Internal Revenue Serv. v. Juntoff (In re Juntoff)

• Citation: 636 B.R. 868
• Decision Date: 21 March 2022
• Docket Number: s. 21-8011,21-8012
• Parties: IN RE: Howard D. JUNTOFF; In re: George J. McPherson and Melanie A. McPherson, Debtors. Internal Revenue Service, Creditor-Appellant, v. Howard D. Juntoff (21-8011); George J. McPherson and Melanie A. McPherson (21-8012), Debtors-Appellees.
• Court: Bankruptcy Appellate Panels. U.S. Bankruptcy Appellate Panel, Sixth Circuit

636 B.R. 868

IN RE: Howard D. JUNTOFF;

In re: George J. McPherson and Melanie A. McPherson, Debtors.

Internal Revenue Service, Creditor-Appellant,

v.Howard D. Juntoff (21-8011); George J. McPherson and Melanie A. McPherson (21-8012), Debtors-Appellees.

Nos. 21-8011

21-8012

United States Bankruptcy Appellate Panel of the Sixth Circuit.

Argued: February 2, 2022

Decided and Filed: March 21, 2022

ARGUED: Marie E. Wicks, UNITED STATES DEPARTMENT OF JUSTICE, Washington, D.C., for Appellant.

Marcel C. Duhamel, VORYS, SATER, SEYMOUR AND PEASE LLP, Cleveland, Ohio, for Appellees.

ON BRIEF: Marie E. Wicks, UNITED STATES DEPARTMENT OF JUSTICE, Washington, D.C., for Appellant.

Marcel C. Duhamel, VORYS, SATER, SEYMOUR AND PEASE LLP, Cleveland, Ohio, Joseph M. Romano, THE ROMANO LAW FIRM, Cleveland, Ohio, for Appellees.

Before: CROOM, DALES, and STOUT, Bankruptcy Appellate Panel Judges.

ALAN C. STOUT, Bankruptcy Appellate Panel Judge.

In this consolidated appeal arising from two separate Chapter 13 cases, Debtors/Appellees (collectively "Debtors") objected to priority unsecured claims that Creditor/Appellant United States of America on behalf of the Internal Revenue Service ("IRS") filed based on Debtors’ failure to pay the "shared responsibility payment" ("SRP") for failing to obtain health insurance as required under the "individual mandate" within the Patient Protection and Affordable Care Act of 2010 (the "ACA").¹ The bankruptcy court sustained Debtors’ objections in both cases, determining that the SRP is not "a tax on or measured by income or gross receipts" or "an excise tax on ... a transaction" entitled to priority treatment under either § 507(a)(8)(A) or (E).² The IRS now appeals the bankruptcy court's decision. For the reasons stated below, the bankruptcy court's decision is REVERSED .

STATEMENT OF ISSUES ON APPEAL

The IRS raises several issues on appeal:

1. Whether the bankruptcy court erred in holding that the shared responsibility payment is not entitled to priority treatment under § 507(a)(8)(A) as a tax on or measured by income or gross receipts.

2. Whether the bankruptcy court erred in holding that the shared responsibility payment is not entitled to priority treatment under § 507(a)(8)(E) as an excise tax on a transaction.

3. Whether the bankruptcy court erred in sustaining the Debtors’ objection to IRS Claim 8 (McPherson ) and IRS Claim 3 (Juntoff ).

(Br. of Appellant United States of America at 2, B.A.P. Case No. 21-8011, ECF No. 15 ("IRS Br.").)

JURISDICTIONAL STATEMENT

The Bankruptcy Appellate Panel of the Sixth Circuit has jurisdiction to decide these consolidated appeals. The IRS initially elected to have the United States District Court for the Northern District of Ohio hear the appeals. (Bankr. Case No. 19-17032, ECF No. 97; Bankr. Case No. 20-13035, ECF No. 72). However, on June 16, 2021, the district court granted the IRS's motion (to which Debtors consented) to transfer the appeal to this Panel. (Bankr. Case No. 19-17032, ECF No. 118; Bankr. Case No. 20-13035, ECF No. 81). The United States District Court for the Northern District of Ohio has authorized this Panel to hear and determine appeals from the district's bankruptcy court in accordance with 28 U.S.C. § 158(b)(6).

Under 28 U.S.C. § 158(a)(1), this Panel has jurisdiction to hear appeals "from final judgments, orders, and decrees" issued by a bankruptcy court. "Orders in bankruptcy cases qualify as ‘final’ when they definitively dispose of discrete disputes within the overarching bankruptcy case." Ritzen Grp., Inc. v. Jackson Masonry, LLC , ––– U.S. ––––, 140 S. Ct. 582, 586, 205 L.Ed.2d 419 (2020) (citing Bullard v. Blue Hills Bank , 575 U.S. 496, 501, 135 S. Ct. 1686, 1691, 191 L.Ed.2d 621 (2015) ). An order sustaining an objection to a creditor's claim is a final order. In re Bowers , 506 B.R. 249, 251 (B.A.P. 6th Cir. 2013), aff'd , 759 F.3d 621 (6th Cir. 2014).

