In re Szczyporski

• Decision Date: 11 May 2022
• Docket Number: 21-1858
• Parties: IN RE: Robert SZCZYPORSKI; Bonnie Szczyporski, Debtors Robert Szczyporski, Appellant
• Court: U.S. Court of Appeals — Third Circuit

34 F.4th 179

IN RE: Robert SZCZYPORSKI; Bonnie Szczyporski, Debtors

Robert Szczyporski, Appellant

No. 21-1858

United States Court of Appeals, Third Circuit.

Argued on January 27, 2022

Filed: May 11, 2022

Sergey Joseph Litvak [argued], Litvak Legal Group, PLLC, 3070 Bristol Pike, Building One, Suite 204, Bensalem, PA 19020, Counsel for Debtor-Appellant Robert Szczyporski

David A. Hubbert, Pooja A. Boisture [argued], Ellen P. DelSole, United States Department of Justice, Tax Division, 950 Pennsylvania Avenue, NW, P.O. Box 502, Washington, DC 20044, Counsel for Defendant-Appellee Internal Revenue Service

Before: HARDIMAN, SHWARTZ, and SMITH, Circuit Judges.

OPINION OF THE COURT

HARDIMAN, Circuit Judge.

This appeal involves the interaction of two federal laws: the Patient Protection and Affordable Care Act (ACA) and the Bankruptcy Code.

The ACA requires certain individuals to maintain "minimal essential [health insurance] coverage" throughout the year (the Individual Mandate). 26 U.S.C. § 5000A(a). A person subject to the Individual Mandate who fails to maintain the required insurance for one month or more is assessed a "shared responsibility payment." Id. § 5000A(b)(1). Though described by the statute as a "penalty," id. , the payment is collected by the Internal Revenue Service along with one's federal income tax return. Id. § 5000A(b)(1)–(2).

Whether the payment is a "penalty" or a "tax" remains contested. In NFIB v. Sebelius , 567 U.S. 519, 132 S.Ct. 2566, 183 L.Ed.2d 450 (2012), the Supreme Court held that the shared responsibility payment is a tax for constitutional purposes, id. at 570, 132 S.Ct. 2566, but is not a tax for purposes of the Anti-Injunction Act, id. at 546, 132 S.Ct. 2566. This appeal requires us to decide whether the shared responsibility payment is a tax for bankruptcy purposes. If it is, we must also determine whether it is entitled to priority under the Bankruptcy Code.

I

In July 2019, Robert and Bonnie Szczyporski (Debtors) filed a Chapter 13 bankruptcy petition. The IRS filed a proof of claim against their estate for various unpaid taxes and interest, including a $927.00 shared responsibility payment the Debtors owed for failing to maintain health insurance in 2018. The IRS's proof of claim characterized the payment as an "EXCISE" tax entitled to priority. The Debtors objected to the IRS's claim, arguing that the shared responsibility payment was not a tax. They claimed it was a penalty not entitled to priority.

The Bankruptcy Court confirmed the Debtors' repayment plan in February 2020, but reserved decision on their objection to the IRS's proof of claim. After briefing from the parties and a hearing, the Bankruptcy Court held: (1) under NFIB v. Sebelius , the shared responsibility payment is a tax—not a penalty—for bankruptcy purposes; and (2) the payment is entitled to priority under Section 507(a)(8) of the Bankruptcy Code, 11 U.S.C. § 507(a)(8), as either an income or an excise tax. In re Szczyporski , 617 B.R. 529, 531–32 (Bankr. E.D. Pa. 2020).

The District Court affirmed. In re Szczyporski , 531 F. Supp. 3d 934, 936 (E.D. Pa. 2021). The Court found Sebelius 's analysis dispositive but explained that it would also find the payment to be a tax for bankruptcy purposes under the functional examination we used in In re United Healthcare System, Inc. , 396 F.3d 247 (3d Cir. 2005). In re Szczyporski , 531 F. Supp. 3d at 939–40.

The District Court also agreed that the shared responsibility payment is entitled to priority, but only as an "income tax" under Section 507(a)(8)(A). Id. at 943 ; 11 U.S.C. § 507(a)(8)(A). The Court concluded the payment is not entitled to priority as an excise tax, since it is not a tax "on a transaction" as required by Section 507(a)(8)(E). In re Szczyporski , 531 F. Supp. 3d at 942. The Debtors filed this timely appeal.

II

The Bankruptcy Court had jurisdiction over the Debtors' objection to the IRS proof of claim under 28 U.S.C. §§ 157(b) and 1334. The District Court had appellate jurisdiction under 28 U.S.C. § 158(a)(1). We have jurisdiction to review the District Court's order under 28 U.S.C. §§ 158(d) and 1291. We exercise plenary review over the District Court's legal conclusions. In re Friedman's Inc. , 738 F.3d 547, 551–52 (3d Cir. 2013).

