1 WO 2 3 4 5 6 IN THE UNITED STATES DISTRICT COURT 7 FOR THE DISTRICT OF ARIZONA
9 United States of America, No. CV-21-02092-PHX-DWL
10 Appellant, ORDER
11 v.
12 Russell Brown,
13 Appellee. 14 15 This is an appeal by the Internal Revenue Service (“IRS”) arising from the Chapter 16 13 bankruptcy proceeding of David and Deborah Vallejo (“Debtors”). During that 17 proceeding, the IRS asserted that it was entitled to priority on its claim for just under $1,500 18 in Shared Responsibility Payments (“SRPs”) that Debtors incurred due to their failure to 19 maintain essential health insurance in 2016 and 2017. The basis for the SRPs was a 20 controversial provision of the Patient Protection and Affordable Care Act (“ACA”), 21 sometimes known as the individual mandate penalty, that has since been rescinded. 22 The trustee of the bankruptcy estate, Russell Brown (“Brown”), objected to the 23 IRS’s priority claim and the bankruptcy court eventually ruled in Brown’s favor, 24 concluding in a carefully reasoned order that SRPs are not entitled to priority treatment. 25 Along the way, the bankruptcy court noted some of the unusual features of the parties’ 26 dispute. (Doc. 11-1 at 1 [“The [dispute] brings to this Court a trio of this Court’s favorite 27 topics: (1) the [ACA], (2) a tax issue which is now just an historical footnote, and (3) an 28 amount in controversy under $1,500. The background leading to this bankruptcy issues 1 jackpot can be summarized as follows . . . .”].) 2 Whether SRPs are entitled to priority treatment is a difficult question that has 3 generated an array of conflicting decisions by bankruptcy, district, and circuit courts across 4 the country. Acknowledging the closeness of the question, the Court respectfully disagrees 5 with one portion of the bankruptcy court’s analysis and thus reverses. 6 BACKGROUND ON PRIORITY UNDER THE BANKRUPTCY CODE 7 Under the Bankruptcy Code, certain categories of “expenses and claims have 8 priority.” 11 U.S.C. § 507(a). Two such recognized categories of priority claims are, in 9 shorthand, (1) excise taxes on transactions, as set forth in § 507(a)(8)(E), and (2) taxes on 10 or measured by income, as set forth in § 507(a)(8)(A). 11 As the Supreme Court has recognized, because priorities deviate from the “equal 12 distribution objective underlying the Bankruptcy Code,” they “must be tightly construed.” 13 Howard Delivery Serv., Inc. v. Zurich Am. Ins. Co., 547 U.S. 651, 667 (2006). 14 Additionally, “the trend of amendments . . . has been to erode the preferred status of taxes.” 15 In re Lorber Indus. of Cal., Inc. (“Lorber I”), 675 F.2d 1062, 1068 (9th Cir. 1982). 16 BACKGROUND 17 I. Factual Background And Bankruptcy Proceedings 18 The facts here are simple, straightforward, and uncontroverted. 19 During the 2016 and 2017 tax years, Debtors did not maintain the minimum 20 essential health insurance required under the ACA and were therefore required to make an 21 SRP pursuant to 26 U.S.C. § 5000A(b) (2017). (Doc. 11-1 at 119-20.)1 22 On February 11, 2020, Debtors filed a Chapter 13 voluntary petition for bankruptcy 23 without having made their SRP payments. (Id. at 23-106.) 24 On February 24, 2020, the IRS timely filed a proof of claim for unsecured excise 25 and income taxes totaling $5,071.79. (Id. at 107-10 [“Claim 4-1”].) 26 1 As the bankruptcy court noted, “[w]hile this tax issue was a live controversary in 27 2017 and 2018, it was mooted by subsequent legislation. Effective January 1, 2019 the penalty in § 5000(A) was reduced to $0 pursuant to the Tax Cuts and Jobs Act of 2017. 28 Here, Debtors’ SRP debts were from 2017 and 2018, when the SRP was still in effect.” (Doc. 11-1 at 12.) 1 On January 8, 2021, the IRS filed an amended proof of claim reducing the income 2 tax to $0 and the unsecured excise tax to $1,540.59. (Id. at 111-14 [“Claim 4-2”].) 3 On February 4, 2021, the IRS filed another amended proof of claim, this time 4 asserting unsecured priority claims totaling $1,451.59. (Id. at 115-18 [“Claim 4-3”].) The 5 income tax remained at $0. (Id. at 118.) However, the IRS altered the kind of tax for which 6 it asserted claims, from claims for an excise tax to “EXCISE-INC” claims. (Compare id. 7 at 114 with id. at 118.) The operative proof of claim lists two separate “EXCISE-INC” 8 claims, one assessed in 2017 and another in 2018.2 (Id. at 118.) 