U.S. – Internal Revenue Serv. v. Alicea

• Decision Date: 26 August 2021
• Docket Number: NO. 7:20-CV-169-FL,7:20-CV-169-FL
• Parties: UNITED STATES of America – INTERNAL REVENUE SERVICE, Appellant, v. Fabio ALICEA and Sarah J. Zabek, Appellees.
• Court: U.S. District Court — Eastern District of North Carolina

634 B.R. 54

UNITED STATES of America – INTERNAL REVENUE SERVICE, Appellant,

v.Fabio ALICEA and Sarah J. Zabek, Appellees.¹

NO. 7:20-CV-169-FL

United States District Court, E.D. North Carolina, Southern Division.

Signed August 26, 2021

Filed August 27, 2021

Kyle L. Bishop, Ryan O. McMonagle, United States Department of Justice - Tax Division, Washington, DC, for Appellant.

Travis Philip Sasser, Sasser Law Firm, Cary, NC, for Appellees.

ORDER

LOUISE W. FLANAGAN, United States District Judge

This bankruptcy appeal is before the court on appellant's appeal from the final order of the bankruptcy court allowing the appellees' objection to a claim in bankruptcy. See In re: Fabio Alicea and Sarah J Fabek, No. 19-05841-5-SWH (E.D.N.C. Br. Aug. 24, 2020). The appeal has been briefed fully, and in this posture the issues raised are ripe for ruling. For the following reasons, the bankruptcy court's order is affirmed.

STATEMENT OF THE CASE

Appellees filed a voluntary Chapter 13 bankruptcy petition, as a married couple, on December 19, 2019. (DE 7-1 at 3-16). Appellant filed a proof of claim, as last amended on June 19, 2020, (hereinafter, the "claim"), which includes the amount of $30,096.37 as an unsecured priority claim in the category of "[t]axes or penalties owned to governmental units." (DE 7-5 at 3). Of this amount, appellant identified $2,409.00 as tax due under the category of "excise/income" tax assessed May 18, 2020, for the tax period ending December 31, 2018. (DE 7-5 at 4).

Appellees filed an objection to the claim, asserting in pertinent part that the "asserted ... tax on the claim relates to the [appellees'] health care individual responsibility penalty." (DE 7-1 at 83). As part of their objection, appellees included an excerpt from their tax return, which lists $2,409.00 as the amount of a "[h]ealth care individual responsibility" in the category of "Other Taxes" on line 61. (DE 7-1 at 85).

Whether this assessed amount properly may be characterized as a tax subject to priority status in bankruptcy is the subject of this appeal. For ease of reference, this amount is specified hereinafter as the "shared responsibility payment," which is part of the Affordable Care Act's "[r]equirement to maintain minimum essential coverage" in health insurance, the terms of which will be discussed in further detail in the analysis herein. 26 U.S.C. § 5000A(a), (b).

In their objection to the claim, appellees contended that this shared responsibility payment is a penalty that "does not qualify for priority status and should be reclassified as part of the unsecured general claim." (DE 7-1 at 83). Appellees thus sought to reclassify the claim, in pertinent part, as including an unsecured priority claim in the amount of only $27,687.37 (that is, the original priority claim amount, $30,096.37, minus the amount of the shared responsibility payment, $2,409.00).

On August 24, 2020, in the order that is subject of the instant appeal, the bankruptcy court allowed appellees' objection to the claim, reclassifying the shared responsibility payment as part of the unsecured general claim and reducing the amount of the unsecured priority claim. In particular, the bankruptcy court reasoned as follows:

Although the IRS has handed up decisions of other courts that hold to the contrary, this court sees no reason to reconsider its decision in In re Parrish, 583 B.R. 873 (Bankr. E.D.N.C. 2018), vacated as moot, 18-CV-173-FL (E.D.N.C. Nov. 30, 2018) or to stray from the holdings by other courts in this district on the issue, see In re Albracht, No. 19-03672-5-DMW (Bankr. E.D.N.C. Mar. 31, 2020), In re Bailey, No. 18-03328-5-DMW (Bankr. E.D.N.C. May 24, 2019), vacated as moot, 19-CV-226-D (E.D.N.C. Nov. 21, 2019), In re Pittman, No. 20-00490-5-JNC (Bankr. E.D.N.C. July 27, 2020), and finds that the [shared responsibility payment] is a penalty and not an excise tax, and that it is not precluded from so finding by National Federation of Independent Business v. Sebelius, 567 U.S. 519, 132 S.Ct. 2566, 183 L.Ed.2d 450 (2012).

(DE 1 at 5).

This appeal followed.

COURT'S DISCUSSION

Section 507 of the bankruptcy code specifies priority of certain "expenses and claims," including, as pertinent here:

(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....

