In re Huenerberg

• Decision Date: 28 September 2018
• Docket Number: Case No. 17-28645-gmh
• Citation: 590 B.R. 862
• Parties: IN RE: Gary E. HUENERBERG and Jody M. Huenerberg, Debtors.
• Court: U.S. Bankruptcy Court — Eastern District of Wisconsin

590 B.R. 862

IN RE: Gary E. HUENERBERG and Jody M. Huenerberg, Debtors.

Case No. 17-28645-gmh

United States Bankruptcy Court, E.D. Wisconsin.

Signed September 28, 2018

Christine Wolk, Oshkosh, WI, for Debtors.

Rebecca R. Garcia, Oshkosh, WI, for Trustee.

DECISION SUSTAINING THE DEBTORS' OBJECTION TO CLAIM NUMBER 1 OF THE INTERNAL REVENUE SERVICE

G. Michael Halfenger, United States Bankruptcy Judge

The Internal Revenue Service (IRS) filed a proof of claim and supporting information in this chapter 13 case asserting that a portion of its claim is entitled to priority under 11 U.S.C. § 507(a)(8) because it is for an "excise tax".¹ The debtors object that this portion of the IRS's claim is for a "shared responsibility payment" imposed for failure to comply with a provision of the Patient Protection and Affordable Care Act (ACA), "commonly referred to as the individual mandate", that "requires most Americans to maintain ‘minimum essential’ health insurance coverage." Nat'l Fed'n of Indep. Bus. v. Sebelius , 567 U.S. 519, 539, 132 S.Ct. 2566, 183 L.Ed.2d 450 (2012) (discussing 26 U.S.C. § 5000A ). According to the debtors, the shared responsibility payment is a penalty, not a tax, so that portion of the IRS's claim is not entitled to priority under § 507(a)(8).

The IRS responds that the Supreme Court's determination in National Federation of Independent Business v. Sebelius that "the shared responsibility payment may for constitutional purposes be considered a tax, not a penalty", see id. at 563–74, 132 S.Ct. 2566, means that the shared responsibility payment is a tax for purposes of § 507(a)(8) and, thus, that the portion of its claim at issue is entitled to priority.

I

The IRS and the debtors do not dispute the material facts. Resolution of the debtors' objection to the IRS's claim depends on the construction of and interaction between two sections of the United States Code.

The first section at issue is 26 U.S.C. § 5000A. Section 5000A(a) contains the ACA's individual mandate and provides that, "for each month beginning after 2013", all "applicable individual[s]" must have "minimum essential coverage"—which is to say, health insurance coverage as defined in § 5000A(f). "If a taxpayer who is an applicable individual" fails to comply with the individual mandate "for 1 or more months, then," subject to certain exemptions not relevant here, § 5000A(b)"impose[s] on the taxpayer a penalty", referred to as a "[s]hared responsibility payment". § 5000A(b)(1) ; see also § 5000A(e)(describing those individuals "with respect to" whom "[n]o penalty shall be imposed"). The amount of the shared responsibility payment "is determined by such familiar factors as taxable income, number of dependents, and joint filing status." Nat'l Fed'n , 567 U.S. at 563, 132 S.Ct. 2566 (citing § 5000A(b)(3), (c)(2) & (c)(4) ).² "Any penalty imposed by this section with respect to any month shall be included with a taxpayer's return ... for the taxable year which includes such month." § 5000A(b)(2). Then, "the IRS must ... assess and collect it in the same manner as taxes." Nat'l Fed'n , 567 U.S. at 564, 132 S.Ct. 2566 (citation and internal quotation marks omitted).

The second section at issue is 11 U.S.C. § 507, which sets out the Bankruptcy Code's priority scheme for certain expenses and claims. Section 507(a)(8) affords priority status to "allowed unsecured claims of governmental units" but "only to the extent that such claims are for" taxes, customs duties, or penalties of a kind specified in that paragraph. One kind of tax so specified is "an excise tax on ... 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". § 507(a)(8)(E)(i). In general, a chapter 13 plan must "provide for the full payment ... of all claims entitled to priority under [§] 507". 11 U.S.C. § 1322(a)(2).

The IRS argues that, for purposes of § 507(a)(8)(E), the shared responsibility payment is an excise on a transaction ("an individual's act or choice not to obtain health insurance coverage") that occurred before the debtors filed their petition in this case and for which the debtors were required to file a tax return within three years before the date on which they filed their petition. CM-ECF Doc. No. 36, at 11; CM-ECF Doc. No. 41, at 4. The debtors reply that the shared responsibility payment is not a tax, much less an excise. They characterize the shared responsibility payment as "a penalty for failure to obtain health insurance". CM-ECF Doc. No. 31, at 1. If that characterization is correct, the portion of the IRS's claim attributable to the debtors' outstanding obligation under § 5000A is not entitled to priority. See In re Parrish , 583 B.R. 873 (Bankr. E.D.N.C. 2018) ; In re Chesteen , No. 17-11472, 2018 WL 878847 (Bankr. E.D. La. Feb. 9, 2018).