9 On May 17, 2021, Brown, as trustee, objected to the claim under 11 U.S.C. 10 §§ 502(a) and 1302(b) and Federal Rule of Bankruptcy Procedure 3007. (Id. at 119-20.) 11 Brown argued that the SRP “is not a tax” or, even if it were, “the SRP is not an excise tax 12 under 11 U.S.C. § 507(a)(8)(E) and does not fit any other category under § 507(a)(8)” that 13 would result in priority status. (Id.) 14 On August 20, 2021, the IRS filed its opposition to the objection. (Id. at 122.) The 15 IRS argued that the Supreme Court had already determined that the SRP is a tax (not a 16 penalty) in National Federation of Independent Business v. Sebelius (“NFIB”), 567 U.S. 17 519 (2012). (Id. at 122-23.) Accordingly, the IRS argued that the SRP “must necessarily 18 fall within one of the enumerated types of tax entitled to priority set forth in 11 U.S.C. 19 § 507(a)(8).” (Id. at 123.) The IRS concluded that the SRP is either an excise tax or a tax 20 on or measured by income, both of which would be entitled to priority status. (Id. at 123, 21 127-33.) 22 II. The Bankruptcy Court’s Decision 23 In November 2021, in a written order issued following oral argument, the 24 bankruptcy court sustained Brown’s objection. (Id. at 10-21.) The court addressed the 25 following issues: (1) whether SRPs qualify as penalties or taxes; (2) even if taxes, whether 26 2 During the underlying proceedings, the IRS asserted that “EXCISE-INC” is a 27 notation by the IRS intended to communicate that the line item may qualify either as an excise tax or as a tax on or measured by income. (Doc. 11-1 at 262-63 [“[T]he way that 28 tax is now coded is as EXCISE-INC which is excise-income because it could be qualified as either one of those taxes.”].) 1 SRPs further qualify as excise taxes on “transactions” such that they trigger priority status 2 under § 507(a)(8)(E); and (3) alternatively, whether SRPs qualify as taxes on or measured 3 by income such that they trigger priority status under § 507(a)(8)(A). (Id. at 13.) 4 A. Penalty Or Tax 5 The bankruptcy court acknowledged that although the ACA purports to characterize 6 the SRP as a penalty, the Supreme Court in NFIB “determined the SRP was a tax.” (Id. at 7 14.) The bankruptcy court further noted that, under tests set out in In re Lorber Industries 8 of California (“Lorber II”), 564 F.3d 1098 (9th Cir. 2009), and In re George, 361 F.3d 9 1157 (9th Cir. 2004), courts in the Ninth Circuit consider certain factors when deciding 10 whether an exaction is a penalty or tax. (Id.) Applying those factors, the bankruptcy court 11 concluded that the SRP is an excise tax because the SRP is a “pecuniary burden,” 12 “Congress authorized the SRP,” “the purpose of the SRP is to provide revenue” in addition 13 to offsetting medical expenses of uninsured individuals, the SRP was constitutionally 14 enacted under Congress’s taxing power, and “no other hypothesized private creditor could 15 make a claim for the SRP, as the SRP is purely a function of federal statute.” (Id. at 14- 16 15.) 17 B. Excise Tax Under § 507(a)(8)(E) 18 The bankruptcy court next observed that “[w]hile the SRP is properly classified as 19 an excise tax under the Lorber II and George tests, it does not necessarily mean the SRP is 20 an excise tax within the meaning of § 507(a)(8) of the Bankruptcy Code.” (Id. at 15.) 21 Accordingly, the court focused on the language of § 507(a)(8)(E)(i)-(ii), which affords 22 priority status only to an excise tax on a “transaction.” (Id. at 15-19.) The bankruptcy 23 court concluded that the failure to obtain health insurance as required by the ACA is not a 24 “transaction” for purposes of § 507(a)(8)(E), reasoning that the Ninth Circuit’s holding in 25 George—that “the failure to make the transaction of purchasing workers’ compensation 26 insurance is the absence of a transaction and, therefore, not an excise tax for purposes of 27 federal bankruptcy law”—similarly applied to Debtors’ failure to obtain required health 28 insurance. (Id., internal quotation marks omitted.) 