Robert Szczyporski v.
PRECEDENTIAL
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
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).
Whether the payment is a “penalty” or a “tax” remains contested. In NFIB v. Sebelius, 567 U.S. 519 (2012), the Supreme Court held that the shared responsibility payment is a tax for constitutional purposes, id. at 570, but is not a tax for purposes of the Anti-Injunction Act, id. at 546. 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
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 Systems, 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;
II
The Bankruptcy Court had jurisdiction over the Debtors’ objection to the IRS proof of claim under
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
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 (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 (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 (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).
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, and (2) lacks common characteristics of a penalty, id. at 566–68. 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 (1978), as the fourth case in a string of citations establishing that the “penalty” label is not determinative, Sebelius, 567 U.S. at 565. And it quotes CF & I Fabricators only to establish that a penalty necessarily entails “punishment for an unlawful act or omission,” id. at 567 (quoting CF & I Fabricators, 518 U.S. at 224). 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 (opinion of Roberts, C.J.) (quoting Hooper v. California, 155 U.S. 648, 657 (1895)). But for purposes of bankruptcy priority, “provisions allowing preferences must be tightly construed.” Howard Delivery Serv., Inc. v. Zurich Am. Ins. Co., 547 U.S. 651, 667 (2006) (citations omitted). These conflicting presumptions suggest that an exaction could function as a tax for the broader purpose of constitutional validity, but not within the narrower confines of bankruptcy priority.
The Supreme Court held in Sebelius that an exaction can be a “tax” for constitutional purposes but not for certain statutory purposes. Compare 567 U.S. at 543-46 (shared responsibility payment is not a tax under the Anti-Injunction Act); with id. at 563–74 (shared responsibility payment is a tax under the Constitution). Accordingly, there is no reason to conclude that Sebelius‘s constitutional analysis is controlling in the context of the Bankruptcy Code.4
B
The Supreme Court‘s Sebelius analysis is not dispositive in the bankruptcy context, but we find it persuasive. Based on the functional examination of the shared responsibility payment‘s actual effects and operation, we conclude that the payment is a tax for bankruptcy purposes. See United Healthcare, 396 F.3d at 255–56.
The Debtors argue that the fifth and sixth Lorber-Suburban factors are not satisfied. They are, for the reasons we described. But even if they were not, our conclusion is supported by other relevant factors. The shared responsibility payment is not “exchanged for a government benefit not shared by others.” See id. at 260 (citation omitted). And the government can—and did—“manipulate the [payment] to encourage or discourage” health insurance purchases. See id. at 254 (citation omitted);
Moreover, as the Supreme Court observed in Sebelius, the shared responsibility payment is calculated and administered like a tax: it (1) “is paid into the Treasury by taxpayers when they file their tax returns”; (2) “does not apply to individuals who do not pay federal income taxes because their household income is” too low; (3) is calculated using factors familiar to the tax context, such as “taxable income, number of dependents, and joint filing status”; (4) “is found in the Internal Revenue Code and enforced by the IRS”; (5) is “assess[ed] and collect[ed] . . . in the same manner as taxes”; and (6) “produces at least some revenue for the [g]overnment.” Sebelius, 567 U.S. at 563–64 (cleaned up).
Finally, as the Supreme Court also explained, despite its statutory “penalty” label, the shared responsibility payment lacks typical penal characteristics. The payment does not impose a heavy financial burden, has no scienter requirement, cannot be enforced through punitive means like criminal prosecution, and is not imposed for an unlawful act. Id. at 566–68.
* * *
Looking behind the payment‘s label to its actual effects, we hold that the shared responsibility payment is a tax for bankruptcy purposes.
V
Having determined that the shared responsibility payment is a tax for bankruptcy purposes, we must decide whether it is entitled to priority under the Bankruptcy Code. Only taxes enumerated in Section 507(a)(8) are entitled to priority status. The IRS argues the shared responsibility payment should receive priority as either (1) “a tax on or measured by income or gross receipts,”
As a preliminary matter, we observe that res judicata does not, as the Debtors argue, bar us from considering the IRS‘s income tax argument. “[A] confirmation order is res judicata as to all issues decided or which could have been decided at the hearing on confirmation.” In re Szostek, 886 F.2d 1405, 1408 (3d Cir. 1989);
On the merits, the Debtors contend that the shared responsibility payment is not an “income tax” entitled to priority under Section 507(a)(8)(A). We agree that the payment is not a traditional tax “on” income earned or received. Section 507(a)(8)(A)‘s plain language, however, grants priority not only to traditional income taxes, but also to taxes, like the shared responsibility payment, whose amounts are calculated based on the taxpayer‘s income.
“When statutory language is plain and unambiguous, ‘the sole function of the courts . . . is to enforce it according to its terms.’” In re Visteon Corp., 612 F.3d 210, 220 (3d Cir. 2010) (omission in original) (quoting Lamie v. United States Tr., 540 U.S. 526, 534 (2004)). Section 507(a)(8)(A) extends priority status to “a tax on or measured by income or gross receipts.”
The Debtors counter that income is “only indirectly considered in the first level of inquiry [along with] other factors,” so the payment is not “measured by” income. Debtors Br. 20. But the statute shows that, when Debtors incurred the obligation in 2018, the payer‘s household income played an essential role in determining the amount of the shared responsibility payment owed.
First, individuals who could not afford coverage because their household income was below a specified level,
A simple example using the IRS‘s payment estimator is illustrative. See IRS Taxpayer Advocate Service, The Individual Shared Responsibility Provision Payment Estimator, https://www.taxpayeradvocate.irs.gov/estimator/isrp/estimator.htm. Consider a single taxpayer who went without health insurance for all of 2018. If the taxpayer‘s gross annual income was less than $12,000 (the minimum filing threshold for 2018), he would not owe any shared responsibility payment. See
If the taxpayer‘s income was between the low-income and high-income cut-offs (between $39,800 and $147,850), he would owe an amount equal to 2.5 percent of his income above the $12,000 filing threshold. See
That the shared responsibility payment provision is located in a portion of the Internal Revenue Code titled “Miscellaneous Excise Taxes,”
For the reasons stated, we hold that the shared responsibility payment is a tax “measured . . . by income.” As such, it is entitled to priority under Section 507(a)(8)(A). We will affirm the District Court‘s order.