US v. Fabio AliceaUS v. Fabio Alicea
PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 21-2220
UNITED STATES OF AMERICA,
Creditor - Appellant,
v.
FABIO ALICEA; SARAH J. ZABEK,
Debtors - Appellees.
Appeal from the United States District Court for the Eastern District of North Carolina, at
Wilmington. Louise W. Flanagan, District Judge. (7:20-cv-00169-FL)
Argued: October 28, 2022 Decided: January 19, 2023
Amended: January 19, 2023
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.
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.
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repealed) requiring most individuals to maintain health insurance meeting certain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
U.S.C. § 5000A
§ 5000A(b)(1)
. . . 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 (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, 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. 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
qualifies as a tax measured by income, and we therefore reverse the judgment of the district
court and remand for further proceedings.
I.
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
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
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
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
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).
II.
The Bankruptcy Code gives priority to certain classes of unsecured claims, which
must be paid in full before other unsecured claims may be paid.
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.”
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
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 (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 (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. 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 (1978) (‘‘That the funds due are referred to as a ‘penalty’ . . .
does not alter their essential character as taxes.”).
III.
At issue in this appeal is whether, for purposes of priority treatment in bankruptcy
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.
A.
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,
The Anti-Injunction Act prohibits lawsuits seeking to “restrain[] the assessment or
collection of any tax.”
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.
On the merits of the constitutional challenges, the Supreme Court concluded that
Clause. The Court explained that “[t]he Constitution grants Congress the power to
‘regulate Commerce.’ The power to regulate commerce presupposes the existence of
commercial activity to be regulated. If the power to ‘regulate’ something included the
power to create it, many of the provisions in the Constitution would be superfluous.” Id. at
550 (citation omitted).
The Court then considered the government’s alternative argument that the mandate
may be read “not as ordering individuals to buy insurance, but rather as imposing a tax on
those who do not buy that product,” id. at 562, and thus a proper exercise of the
government’s powers to lay and collect taxes. Although the Court believed “[t]he most
straightforward reading of the mandate is that it commands individuals to purchase
insurance,” id., the Court recognized that “[t]he text of a statute can sometimes have more
than one possible meaning.” Id.
The question is not whether [the government’s view that the mandate
imposes a tax on those without insurance] is the most natural interpretation
of the mandate, but only whether it is a fairly possible one. As we have
explained, every reasonable construction must be resorted to, in order to save
a statute from unconstitutionality. The Government asks us to interpret the
mandate as imposing a tax, if it would otherwise violate the Constitution.
Granting the Act the full measure of deference owed to federal statutes, it
can be so read . . . .
Id. at 563 (cleaned up).
When explaining why the mandate can reasonably be read as imposing a tax on the
uninsured, the Court engaged in a functional analysis of the SRP. The Court noted that the
SRP
looks like a tax in many respects. The [SRP] is paid into the Treasury by
taxpayers when they file their tax returns. It does not apply to individuals
who do not pay federal income taxes because their household income is less
than the filing threshold in the Internal Revenue Code. For taxpayers who do
owe the payment, its amount is determined by such familiar factors as taxable
income, number of dependents, and joint filing status. The requirement to
pay is found in the Internal Revenue Code and enforced by the IRS, which .
. . must assess and collect it in the same manner as taxes. This process yields
the essential feature of any tax: It produces at least some revenue for the
Government.
NFIB, 567 U.S. 563–64 (cleaned up).
While the statutory labelling of the SRP as a penalty was determinative of the Anti-
Injunction Act question, the Court explained that the penalty label
does not determine whether the payment may be viewed as an exercise of
Congress’s taxing power. It is up to Congress whether to apply the Anti–
Injunction Act to any particular statute, so it makes sense to be guided by
Congress’s choice of label on that question. That choice does not, however,
control whether an exaction is within Congress’s constitutional power to tax.
