In re Parrish

• Citation: 583 B.R. 873
• Decision Date: 06 April 2018
• Docket Number: CASE NO. 17–02341–5–SWH
• Court: U.S. Bankruptcy Court — Eastern District of North Carolina
• Parties: IN RE: Angela Boykin PARRISH, Debtor

583 B.R. 873

IN RE: Angela Boykin PARRISH, Debtor

CASE NO. 17–02341–5–SWH

United States Bankruptcy Court, E.D. North Carolina, Raleigh Division.

Signed April 6, 2018

William F. Braziel, III, William E. Brewer, Jr., Janvier Law Firm, PLLC, Raleigh, NC, for Debtor.

ORDER ALLOWING OBJECTION TO CLAIM

Stephani W. Humrickhouse, United States Bankruptcy Judge

The issue before the court is whether the "individual shared responsibility payment" (the "ISRP") imposed for failure to obtain health insurance under the Affordable Care Act, 26 U.S.C. § 5000 (the "ACA"), is a tax or a penalty for purposes of 11 U.S.C. § 507(a). A hearing took place in Raleigh, North Carolina on February 22, 2018.

BACKGROUND

Angela Boykin Parrish filed a voluntary petition for relief under chapter 13 of the Bankruptcy Code on May 10, 2017. On her 2016 federal tax return, Ms. Parrish indicated that she owed an ISRP of $664.00, arising from her failure to obtain health insurance as required by the ACA. Based on the 2016 tax return, the Internal Revenue Service ("IRS") assessed Ms. Parrish in the amount of $664.00, and filed a proof of claim in that amount. Claim No. 1–1. The claim indicates that it is for a tax or penalty owed to the government entitled to priority under 11 U.S.C. § 507(a)(8). Claim No. 1–1 at 3, ¶ 12. An attachment to the claim provides that the "Kind of Tax" is "Excise." Id. at 4.

On September 26, 2017, Ms. Parrish filed an objection to the claim filed by the IRS, Dkt. 13, which was amended on October 3, 2017, Dkt. 15. Ms. Parrish contends that the ISRP is not an excise tax, but is instead a penalty that is not entitled to priority under 11 U.S.C. § 507(a)(8). The IRS filed a response on December 4, 2017, Dkt. 27, setting forth the legal basis for its position that the ISRP is a tax. Ms. Parrish submitted a brief on January 21, 2018, Dkt. 32, and a submission in supplemental support on February 21, 2018, Dkt. 36.

DISCUSSION

Section 507(a)(8) provides for priority treatment of "allowed unsecured claims of governmental units, only to the extent such claims are for—... (E) an excise tax ...; 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. § 523(a)(8). The parties agree that the ISRP is not a penalty as described by (G), but the IRS maintains that the ISRP is either an income tax or an excise tax, while Ms. Parrish contends that it is a penalty that is not entitled to any priority under the Bankruptcy Code. The IRS has the burden of proof to establish that its claim is entitled to priority. In re Bradford , 534 B.R. 839, 842 (Bankr. M.D. Ga. 2015) (citing In re Firearms Imp. & Exp. Corp. v. United Capitol Ins. Co. (In re Firearms Imp. & Exp. Corp.), 131 B.R. 1009, 1015 (Bankr. S.D. Fla. 1991).

The ACA established an "individual mandate" requiring most Americans to maintain "minimum essential" health insurance coverage. 26 U.S.C. § 5000A(a).¹ The failure to obtain that insurance results in the ISRP, which is called a "penalty" within the statute. 26 U.S.C. § 5000A(b).² However, the parties agree that the label given to an exaction by Congress is not controlling for purposes of determining bankruptcy classification. Instead, courts must look to how that exaction functions. See United States v. Reorganized CF & I Fabricators of Utah, Inc. , 518 U.S. 213, 116 S.Ct. 2106, 135 L.Ed.2d 506 (1996) ("On a number of occasions, this Court considered whether a particular exaction, whether or not called a "tax" in the statute creating it, was a tax for purposes of [bankruptcy priority], 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.").

The IRS maintains that the Supreme Court of the United States, in a binding determination, has already performed a functional analysis and concluded that the ISRP is a tax. Indeed, the Court considered the ISRP in National Federation of Independent Business v. Sebelius , 567 U.S. 519, 132 S.Ct. 2566, 183 L.Ed.2d 450 (2012), reviewing a constitutional challenge to the ACA as a whole and the ISRP in particular. In Sebelius , the Court described the ISRP as follows:

