United States v. Juvenile Shoe Corp. of America

No. 95-2289
In re: Juvenile Shoe *
Corporation of America, *
*
Debtor, *
*
United States of America, *
*
Appellee, * Appeal from the United States
* District Court for the
v. * Eastern District of Missouri.
*
Juvenile Shoe Corporation *
of America, *
*
Appellant, *
*
Unsecured Creditors Committee, *
James S. Cole, *
*
Trustees. *
Submitted: September 12, 1996
Filed: November 7, 1996
Before BEAM, HEANEY, and MORRIS SHEPPARD ARNOLD, Circuit Judges.
HEANEY, Circuit Judge.
This appeal presents the question of whether a fifteen percent flat
tax levied on funds reverted to an employer from an over-funded employee
pension plan constitutes an excise tax or a nonpecuniary-loss penalty for
purposes of establishing priority in a bankruptcy proceeding. The
bankruptcy court held that the tax levied pursuant to 26 U.S.C. § 4980
(1988) constitutes a nonpecuniary-loss penalty. The district court
reversed and we now affirm.
I.
In 1989, Juvenile Shoe Corporation ("Juvenile Shoe") separated its
employee pension plan into two separate plans: one for retired employees,
and the other for active employees. Juvenile Shoe then liquidated the
retiree plan, paying out the amount due to each plan participant and
beneficiary under the plan's provisions. After the payout, surplus funds
in the amount of $2.3 million remained, which Juvenile Shoe reverted to
itself for corporate use.1 Twenty-two days after the reversion, Juvenile
Shoe declared bankruptcy.
Shortly thereafter, the Internal Revenue Service (IRS) filed an
unsecured priority claim with the bankruptcy court for a reversion tax
against Juvenile Shoe pursuant to 26 U.S.C. § 4980.2 The IRS asserted that
the assessment constitutes an excise tax and therefore is entitled to
1
Section 4980 defines an "employer reversion" as "the amount
of cash and the fair market value of other property received
(directly or indirectly) by an employer from the qualified plan."
26 U.S.C. § 4980(c)(2)(A) (1988).
2
26 U.S.C. § 4980(a)-(b) provides:
(a) Imposition of tax
There is hereby imposed a tax of 15 percent
of the amount of any employer reversion from
a qualified plan.
(b) Liability for tax
The tax imposed by subsection (a) shall be
paid by the employer maintaining the plan.
2
seventh priority under section 507(a)(7) of the Bankruptcy Code.3 The
bankruptcy plan committee
3
Section 507(a)(7) provides, in relevant part:
(a) The following expenses and claims have priority
in the following order:
. . . .
(7) Seventh, allowed unsecured claims of
governmental units, only to the extent that
such
claims are for-
. . . .
(E) an excise tax on-
(i) a transaction occurring
before the date of the filing of
the petition for which a return,
if required, is last due, under
applicable law or under any
extension, after the three years
before the date of the filing of
the petition . . . .
11 U.S.C. § 507(a)(7)(E)(i) (1988). Under section 4980(c)(4),
employer reversions must be reported on a return and would
therefore be governed by this section if determined to be an excise
tax.
3
representing Juvenile Shoe's unsecured creditors stipulated to the amount
owed under section 4980 but disputed that the assessment constitutes an
excise tax; rather, the committee argued that the assessment constitutes
a nonpecuniary-loss penalty and that it should be subordinated to the
claims of other unsecured creditors. The IRS filed a motion for summary
judgment. The bankruptcy court agreed with the committee that the section
4980 tax constitutes a penalty and subordinated the claim to other
unsecured creditors. The IRS appealed the decision to the district court,4
which reversed and remanded for further proceedings. The bankruptcy plan
committee now appeals.
II.
The Supreme Court recently addressed the issue raised in this appeal
relating to a different statutory assessment. In United States v.
Reorganized CF & I Fabricators, Inc., ("Reorganized CF & I"), 116 S. Ct.
2106, 2110 (1996), the Court determined that the tax imposed under 26
U.S.C. § 4971 (1988) on an employer that under funds an employee pension
plan constitutes a nonpecuniary-loss penalty for purposes of priority in
bankruptcy proceedings. To
4
The matter was argued before a magistrate judge by consent of
the parties pursuant to 28 U.S.C. § 636(c)(3) (1992).
4
determine whether an assessment is an excise tax or a penalty, a court
looks beyond the assessment's label to "the operation of the provision."