1 In the course of this analysis, the bankruptcy court distinguished the three cases on 2 which the IRS primarily sought to rely: Matter of Cousins, 601 B.R. 609 (Bankr. E.D. La. 3 2019), In re Nat’l Steel Corp., 321 B.R. 901 (Bankr. N.D. Ill. 2005), and In re DeRoche, 4 287 F.3d 751 (9th Cir. 2002). (Id. at 16-19.) For example, Cousins held that a taxpayer 5 exercises his or her right to remain uninsured, thus making the SRP “a tax imposed, ‘upon 6 the exercise of a right or privilege,’ making it an excise tax.’” (Id. at 16 [quoting Cousins, 7 601 B.R. at 620].) The bankruptcy court found this rationale unpersuasive because Cousins 8 “was reluctant to even name the SRP an excise tax” and did not identify how the exercise 9 of a right fits within the “‘transactional’ requirement of § 507(a)(8)(E).” (Id. at 16-17.) 10 Next, the bankruptcy court distinguished National Steel Corp., which focused on a 11 franchise tax required by Texas for the ‘privilege to transact business in the state,’ from 12 the facts here, reasoning that the “failure to obtain health insurance” is the “absence of a 13 transaction.” (Id. at 17, citation omitted.) The bankruptcy court added: “This Court views 14 a ‘transaction’ as requiring an active excise, i.e. the purchase of insurance, not a decision 15 to not buy insurance. Here, the Debtors’ decision to not purchase health insurance was a 16 passive choice, a ‘nonexcise’ if you will.” (Id.) Finally, the bankruptcy court noted that 17 DeRoche “considered whether an employer’s obligation to reimburse the Arizona 18 Workers’ Compensation ‘Special Fund’ constituted an excise tax under § 507(a)(8)(E).” 19 (Id.) Because “the 9th Circuit identified six events that led to characterizing the tax as an 20 excise tax on a ‘transaction,” and thus the transaction was “not simply the employer’s 21 failure to obtain workers’ compensation insurance but events subsequent to that passive 22 choice,” the bankruptcy court held that Debtors’ conduct was distinguishable and was 23 instead more like the conduct at issue in George. (Id. at 17-18.) Finally, the bankruptcy 24 court identified In re Jones, 610 B.R. 663 (Bankr. D. Mont. 2019), as another decision 25 supporting the conclusion that an SRP simply arises from inaction and thus does not 26 involve a “transaction” as required for priority under § 507(a)(8)(E). (Id. at 18-19.) 27 … 28 … 1 C. Tax On Or Measured By Income Under § 507(a)(8)(A) 2 After noting that the “issue has not been resolved by the 9th Circuit,” the bankruptcy 3 court concluded that the SRP is not “an income tax subject to priority status under 4 § 507(a)(8)(A).” (Id. at 19-21.) The bankruptcy court found unpersuasive the decision in 5 In re Szczyporski, 531 F. Supp. 934, 943 (E.D. Pa. 2021), which held that the SRP “was 6 entitled to priority treatment as an income tax” because “the SRP is first dependent on a 7 taxpayer’s income, then determined by such familiar factors as taxable income, number of 8 dependents, and joint filing status.” (Id. at 20.) Instead, the court relied on In re Juntoff, 9 2021 WL 1522206 (Bankr. N.D. Ohio 2021), which reasoned that “analyzing a taxpayer’s 10 income is not always necessary to determine the SRP to be paid by that individual, and 11 thus cannot be called an income tax under § 507(a)(8)(A).” (Id.) The bankruptcy court 12 also noted that the structure of the tax code, which lists the SRP under the “Miscellaneous 13 Excise Taxes” category (as opposed to “Income Taxes”), supports this interpretation. (Id. 14 at 21.) 15 STANDARD OF REVIEW 16 The Court has jurisdiction to hear the IRS’s appeal under 28 U.S.C. § 158(a)(1). 17 The Court reviews the bankruptcy court’s conclusions of law de novo and its findings of 18 fact for clear error. In re Thorpe Insulation Co., 677 F.3d 869, 879 (9th Cir. 2012). Here, 19 no significant facts are in dispute. (Doc. 11 at 3; accord Doc. 12 at 3 [noting one immaterial 20 discrepancy].) 21 ANALYSIS 22 I. Penalty Or Tax 23 As noted, the bankruptcy court agreed with the IRS on one of the threshold issues 24 in this case—whether the SRP is properly characterized as a penalty or tax—even though 25 it eventually ruled against the IRS on the priority issue. The IRS argues that because Brown 26 did not file a cross-appeal to challenge this aspect of the bankruptcy court’s ruling, he is 27 bound by it on appeal. (Doc. 11 at 7 n.3.) Brown disagrees and urges the Court to find 28 that the SRP is properly characterized as a penalty, which would serve as an alternative 1 basis for affirmance. (Doc. 12 at 2 n.1, 5-9.) 