Id. at 564. In the Court’s view, “[t]he Affordable Care Act’s requirement that certain
individuals pay a financial penalty for not obtaining health insurance may reasonably be
characterized as a tax. Because the Constitution permits such a tax, it is not our role to
forbid it, or to pass upon its wisdom or fairness.” Id. at 574.
As noted above, both sides of this case rely on NFIB to support their positions. The
government contends that the Court’s determination that the SRP was a tax for purposes
of the constitutional inquiry requires us to conclude that the SRP is a tax for bankruptcy
purposes, while the Taxpayers contend that the NFIB Court’s determination that the SRP
was a penalty for purposes of the Anti-Injunction Act requires us to conclude that the SRP
is a penalty for bankruptcy purposes. The dissent agrees with the Taxpayers and argues
that, under NFIB, the statutory label given a governmental exaction always controls any
question of statutory interpretation. See Dissenting Op. at 23 (“[W]hen Congress labels the
shared responsibility payment a penalty, not a tax, the payment should be treated as a
penalty in other congressional enactments, including the Bankruptcy Code. This holding is
required by [NFIB].”).
1.
We disagree with the Taxpayers and the dissent that NFIB requires us to treat the
SRP as a penalty. While the NFIB Court did rely primarily on the statutory label when
deciding that the SRP was not a tax for purposes of the Anti-Injunction Act, the court did
not hold that the statutory label always controls all statutory questions. Instead, the court
indicated that its analysis only governed questions under the Anti-Injunction Act. See
NFIB, 567 U.S. at 564 (“It is up to Congress whether to apply the Anti–Injunction Act to
any particular statute, so it makes sense to be guided by Congress’s choice of label on that
question.”) (emphasis added).
Accepting the Taxpayers’ argument would mean that the NFIB Court silently
upended bankruptcy practice and overruled a long line of cases. As discussed above, when
determining whether a governmental exaction is a tax or penalty for bankruptcy purposes,
Supreme Court precedent requires us to apply a functional analysis that ignores the label
given to the exaction and instead considers whether the exaction operates as a tax or a
penalty:
On a number of occasions, this Court considered whether a particular
exaction, whether or not called a “tax” in the statute creating it, was a tax for
purposes of [priority in bankruptcy proceedings], and in every one of those
cases the Court looked behind the label placed on the exaction and rested its
answer directly on the operation of the provision using the term in question.
CF & I Fabricators, 518 U.S. at 220 (1996); see City of Huntington, 999 F.2d at 73 (“The
proper analysis to arrive at the real nature of the [exaction] is to examine all the facts and
circumstances and assess them on the basis of economic realities.”).
If the dissent is right that the NFIB Court held that the statutory label given a
governmental exaction always controls any question of statutory construction, that would
mean that the Court used a non-bankruptcy case to overrule CF&I and to reject its long-
standing approach to bankruptcy cases. The NFIB Court, however, never indicated that its
analysis of the Anti-Injunction Act issue was breaking new ground or required the
overruling of any cases. If the Court’s analysis of the Anti-Injunction Act issue had worked
such a fundamental change in unrelated areas of the law, it seems likely that the Court
would have been aware of the change and would have acknowledged the consequences of
its decision.
Moreover, the NFIB Court relied on two bankruptcy functional-approach cases—
CF&I and Sotelo—when concluding
purposes. See NFIB, 567 U.S. at 565-67 & n.7. If the Court intended to overrule those cases
and hold the statutory label controls all statutory questions, it seems unlikely that the Court
would rely, without comment, on cases that it had just silently overruled.
The dissent does not address these difficulties in its approach or even acknowledge
the long-established line of cases requiring a functional approach when considering claims
of priority under the Bankruptcy Code. CF&I and City of Huntington are binding precedent
that require us to apply a functional approach when determining whether a governmental
exaction qualifies as a tax or a penalty for purposes of claim priority under the Bankruptcy
Code. Because the Supreme Court in NFIB did not purport to overrule any of its Anti-
Injunction Act cases, much less any of its bankruptcy cases, “it is not our role to say it did.”