Reorganized CF & I, 116 S. Ct. at 2106. The Court defined a tax as "a
pecuniary burden laid upon individuals or property for the purpose of
supporting the government." Id. at 2113 (quoting New Jersey v. Anderson,
203 U.S. 483, 492 (1906)). A penalty, in contrast, is "an exaction imposed
by statute as punishment for an unlawful act." Id. (citing United States
v. La Franca, 282 U.S. 568, 572 (1931)). Applying the Reorganized CF & I
standard to section 4980, we are persuaded that the provision levies an
excise tax for the purpose of bankruptcy prioritization.
To determine the purpose of section 4980, we begin by looking at the
statutory language. See Connecticut Nat'l Bank v. Germain, 503 U.S. 249,
254 (1992). Although the section is located under Subtitle D, labeled
"Miscellaneous Excise Taxes," section 4980 makes no reference to its
provision specifically as an "excise tax." We are not guided by the
placement of the statute because the placement of a provision in the
Internal Revenue Code gives no inference of legislative construction. See
Reorganized CF & I, 116 S. Ct. at 2113; see also 26 U.S.C. § 7806(b)
(1988). Moreover, in the bankruptcy context, courts apply well-established
principles that Congress must specifically abrogate if Congress intends to
alter the way a court conducts statutory interpretation. See Reorganized
CF & I, 116 S. Ct. at 2113 (citing Midatlantic Nat'l Bank v. New Jersey
Dep't of Envtl. Protection, 474 U.S. 494, 501 (1986)). The labelling
included in the enactment is not conclusive as to the nature of an
assessment. See City of New York v. Feiring, 313 U.S. 283, 285 (1941)
(holding that a court places no weight on the label of a tax, but looks to
the "incidents" of the statute to determine whether the levy is a tax for
the purpose considered).
The language of section 4980 does not provide conclusive evidence
that Congress intended a means of interpreting whether
5
section 4980 levies an excise tax distinct from the established rules for
that purpose in the bankruptcy context. Absent a clear statement
demonstrating congressional intent to place authoritative weight on the
statutory labelling of section 4980, we next look to the "operation of the
provision."
As discussed by the district court, the tax levied by section 4980
recaptures revenue that is lost to the government and discourages employers
from reverting excess funds from employee pensions. In re Juvenile Shoe
Corp. of Am., 180 B.R. 206, 209 (E.D. Mo. 1995) (citing H.R. Rep. No. 881,
101st Cong., 2d Sess. 52 (1990) reprinted in 1990 U.S.C.C.A.N. 2017, 2066).
Under the Internal Revenue Code, Congress granted a corporate tax exemption
to employers for placing money in an employee pension fund. See 26 U.S.C.
§ 401(a) (1988). As the pension fund grows, it includes earnings on the
money that would have been taken as tax revenue at the corporate tax rate
had it not been placed in the pension fund. Although the employer must pay
the corporate tax rate on funds reverted from the pension plan, see 26
U.S.C. § 11 (1988), the employer earns interest while the funds are in the
pension plan, and the government is denied the use of the tax revenue
during the same period forcing the government to borrow from other sources
to fund its operations. Capturing the tax benefit the employer received
at the expense of the government has the same purpose and similar effect
as assessing the tax prior to the employer's placement of the funds in the
pension plan. See In re C-T of Virginia, Inc., 977 F.2d 137, 140 (4th Cir.
1992) (holding in a pre-Reorganized CF & I decision that section 4980
operates primarily to generate revenue), cert. denied, 507 U.S. 1004
(1993).5
5
In reaching its conclusion, the Fourth Circuit used a test
similar to Reorganized CF & I for determining whether a levy
constitutes an excise tax or a penalty. The court concluded that
taxes are "pecuniary burdens laid upon individuals or their
property, regardless of their consent, for the purpose of defraying
the expenses of the government or of undertakings authorized by
it." In re C-T of Virginia, Inc., 977 F.2d at 139 (quoting City of
New York v. Feiring, 313 U.S. 283, 285 (1941)). A penalty, by
contrast, is "[a]n enactment which has as its purpose the
punishment of conduct perceived as wrongful . . . regardless of the
terminology employed by the legislature." Id. at 139 (quoting In
6
To recapture the revenue lost to the government, Congress chose a
flat tax on the amount reverted to the corporation. See 26 U.S.C. §
6
4980(a) (1988); H.R. Rep. No. 881, 101st Cong., 2d Sess. 52 (1990)
reprinted in 1990 U.S.C.C.A.N. 2017, 2066. Although Congress could have
enacted a tax based on a complex formula that would more accurately reflect
the government's loss of revenue, the government chose the efficiency and
simplicity of a flat rate. See In re C-T of Virginia, Inc., 128 B.R. 628,
630-31 (Bankr. W.D. Va. 1991). Appellants argue that the assessment is
penal because the rate of tax exceeds the benefit derived; yet the General
Accounting Office submitted a report to a congressional subcommittee
considering an increase in the tax rate under section 4980 that showed that
in many cases a 15% tax is not sufficient to recapture tax benefits
received by an employer. H.R. Rep. 881, 101st Cong., 2d Sess. 52 (1990),
reprinted in 1990 U.S.C.C.A.N. 2017, 2066.
