy court erred in finding that the
SRP is not a tax measured by income for purposes of § 507(a)(8)(A). Therefore, the court’s
Order Sustaining Debtor’s Objection to the IRS’s priority claim is REVERSED and Debtors’
cases are REMANDED for further proceedings consistent with this opinion.
16
Because the Panel concludes that the SRP constitutes a tax “measured by” income under § 507(a)(8)(A),
it need not address the IRS’s arguments that the SRP is a tax “on” income or an “excise tax on a transaction” under
§ 507(a)(8)(E).
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In re McPherson
_________________
DISSENT
_________________
SCOTT W. DALES, Chief Bankruptcy Appellate Panel Judge, dissenting. Each of the
Appellees in these consolidated appeals owes a modest and undisputed debt to the Appellant,
Internal Revenue Service (“IRS”), on account of the formerly-key feature of the Patient
Protection and Affordable Care Act of 2010 (“ACA”) sometimes called the “Shared
Responsibility Payment (“SRP”). See Pub. L. No. 111-148, 124 Stat. 119; see also 26 U.S.C.
§ 5000A(b) (imposing the SRP as a “penalty” for not maintaining minimum health insurance
coverage). After failing to persuade the Bankruptcy Court that the SRP is either an “excise tax”
or a tax “measured by income,” the IRS now makes its same pitch to the Panel, arguing that the
SRP is such a tax—the key to unlocking priority treatment for its claims under 11 U.S.C.
§ 507(a)(8). I agree with the Bankruptcy Court that the IRS has not clearly established its right
to priority treatment. Though I regard the question as close and the Panel’s analysis as
thoughtful, I cannot subscribe to reversal.
In seeking priority treatment for its SRP claim as a “tax,” the IRS faces an uphill battle
for at least three reasons.
First, and most generally, the applicable rule of decision does not favor priority treatment
because “[e]quality of distribution among creditors is a central policy of the Bankruptcy Code.”
Begier v. Internal Revenue Serv., 496 U.S. 53, 58 (1990). To honor this precept, courts must be
sparing in permitting priority treatment because every decision to elevate the priority of one
creditor reduces the fund that feeds unsecured creditors. It also reduces the share of other
priority creditors. For these reasons, “creditors must directly tie their priority claims to specific
provisions of the Bankruptcy Code.” See Yoder v. Ohio Bur. of Workers’ Comp. (In re Suburban
Motor Freight, Inc.), 998 F.2d 338, 342 (6th Cir. 1993) (“Suburban I”). Sixth Circuit case law
and fundamental bankruptcy policy1 tip the scales against affording the IRS priority for the SRP.
1
As the Bankruptcy Court also observed, the IRS’s expansive view of the SRP as a tax undermines the
other fundamental bankruptcy policy—the fresh start. In order to earn a chapter 13 confirmation and discharge, the
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In re McPherson
As explained below, and for slightly different reasons than those motivating the Bankruptcy
Court, in my judgment, the IRS has not tied its claim to the Bankruptcy Code’s priority
provisions.
Second, the only textual indication that the SRP is a “tax” is its placement within the
Internal Revenue Code, yet Congress expressly tells us not to draw any “inference, implication,
or presumption of legislative construction” from the location of the SRP (or any other provision)
within title 26. See 26 U.S.C. § 7806(b). Moreover, the actual text of the statute consistently
and repeatedly refers to the SRP as a “penalty.” The Supreme Court authority upon which the
IRS principally relies, National Federation of Independent Business v. Sebelius, 567 U.S. 519(2012), teaches that Congress’s choice of language deserves respect when we are called upon to
decipher how two federal statutes fit together, even while applying a less textual, and more
functional, approach to the same question for other purposes. Id. at 544 (holding that the SRP is
not a “tax” for purposes of the Anti-Injunction Act, and noting that how two federal statutes
relate to each other “is up to Congress, and the best evidence of Congress’s intent is the statutory
text.”). Here, we are confronting precisely the same sort of question that the Chief Justice
addressed in Part II of his opinion for the court, namely, how to dovetail two federal statutory
creatures—the SRP and the Bankruptcy Code’s priority provision. If Congress had included the
health insurance coverage requirement (and the related exaction for noncoverage) within, say,
title 42, instead of title 26, I doubt it would have occurred to anyone to treat the SRP as a tax,
rather than a penalty or forfeiture for ignoring a statutory command. But for its placement within
the Internal Revenue Code, the SRP would appear to be a regulatory penalty for an individual’s
failure to comply with a statutory requirement.
