In re Cousins, BANKRUPTCY NO. 18-10739

• Decision Date: 10 April 2019
• Docket Number: BANKRUPTCY NO. 18-10739
• Citation: 601 B.R. 609
• Parties: In the MATTER OF John D. COUSINS, Allison J. Cousins, Debtor(s)
• Court: U.S. Bankruptcy Court — Eastern District of Louisiana

601 B.R. 609

In the MATTER OF John D. COUSINS, Allison J. Cousins, Debtor(s)

BANKRUPTCY NO. 18-10739

United States Bankruptcy Court, E.D. Louisiana.

Signed April 10, 2019

Rachel Thyre Anderson, Covington, LA, for Debtors.

SECTION "A"

REASONS FOR DECISION

Hon. Elizabeth W. Magner, U.S. Bankruptcy Judge

On August 21, 2018, John and Allison Cousins' ("Debtors") Objection to Claim No. 8 of the Internal Revenue Service ("Objection") came before the Court. After hearing, the Court took this matter under advisement.

I. Background:

On March 26, 2018, Debtors filed a Petition for Relief under Chapter 13 of Title 11 of the United States Code.¹ On April 27, 2018 the Internal Revenue Service ("IRS") filed a proof of claim ("Claim") that was subsequently amended on June 7, 2018 and June 13, 2018.² The final Claim asserted tax liabilities totaling $ 822,891.44, which consisted of a $ 88,675.87 unsecured priority claim and a $ 814,215.57 general unsecured claim.³

On June 28, 2018, Debtors objected to the Claim ("Objection")⁴ taking issue with the priority classification of $ 82,085, for the shared responsibility payment ("SRP").⁵ Under the federal Affordable Care Act ("ACA"), taxpayers may pay the SRP as an alternative to retaining minimal essential health insurance coverage.

Debtors argue that the SRP is not a priority claim because the Internal Revenue Code ("IRC") labels it a "penalty." The IRS responds that the SRP's label does not resolve whether it is considered a "tax" or a "penalty" under the Bankruptcy Code.

II. Law and Analysis:

The IRS seeks priority status, thus, it has the burden of proving the SRP falls within § 507(a) defining priority claims.⁶ The IRS has adequately characterized the SRP as a tax, not a penalty, making the SRP a priority claim under the Bankruptcy Code.

The Bankruptcy Code allows for the discharge of all debts with the exception of those listed as priority clams in § 507(a).⁷ Specifically, section 507(a)(8)(A)(iii) prevents a debtor from discharging a priority tax⁸ while sections 523(a)(7)⁹ and 1328(a) allow for the discharge of a penalty. The distinction between tax and penalty is not as clear as one might imagine.

Courts define "tax" as "a pecuniary burden laid upon individuals or property for the purpose of supporting the government."¹⁰ In United States v. New York ,¹¹ the Supreme Court expanded the definition concluding that a tax must be an "effort by the United States to obtain ... revenue."¹² In contrast, a "penalty" is an "exaction imposed by statute as a punishment for an unlawful act" or omission.¹³ Nevertheless, "an exaction having in part a deterrent effect does not make the exaction a penalty."¹⁴

A. The Shared Responsibility Payment is a Tax

SRP liability arises under § 5000A of the IRC, which was enacted as a part of the ACA.¹⁵ Section 5000A(a) requires individual taxpayers to maintain minimum essential health insurance coverage, unless they qualify for an exemption.¹⁶ However, subsection (b) offers a taxpayer as an alternative, the right to make a SRP to the government when he files his tax return without incurring any other consequences. Subsection (b) states:

(b) Shared responsibility payment.–

(1) In general.–If a taxpayer who is an applicable individual, or an applicable individual for whom the taxpayer is liable under paragraph (3), fails to meet the requirement of subsection (a) for 1 or more months, then, except as provided in subsection (e), there is hereby imposed on the taxpayer a penalty with respect to such failures in the amount determined under subsection (c).

(2) Inclusion with return.–Any penalty imposed by this section with respect to any month shall be included with taxpayer's return under chapter 1 for the taxable year which includes such month.

