Pending before the Court is the appeal of the IRS from a United States Bankruptcy Court ("Bankruptcy Court") opinion holding that the 10% exaction is compensation for non-pecuniary loss and thus subject to a general unsecured claim.
I. Background and Procedural History
In July, 2015, appellees filed for bankruptcy protection under Chapter 13 of the Bankruptcy Code. In March, 2016, the IRS filed its fifth amended proof of claim No. 1 ("POC") in the amount of $44,149, of which $28,431 was categorized as "Unsecured Priority Claims". The amount of the Unsecured Priority Claim attributable to § 72(t) is $6,693 for the tax year 2012 and $10,351 for the tax year 2013.
In May, 2017, the Bankruptcy Court allowed the Daleys' motion for summary judgment and denied the IRS's cross-motion for summary judgment. The Bankruptcy Court held that the charges against the Daleys attributable to § 72(t) are penalties that do not compensate the IRS for a pecuniary loss and thus its claims are characterized as unsecured general claims. On May 22, 2017, appellant filed an appeal in this Court.
II. Analysis
United States district courts have jurisdiction to hear "appeals from final judgments, orders, and decrees ... of bankruptcy judges."
An individual who makes an early withdrawal from certain qualified retirement accounts must include the withdrawn money in gross income for that year.
The IRS avers that the 10% exaction is either a tax or a penalty for actual pecuniary loss and as such should be properly characterized as an unsecured priority claim. The Daleys deny that characterization and maintain that the decision of the Bankruptcy Court characterizing the 10% exaction as an unsecured general claim should be affirmed. They contend that because the 10% exaction is not intended as recompense for an actual pecuniary loss, it is not entitled to priority status as an unsecured priority claim.
The IRS claims that the 10% exaction should be classified as a priority claim because it is a "tax on or measured by income or gross receipts."
Relying on Nat'l Fed'n of Indep. Bus. v. Sebelius,
When determining whether an exaction is a tax or penalty for purposes of establishing priority of claim in a bankruptcy proceeding, the United States Supreme Court has held that courts interpreting the Internal Revenue Code should place no weight on the "tax" label in the statute but rather make determinations based "directly on the operation of the provision using the term in question." United States v. Reorganized CF & I Fabricators of Utah, Inc.,
The standard for determining whether the 10% exaction is a tax or a penalty for purposes of establishing priority of claim in a bankruptcy proceeding is complicated. Under the so-called "Feiring-Anderson" standard, taxes are defined as
pecuniary burdens laid upon individuals or their property, regardless of their consent, for the purpose of defraying the expenses of government or of undertakings authorized by it.
CF & I,
To apply that standard, courts look beyond the statutory label of an exaction and evaluate its actual effects to determine "whether it functions as either a tax or else as some different kind of obligation, like a debt, fee, or penalty." Boston Reg'l Med. Ctr., Inc. v. Massachusetts Div. of Health Care Fin. & Policy,
The IRS's contention that NFIB replaced the Feiring-Anderson framework is unavailing.
The Supreme Court acknowledged in NFIB that the same exaction can be construed
if the concept of penalty means anything, it means punishment for an unlawful act or omission.
Id. at 2596 (quoting CF & I
But that remark appears in the Court's discussion of whether the disputed Affordable Care Act exaction constituted a tax for constitutional purposes. See id. at 2594 ("[W]hile that label [as a penalty] is fatal to the application of the Anti-Injunction Act, it does not determine whether the payment may be viewed as an exercise of Congress's taxing power."). The case is silent on the standard for determining whether an exaction is a tax for bankruptcy purposes. There is no reason to believe it upset Feiring-Anderson.
The IRS cites no caselaw in which a court has adopted its interpretation of that provision. In contrast, multiple bankruptcy courts have held that § 72(t) exactions are penalties for purposes of the Bankruptcy Code. See, e.g., In re Cespedes,
Similarly, the only United States Circuit Court of Appeals to address the question determined that the 10% exaction is a penalty in the context of the Bankruptcy Code. In re Cassidy,
The judgement of the Bankruptcy Court that the Daleys' charges attributable to § 72(t) are penalties will be affirmed.
B. The Liability Imposed by § 72(t) Is Not a Penalty for Actual Pecuniary Loss
Alternatively, the IRS claims that the 10% exaction should be classified as a penalty compensating the government for actual pecuniary loss because it compensates the government for the cost incurred in deferring tax revenue. Appellant asserts that because the 10% exaction is a penalty for actual pecuniary loss, it is entitled to priority status as an unsecured priority claim under
This Court agrees with appellees that the primary purpose of § 72(t) in the context of the Bankruptcy Code is to deter taxpayers from making early withdrawals from qualified retirement plans and not to compensate the government for lost revenue. The Cassidy court concluded that the § 72(t) penalty is not for actual pecuniary loss because it is a flat rate penalty "bearing no relationship to the direct financial loss of the government."
Accordingly, the judgment of the Bankruptcy Court that appellees' charges attributable to § 72(t) are penalties not for actual pecuniary loss will be affirmed.
ORDER
For the foregoing reasons, the order of the Bankruptcy Court is AFFIRMED and the bankruptcy appeal (Docket No. 1) is DISMISSED .
So ordered .