The Reorganized CF & I definition of a penalty requires that the
exaction be imposed "as punishment for an unlawful act." Although Congress
disfavors the reversion of pension plan funds to employers,7 it has not
made such reversions unlawful, instead
re Kline, 403 F. Supp. 974, 978 (D. Md. 1975)).
6
Originally, section 4980 imposed a 10% tax. See 26 U.S.C.
§ 4980 (Supp. IV 1986). Congress had raised the rate to 15% at
the time of the reversion in this case. The rate is now 20%. 26
U.S.C. §4980(a) (1994).
7
Congress prefers that over-funded benefits remain in
pension plans to ensure the financial stability of the funds or
go to the pension beneficiaries. H.R. Rep. No. 881, 101st Cong.,
2d Sess. 52 (1990), reprinted in 1990 U.S.C.C.A.N. 2017, 2065-66.
As appellant points out, over-funded pension benefits given to
the pension beneficiaries are not assessed a reversion tax. See
26 U.S.C. § 4980(c)(2)(B)(i).
7
giving employers that inadvertently over fund their employee pension plans
the right to revert the overfunding.8 See H.R. Rep. No. 881, 101st Cong.,
2d Sess. 52 (1990), reprinted in 1990 U.S.C.C.A.N. 2017, 2066. Further,
as noted by the Fourth Circuit, the fact that an excise tax on alcohol,
tobacco, or certain conduct also affects behavior in a fashion intended by
Congress does not make the tax a penalty. In re C-T of Virginia, Inc., 977
F.2d at 140 n.8; cf. Sonzinsky v. United States, 300 U.S. 506, 513 (1937)
(noting that "a tax is not any less a tax because it has a regulatory
effect"). Because we determine that, for the reasons above, section 4980
primarily raises revenue for the operation of the government, it fits the
Supreme Court's definition of an excise tax.
Despite our determination that the legislative history of section
4980 is inconclusive, it nonetheless provides support for our conclusion
that Congress intended to levy an excise tax on employer reversions. In
considering the statute, Congress described the assessment as a "non-
deductible excise tax on a reversion occurring upon the termination of a
qualified plan." Tax Reform Act of 1986, Pub. L. No. 99-514, 1986
U.S.C.C.A.N. (100 Stat.) 4075, 4570. Further, the relevant provision in
the Tax Reform Act of 1986 is captioned: "Excise tax on reversion of
qualified plan assets to employer." Id., 100 Stat. at 2478. Also, the
conference agreement for changing the section 4980 tax from 10% to 15%
refers to the levy as an "excise tax" four times in the
8
Congress specifically allows employers to revert funds from
pension plans upon termination under section 4980 if an overfunding
occurred to "actuarial error." H.R. Rep. No. 391(I), 100th Cong.,
1st Sess., 110, reprinted in 1987 U.S.C.C.A.N. 2313-1, 2313-84.
Congress has also considered providing a mechanism for allowing
employers to revert pension surpluses without requiring them to
terminate the pension plans. Id. at 2313-85.
8
opening paragraph. H.R. Conf. Rep. No. 1104, 100th Cong., 2d Sess. 129
(1988), reprinted in 1988 U.S.C.C.A.N. 5048, 5189.
In contrast, section 4971, the provision examined in Reorganized CF
& I, provides a clear example of an assessment that constitutes a
nonpecuniary-loss penalty.9 The Court focused on the "obviously penal
character" of its provisions, particularly the one that levies a tax
equivalent to 100% of the funding deficiency. Reorganized CF & I, 116 S.
