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

Docket Number22-3312
Decision Date31 July 2023
PartiesIn re: Howard D. Juntoff, Debtor. v. Howard D. Juntoff, Debtor-Appellant. Internal Revenue Service, Creditor-Appellee,
CourtU.S. Court of Appeals — Sixth Circuit

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In re: Howard D. Juntoff, Debtor.

Internal Revenue Service, Creditor-Appellee,
v.

Howard D. Juntoff, Debtor-Appellant.

No. 22-3312

United States Court of Appeals, Sixth Circuit

July 31, 2023


Argued: July 10, 2023

On Appeal from Bankruptcy Appellate Panel of the Sixth Circuit. No. 21-8011-James L. Croom, Scott W. Dales, Alan C. Stout, Bankruptcy Appellate Panel Judges.

United States Bankruptcy Court for the Northern District of Ohio at Cleveland. Nos. 1:19-bk-17032-Arthur I. Harris, Bankruptcy Judge.

ARGUED:

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

Marie E. Wicks, UNITED STATES DEPARTMENT OF JUSTICE, Washington, D.C., for Appellee.

ON BRIEF:

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

Marie E. Wicks, Ellen Page DelSole, UNITED STATES DEPARTMENT OF JUSTICE, Washington, D.C., for Appellee.

Before: SUTTON, Chief Judge; DAVIS and MATHIS, Circuit Judges.

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OPINION

SUTTON, CHIEF JUDGE

In passing the Affordable Care Act, Congress created a "Shared Responsibility Payment" for individuals who did not purchase qualifying individual health insurance plans. Congress eventually eliminated the Payment. That development did not end debates over whether the Payment is a tax or a penalty. At issue today is whether the Payment amounts to a "tax . . . measured by income" under the Bankruptcy Code's provisions for prioritizing the payment of some debts over others. We join the Third and Fourth Circuits in concluding that it is.

I.

From 2014 to 2018, the Affordable Care Act's individual mandate instructed most Americans to purchase health insurance. 26 U.S.C. § 5000A(a) (2012); see also California v. Texas, 141 S.Ct. 2104, 2112 (2021). Abstainers paid a levy, the "Shared Responsibility Payment," as a "penalty." 26 U.S.C. § 5000A(b). Congress set the Payment equal to 2.5% of the taxpayer's income, subject to a floor ($695, adjusted for inflation) and a ceiling (the nationwide average premium for certain health insurance plans). Id. § 5000A(c)(1)-(3).

Some questioned the constitutional pedigree of the individual mandate. The Supreme Court agreed with the challengers, in part. It held that the Commerce Clause did not authorize Congress to compel Americans to purchase health insurance. Nat'l Fed'n of Indep. Bus. v. Sebelius, 567 U.S. 519, 561 (2012) (opinion of Roberts, C.J.) (NFIB). But it saved § 5000A from invalidity by construing the mandate "as imposing a tax." Id. at 563 (majority).

Spared from a verdict of unconstitutionality by the courts, the mandate could not escape further review by the democratic process in Congress. The National Legislature eliminated the mandate in 2017 and relieved any responsibility under it for tax years 2019 and after. That might have ended legal and policy debates about the status of the Shared Responsibility Payment but for a reference in the Bankruptcy Code.

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In 2018, Howard Juntoff opted not to buy the minimum health insurance and failed to make his Shared Responsibility Payment. After he declared bankruptcy, the IRS tried to collect the Payment from him and filed a proof of claim in bankruptcy court. The agency asked for priority above other debtors under a provision that covers bankruptcy "claims" by "governmental units" for any "tax on or measured by income." 11 U.S.C. § 507(a)(8)(A).

The bankruptcy court denied the request, reasoning that the Shared Responsibility Payment was not a "tax on or measured by income." The Bankruptcy Appellate Panel reversed, prompting Juntoff to file this appeal.

II.

When a debtor declares bankruptcy, the Bankruptcy Code generally grants each unsecured creditor an equal claim on his assets. Howard Delivery Serv., Inc. v. Zurich Am. Ins. Co., 547 U.S. 651, 667 (2006); see, e.g., 11 U.S.C. §§ 726(a)-(b), 1129(a)(7)(A)(ii), 1325(a)(4). But the Code gives some claimants "priority," putting them higher in line for payment. 11 U.S.C. § 507; Czyzewski v. Jevic Holding Corp., 580 U.S. 451, 457 (2017).