United States v. Moses, 23 F.4th 347, 357 (4th Cir. 2022) (“[I]t is noteworthy that Kisor
did not purport to overrule Stinson, and it is not our role to say it did.”), cert. denied, No. 22-
163 (U.S. Jan. 9, 2023). Unless and until the Supreme Court overrules CF&I, we are
obliged to follow it. See Payne v. Taslimi, 998 F.3d 648, 654 (4th Cir. 2021) (It is “the
Supreme Court’s prerogative alone to overrule one of its precedents. It is beyond our power
to disregard a Supreme Court decision, even if we are sure the Supreme Court is soon to
overrule it.” (cleaned up), cert. denied, 211 L. Ed. 2d 403 (Dec. 13, 2021). Under CF&I
and City of Huntington, the “penalty” label assigned to the SRP is not dispositive of the
priority question before us, and we must instead look to the nature and function of the SRP
to determine whether it qualifies as a tax entitled to priority under
2.
We turn now to the government’s claim that we are bound by the NFIB Court’s
application of the functional approach to conclude the SRP can be viewed as a tax. The
Taxpayers correctly observe that conflicting presumptions are involved in this case and in
NFIB. In NFIB, the determination that the SRP could reasonably be viewed as a tax was a
product of long-standing principles of statutory interpretation that required the Supreme
Court to find the mandate constitutional if fairly possible. This case, however, presents a
question of statutory meaning rather than congressional power. The question is whether the
SRP is a tax within the meaning of the Bankruptcy Code, under a statute that we must
construe narrowly.
The Third Circuit recently considered the issue before us and concluded that, in light
of the differing presumptions involved, NFIB was not directly controlling of the bankruptcy
priority question. See In re Szczyporski, 34 F.4th 179, 186 (3d Cir. 2022) (“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.”). We generally agree with the Third Circuit that, because of the differing
presumptions, a hypothetical exaction could be a tax for constitutional purposes and a
penalty for purposes of priority in bankruptcy proceedings. The NFIB Court, however,
stated that the SRP qualified as a tax even under the narrowest view of the taxing power.
See NFIB, 567 U.S. at 573
payment’s practical characteristics pass muster as a tax under our narrowest interpretations
of the taxing power.”). Accordingly, we are not so sure that the broader presumption at
play in NFIB makes the decision less applicable to the question before us.
Moreover, as noted above, the Court concluded that the SRP could reasonably be
viewed as a tax by relying on cases that applied the functional approach to the question of
tax versus penalty in the bankruptcy context. If applying the identical functional analysis
that we apply in the bankruptcy context led the Supreme Court to conclude that the SRP
functions as a tax, it would seem difficult for an intermediate court to reach a different
conclusion.
In any event, as we will explain, we agree that a functional analysis of the SRP
shows that it operates as a tax, not a penalty. We therefore do not need to decide whether
we are technically bound by the Supreme Court’s functional analysis of the SRP.
IV.
We turn now to the meat of the issue on appeal—whether the government’s claim
for the unpaid SRP is entitled to priority under
A.
When determining whether a governmental exaction is a tax, “[t]he proper analysis
to arrive at the real nature of the [exaction] is to examine all the facts and circumstances
and assess them on the basis of economic realities.” United States v. City of Huntington,
999 F.2d 71, 73 (4th Cir. 1993) (cleaned up). “For the purpose of determining claim priority
in the context of bankruptcy,” an exaction is a tax if it is
(a) An involuntary pecuniary burden, regardless of name, laid upon
individuals or property; (b) Imposed by, or under authority of the legislature;
(c) for public purposes, including the purpose of defraying expenses of
government of undertakings authorized by it; and (d) Under the police or
taxing power of the state.
Id. at 73 n.4. Applying this functional standard, we conclude that the SRP qualifies as a
tax.*
The SRP is imposed by the government under its taxing power on a large,
identifiable class of people (uninsured, nonexempt taxpayers), and the SRP is collected by
the IRS as part of the regular income tax filing process. The SRP serves public purposes,
as it raises some amount of revenue for the government and encourages individuals to
maintain health insurance, which in turn reduces the expenses of providing medical care to
the uninsured borne by
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.”).