10
Ct. at 2113. Section 4971 was not enacted to generate or recapture
revenue for the operation of the government. The statute imposes a tax on
conduct that does not deny the government any tax revenue. In fact, when
an employer fails to fund a pension plan on time, the government benefits
by receiving tax revenue early because the employer cannot claim a tax
exemption on the amount under funded until it places the funds into the
employee pension fund.
Unlike the law at issue here, the intent of the section 4971 is to
deter all underfunding of employee pension plans. See Reorganized CF & I,
116 S. Ct. at 2114 (citing H.R. Rep. No. 807, 93d Cong. 2d Sess. 28 (1974).
In addition, the conduct taxed pursuant to section 4971 is prohibited by
federal law. See 29 U.S.C. § 1001 (1988) (setting forth the minimum
federal standards for pension funding levels). As the Court pointed out,
Congress's clear intention was to penalize employers who fail to comply
with
9
Section 4971 imposes a flat tax rate of 10% on any amount an
employer under funds an employee pension fund. See Employee
Retirement Income Security Act of 1974, 88 Stat. 935, (codified at
29 U.S.C. § 1001 (1988)). If the employer does not correct the
underfunding within the statutory period, section 4971(b) increases
the tax to 100%.
10
The Court also noted that, even after paying the 100% tax for
under funding the plan, the employer remained liable for claims by
the Pension Benefit Guarantee Corporation for the entire amount of
the underfunding under 29 U.S.C. § 1362(b)(1)(A) (1988).
Reorganized CF & I, 116 S. Ct. at 2113-14.
9
statutory pension funding requirements. Reorganized CF & I, 116 S. Ct. at
2114 (quoting H.R. Rep. No. 93-807, p. 28 (1974)) ("The bill provides new
and more effective penalties where employers fail to meet the funding
standards.").
III.
Accordingly, because the primary operation of section 4980 is to
support the government rather than to penalize an unlawful act, we affirm
the district court and hold that the assessment constitutes an excise tax
entitled to seventh priority under 11 U.S.C. § 507(a)(7).11
BEAM, Circuit Judge, dissenting.
The government requested a stay in this matter pending the Supreme
Court’s decision in United States v. Reorganized CF&I Fabricators, Inc.,
116 S. Ct. 2106 (1996), asserting that the decision would “in all
likelihood control the outcome of this case.” Reorganized CF&I determined
that an identical tax assessment under an almost identical statute was,
indeed, a nonpecuniary loss penalty for purposes of priority in a
bankruptcy proceeding. The government, recovering from its surprise,
reversed its field and now attempts to distinguish this case from
Reorganized CF&I. I disagree with this tactic and also disagree with the
court’s analysis of the nature and character of the fifteen percent
assessment under the standards established in Reorganized CF&I.
11
As noted by the Supreme Court, the Bankruptcy Reform Act of
1994, 108 Stat. 4132 § 304(c) (codified at 11 U.S.C. § 507 (1996)),
added a new seventh priority, moving the relevant provision from
seventh (section 507(a)(7)) to eighth (section 507(a)(8)).
Reorganized CF & I, 116 S. Ct. at 2109 n.1. Our determination that
section 4980 operates as an excise tax applies equally to the new
prioritization scheme.
10
The court depends largely upon its belief that the fifteen percent
assessment compensates the government for pecuniary loss resulting from
taxes not collected on the excess funds directed into the pension plan but
now returned to the employer. This reasoning is flawed.
First, ordinary income taxes are levied upon the returned funds. Tax
revenues are collected on both the initial amounts directed into the fund
and accrued earnings, if any.
Second, the penalty is assessed whether or not the employer has
actually enjoyed tax benefits and without regard to whether there has been
any revenue loss by the government. A company operating at a loss would
have no benefit from a deduction for funds directed into the plan. If the
plan has had no earnings because of the nature of its investments, there
would be no tax losses by the government from untaxed income within the
plan. Also, the flat rate penalty is assessed without regard to the length
of time the returned funds have been held by the plan.
Third, had the returned funds been directed to employees instead of
the coffers of the employer, no assessment would have been levied at all.
Thus, in reality, there is no discernible relationship between the penalty
and revenue purportedly lost by the government.
I agree with the bankruptcy court that the assessment is simply a
penalty. I would reverse.
A true copy.
Attest:
CLERK, U. S. COURT OF APPEALS, EIGHTH CIRCUIT.
11