Third, laying aside the text of the ACA for a moment, even the Sixth Circuit’s functional
approach to deciding whether an exaction is a tax points against treating the SRP as a tax. See
Ohio Bur. of Workers’ Comp. v. Yoder (In re Suburban Motor Freight, Inc.), 36 F.3d 484 (6th
Cir. 1994) (“Suburban II”); Suburban I, 998 F.2d at 489. Our Court of Appeals, in Suburban I,
Appellees’ plans must pay all priority claims in full. See 11 U.S.C. § 1322(a)(2) (plan must pay priority claims in
full) and 1328(a) (discharge upon completion of payments under the plan); see also id. § 523(a)(1) (exception to
discharge for priority tax claims). It is the rare case in which both bankruptcy precepts, one excusing payment and
the other requiring it, point in the same direction.
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criticized the Ninth Circuit’s approach in County Sanitation District No. 2 v. Lorber Industries of
California, Inc. (In re Lorber Industries of California, Inc.), 675 F.2d 1062 (9th Cir. 1982), as
creating a “threat” that “the Government automatically wins priority for all money any debtor
owes it, regardless of the nature of the payments.” Suburban I, 998 F.2d at 341. To curb that
threat, the Sixth Circuit adopted the Fourth Circuit’s more limiting approach, and did so in large
part to respect the Bankruptcy Code’s principal of pro rata distribution, mentioned above:
Where a State “compel[s] the payment” of “involuntary exactions, regardless of
name,” and where such payment is universally applicable to similarly situated
persons or firms, these payments are taxes for bankruptcy purposes.
Suburban I, 998 F.2d at 342. Indeed, in the first Suburban opinion, our Court of Appeals derided
the Fourth Circuit’s later decision to treat as a tax under the Bankruptcy Code a fee that Virginia
charged motorists who failed to obtain private insurance.2 See id. at 341. Although the motor
vehicle insurance program in Virginia obviously differed in many respects from the ACA, the
fact that both depended on a similar fee-for-failure mechanism to induce compliance with a
requirement to obtain private insurance should give us pause.
Later, in Suburban II, the court reiterated its requirement that, to qualify as a tax, the
exaction must be “universally applicable to similarly situated persons or firms,” and noted that
when a debtor’s liability to pay the government “arises solely by virtue of its default, [it] is not a
liability ‘universally applicable to similarly situated persons or firms.’” Suburban II, 36 F.3d at
489. Returning to the present appeal, the obligation of the Appellees to pay the SRP arose only
when they “fail[ed] to meet the requirement of subsection (a) for 1 or more months.” 26 U.S.C.
§ 5000A(b)(1). The requirement to maintain a minimum level of health insurance may be
universally applicable to all “applicable individuals,” but the penalty for not doing so arises only
upon default in obtaining coverage. This makes the SRP look more like what Congress
repeatedly called it—a penalty.3
2
The case in the crosshairs of Suburban I was Williams v. Motley, 925 F.2d 741 (4th Cir. 1991), a decision
upon which the IRS relies in its briefing before our Panel.
3
I would reject the IRS’s argument that the SRP is “universally applicable” to those who fail to maintain
the minimum essential coverage as a plausible but ultimately fallacious one, premised on a convenient narrowing of
the class of persons at whom Congress directed its efforts. The IRS in this way disregards Suburban II’s
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An additional observation regarding the Sixth Circuit’s requirement that the exaction
must be involuntary: the Chief Justice’s explication of the SRP in Part III.C. of the Sebelius
opinion, where he said that it “merely imposes a tax citizens may lawfully choose to pay in lieu
of buying health insurance,” undercuts the characterization of the SRP as an “involuntary
exaction.” Sebelius, 567 U.S. at 568.