The Taxpayers contend that the SRP cannot be viewed as a tax because the primary
purpose of the individual mandate and the SRP was to encourage the purchase of health
insurance, not to raise revenue. We disagree. As the Supreme Court has explained, the
“essential feature of any tax” is that “[i]t produces at least some revenue for the
Government.” NFIB, 567 U.S. at 564.
Although the [SRP] will raise considerable revenue, it is plainly designed to
expand health insurance coverage. But taxes that seek to influence conduct
are nothing new. . . . That§ 5000A seeks to shape decisions about whether
to buy health insurance does not mean that it cannot be a valid exercise of
the taxing power.SRP satisfies one of two subsections:
11 U.S.C. § 507(a)(8)(E)(i) , ‘an excise tax on a
transaction’; and11 U.S.C. § 507(a)(8)(A) , ‘a tax on or measured by income.’ As explained
infra, the former fails, and the latter is not properly before our court.”) (cleaned up). District
courts and bankruptcy courts have reached conflicting conclusions. See In re Szczyporski, 34 F.4th at 184-85 nn.1-3 (collecting cases).
Id. at 567. Accordingly, we conclude that the SRP operates as a tax, not a penalty.
B.
Although we conclude that the SRP is properly viewed as a tax, the government’s
claim is entitled to priority only if the SRP further qualifies as either “a tax on or measured
by income or gross receipts,”
transaction,”
by income, it is unnecessary for us to consider whether the SRP also amounts to an excise
tax.
The statute setting out the method for calculating the SRP,
contains formulas keyed to individual and household income. The amount of the SRP is
calculated “as a percentage of household income, subject to a floor based on a specified
dollar amount and a ceiling based on the average annual premium the individual would
have to pay for qualifying private health insurance.” NFIB, 567 U.S. at 539. Because
household income provides the starting point for all SRP calculations, we have no difficulty
concluding that the SRP is “measured by income.”
According to the Taxpayers, however, the SRP is not a tax measured by income
because “[t]he threshold question of whether the [SRP] is triggered is not answered by
reference to how much income an individual earned, but by reference to whether an
individual had health insurance.” Brief of Respondent at 12. The Supreme Court appears
to have already rejected this argument, as the Court in NFIB explained that the SRP
obligation “is triggered by specific circumstances—earning a certain amount of income but
not obtaining health insurance.” 567 U.S. at 571.
Moreover, the bankruptcy statute gives priority to claims for taxes measured by
income, not to claims for taxes triggered by a particular income level. Even if income has
nothing to do with triggering liability for the SRP, the amount owed for the SRP is
measured by income. See In re Szczyporski, 34 F.4th at 188 (The SRP “is not a traditional
tax ‘on’ income earned or received.
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.”).
The Taxpayers also suggest that the SRP is not measured by income because
groups—like members of Indian tribes and those who cannot afford the SRP—are not
required to pay it at all, and others pay only a flat rate. Again, we disagree.
As the government points out, the flat rate applies only if it is greater than the
amount calculated based on the taxpayer’s income. See
the flat rate cannot be calculated without first calculating the amount due based on income,
the existence of the flat rate does not mean that the SRP is not measured by income. See In
re Szczyporski, 34 F.4th at 189 (“Because the amount due under each of these scenarios is
based on the taxpayer’s household income, the shared responsibility payment is an
obligation ‘measured by income,’ even when the payment is a flat fee rather than a
percentage of income.”). And while certain groups are entirely exempt from the SRP, that
again does not mean that the SRP is not measured by income. There are many exemptions
from the obligation to pay federal income taxes, yet there is no dispute that federal income
taxes are entitled to priority as taxes measured by income. That some taxpayers are not
required to pay the SRP does not change the fact that when the SRP must be paid, the
amount to be paid is measured by the taxpayer’s income. See In re Juntoff, 636 B.R. 868,
885 (B.A.P. 6th Cir. 2022) (“[W]hile a taxpayer may be obligated to pay a flat amount
rather than a percentage of their income, making that determination requires a taxpayer to
input their income into a calculation. Stated differently, it is impossible to discern a
nonexempt taxpayer’s liability for the SRP without factoring their income into the analysis,
making the SRP a tax ‘measured by’ the taxpayer’s income.”).