STANDARD OF REVIEW

This appeal solely presents issues of law, reviewed de novo . Mich. Unemployment Ins. Agency v. Boyd (In re Albion Health Servs. ), 360 B.R. 599, 601 (B.A.P. 6th Cir. 2007) ("An order determining that a claim is not entitled to priority status is a question of law requiring de novo review on appeal."); see also Church Joint Venture, L.P. v. Blasingame (In re Blasingame ), 986 F.3d 633, 638 (6th Cir. 2021) (stating a bankruptcy court's legal conclusions are reviewed de novo ). "De novo review requires the Bankruptcy Appellate Panel to interpret statutes independently of the determination of the bankruptcy court." Rudnicki v. S. Coll. of Optometry (In re Rudnicki ), 228 B.R. 179, 180 (B.A.P. 6th Cir. 1999) (citing Nat'l City Bank v. Elliott (In re Elliott ), 214 B.R. 148, 149 (B.A.P. 6th Cir. 1997) ); see also Plymouth Park Tax Servs., LLC v. Bowers (In re Bowers ), 759 F.3d 621, 625 (6th Cir. 2014) (citation omitted) ("De novo review requires the appellate court to determine the law at issue independently of the Bankruptcy Court's determination.").

FACTS

No one disputes the facts underlying these appeals.

The ACA requires non-exempt individuals either to maintain a minimum level of health insurance or to pay a "penalty." 26 U.S.C. § 5000A. In tax years 2017 and 2018,³ the ACA provided that non-exempt individuals who did not have "minimum essential coverage" for one or more months had to make a "shared responsibility payment" with their annual federal tax payment. 26 U.S.C. § 5000A(b)(1). The monthly SRP amount owed equaled 1/12 of the greater of either a flat dollar amount or 2.5% of the taxpayer's taxable income (for taxable years beginning after 2015). 26 U.S.C. § 5000A(c)(2)(A), (B)(iii). Under paragraph (3) of subsection (c), the amount used to compute the flat dollar amount in paragraph (2)(A) was $695. 26 U.S.C. § 5000A(c)(3) as amended by Pub. L. No. 111-152, § 1002, 124 Stat. 1029 (2010). If the taxpayer's income fell below a certain threshold, the flat dollar amount would be higher than 2.5% of the taxable income, and the SRP then would be the flat dollar amount and not a percentage of the taxpayer's income.

Despite the "individual mandate," Debtors George and Melanie McPherson ("McPhersons") did not maintain health insurance for nine months of the year in 2017, and Debtor Howard Juntoff ("Juntoff") did not maintain health insurance in any month in 2018. They also did not pay their SRP obligations. Debtors’ SRP liabilities are based on the number of months during which they lacked health insurance.

Juntoff filed a bankruptcy petition under Chapter 13 in 2019, and the McPhersons filed a Chapter 13 petition in 2020. In each case, the IRS filed, and subsequently amended, proofs of claim reflecting Debtors’ failure to pay the SRP. In each case, the IRS's last amended proof of claim sought priority treatment as an "excise/income tax."

More specifically, in the Juntoff case, IRS Proof of Claim 3-4 asserted that Juntoff's SRP-related liability for calendar year 2018 consisted of an SRP amount of $1,016, plus prepetition interest of $26.39, for a total of $1,042.39. Juntoff self-reported his SRP on his 2018 Form 1040 individual income tax return as $1,016, which equaled 2.5% of his 2018 taxable income of $40,629. Juntoff filed his 2018 Form 1040 under the single filing status, claiming the standard deduction for single taxpayers of $12,000. Because Juntoff reported a single filing status, his flat dollar amount option was $695. His adjusted gross income was $52,629.00, and after subtracting the $12,000 standard deduction for single filing status (Juntoff did not claim any tax-exempt interest or dependents), his taxable income was $40,629.00.⁴ Juntoff's taxable income of $40,629.00 multiplied by 2.5% equaled $1,015.73 for twelve months, consistent with his self-reported SRP of $1,016. According to the 2018 Instructions, the National Average Bronze Plan Premium insurance payment for one person was $3,396.⁵ Juntoff's SRP amount, therefore, resulted from first choosing the larger of $695 or $1,016 (which was $1,016), and then selecting the lesser of $1,016 or $3,396, which yielded $1,016 as the SRP amount (not including the pre-petition interest of $26.39).

In the McPherson case, IRS Proof of Claim 8-4 asserted that their SRP-related liability for calendar year 2017 consisted of an SRP amount of $1,564, plus prepetition interest of $136.70, for a total of $1,700.70. The McPhersons self-reported their SRP on their 2017 Form 1040 individual income tax return, and the amount of $1,564 equals the SRP flat dollar amount for the nine months of 2017 during which they did not maintain minimum health insurance coverage.⁶ The McPhersons filed their 2017 Form 1040 under the married filing jointly filing status, claiming itemized deductions of $15,634, and claiming two dependents. Because the McPhersons filed a joint return, their flat dollar amount option was $1,564, or $173.75 per month for nine months, consistent with their self-reported SRP. Their adjusted gross income was $74,073.00, minus the amount associated with the "married filing jointly" filing status of $20,800,⁷ for a difference of $53,273.00. Multiplied by 2.5% and then divided by twelve, the McPhersons’ monthly percentage income amount was $110.99. That monthly payment, multiplied by nine, equaled $998.87 (rounded up to $999). According to the 2017 Instructions, the National Average Bronze Plan Premium for 4 people was $13,056.⁸ The McPhersons’ SRP amount, therefore, resulted from choosing the larger of $1,564 or $999 (which was $1,564), and then selecting the lesser of $1,564 or $13,056, which yielded $1,564 as the SRP amount (not including the prepetition interest of $136.70).

Debtors objected to the IRS's claims in both cases, arguing that the SRP debt was not entitled to priority treatment. Before the bankruptcy court ruled on these objections, it confirmed a Chapter 13 plan in each case. The court confirmed the McPhersons’ Chapter 13 plan in November 2020, which provided for payment in full of all allowed priority claims and...