Today's case involves one such provision. Section 507(a)(8)(A) offers priority to "unsecured claims of governmental units . . . [for] a tax on or measured by income." The parties agree that the IRS is a "governmental unit," leaving two questions: Is the Shared Responsibility Payment a "tax"? If so, is it "measured by income"? We consider each in turn.

Is the Payment a "tax"? Section 507(a)(8)(A) covers claims for unpaid "tax[es]." It does not reach "penalties" or "fees." See United States v. Reorganized CF &I Fabricators of Utah, Inc., 518 U.S. 213, 224 (1996) (penalties); Spiers v. Ohio Dep't of Nat. Res. (In re Jenny Lynn Mining Co.), 780 F.2d 585, 588 (6th Cir. 1986) (fees). As Juntoff concedes, or at least as the inaction in his brief suggests, the Shared Responsibility Payment does not resemble a fee. That makes it either a tax or a penalty. See Spiers, 780 F.2d at 587-89 (describing the tax/fee distinction in more detail).

The Code does not define taxes or spell out the difference between taxes and penalties. But the Supreme Court's cases offer guidance. "[A] tax," they say, "is a pecuniary burden laid

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upon individuals or property for the purpose of supporting the Government." CF & I, 518 U.S. at 224 (quoting New Jersey v. Anderson, 203 U.S. 483, 492 (1906)). By contrast, a "penalty" "is an exaction imposed by statute as punishment for an unlawful act." Id. (quoting United States v. La Franca, 282 U.S. 568, 572 (1931)). To distinguish the two, we look beyond congressional "label[s]," for what Congress calls a "tax" can be a "penalty" under the Bankruptcy Code and what Congress calls a "penalty" can be a "tax." Id. at 220; compare id. at 225-26, with United States v. Sotelo, 436 U.S. 268, 275 (1978). Instead, we consider a levy's "operation," "function[]," and "actual effects." CF &I, 518 U.S. at 220-25.

Which functional facts matter? The key question is whether the exaction works like mere revenue-raising tax laws or like a sanction imposed on lawbreakers. Id. at 224; cf. Dep't of Revenue of Mont. v. Kurth Ranch, 511 U.S. 767, 779-83 (1994). Levies drawn at ordinary rates from ordinary citizens look like taxes, especially when the IRS collects them through a citizen's annual tax return. See, e.g., Sotelo, 436 U.S. at 275; United States v. New York, 315 U.S. 510, 514-17 (1942). But when a levy targets independent acts of misconduct, say violations of state or federal law, or makes liability turn on a culpable mental state, the exaction operates more like a penalty. CF &I, 518 U.S. at 225 &n.9; cf. Helwig v. United States, 188 U.S. 605, 612 (1903). In the same way, levies "enormously in excess" of typical taxes resemble punishments more than run-of-the-mine, revenue-raising taxes. Helwig, 188 U.S. at 613; see CF &I, 518 U.S. at 22527.

Gauged by these principles, the Shared Responsibility Payment amounts to a "tax" under § 507(a)(8). Start with the reality that the congressional label-here a "payment" and a "penalty"-is relevant but not dispositive. What is dispositive is the function and manner of the exaction.

This Payment has several tax-like qualities. The IRS collects it and uses it to fund the government, just as it does with taxes. 26 U.S.C. § 5000A(g); cf. New York, 315 U.S. at 514-17. The Shared Responsibility Payment targets ordinary taxpayers-the millions of Americans who chose to abstain from purchasing health insurance-and is paid through an individual's annual tax return. The Payment does not apply to individuals who are exempt from paying taxes. 26 U.S.C. § 5000A(e)(2). Unlike a penalty, the Payment does not apply just to those who fall

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afoul of some independent "federal prohibition." CF &I, 518 U.S. at 225 n.9. Recall that Congress did not make the failure to buy health insurance illegal or make the Payment turn on a taxpayer's culpable mens rea. As the Court explained in NFIB: "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." 567 U.S. at 567-68.

The Payment's burdens do not "enormously . . . exce[ed]" those associated with traditional taxes either. Helwig, 188 U.S. at 613. Congress capped the Shared Responsibility Payment at the average national cost of a qualifying health insurance plan, hardly a penalty-like exaction. See NFIB, 567 U.S. at 539, 566. And tax-like considerations-such as taxable income, joint or individual filing status, and number of dependents-drive what the individual owes. Id. at 563.

We are not the first ones to assess the qualities of this Payment to the government. The Supreme Court construed § 5000A "to impose" a tax...

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