V.
To summarize, we conclude that the SRP qualifies as a tax under the functional
approach that has consistently been applied in bankruptcy cases and that nothing in the
Supreme Court’s decision in NFIB requires us to abandon that functional approach.
Because the SRP is a tax that is measured by income, the government’s claim is entitled to
priority under
district court and remand for further proceedings consistent with this opinion.
REVERSED AND REMANDED
WILKINSON, Circuit Judge, concurring:
I concur in full in Judge Traxler’s fine majority opinion in this case. Plaintiff’s suit
strikes me as a not-too-subtle rearguard action against the Affordable Care Act and the
decision to uphold it, NFIB v. Sebelius, 567 U.S. 519 (2012). That decision is the law,
however, and circumventing it would be as impermissible as overruling it.
The SRP has now been effectively slain, see Tax Cuts and Jobs Act of 2017, Pub.
L. No. 115–97, § 11081, 131 Stat. 2092 (reducing payments to zero), and I should have
thought the matter, so very controversial at the time, had been well settled. The smoke of
battle lingers still, however, in our fine bankruptcy courts of all places. During its brief
lifetime, the SRP behaved and functioned as one would expect a tax to do. Not just in one
particular but in many. See NFIB, 567 U.S. at 563–64; Maj. Op. at 11–13. This
functionality trumps labeling, as the Supreme Court and this court have repeatedly held.
the Bankruptcy Code affords.
This fight is over. R.I.P.
NIEMEYER, Circuit Judge, dissenting:
The issue in this case is straightforward — whether the “shared responsibility
payment” imposed by the Patient Protection and Affordable Care Act of 2010 (“Affordable
Care Act” or “ACA”) is a “tax” or a “penalty” when considered in the context of the
Bankruptcy Code, which gives the IRS priority for tax claims but not for penalty claims.
See
question is provided by the Supreme Court’s decision in National Federation of
Independent Business v. Sebelius (NFIB), 567 U.S. 519 (2012), which specifically
addressed the nature of the payment. But I differ with the majority in that I conclude that
NFIB requires that the payment be treated as a penalty in the context of the Bankruptcy
Code. By concluding instead that the payment is a tax in that context, the majority fails to
recognize that NFIB applied two distinct analyses, one when construing the ACA’s
statutory text and another when determining the scope of Congress’s constitutional
authority for enacting the ACA. While the NFIB Court chose to apply a functional standard
when determining the scope of Congress’s constitutional authority, it applied the standard
rules of statutory construction when determining, for purposes of how the ACA interacted
with another statute, whether the shared responsibility payment was a tax or a penalty,
concluding that the payment was a penalty.
Specifically, the NFIB Court held that for purposes of the Anti-Injunction Act —
which prohibits actions to restrain the assessment or collection “of any tax” — the ACA’s
shared responsibility payment is a “penalty,” as so labeled, and not a “tax.” 567 U.S. at
543. The Court explained, “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.”
Id. at 544 (citation omitted). But the Court noted that while Congress chose to label the
shared responsibility payment a penalty, its label does not control when the Court must
determine the scope of Congress’s authority under the Constitution — more particularly,
when it must determine the scope of Congress’s taxing power. See
cl. 1
“constitutional question was not controlled by Congress’s choice of label,” NFIB, 567 U.S.
at 564 (emphasis added), and thus the shared responsibility payment “may for
constitutional purposes be considered a tax, not a penalty,” id. at 566 (emphasis added).