2 On the one hand, the Court agrees with Brown that the penalty/tax characterization 3 issue has not been waived or forfeited. As the Supreme Court has explained, a party who 4 has not filed a cross-appeal may not “attack” the underlying judgment in a way that would 5 “enlarg[e] his own rights thereunder or [lessen] the rights of his adversary.” Jennings v. 6 Stephens, 574 U.S. 271, 276 (2015). Nevertheless, “an appellee who does not take a cross- 7 appeal may urge in support of a decree any matter appearing in the record, although his 8 argument may involve an attack upon the reasoning of the lower court.” Id. (citation 9 omitted). Here, the underlying judgment concludes that the IRS’s claim is not entitled to 10 priority. Brown’s theory that the SRP is a penalty and not a tax would produce the same 11 result. Therefore, Brown’s rights are not enlarged by advancing this argument, nor are the 12 IRS’s rights curtailed.3 13 On the other hand, Brown’s argument fails on the merits. The Supreme Court has 14 explained that “a tax is a pecuniary burden laid upon individuals or property for the purpose 15 of supporting the Government,” whereas a penalty is “an exaction imposed by statute as 16 punishment for an unlawful act.” United States v. Reorganized CF & I Fabricators of 17 Utah, Inc., 518 U.S. 213, 224 (1996). The Court agrees with the bankruptcy court that the 18 SRP is a tax. 19 In NFIB, the Supreme Court considered whether the individual mandate represented 20 an unconstitutional exercise of Congress’s power. 567 U.S. at 546-75. As relevant here, 21 the Court held that the ACA’s “requirement that certain individuals pay a financial penalty 22 for not obtaining health insurance may reasonably be characterized as a tax” and was 23
24 3 The IRS also suggests that In re Alexander, 472 B.R. 815 (B.A.P. 9th Cir. 2012), requires the filing of a cross-appeal in this circumstance. (Doc. 13 at 1 n.2.) This argument 25 is unavailing. Decisions of the BAP are not binding on this Court. Vitalich v. Bank of N.Y. Mellon, 569 B.R. 502, 507 (N.D. Cal. 2016) (“[D]ecisions of the BAP are not binding on 26 this Court.”). Instead, this Court must follow the decisions of the Supreme Court (like Jennings) and the Ninth Circuit, which do not require a cross-appeal. See also Engleson v. 27 Burlington N. R. Co., 972 F.2d 1038, 1041 (9th Cir. 1992) (“Generally, a cross-appeal is required to support modification of the judgment, but . . . arguments that support the 28 judgment as entered can be made without a cross-appeal.”) (citations and internal quotation marks omitted). 1 therefore a constitutional exercise of Congress’s taxing power. Id. at 574. The Court 2 reasoned that Congress’s label of the payment as a “penalty” was not dispositive and 3 instead employed a functional analysis. Id. at 564-65. In comparing the SRP to a penalty, 4 it found three critical distinctions: (1) the SRP does not impose an “exceedingly heavy 5 burden” on the taxpayer; (2) there is no “scienter requirement,” like knowledge; and (3) the 6 IRS, a revenue collecting agency, collects the SRP, not an agency responsible for 7 punishment. Id. at 565-67. The Court also noted that non-payment of an SRP does not 8 subject the individual to the most severe sanctions (criminal punishment) or other “negative 9 legal consequences.” Id. at 567-68. See also id. at 572 (“[I]t is abundantly clear the 10 Constitution does not guarantee that individuals may avoid taxation through inactivity.”). 11 It is, of course, true that NFIB only reached whether the SRP was constitutionally 12 enacted under Congress’s taxing power and left open the possibility that the SRP might be 13 categorized differently depending on the context. 