Article courtesy of Michael Robson (Greenberg Traurig, LLP)
In re Juntoff, 636 B.R. 868 (B.A.P. 6th Cir. 2022)
In a consolidated appeal arising from two separate Chapter 13 cases, the debtors objected to priority unsecured claims filed by United States on behalf of Internal Revenue Service (“IRS”) for “shared responsibility payment” (“SRP”) assessed for failure to purchase health insurance in accordance with the “individual mandate” under Patient Protection and Affordable Care Act (“ACA”). The bankruptcy court sustained the 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). The IRS appealed the bankruptcy court’s decision and the U.S. Bankruptcy Appellate Panel of the Sixth Circuit (the “Court”) agreed with the IRS, reversing the bankruptcy court.
The ACA requires non-exempt individuals to either maintain a minimum level of health insurance or to pay a “penalty”. In tax years 2017 and 2018, the ACA provided that non exempt individuals who did not have “minimal essential coverage” for one or more months had to make a SRP with their annual federal tax payment. The monthly SRP amount owed equaled 1/12 of the greater of either (i) a flat dollar amount or (ii) 2.5% of the taxpayer’s taxable income. Despite the “individual mandate” requirements of the ACA, debtors George and Melanie McPherson (the “McPhersons”) did not maintain health insurance for nine (9) months of the year in 2017 and debtor Howard Juntoff (“Juntoff”; together with the McPhersons, the “Debtors”) did not maintain health insurance in 2018. The Debtors also did not pay their SRP obligations. 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.” 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. In April 2021, the bankruptcy court issued a consolidated memorandum opinion sustaining Debtors’ objections and entered a consistent order in each case. The IRS then appealed.
The IRS raised several issues on appeal. Namely, (1) whether the bankruptcy court erred in holding that the SRP 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 SRP is not entitled to priority treatment under § 507(a)(8)(E) as an excise tax on a transaction; and (3) whether the bankruptcy court erred in sustaining the Debtors’ objection to IRS Claim 8 (McPherson) and IRS Claim 3 (Juntoff).
In addressing IRS’s arguments on appeal, the Court first outlined the statutory framework of the Bankruptcy Code, which provides that a Chapter 13 debtor must have a plan confirmed that, among other things, pays all claims entitled to priority under Section 507 unless the claimholder consents to different treatment. The Court noted that the IRS contended that the SRP claims must be treated as priority tax claims under Section 507(a)(8), which provides in pertinent part that allowed unsecured claims of governmental units are granted priority to the extent such claims are for “(A) a tax on or measured by income or gross receipts. . . or (E) an excise tax on….a transaction occurring before the date of the filing of the petition”. In determining whether the SRP constitutes a tax eligible for priority treatment, the Court turned to precedent. The Court held that, although the National Federation of Independent Business v. Sebelius, 567 U.S. 519 (2012) decision determined that the SRP is a tax and not a penalty for constitutional purposes, such holding is not dispositive for whether the SRP is a tax for purposes of the Bankruptcy Code. To ascertain whether the SRP is “tax” or “penalty” for purposes of the Bankruptcy Code, the Court applied a “functional examination” of the applicable statutory scheme to determine whether it falls within the federal statutory definition. The Court then noted that the four prong test established in County Sanitation Dist. No. 2 v. Lorber Indus. of Cal Inc., 675 F.2d 1062 (9th Cir. 1982) which provides that a tax under the Bankruptcy Code is (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, (d) under the police or taxing power of the statute is determinative on the issue (the “Lorber Test”). Applying the Lorber Test to facts at hand, the Court noted that the Debtors only dispute of the Lorber Test is that the SRP is not a universally applicable to similarly situated entities since the Secretary of Health and Human Services, a “non taxing authority”, was granted discretion to grant hardship exceptions. The Court disagreed holding that the SRP satisfied the Lorber Test and constituted a tax for purposes of the Bankruptcy Code. The Court then held that, given the inclusion of a taxable income component in the calculation of the SRP, the SRP is a tax on or measured by income or gross receipts. In light of the foregoing, the Court reversed the bankruptcy court decision and held that the SRP is a tax entitled to priority under the Bankruptcy Code.