The distinction the Court drew between following Congress’s labels when construing its
legislation and looking behind them when determining the scope of Congress’s power
under the Constitution is central to the disposition of this case.
The majority fails to accept the Supreme Court’s distinct analyses, applying the
functional analysis that the Court employed only for constitutional interpretation to its
statutory interpretation of the ACA. And even then, the majority is noncommittal as to
whether it is “technically
responsibility payment].” Ante at 13. Moreover, to avoid the Court’s statutory analysis,
which rejected a functional analysis in construing the term “penalty,” see NFIB, 567 U.S.
at 544 (rejecting the argument that the shared responsibility payment, although labeled a
penalty, “functions like a tax”), the majority states simply that “the [NFIB] [C]ourt did
not hold that the statutory label always controls all statutory questions.” Ante at 9. In short,
the majority simply refuses to apply the analysis specified by the Court that
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.
NFIB, 567 U.S. at 544 (citation omitted). And the majority does so to be able to hold that
the “penalty” is not actually a penalty but a “tax,” even though it was not considered a tax
by Congress. That reasoning is unsustainable.
I
The Affordable Care Act mandates that “applicable individual[s]” maintain
“minimum essential [health insurance] coverage,”
who fail to do so, it imposes a “penalty,”
“penalty” must be paid to the IRS with the taxpayer’s tax return and “shall be assessed and
collected in the same manner as an assessable penalty under [
payment a “penalty” that is imposed for failure to maintain mandated health insurance,
which stands in contrast to the Act’s labeling of other exactions as “taxes.” See NFIB, 567
U.S. at 544.
The taxpayers before us filed a voluntary Chapter 13 bankruptcy petition in
December 2019, and the IRS filed a proof of claim of roughly $30,000 as an unsecured
priority claim, which included $2,409 owed for an unpaid shared responsibility payment
under the ACA. The taxpayers objected to the claim, contending that the portion consisting
of the shared responsibility payment was not entitled to priority because it was not a tax,
but a penalty, and therefore should be classified as an “unsecured general claim,” not an
“unsecured priority claim.”
The Bankruptcy Code distinguishes between how claims for unpaid taxes and
claims for unpaid penalties are to be treated. Under
for certain unpaid taxes. See
priority to various types of taxes”). But if the debt is an unpaid penalty, the claim is not
given priority.
The bankruptcy court sustained the taxpayers’ objection and concluded that the
shared responsibility payment was a penalty and not a tax, relying on NFIB. The district
court affirmed, explaining in particular how its holding was governed by NFIB:
The [NFIB] court observed that “Congress cannot change whether an
exaction is a tax or a penalty for constitutional purposes simply by describing
it as one or the other.” But, the manner in which the Anti-Injunction Act and
the Affordable Care Act “relate to each other is up to Congress, and the best
evidenceof Congress’s intent is the statutory text.”
(Quoting NFIB, 567 U.S. at 544). I would affirm.
II
The issue in this case is one of statutory interpretation — whether the shared
responsibility payment is a penalty as so labeled by Congress in the ACA. Given the plain
meaning of the text, I conclude that Congress’s labeling it a penalty is controlling for
purposes of other congressional enactments, and therefore it should be treated as a penalty
in the Bankruptcy Code, which distinguishes penalties from taxes. As the Supreme Court
instructs, Congress’s labels must be honored when engaging in statutory interpretation,
“even where [the] label was inaccurate.” NFIB, 567 U.S. at 544. And in responding to the
argument that the ACA treats the shared responsibility payment as a tax, despite being
labeled a penalty, for purposes of applying the Anti-Injunction Act,
the Court stated that “[t]he text of the pertinent statutes suggests otherwise.” NFIB, 567
U.S. at 543. It explained that Congress “chose to describe the ‘[s]hared responsibility
payment’ imposed on those who forgo health insurance not as a ‘tax,’ but as a ‘penalty,’”
and that because the pertinent statutes are “creatures of Congress’s own creation[,] [h]ow
they relate to each other is up to Congress,” even if Congress’s labels are thought to be
inaccurate. Id. at 543–44. Indeed, the Court specifically rejected the argument that, for its
statutory construction, it should apply a functional analysis. Id. at 544.