567 U.S. at 543-47 (discussing that the 14 SRP is not considered a tax for purposes of the Anti-Injunction Act). But the Court “cannot 15 ignore that the Supreme Court already has explained that a penalty is ‘punishment for an 16 unlawful act or omission’ and that not purchasing insurance in compliance with the 17 individual mandate did not constitute an unlawful act or omission.” Juntoff, 636 B.R. at 18 868 (citation omitted). Put simply, the SRP is “a pecuniary burden laid upon individuals 19 or property for the purpose of supporting the Government”—i.e., a tax. NFIB, 567 U.S. at 20 567 (“Although the payment will raise considerable revenue, it is plainly designed to 21 expand health insurance coverage. But taxes that seek to influence conduct are nothing 22 new.”). See also United States v. Alicea, 58 F.4th 155, 164 (4th Cir. 2023) (“[W]e agree 23 that a functional analysis of the SRP shows that it operates as a tax, not a penalty. We 24 therefore do not need to decide whether we are technically bound by the Supreme Court’s 25 functional analysis of the SRP [in NFIB].”); In re Szczyporski, 34 F.4th 179, 186 (3rd Cir. 26 2022) (“The Supreme Court’s Sebelius analysis is not dispositive in the bankruptcy context, 27 but we find it persuasive. Based on the functional examination of the [SRP’s] actual effects 28 and operation, we conclude that the payment is a tax for bankruptcy purposes.”). 1 II. Excise Tax Under § 507(a)(8)(E) 2 The bankruptcy court held that although the SRP may generally qualify as an excise 3 tax, it does not qualify as the sort of excise tax that is entitled to priority treatment under 4 § 507(a)(8)(E) because it is not tied to a “transaction.” (Doc. 11-1 at 16-19.) 5 The IRS argues that the SRP is an excise tax within the meaning of § 507(a)(8)(E) 6 because the requisite transaction “occurs when the taxpayer becomes liable for its 7 payment.” (Doc. 11 at 10.) The IRS argues that the bankruptcy court’s reliance on Jones 8 was misplaced because the cases on which Jones relied “declined to find the [SRP] was an 9 excise tax altogether” and “[m]any of these cases referenced by Jones were also vacated or 10 dismissed on appeal.” (Id.) The IRS also cites In re Groetken, 843 F.2d 1007 (7th Cir. 11 1988), and In re Rizzo, 741 F.3d 703 (6th Cir. 2014), for the proposition that the term 12 “transaction” should be read broadly enough to encompass an excise tax “imposed on the 13 exercise of a right or privilege, including the right not to choose to purchase healthcare.” 14 (Id. at 11.) The IRS also argues that DeRoche, a Ninth Circuit case, permits taxes on 15 “inaction” to be classified as excise taxes. (Id.) Finally, the IRS argues that the most 16 natural reading of § 507(a)(8)(E) is that “the phrase ‘on a transaction’ serves to establish 17 the three-year window within which a tax claim receives priority treatment, not to limit 18 which types of taxes receive priority.” (Id. at 12, citing Quiroz v. Mich. Dep’t of Treasury, 19 472 B.R. 434, 440-41 (E.D. Mich. 2012).) 20 In response, Brown contends that the SRP fails the functional test for an excise tax 21 because the “government’s claim for the penalty under the ACA is not applicable to 22 similarly situated entities as there is no business and the penalty comes into play only for 23 those individuals who fail to buy private health insurance.” (Doc. 12 at 10.) Brown also 24 argues that the SRP “benefits the private health insurance market,” which fails the George 25 and Lorber II inquiries. (Id. at 11.) Brown places heavy reliance on George and Jones, 26 arguing that both support the conclusion that because there is no “transaction” for purposes 27 of the SRP (because failing to purchase health insurance is “inaction”), the SRP is not 28 entitled to priority. (Id. at 11-12.) Finally, Brown cites the Fifth Circuit’s recent 1 unpublished decision in Matter of Chesteen, 799 F. App’x 236 (5th Cir. 2020), which found 2 that the SRP is a tax on inactivity and thus cannot be considered an excise tax “on a 3 transaction.” (Id. at 12-13.) 4 In reply, the IRS reiterates that the SRP meets the test for an excise tax under George 5 and Lorber II and argues that “transaction” does not always require a “discrete, readily 6 identifiable transaction” and is instead a “temporal limit.” (Doc. 13 at 6-8, quoting Nat’l 7 Steel Corp., 321 B.R. at 912.) 