by “The shared responsibility payment is neither ‘a tax on or measured by income or gross Receipts’ nor ‘an excise tax on . . . a transaction’ within the meaning of § 507(a)(8)(A) or (E) of the Bankruptcy Code.” In re Juntoff, 2021 WL 1522206 (Bankr. N.D. Ohio April 15, 2021) (case nos. 1:19-bk-17032, 1:20-bk-13035) (unpublished).
In two cases consolidated for purposes of this opinion, the United States filed proofs of claim against debtors, Howard Juntoff and George and Melanie McPherson, representing the debtors’ liability for the shared responsibility payment (SRP) under the ACA, 26 U.S.C. § 5000A, and identifying the obligation as a tax entitled to priority in the debtors’ chapter 13 plans. The debtors objected to the treatment of the SRP arguing that it should be treated as an unsecured claim.
Section 507(a)(8) prioritizes: “(A) 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,” and “(E) an excise tax on—(i) a transaction occurring before the date of the filing of the petition.”
The court began with the question of whether the SRP was a “tax” at all noting that the question turns on function rather than label. In Nat’l Fed’n of Indep. Bus. v. Sebelius, 567 U.S. 519 (2012), the Supreme Court determined that the STP should be deemed a “tax” for purposes of determining its constitutionality under Congress’s taxing authority. The Juntoff court found that case instructive but not dispositive, noting that a statute will be liberally construed to support constitutionality. The same is not true when addressing treatment of claims under the Bankruptcy Code. In fact, under Howard Delivery Serv., Inc. v. Zurich Am. Ins. Co., 547 U.S. 651 (2006), the Court noted that, when determining priority status, a statute should be “tightly construed” with an eye toward favoring equal distribution among creditors.
The court side-stepped the general question of whether the SRP operates as a tax to look at the more specific requirement of whether it operates as “a tax on or measured by income or gross receipts” or “an excise tax on . . . a transaction” within the meaning of § 507(a)(8)(A) or (E).
Because section 5000A is found under the heading of “Miscellaneous Excise Taxes” in the IRC, the court found it need only decide whether the SRP is an excise tax “on a transaction.” Dictionary definitions of a “transaction” include performance of a discrete act. The court found that the failure to pay the SRP was non-performance and that “[i]naction is not a transaction.” The court therefore found that while the SRP was an excise tax, it was not an excise tax on a transaction for purposes of bankruptcy priority.
The US next argued that the SRP fell under the priority category of a tax “on or measured by income or gross receipts,” because the amount owed by the taxpayer is determined in part by the taxpayer’s income.
The court found that the US’s argument essentially read the provision as “a tax [on anything so long as it is] measured [in any way, shape, or form] by income or gross receipts.” The court rejected this broad interpretation as rendering the word “on” in section 507(a)(8)(A) superfluous. Also, mindful of the principle that priority claims should be tightly construed, the court found it reasonable to limit interpretation of “tax on or measured by income” to traditional income tax rather than any tax in which income is a component of the calculation.
The court found further support for a narrow interpretation in the 2017 amendment to the ACA (effective in 2019), where Congress eliminated the penalty for failure to maintain the SRP. The court reasoned that “Congress has already declined to put the shared responsibility payment on equal footing with other taxes, including income taxes, when it prohibited the government from using traditional tax collection and enforcement tools for nonpayment.” Finally, the court noted that income was only one of many factors to be considered in the calculation for the SRP and, in some cases, was not a factor at all. The court thus rejected the US’s argument that the SRP was a tax on or measured by income.
Based on these conclusions, the court sustained the debtors’ objections to treatment of the SRP as a priority claim in their chapter 13 cases, finding instead that they should be treated as general unsecured claims.
The US has appealed to the Bankruptcy Appellate Panel for the Sixth Circuit. In re McPherson, Case No. 21-8012 (B.A.P. 6th Cir. filed June 16, 2021); In re Juntoff, Case No. 21-8011 (B.A.P. 6th Cir. filed June 16, 2021).