Similarly here, the pertinent statutes are the ACA and the Bankruptcy Code, both of
which are “creatures of Congress’s own creation.” Accordingly, when Congress labels the
shared responsibility payment a penalty, not a tax, the payment should be treated as a
penalty in other congressional enactments, including the Bankruptcy Code. This holding
is required by NFIB. In NFIB, the Court noted that “Amicus argues that even though
Congress did not label the shared responsibility payment a tax, we should treat it as such
under the Anti-Injunction Act because it functions like a tax.” 567 U.S. at 544 (emphasis
added). Yet, the Court rejected that argument in favor of honoring Congress’s deliberate
decision to label it a penalty. Id. The Court recognized that, while the Anti-Injunction Act
applied to “any tax,” the shared responsibility payment in the ACA was not a tax as a matter
of statutory construction because Congress “chose to describe [the payment] not as a ‘tax,’
but as a ‘penalty.’ There is no immediate reason to think that a statute applying to ‘any
tax’ would apply to a ‘penalty.’” Id. at 543 (citations omitted). Nonetheless, the majority
concludes that the penalty should be treated as a tax to give the government a priority in
bankruptcy, employing the same functional analysis rejected by the NFIB Court.
Although in NFIB the ACA’s penalty label was applied to the Anti-Injunction Act
and the other statute involved here is the Bankruptcy Code, the language of the ACA that
labels the payment a “penalty,”
the payment is a “penalty” in one statutory context but a “tax” in another. And the Supreme
Court so observed. See NFIB, 567 U.S. at 544–45, 564. All three statutes are of Congress’s
creation.
To be sure, when determining whether Congress has the constitutional power to
impose the shared responsibility payment, the question in NFIB became one of
constitutional
functional analysis of the shared responsibility payment, concluding that the shared
responsibility payment functions in large part like a tax such that Congress could
constitutionally require the payment. As the Court stated:
It is of course true that the Act describes the payment as a “penalty,” not a
“tax.” But while that label 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. It is up to Congress whether to apply the Anti–
Injunction Act to any particular statute, so it makes sense to be guided by
Congress’s choice of label on that question. That choice does not, however,
control whether an exaction is within Congress’s constitutional power to tax.
NFIB, 567 U.S. at 564 (citation omitted).
In this case, there is no question presented about the scope of Congress’s
constitutional authority. Rather, the question presented involves the statutory
interpretation of the ACA, a congressional enactment, in which Congress distinguished a
“penalty” from a “tax.” While Congress described numerous exactions in the Act as
“taxes,” it described the shared responsibility payment as a “penalty.” Thus, when
determining how the shared responsibility payment must be treated under the Bankruptcy
Code, we must yield to Congress’s determination that it is a penalty. As NFIB observes,
in the context of two congressional enactments, we must honor the congressional texts as
written.
* * *
At bottom, in the Affordable Care Act, Congress deliberately labeled the shared
responsibility payment a penalty — as distinct from other payments required under the Act
that are labeled as taxes — and therefore, when addressing the payment in the Bankruptcy
Code, it must be treated as a penalty. This is what NFIB requires; this is what the district
court held; and this is what I would conclude. I respectfully dissent.
Notes
concluded that the SRP qualifies as a tax measured by income. See In re Szczyporski, 34 F.4th 179, 190 (3d Cir. 2022) (“[W]e hold that the shared responsibility payment is a tax
‘measured by income.’ As such, it is entitled to priority under
(cleaned up). The Fifth Circuit in a non-precedential opinion has concluded that the SRP
does not qualify as an excise tax, but the court declined to consider the untimely raised
question of whether it qualified as a tax measured by income. See In re Chesteen, 799 F. App’x 236, 239-40 (5th Cir. 2020) (“In this appeal, the Government . . . contends the owed
(Continued)