United States v. Alicea

Decision Date19 January 2023
Docket Number21-2220
Parties UNITED STATES of America, Creditor - Appellant, v. Fabio ALICEA; Sarah J. Zabek, Debtors - Appellees.
CourtU.S. Court of Appeals — Fourth Circuit

ARGUED: Pooja Ashok Boisture, UNITED STATES DEPARTMENT OF JUSTICE, Washington, D.C., for Appellant. William Earl Brewer, Jr., Raleigh, North Carolina, for Appellees. ON BRIEF: David A. Hubbert, Deputy Assistant Attorney General, Ellen Page DelSole, Tax Division, UNITED STATES DEPARTMENT OF JUSTICE, Washington, D.C.; Michael F. Easley, Jr., United States Attorney, OFFICE OF THE UNITED STATES ATTORNEY, Raleigh, North Carolina, for Appellant. Travis Sasser, SASSER LAW FIRM, Cary, North Carolina, for Appellees.

Before WILKINSON and NIEMEYER, Circuit Judges, and TRAXLER, Senior Circuit Judge.

Reversed and remanded by published opinion. Senior Judge Traxler wrote the opinion in which Judge Wilkinson joined. Judge Wilkinson wrote a separate concurring opinion, and Judge Niemeyer wrote a dissenting opinion.

TRAXLER, Senior Circuit Judge:

When first enacted, the Affordable Care Act ("ACA") included a mandate (now repealed) requiring most individuals to maintain health insurance meeting certain minimum requirements. Individuals covered by the ACA who did not maintain the minimum level of insurance were required to pay a "shared responsibility payment" ("SRP") to the Internal Revenue Service through their annual income tax returns. See 26 U.S.C. § 5000A. The ACA identifies the SRP as a penalty rather than a tax. See 26 U.S.C. § 5000A(b)(1) ("If a taxpayer [required to maintain insurance] fails to meet the requirement ... for 1 or more months, then, except as provided in subsection (e), there is hereby imposed on the taxpayer a penalty with respect to such failures in the amount determined under subsection (c).").

In National Federation of Independent Business v. Sebelius , 567 U.S. 519, 132 S.Ct. 2566, 183 L.Ed.2d 450 (2012) ( NFIB ), the Supreme Court upheld the constitutionality of the individual mandate. Although the Court determined that the SRP was a penalty, not a tax, for purposes of the Anti-Injunction Act, see id. at 546, 132 S.Ct. 2566, it concluded that, as a constitutional matter, the SRP could fairly be read as a tax on the uninsured, which the Court found was within Congress's power to impose, see id. at 574, 132 S.Ct. 2566. The question in this case is whether the SRP qualifies as a tax measured by income or as an excise tax entitled to priority in bankruptcy proceedings. See 11 U.S.C. §§ 507(a)(8)(A), 507(a)(8)(E). As we will explain, we conclude that the SRP qualifies as a tax measured by income, and we therefore reverse the judgment of the district court and remand for further proceedings.


In 2018, when the ACA's mandate and SRP were still in effect, Fabio Alicea and his wife Sarah Zabek ("Taxpayers") did not maintain the minimum insurance coverage required by the ACA. The taxpayers did not include their $2409 SRP when they filed their 2018 federal tax return. In December 2019, the Taxpayers filed for Chapter 13 bankruptcy protection in the Eastern District of North Carolina.

The IRS filed a proof of claim for the unpaid SRP and asserted that its claim was entitled to priority as an income or excise tax under § 507 of the Bankruptcy Code. The Taxpayers objected to the government's claim of priority. The bankruptcy court granted the objection, concluding that, for purposes of the Bankruptcy Code, the SRP is a penalty, not a tax, and therefore is not entitled to priority under § 507(a)(8). The government appealed to the district court, which affirmed the bankruptcy court's decision. The district court held that even if the SRP was generally a tax, it did not qualify as a tax measured by income or an excise tax and thus was not entitled to priority. The government thereafter appealed to this court. Whether the SRP is entitled to priority under 11 U.S.C. § 507(a)(8) as either a tax measured by income or an excise tax on a transaction is a purely legal question that we review de novo. See Ford Motor Credit Co. v. Dobbins , 35 F.3d 860, 865 (4th Cir. 1994).


The Bankruptcy Code gives priority to certain classes of unsecured claims, which must be paid in full before other unsecured claims may be paid. Section 507(a)(8)(A) gives priority to unsecured claims for "a tax on or measured by income or gross receipts for a taxable year ending on or before the date of the filing of the petition." Section 507(a)(8)(E) gives priority status to "an excise tax on ... a transaction" occurring within a designated time period. The Bankruptcy Code does not define "tax" or "excise tax."