III

The IRS has litigated the priority status of the shared responsibility payment since at least 2018, with mixed results. Some district and bankruptcy courts have held that the payment was not entitled to priority, either because the payment (1) was a penalty, and not a tax, for bankruptcy purposes¹ or (2) was not "an excise tax on a transaction" or "a tax on or measured by income," as required for priority under § 507(a)(8).² Two courts held, like the Bankruptcy Court here, that the payment may be entitled to priority as either an excise or income tax. In re Cousins , 601 B.R. 609, 621 (Bankr. E.D. La. 2019) ; In re Gabbidori , 2020 WL 3566538, at *1 (Bankr. S.D. Fla. June 4, 2020). And two other courts held, like the District Court here, that the payment was entitled to priority as an income tax.³ Among the courts of appeals, the Fifth Circuit concluded in a non-precedential opinion that the payment is not entitled to priority as an excise tax because it is not assessed on a transaction. In re Chesteen , 799 F. App'x 236, 240–41 (5th Cir. 2020).

In our view, the shared responsibility payment is a tax "on or measured by income." So we join those courts that hold the shared responsibility payment is entitled to priority in bankruptcy under Section 507(a)(8)(A).

IV

"The Bankruptcy Code does not define ‘tax.’ " United Healthcare , 396 F.3d at 252 (citing United States v. Reorganized CF & I Fabricators of Utah, Inc. , 518 U.S. 213, 220, 116 S.Ct. 2106, 135 L.Ed.2d 506 (1996) ). When determining whether an exaction is a tax for bankruptcy purposes, the Supreme Court instructs us to "look[ ] behind the label placed on the exaction" to "the operation of the provision" and the exaction's "actual effects." CF & I Fabricators , 518 U.S. at 220–21, 116 S.Ct. 2106 (citation omitted).

For that reason, we apply "a functional examination that balances the characteristics" of the exaction to determine whether it is a tax for bankruptcy purposes. United Healthcare , 396 F.3d at 255. In making our determination, we may consider the six Lorber - Suburban factors, which ask whether the exaction is

(1) an involuntary pecuniary burden, regardless of name, laid upon individuals or property; (2) imposed by, or under authority of the legislature; (3) for public purposes, including the purposes of defraying expenses of government or undertakings authorized by it; (4) under the police or taxing power of the state[;] ... [(5)] universally applicable to similarly situated entities; and [(6)] whether granting priority status to the government will disadvantage private creditors with like claims.

United Healthcare , 396 F.3d at 253 (internal quotation marks omitted) (first quoting In re Lorber Indus. of Cal., Inc. , 675 F.2d 1062, 1066 (9th Cir. 1982), then quoting In re Suburban Motor Freight, Inc. , 36 F.3d 484, 488–89 (6th Cir. 1994) ).

But these "six factors [do not] constrain our inquiry"; we can consider "any relevant factor." Id. at 255. For example, we can consider whether the payer received a particularized benefit. A payment made without regard for any "benefits bestowed by the [g]overnment on a taxpayer" is indicative of a tax, while "a payment ... exchanged for a government benefit not shared by others" is generally not a tax. Id. at 260 (citing Nat'l Cable Television Ass'n, Inc. v. United States , 415 U.S. 336, 340–41, 94 S.Ct. 1146, 39 L.Ed.2d 370 (1974) ). And we can consider whether the government can alter the exaction, since the "ability to manipulate the assessment also is characteristic of a tax." Id. (citing Nat'l Cable , 415 U.S. at 341, 94 S.Ct. 1146 ).

In sum, our examination of an exaction under United Healthcare is a "flexible" one that "allows us to consider the characteristics of the obligation in light of the evolving treatment of priority claims under the Bankruptcy Code." Id. at 256.

A

The District and Bankruptcy Courts held that the Supreme Court's determination that the shared responsibility payment is a tax for constitutional purposes is dispositive in the bankruptcy context.

In re Szczyporski , 531 F. Supp. 3d at 939 ; In re Szczyporski , 617 B.R. at 531. We disagree.

While the Supreme Court's analysis in Sebelius shares features with our functional examination in United Healthcare , the analyses are not identical. Explaining why the shared responsibility payment is a tax for constitutional purposes, the Supreme Court observed that the payment (1) is administered like a tax, Sebelius , 567 U.S. at 563–64, 132 S.Ct. 2566, and (2) lacks common characteristics of a penalty, id. at 566–68, 132 S.Ct. 2566. But the Court did not address the Lorber - Suburban factors or other factors we have previously said were relevant for bankruptcy. See United Healthcare , 396 F.3d at 255–56, 260. Nor did Sebelius "rel[y] significantly on Bankruptcy Code Section 507 jurisprudence" as the IRS argues. See IRS Corr. Br. 23. The Supreme Court references only two cases from the bankruptcy context in its analysis. It cites United States v. Sotelo , 436 U.S. 268, 275, 98 S.Ct. 1795, 56 L.Ed.2d 275 (1978), as the fourth case in a string of citations establishing that the "penalty" label is not determinative, Sebelius , 567 U.S. at 565, 132 S.Ct. 2566. And it quotes CF & I Fabricators only to establish that a penalty necessarily entails "punishment for an unlawful act or omission," id. at 567, 132 S.Ct. 2566 (quoting CF & I Fabricators , 518 U.S. at 224, 116 S.Ct. 2106 ). Neither reference is essential to the Court's holding.

Moreover, the constitutional and bankruptcy contexts call for conflicting presumptions. "[E]very reasonable construction must be resorted to, in order to save a statute from unconstitutionality." Sebelius , 567 U.S. at 563, 132...