Of course, the Supreme Court construed the SRP as a tax, and not a penalty, when
deciding whether Congress had the constitutional power to impose it under a variant of the
doctrine of constitutional avoidance. We must read Part III.C. of the Sebelius decision,
therefore, for what it was—the fulfillment of the Supreme Court’s duty to indulge “every
reasonable construction . . . in order to save a statute from unconstitutionality.” Sebelius,
567 U.S. at 562. The Chief Justice made it rather clear that treating the SRP as a tax was not
“the most straightforward reading of the mandate,” but only a “fairly possible one,” one that was
necessary to avoid the counter-majoritarian consequences of invalidating an Act of Congress. Id.It is also worth repeating, however, that although the Sebelius court called the SRP a tax
for purposes of saving the ACA from constitutional infirmity, the same decision called the SRP a
penalty for purposes of understanding the interplay of two federal statutes, the ACA and the
Anti-Injunction Act. The Panel’s task today—assessing how the SRP dovetails with the
Bankruptcy Code’s priority provision—is more like the latter than the former. Because Congress
has the undoubted authority to make the SRP a priority claim under the Bankruptcy Code or not,
and because the SRP functions as a penalty, and because Congress consistently called it a
penalty,4 the Panel should treat it as a penalty for purposes of the Bankruptcy Code, just as the
Supreme Court did for purposes of the Anti-Injunction Act. A tax-related penalty may qualify
requirement that an exaction is not a tax if, as here, it “arises solely by virtue of default.” Suburban II, 36 F.3d at
489.
4
Nothing in my dissent should suggest that the statutory labels that a state or local government might affix
to their exactions merit the same deference that I would give federal statutory language. The Supremacy and
Bankruptcy Clauses ensure that, unlike Congress, state and local governments have no authority to draft around the
Bankruptcy Code. For this reason, it makes sense to apply a strictly functional approach to state enactments,
disregarding labels, just as the Sebelius court did (in Part III.C of its opinion) when deciding whether Congress had
the constitutional power to enact the ACA.
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for priority treatment, but only where the penalty, unlike the SRP, is compensatory. 11 U.S.C.
§ 507(a)(8)(G).
In striving to uphold the ACA as a constitutional exercise of legislative power, the
Supreme Court only needed to find a loose tie between the enactment and an enumerated power
within the Constitution; to bring a claim, even a claim of a governmental entity, within the
Bankruptcy Code’s priority provision, however, the tie must be direct, tight, certain. Doubts
about the nature of the SRP as a tax or a penalty or a forfeiture or other exaction must be
resolved against finding priority. Howard Delivery Serv. Inc. v. Zurich Am. Ins. Co., 547 U.S.
651, 667-68 (2006).
I recognize that treating the SRP as a tax for constitutional purposes and a non-tax
exaction for the Bankruptcy Code’s priority provision is in tension with Clark v. Martinez,
543 U.S. 371, 381 (2005), but the Supreme Court’s more recent decision in Sebelius tolerated, if
not created, this tension, by upholding the ACA as an exercise of Congress’s taxing power
notwithstanding the Anti-Injunction Act. And, as Appellees’ counsel reminded us during oral
argument, the premise that the SRP must be either a tax or a penalty creates a “false dichotomy,”
a flawed premise that unnecessarily limits the Panel’s options: the Panel may affirm the
Bankruptcy Court’s order as long as the SRP falls outside § 507(a)(8)(A) and (E). The SRP may
not be a tax or a penalty, but some other form of exaction, such as the price for choosing not to
buy minimum health coverage (as the Chief Justice suggested while striving in his duty to
uphold the ACA), or some other fee, fine, forfeiture, or other funding. As long as the SRP is not
a tax, we must affirm.
The Bankruptcy Court resolved its doubts about affording priority treatment to the SRP
in favor of equality of distribution as Howard Delivery, supra, requires. Despite the capable
advocacy of the Appellant’s counsel, those doubts, and others, persist, and should prompt us to
affirm. Therefore, I respectfully dissent.