Because "[t]he presumption in bankruptcy cases is that the debtor's limited resources will be equally distributed among the creditors...., statutory priorities must be narrowly construed." Ford Motor Credit , 35 F.3d at 865 ; see also New Neighborhoods, Inc. v. W. Virginia Workers' Comp. Fund , 886 F.2d 714, 719 (4th Cir. 1989) (explaining that "there is a need carefully to limit priority claims in bankruptcy," given that "[e]very priority claim lessens the dividend, if any, of a general creditor in the event of bankruptcy"). When applying § 507(a), courts distinguish between taxes and penalties. Taxes are entitled to priority if they qualify as taxes measured by income or as excise taxes, but penalties are not entitled to priority and must "be dealt with as an ordinary, unsecured claim." United States v. Reorganized CF & I Fabricators of Utah, Inc. , 518 U.S. 213, 226, 116 S.Ct. 2106, 135 L.Ed.2d 506 (1996).

Broadly speaking, "a tax is an enforced contribution to provide for the support of government; a penalty ... is an exaction imposed by statute as punishment for an unlawful act." Id. at 224, 116 S.Ct. 2106 (cleaned up); see also New Neighborhoods , 886 F.2d at 718 ("[A] payment may be classified as a tax if the state has compelled the payment and if the payment serves a public purpose."). When determining whether a particular exaction qualifies as a tax or as a penalty for purposes of priority in bankruptcy, "the label placed on the exaction" is not controlling. CF&I Fabricators , 518 U.S. at 220, 116 S.Ct. 2106. Instead, we apply a functional analysis looking to "the operation of the provision using the term in question." Id. ; see United States v. Sotelo , 436 U.S. 268, 275, 98 S.Ct. 1795, 56 L.Ed.2d 275 (1978) ("That the funds due are referred to as a ‘penalty’ ... does not alter their essential character as taxes.").


At issue in this appeal is whether, for purposes of priority treatment in bankruptcy proceedings, the SRP qualifies as a tax or a penalty. If we conclude that the SRP is a tax rather than a penalty, we must then determine whether it qualifies as a tax measured by income or as an excise tax.

The government argues that the Supreme Court's decision in NFIB upholding the individual mandate largely resolves these questions, because the Court found the SRP to be a tax by engaging in the same functional analysis required in the bankruptcy context. The Taxpayers, however, argue that the NFIB Court's analysis of the tax question is not binding on this court, because the constitutional question of whether the SRP was within Congress's taxing power is governed by different principles than the statutory question of whether the SRP constitutes a tax within the meaning of the Bankruptcy Code. Relying instead on the NFIB Court's analysis of the SRP under the Anti-Injunction Act, the Taxpayers contend that because Congress deliberately labeled the SRP as a penalty, Congress did not intend to treat the SRP as a tax.


Given the centrality of the Supreme Court's decision in NFIB to the parties' arguments, we begin there.

As is relevant to this case, NFIB involved constitutional challenges to the ACA that focused on the individual mandate and the SRP. The challengers contended that the mandate and SRP exceeded Congress' powers under the Commerce Clause because the Act sought to regulate inaction —the failure to maintain adequate insurance. Before addressing the merits of the constitutional question, however, the Court first had to determine whether the Anti-Injunction Act, 26 U.S.C. § 7421, barred the challenge.

The Anti-Injunction Act prohibits lawsuits seeking to "restrain[ ] the assessment or collection of any tax." § 7421(a). Instead, the tax must first be paid, and the taxpayer may then go to court to challenge the tax and seek a refund. The Supreme Court held that the SRP was not a tax for purposes of the Anti-Injunction Act. The Court noted that the ACA labels the SRP a penalty, but labels other exactions taxes. The Court concluded that the different statutory treatment demonstrated that Congress did not intend the SRP to be treated as a tax within the meaning of the Anti-Injunction Act:

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." Where Congress uses certain language in one part of a statute and different language in another, it is generally presumed that Congress acts intentionally.
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. We have thus applied the Anti–Injunction Act to statutorily described "taxes" even where that label was inaccurate....
Congress can, of course, describe something as a penalty but direct that it nonetheless be treated as a tax for purposes of the Anti–Injunction Act.
The Affordable Care Act[, however,] 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.

567 U.S. at 544, 546, 132 S.Ct. 2566.

On the merits of the constitutional challenges, the Supreme Court concluded that ...

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