(3) Payment of penalty.–If an individual with respect to whom a penalty is imposed by this section for any month–

(A) is a dependent (as defined in section 152) of another taxpayer for the other taxpayer's taxable year including such month, such other taxpayer shall be liable for such penalty, or

(B) files a joint return for the taxable year including such month, such individual and the spouse of such individual shall be jointly liable for such penalty.¹⁷

The individual mandate was enacted to solve a problem:

Because state and federal laws nonetheless require hospitals provide a certain degree of care to individuals without regard to their ability to pay, see , e.g. , 42 U.S.C. § 1395 ; Fla. Stat. § 395.1041(2010), hospitals end up receiving compensation for only a portion of the services they provide. To recoup the losses, hospitals pass on the cost to insurers through higher rates, and insurers, in turn, pass on the cost to policy holders in the form of higher premiums.¹⁸

Thus, a "central aim of the ACA"[is to]—"reduce the number of uninsured U.S. residents ... by giving potential recipients of health care a financial incentive to acquire insurance."¹⁹ Congress recognized that most of the uninsured were not so by choice, so it devised a three-part solution: (1) " ‘a guaranteed issue’ requirement, which bars insurers from denying coverage ... on account of [a] person's medical condition or history;" (2) a requirement that insurers use a " ‘community rating’ to price their insurance policies," which "bars insurance companies from charging higher premiums to those with preexisting conditions;" and (3) the minimum coverage provision because the first two provisions "Congress comprehended, could not work effectively unless individuals were given a powerful incentive to obtain insurance."²⁰ At a House of Representatives House Ways and Means Committee Meeting Uwe Reinhardt stated:

[I]mposition of community-rated premiums and guaranteed issue on a market of competing private health insurers will inexorably drive that market into extinction, unless these two features are coupled with ... a mandate on individual[s] to be insured.²¹

The SRP was enacted to provide this incentive.

The IRC refers to the SRP as a penalty, but the Supreme Court has repeatedly held that whether the IRC labels a liability a "tax" or a "penalty" does not control.²² Rather the assessment's function is the determining factor in deciding its character as a penalty or tax.²³ "The Supreme Court, [ ] has focused the tax-penalty inquiry under § 507(a)(8) on function [ ] rather than purpose."²⁴

The functional analysis requires courts look at the assessment's purpose reflected through its operation rather than its label.²⁵ Although not squarely on point as to all the issues presented, the Supreme Court's decision in National Federation of Independent Business v. Sebelius , guides and forecloses some of this Court's analysis.²⁶

In Sebelius , the Court found that the assessment under § 5000A (or SRP) constituted a tax and therefore was within Congress' constitutional powers to create. In reaching its conclusion, the Court applied the same functional-analysis test used to determine the nature of an assessment under § 507(a) of the Bankruptcy Code.

In Sebelius , the Court reasoned that the SRP appeared to be a tax because:

[The SRP] looks like a tax in many respects. [It] ... is paid into the Treasury by "taxpayer[s]" when they file their tax returns. 26 U.S.C. § 5000A(b). It does not apply to individuals who do not pay federal income taxes because their household income is less than the filing threshold in the Internal Revenue Code. § 5000A(e)(2). For taxpayers who do owe the payment, its amount is determined by such familiar factors as taxable income, number of dependents, and joint filing status. §§ 5000A(b)(3), (c)(2), (c)(4). The requirement to pay is found in the Internal Revenue Code and enforced by the IRS, which—as we previously explained—must assess and collect it ‘in the same manner as taxes.’ ... This process yields the essential feature of any tax: It produces at least some revenue for the Government.²⁷

Having found the SRP's assessment to be similar to all taxes, the Court turned its attention to the defining characteristics of penalties. In Drexel Furniture ,²⁸ the Supreme Court had previously enumerated three (3) characteristics distinguishing penalties from taxes. According to Drexel Furniture , penalties: (1) " impose an exceedingly heavy burden" for lack of compliance; (2) contain a scienter requirement typical of punitive statutes; and (3) are enforced by an agency other than the IRS.²⁹ Examining the SRP under the Drexel Furniture analysis, the Court stated:

...[F]or most Americans the amount due will be far less than the price of insurance, and, by statute, it can never be more .... Second, the individual mandate contains no scienter requirement. Third, the payment is collected solely by the IRS through the normal means of taxation–except that the Service is not allowed to use those means most suggestive of a punitive sanction, such as criminal prosecution.³⁰

The conclusion that the SRP did not function like a penalty also pertained to allegations that it was regulatory or coercive. The Sebelius Court explained:

Indeed, ‘[e]very tax is in some measure regulatory. To some extent it interposes an economic impediment to the activity taxed as compared with others not taxed.’ [ ] That § 5000A seeks to shape decisions about whether to buy health insurance does not mean that it cannot be a valid exercise of the taxing power.... 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 payment to the IRS.... if someone chooses to pay rather than obtain health insurance, they have fully complied with the law. Indeed, it is estimated that four million people each year will choose to pay the IRS rather than buy insurance. We would expect Congress to be troubled by that prospect if such conduct were unlawful.³¹

Finally, the Court recognized that the SRP...