(B) a property tax....;

(C) a tax required to be collected or withheld and for which the debtor is liable in whatever capacity;

(D) an employment tax on a wage, salary, or commission....;

(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 three years before the date of the filing of the petition; or

(ii) if a return is not required, a transaction occurring during the three years immediately preceding the date of the filing of the petition;

(F) a customs duty arising out of the importation of merchandise.... or

(G) a penalty related to a claim of a kind specified in this paragraph and in compensation for actual pecuniary loss....

11 U.S.C. § 507(a)(8) (emphasis added) (hereinafter, the "priority provision"). In brief, this priority provision "extends priority to various types of taxes." New Neighborhoods, Inc. v. W. Virginia Workers' Comp. Fund, 886 F.2d 714, 719 (4th Cir. 1989).

"[T]here is a need carefully to limit priority claims in bankruptcy." Id. "The presumption in bankruptcy cases is that the debtor's limited resources will be equally distributed among the creditors." Ford Motor Credit Co. v. Dobbins, 35 F.3d 860, 865 (4th Cir. 1994). "Thus, statutory priorities must be narrowly construed." Id. "Further, ambiguities in the Code are generally resolved in favor of the debtor." New Neighborhoods, 886 F.2d at 719. "[I]f one claimant is to be preferred over others, the purpose should be clear from the statute." Howard Delivery Serv., Inc. v. Zurich Am. Ins. Co., 547 U.S. 651, 667, 126 S.Ct. 2105, 165 L.Ed.2d 110 (2006).

In this case, appellant contends that the shared responsibility payment is either an income tax or an excise tax, under the meaning of 11 U.S.C. § 507(a)(8)(A) or (E).² In order to determine whether the shared responsibility payment meets the requirements of an income tax or an excise tax under this priority provision, the court first considers the meaning of the terms in the Bankruptcy Code, followed by an analysis of the meaning of the shared responsibility payment.

The Bankruptcy Code does not define the phrases "tax on or measured by income," and "excise tax on ... a transaction." Id. § 507(a)(8)(A), (E). In addition, neither the United States Court of Appeals for the Fourth Circuit nor the United States Supreme Court has interpreted the meaning of the phrase "tax on or measured by income." Id. § 507(a)(8)(A). However, they have interpreted the meaning of "tax" and "excise tax," more generally, for purposes of the Bankruptcy Code. "[F]or the purposes of priority under the Bankruptcy Act, taxes include ‘those pecuniary burdens laid upon individuals or their property, regardless of their consent, for the purpose of defraying the expenses of government or of undertakings authorized by it.’ " New Neighborhoods, 886 F.2d at 718 (quoting City of New York v. Feiring, 313 U.S. 283, 285, 61 S.Ct. 1028, 85 L.Ed. 1333 (1941) ). "An excise tax is an indirect tax, one not directly imposed upon persons or property, and is one that is ‘imposed on the performance of an act, the engaging in any occupation, or the enjoyment or [sic] a privilege.’ " Id. at 719 (quotations omitted; "[sic]" in original).

With respect to the "[s]hared responsibility payment," again, neither the Fourth Circuit nor the Supreme Court has interpreted its meaning in the context of the priority provision in the Bankruptcy Code.³ In this context, "[i]t is the purpose of" the exaction, "not its name, which controls." In re C-T of Virginia, Inc., 977 F.2d 137, 139 (4th Cir. 1992). Nevertheless, while "[t]he name given to the exaction by the [federal Congress] is not conclusive," "it may well be indicative of purpose." Id. (quotations omitted). Indeed, "[t]he best evidence of that purpose is the statutory text adopted by both Houses of Congress and submitted to the President." W. Virginia Univ. Hosps., Inc. v. Casey, 499 U.S. 83, 98, 111 S.Ct. 1138, 113 L.Ed.2d 68 (1991).

Here, the plain language of the Affordable Care Act gives a strong indication that its purpose is to establish a penalty, and not a "tax on or measured by income" or an "excise tax on ... a transaction." Id. § 507(a)(8)(A), (E). It imposes first a "[r]equirement to maintain minimum essential coverage" of health insurance in one of the forms enumerated in the statute. 26 U.S.C. § 5000A(a), (f). Second, for "fail[ures] to meet the requirement," it states "there is hereby imposed on the taxpayer a penalty with respect to such failures." Id. § 5000A(b)(1). It then provides rules for determining "[t]he amount of the penalty imposed by this section on any taxpayer for any taxable year with respect to failures described in subsection (b)(1)." Id. § 5000A(c)(1).

At the same time, the priority provision gives no indication by its text that it covers such a penalty imposed for failure to comply with a requirement to maintain minimum health insurance coverage. In one subsection to the priority provision, it gives priority to "a penalty related to a claim of a kind specified in this paragraph and in compensation for actual pecuniary loss." 11 U.S.C. § 507(a)(8)(G). That reference to a penalty, is a narrow one limited to penalties in compensation for actual pecuniary loss, which is inapposite here. Nevertheless, its express presence in the priority provision demonstrates that the priority provision allows for a distinction, itself, between taxes and penalties. If Congress had...