601 B.R. 609
Bankr. E.D. La.2019Background
- Debtors John and Allison Cousins filed Chapter 13 on March 26, 2018; IRS filed and amended Claim No. 8 asserting $822,891.44 in tax liabilities, including an $88,675.87 unsecured priority amount and $814,215.57 general unsecured amount.
- Debtors objected to the IRS claim contesting $82,085 classified as a Shared Responsibility Payment (SRP) under 26 U.S.C. §5000A, arguing the SRP is a "penalty" and thus not a priority nondischargeable tax.
- The IRS contended the SRP’s statutory label is not dispositive and that the SRP functions as a tax subject to §507(a)(8) priority treatment.
- The court applied the functional-analysis used in Sebelius and bankruptcy precedents to determine whether the SRP is a tax or a penalty for §507(a)(8) purposes.
- The court found the SRP functions to raise revenue, is assessed and collected by the IRS via the tax code, lacks scienter and extremely punitive features, and does not criminalize failure to purchase insurance.
- The court concluded the SRP is a "tax" (either an excise or income tax) and therefore is entitled to priority nondischargeable status under §507(a)(8); Debtors’ objection was denied.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Is the ACA Shared Responsibility Payment a "penalty" (non-priority) or a "tax" (priority) under §507(a)(8)? | Debtors: §5000A labels the SRP a "penalty," so it should be dischargeable under bankruptcy penalty exceptions. | IRS: The label is not dispositive; the functional operation determines tax vs. penalty and SRP functions like a tax. | The SRP functions as a tax for bankruptcy purposes and is entitled to priority under §507(a)(8). |
| Does the SRP bear characteristics of a punitive penalty (scienter, severe burden, enforcement outside IRS)? | Debtors: The SRP serves to coerce behavior and is punitive in effect. | IRS: SRP lacks scienter, is modest compared to insurance cost, and is collected by IRS under tax procedures. | Court: SRP lacks core punitive features; deterrent effect alone does not make an exaction a penalty. |
| If a "tax," what category fits §507(a)(8) (income, excise, direct, duty)? | Debtors: SRP is not a tax fitting priority categories. | IRS: SRP is not a duty or direct tax; it is either an excise (tax on discrete act/right) or an income-based tax. | Court: SRP is not a duty or direct tax; by elimination and its statutory placement it is an excise or income tax and thus within §507(a)(8). |
| Does Sebelius controllingly interpret §5000A for bankruptcy treatment? | Debtors: Constitutional analysis may differ from bankruptcy priority analysis. | IRS: Sebelius applied the same functional test and supports treatment of SRP as a tax. | Court: Sebelius’ functional-analysis and cited bankruptcy cases control and support treating SRP as a tax. |
Key Cases Cited
- National Fed. of Indep. Bus. v. Sebelius, 567 U.S. 519 (2012) (applied functional test and concluded the SRP operates like a tax for constitutional purposes)
- United States v. Sotelo, 436 U.S. 268 (1978) (statutorily labeled "penalty" may function as a tax under a functional analysis)
- United States v. Reorganized CF & I Fabricators of Utah, Inc., 518 U.S. 213 (1996) (two-step functional inquiry can identify punitive exactions that are penalties)
- Bailey v. Drexel Furniture Co., 259 U.S. 20 (1922) (identifies characteristics distinguishing penalties from taxes)
- United States v. New York, 315 U.S. 510 (1942) (defines tax as pecuniary burden to support government)
- Grogan v. Garner, 498 U.S. 279 (1991) (party asserting nondischargeability bears the burden of proof)