by Kentucky’s Office of Unemployment Insurance’s claim for an overpayment of unemployment compensation benefits was not entitled to priority in the debtor’s chapter 13 case where the nature of the claim was better characterized as a “penalty” than a “tax.” In re Clardy, No. 22-30089 (Bankr. W.D. Ky. Dec. 1, 2022).
The claim filed by the Office of Unemployment Insurance (OUI) arose when the debtor received unemployment insurance at a time she was working. The OUI was authorized under Kentucky law to seek recompense either by withholding future unemployment benefits or by demanding repayment. The debtor objected to the OUI characterization of the claim as a priority tax debt under section 507(a)(8), arguing that the debt should be treated as a non-priority unsecured claim.
Recognizing that not all government exactions are in the nature of taxes, the bankruptcy court began its analysis with United States v. Reorganized CF & I Fabricators of Utah, Inc., et al., 518 U.S. 213 (1996). There the Supreme Court stated that when determining whether a government exaction should be characterized as a “tax,” a court should look “behind the label placed on the exaction and rest[] its answer directly on the operation of the provision.”
In City of New York v. Feiring, 313 U.S. 283 (1941), the Court defined taxes 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.” Other government collections, such as fines or penalties, license fees, or certain commercial costs such as the sale of logging rights, do not qualify as taxes.
The bankruptcy court turned next to County Sanitation Dist. No. 2 v. Lorber Indus. of Cal., Inc. (In re Lorber Indus. of Cal., Inc.), 675 F.2d 1062, 1066 (9th Cir. 1982), where the Ninth Circuit described a “tax” as: “(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 purposes of defraying expenses of government or undertakings authorized by it; (d) Under the police or taxing power of the state.”
Finding this test inadequate to distinguish taxes from other government exactions, the Sixth Circuit, in Yoder v. Ohio Bureau of Workers’ Comp. (In re Suburban Motor Freight, Inc.), 998 F.2d 338 (6th Cir. 1993) (“Suburban I”); Ohio Bureau of Workers’ Comp. v. Yoder (In re Suburban Motor Freight, Inc.), 36 F.3d 484 (6th Cir. 1994) (“Suburban II”), articulated two additional requirements: “(1) that the pecuniary obligation be universally applicable to similarly situated entities; and (2) that according priority treatment to the government claim not disadvantage private creditors with like claims.”
Applying the combined six-part Lorber/Suburban Motor Freight test, the court here found OUI’s claim was more in the nature of a penalty than a tax. The court was persuaded by the notice the OUI sent to the debtor informing her of the overpayment which accused her of misrepresentation, contained references to perjury, and made threats of criminal prosecution. Also, because the exaction applied only to unemployment compensation recipients who received an overpayment, it was not universally applicable.
For these reasons, the court found the debt was not entitled to priority status. It sustained the debtor’s objection.