8 The bankruptcy court correctly determined that the SRP qualifies as an excise tax 9 under Ninth Circuit law. “Federal courts apply a ‘functional examination’ to the exaction, 10 regardless of how it is labeled, to determine whether it is a tax, a penalty, a debt, or 11 something else.” George, 361 F.3d at 1160. See also Lorber II, 564 F.3d at 1101 (“The 12 Bankruptcy Code does not define ‘excise tax,’ and federal courts do not rely on state law 13 labels to determine which obligations qualify. Instead, courts engage in a functional 14 examination to determine if a government exaction is an excise tax.”). In the Ninth Circuit, 15 courts consider certain factors when evaluating whether an exaction qualifies as an excise 16 tax—specifically, whether the exaction “is: (a) an involuntary pecuniary burden, regardless 17 of name, laid upon individual or property; (b) imposed by or under the authority of the 18 legislature; (c) for public purposes, including the purposes of defraying expenses of 19 government or undertakings authorized by it; and (d) under the police or taxing power of 20 the state.” Lorber II, 564 F.3d at 1101. Another relevant factor is whether “a creditor 21 similarly situated to the government can be hypothesized under the relevant statute.” Id. 22 (citing George, 361 F.3d a 1162).4
23 4 Brown argues that two additional considerations bear on whether an exaction is an excise tax: “[t]hat [the] pecuniary obligation be universally applicable to similarly situated 24 entities; and that according priority treatment to a government claim not disadvantage private creditors with like claims.” (Doc. 12 at 10, citing In re Camilli, 94 F.3d 1330 (9th 25 Cir. 1996).) It’s unclear whether those considerations are incorporated into the Ninth Circuit’s standard excise-tax analysis. Camilli, 94 F.3d at 1334 (“Because the obligation 26 in this case meets the four additional requirements set forth by the Sixth Circuit in Suburban I, as well as the criteria of Lorber, there is no need to decide whether the 27 Suburban I requirements must be met in all cases.”). See also Lorber II, 564 F.3d at 1101 (“In re Camilli favorably cited the Sixth Circuit’s analysis in Suburban I and II.”); id. at 28 1101-02 (noting that George added a “fifth element”); George, 361 F.3d at 1162 (“Camilli distinguished Lorber because of some unique, non-universal characteristics of the Arizona 1 These considerations compel the conclusion that the SRP is an excise tax. First, the 2 SRP is an involuntary obligation. George limits “involuntariness to ‘inherent 3 characteristics of the charges,’ not the ‘motivation’ of the payer or the ‘practical and 4 economic factors which constrained’ the payer.” 361 F.3d at 1161 (citations omitted). 5 When it still existed, 26 U.S.C. § 5000A(b)(1) mandated payment of the SRP if an 6 individual did not purchase the requisite health insurance coverage. Second, Congress 7 imposed the SRP under its taxing power. NFIB, 567 U.S. at 570. Third, collecting the 8 SRP “produces at least some revenue for the Government.” Id. at 564. Fourth, NFIB 9 concluded that Congress acted constitutionally when it enacted the SRP. Id. at 570. 10 Finally, neither party, nor the Court, can hypothesize a creditor who would be similarly 11 situated to impose this type of exaction on taxpayers, given that the SRP is a creature of 12 federal statute. Cf. Lorber II, 564 F.3d at 1102 (“Under the Arizona workers’ 13 compensation framework, there are no private creditors similarly situated to the 14 government. . . . [The Arizona fund] carries its statutorily-imposed burden alone. No 15 private entity competes with the [Arizona fund] to pay ‘insurance’ claims for which no 16 insurance has been bought.”) (citations and internal quotation marks omitted). See also In 17 re Szczyporski, 34 F.4th at 186-87 (applying the Lorber II factors to conclude the SRP is a 18 tax). Brown’s argument that the Lorber II factors should only be applied to businesses is 19 unavailing. 20 Next, the Court considers whether the SRP is the type of excise tax that Congress 21 intended to attain priority status. This analysis begins with the relevant statutory language. 22 United States v. Hanousek, 176 F.3d 1116, 1120 (9th Cir. 1999) (“Statutory interpretation 23 begins with the plain language of the statute.”). Under 11 U.S.C. § 507(a)(8)(E), one of 24 workers’ compensation system.”). Nevertheless, even if those elements are included, the 25 SRP qualifies as an excise tax. First, any similarly situated taxpayer who did not obtain health insurance (and was not subject to any exemption) was required to pay the SRP. 26 Second, there is no similarly situated private creditor. The imposition of the SRP does not compete with any private creditor for reimbursement. Cf. Camilli, 94 F.3d at 1333-34 27 (where unemployment insurance premiums paid to Ohio were a “universal obligation” and there was no “similar obligations to a private carrier,” the premiums were correctly 28 classified as a tax, in part because “according priority treatment to those claims did not disadvantage any private creditors with similar claims”). 