II

A

When considering "whether [an] exaction is an ‘excise tax’ for purposes of" 11 U.S.C. § 507(a)(8)(E), a court must first "answer the question whether the exaction is a tax to begin with." United States v. Reorganized CF & I Fabricators of Utah, Inc. , 518 U.S. 213, 215 & n.1, 224, 116 S.Ct. 2106, 135 L.Ed.2d 506 (1996) (analyzing 11 U.S.C. § 507(a)(7)(E), which Congress renumbered as § 507(a)(8)(E) in section 304(c) of the Bankruptcy Reform Act of 1994, Pub. L. No. 103-394, 108 Stat. 4132). To determine whether an exaction is a tax, one ignores the label given to the exaction by Congress and instead looks to how the exaction operates:

On a number of occasions, [the Supreme] Court considered whether a particular exaction, whether or not called a "tax" in the statute creating it, was a tax for purposes of [§ 64(a) of the Bankruptcy Act of 1898, that statute's priority provision], and in every one of those cases the Court looked behind the label placed on the exaction and rested its answer directly on the operation of the provision using the term in question.

Id. at 220, 116 S.Ct. 2106. As the Supreme Court stated, "the 1978 Act reveals no congressional intent to reject generally the interpretive principle that characterizations in the Internal Revenue Code are not dispositive in the bankruptcy context, and no specific provision that would relieve us from making a functional examination of" the specific exaction at issue to determine whether it is a tax. Id. at 224, 116 S.Ct. 2106.

The Supreme Court has ruled that, for purposes of priority in bankruptcy, an exaction operates as a tax when it lays "a pecuniary burden ... upon individuals or property for the purpose of supporting the Government", New Jersey v. Anderson , 203 U.S. 483, 492, 27 S.Ct. 137, 51 L.Ed. 284 (1906) ; when it "is an enforced contribution to provide for the support of government", Reorganized CF & I Fabricators , 518 U.S. at 224, 116 S.Ct. 2106 (quoting United States v. La Franca , 282 U.S. 568, 572, 51 S.Ct. 278, 75 L.Ed. 551 (1931) ); or when it lays a "pecuniary burden[ ] ... upon individuals or their property, regardless of their consent, for the purpose of defraying the expenses of government or of undertakings authorized by it", City of New York v. Feiring , 313 U.S. 283, 285, 61 S.Ct. 1028, 85 L.Ed. 1333 (1941). By contrast, an exaction is a penalty if it operates as "punishment for an unlawful act or omission". Reorganized CF & I Fabricators , 518 U.S. at 224, 116 S.Ct. 2106 (citing La Franca , 282 U.S. at 572, 51 S.Ct. 278 ).

a

The IRS contends that the Supreme Court in National Federation engaged in the same functional analysis in holding that the ACA's shared responsibility payment falls within Congress's constitutional taxing power that it would have applied had it instead analyzed whether the shared responsibility payment is a tax for purposes of § 507(a)(8). See CM-ECF Doc. No. 36, at 1–5. For example, the Court concluded:

The requirement to [make shared responsibility payments,] ... found in the Internal Revenue Code and enforced by the IRS[,] ... yields the essential feature of any tax: It produces at least some revenue for the Government. Indeed, the payment is expected to raise about $4 billion per year by 2017.

Nat'l Fed'n , 567 U.S. at 563–64, 132 S.Ct. 2566 (citations omitted). Thus, in the language of the Court's bankruptcy-priority cases, § 5000A imposes an involuntary pecuniary burden on individuals to defray the expenses of government.

The Court in National Federation also "focused on three practical characteristics" of the shared responsibility payment, each of which weighs against concluding that the payment operates to punish unlawful conduct—the Court's penalty touchstone. Id. at 565, 132 S.Ct. 2566. The Court observed that (1) § 5000A imposes a relatively light burden on those who must pay; (2) "the individual mandate contains no scienter requirement"; and (3) "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." Id. at 566, 132 S.Ct. 2566.

The Court contrasted the shared responsibility payment with "the so-called tax on employing child laborers" that the Court in Bailey v. Drexel Furniture Co. , 259 U.S. 20, 42 S.Ct. 449, 66 L.Ed. 817 (1922), held "was actually a penalty" for purposes of Congress's power to lay and collect taxes under the Constitution. Nat'l Fed'n , 567 U.S. at 565, 132 S.Ct. 2566. The "tax" at issue in Drexel Furniture "imposed an exceedingly heavy burden—10 percent of a company's net income—on those who employed children, no matter how small their infraction." Id. Further, it "imposed that exaction only on those who knowingly employed underage laborers." Id. at 565–66, 132 S.Ct. 2566 (emphasis added). Finally, "this ‘tax’ was enforced in part by the Department of Labor, an agency responsible for punishing violations of labor laws, not collecting revenue." Id. at 566, 132 S.Ct. 2566.

Ultimately, ...