The shared responsibility payment under the Affordable Care Act is not an “excise tax,” within the meaning of section 507(a)(8) and, therefore, the IRS’s claim for unpaid SRP was not entitled to priority in bankruptcy. IRS v. Huenerberg, No. 18-1617 (E.D. Wisc. Oct. 22, 2020).
When the debtors filed for chapter 13 bankruptcy, the IRS submitted a claim for over $6,000 in unpaid taxes, a portion of which was attributable to the debtors’ failure to pay what they owed under the Affordable Care Act as their shared responsibility payment (SRP). The IRS sought to have the SRP treated as a priority tax debt under section 507(a). The bankruptcy court found that the SRP did not qualify as an “excise tax” under that section and denied the IRS’s motion. The IRS appealed to the district court.
The portion of the ACA, 26 U.S.C. §5000A(c) (2016), giving rise to the debtors’ SRP debt provides: “(1) In general. — If a taxpayer who is an applicable individual, or an applicable individual for whom the taxpayer is liable under paragraph (3), fails to meet the requirement of subsection (a) 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).”
The IRS argued that despite the designation in the statute of the tax debt as a “penalty” it is in fact an excise tax which enjoys priority in bankruptcy under section 507(a)(8)(E). That section gives priority to an excise tax on “a transaction occurring before the date of the filing of the petition for which a return, if required, is last due [.]” The IRS supported its position with the case of Nat’l Fed’n of Indep. Bus. v. Sebelius, 567 U.S. 519, 539 (2012), which applied a functional analysis to distinguish between taxes and penalties. The Supreme Court held that the SRP was a tax that citizens chose to pay instead of buying health insurance.
In light of Sebelius, the district court agreed that the SRP was a tax rather than a penalty. However, the district court found that the SRP was not an “excise tax” under the priority statute. Citing Black’s Law Dictionary and seventh circuit cases relying on it, the court found that excise taxes are taxes imposed on an affirmative act, such as “the purchase of a particular good or service, be it the manufacture, sale or consumption of a commodity, the engaging in of an occupation, or the acquisition of a right or license to engage in an occupation.” Under the Court’s discussion in Sebelius, it was clear that the SRP, rather than taxing an affirmative act, taxed a citizen’s inaction. Therefore, the SRP was not an excise tax.
For similar reasons, the court found that even if the SRP could be called an excise tax, it did not meet section 507(a)(8)’s specification that the tax be “on a transaction,” because imposition of the SRP is a result of the taxpayer’s inaction rather than an affirmative act. The court rejected the IRS’s argument that “transaction” should be interpreted broadly, finding that even a broad interpretation of transaction could not reasonably be read to include a non-transaction.
Having failed to persuade the court that the SRP was an excise tax, the IRS argued that the mere fact of its being a tax at all gave it priority status in bankruptcy under section 507(a)(8). The court disagreed. It found that section 507(a)(8)(A) – (G) enumerates seven specific taxes subject to priority. Taxes not included in that list are not given priority, and the IRS did not argue that the SRP fell under any of the other categories of prioritized taxes.
The court affirmed.
Tags: ACA, priority of claims