Beginning in 2014, those who do not comply with the mandate must make a "[s]hared responsibility payment" to the Federal Government. § 5000A(b)(1). That payment, which the Act describes as a "penalty," is calculated as a percentage of household income, subject to a floor based on a specified dollar amount and a ceiling based on the average annual premium the individual would have to pay for qualifying private health insurance. § 5000A(c). In 2016, for example, the penalty will be 2.5 percent of an individual's household income, but no less than $695 and no more than the average yearly premium for insurance that covers 60 percent of the cost of 10 specified services (e.g., prescription drugs and hospitalization). Ibid. ; 42 U.S.C. § 18022. The Act provides that the penalty will be paid to the Internal Revenue Service with an individual's taxes, and "shall be assessed and collected in the same manner" as tax penalties, such as the penalty for claiming too large an income tax refund. 26 U.S.C. § 5000A(g)(1). The Act, however, bars the IRS from using several of its normal enforcement tools, such as criminal prosecutions and levies. § 5000A(g)(2). And some individuals who are subject to the mandate are nonetheless exempt from the penalty—for example, those with income below a certain threshold and members of Indian tribes. § 5000A(e).

567 U.S. at 539–40, 132 S.Ct. 2566.

In its opinion, the Court considered the ISRP in two contexts: first, whether it was barred from reviewing it under the Anti–Injunction Act,³ and second, whether the ISRP was enacted as part of the taxing authority allocated to Congress under the Constitution. The Court reached two different conclusions. First, the Court determined that the ISRP is a penalty for purposes of the Anti–Injunction Act, 567 U.S. at 546, 132 S.Ct. 2566, and second, that the ISRP could reasonably be characterized as a tax for purposes of constitutionality. Id. , 567 U.S. at 574, 132 S.Ct. 2566. In short, the Court implicitly acknowledged that the same exaction can be construed as a tax for some purposes and a penalty for others. What the Court did not do, however, is construe the ISRP as either a tax or a penalty for purposes of the Bankruptcy Code. Thus, this court must consider whether the determination that the ISRP is a tax for constitutional purposes is necessarily a determination that it is a tax for bankruptcy purposes.

In its consideration of the ISRP, the Court was first required to determine whether it had the authority to review the exaction under the Anti–Injunction Act. That Act would prohibit the review of any tax , but not the review of a penalty. See Sebelius , 567 U.S. at 543, 132 S.Ct. 2566 ("The Anti–Injunction Act applies to suits ‘for the purpose of restraining the assessment or collection of any tax. ’ [ 26 U.S.C.] § 7421(a) (emphasis added). Congress, however, chose to describe the ‘[s]hared responsibility payment’ imposed on those who forgo health insurance not as a ‘tax,’ but as a ‘penalty.’ §§ 5000A(b), (g)(2). There is no immediate reason to think that a statute applying to ‘any tax’ would apply to a ‘penalty.’ ").

The Court concluded that for purposes of the Anti–Injunction Act, the ISRP is a penalty, giving weight to the Congressional decision to label the ISRP as a penalty and not a tax:

Congress's decision to label this exaction a "penalty" rather than a "tax" is significant because the Affordable Care Act describes many other exactions it creates as "taxes." See Thomas More [Law Center v. Obama], 651 F.3d [529] at 551 [6th Cir. 2011]. Where Congress uses certain language in one part of a statute and different language in another, it is generally presumed that Congress acts intentionally.

Sebelius , 567 U.S. at 544, 132 S.Ct. 2566. (citing Russello v. United States, 464 U.S. 16, 23, 104 S.Ct. 296, 78 L.Ed.2d 17 (1983) ). The Court went on to note that "The Anti–Injunction Act and the Affordable Care Act ... are creatures of Congress's own creation. How they relate to each other is up to Congress, and the best evidence of Congress's intent is the statutory text." Id. , 567 U.S. at 544, 132 S.Ct. 2566. Finally,

In light of the Code's consistent distinction between the terms "tax" and "assessable penalty," we must accept the Government's interpretation: Section 6201(a) instructs the Secretary that his authority to assess taxes includes the authority to assess penalties, but it does not equate assessable penalties to taxes for other purposes.... The Affordable Care Act does not require that the penalty for failing to comply with the individual mandate be treated as a tax for purposes of the Anti–Injunction Act.

Id. , 567 U.S at 546, 132 S.Ct. 2566.

However, the Court explained that the same deference is not applied to the chosen term in its analysis of the constitutional authority to impose the ISRP:

It is of course true that the Act describes the payment as a "penalty," not a "tax." But while that label is fatal to the application of the Anti–Injunction Act, ... it does not determine whether the payment may be viewed as an exercise of Congress's taxing power. It is up to Congress whether to apply the Anti–Injunction Act to any particular statute, so it makes sense to be guided by Congress's choice of label on that question. That choice does not, however, control whether an exaction is within Congress's constitutional power to tax.

Id. , 567 U.S. at 564, 132 S.Ct. 2566.

The Court then turned to whether the ISRP could fairly be characterized as a tax. The government maintained that the individual mandate was "not a legal command to buy insurance," but made "going without insurance just another thing the Government taxes, like buying gasoline or earning income," that is within Congress's...