1 the categories of expenses and claims that has priority is: 2 [U]nsecured claims of governmental units, only to the extent that such claims are for . . . an excise tax on— 3 (i) a transaction occurring before the date of the filing of the 4 petition for which a return, if required, is last due, under applicable law or under any extension, after three years before 5 the date of the filing of the petition; or 6 (ii) if a return is not required, a transaction occurring during the three years immediately preceding the date of the filing of the 7 petition. . . . 8 In George, the Ninth Circuit analyzed the interplay of the phrases “excise tax” and 9 “transaction” within subsection (E). 361 F.3d at 1163. The facts of George are 10 straightforward. The Georges filed for bankruptcy and were eventually found liable for a 11 $116,000 debt arising from their failure to “cover an employee injury by purchasing 12 workers’ compensation insurance or meeting state requirements for self insurance.” Id. at 13 1159. California’s Uninsured Employer’s Fund filed a lien against the Georges’ real 14 property for the balance, but the bankruptcy court discharged the lien because it was not 15 an “excise tax” under § 507(a)(8)(E). Id. The Ninth Circuit agreed, concluding that the 16 lien was not an excise tax for purposes of § 507(a)(8)(E) for two reasons. First, the court 17 emphasized that the state statute that authorized the agency’s claim (which characterized 18 the claim as a “liquidated claim for damages”) allowed recovery for “cumulative injury” 19 from two or more employers, thus potentially creating unequal footing between the 20 government and a private creditor’s claim. Id. at 1162-63. Second, the court held that the 21 Fund’s “claim against the Georges was not an exaction ‘on a transaction’ the Georges 22 made.” Id. at 1163. On this point, the court elaborated: “Their only relevant transaction 23 was hiring the employee who got injured, but hiring does not occasion a Trust Fund claim 24 in California, and neither does an employee injury. What occasions such a claim is the 25 failure to make the transaction of purchasing workers’ compensation insurance (or 26 applying for self-insured status). It is hard to squeeze the absence of a transaction, which 27 triggers California Trust Fund liability, into the bankruptcy statute requirement of ‘a 28 transaction occurring during’ the three years preceding bankruptcy.” Id. 1 The Court agrees with the bankruptcy court that, in light of George, the SRP is not 2 the type of excise tax that falls within 11 U.S.C. § 507(a)(8)(E). The liability-inducing 3 event for an SRP is the failure to maintain “minimum essential coverage.” 26 U.S.C. 4 § 5000A(b)(1) (2017) (“If a taxpayer who is an applicable individual . . . fails to meet the 5 requirement of subsection (a) [minimum essential coverage] for one or more months, then 6 . . . there is hereby imposed on the taxpayer a penalty with respect to such failures in the 7 amount determined under subsection (c).”). This is nearly identical to the liability-inducing 8 event at issue in George—i.e., “the failure to make the transaction of purchasing workers’ 9 compensation insurance (or applying for self-insured status)”—and it is therefore equally 10 “hard to squeeze the absence of a transaction, which triggers [ACA] liability, into the 11 bankruptcy statute’s requirement of ‘a transaction occurring during the three years’ 12 preceding bankruptcy.” George, 361 F.3d at 1163. The IRS is correct that subsection E 13 has a timing element to it, but the Ninth Circuit has interpreted the requirement of a 14 “transaction” to be a substantive limitation. Id. at 1163-64. See also Szczyporski, 34 F.4th 15 at 189 n.5 (“[T]he payment is not entitled to priority under 11 U.S.C. § 507(a)(8)(E) as ‘an 16 excise tax . . . on a transaction’ because the failure to purchase healthcare is not a 17 ‘transaction.’”) (citation omitted).5 18 In re DeRoche, 287 F.3d 751 (9th Cir. 2002), on which the IRS relies, does not 19 compel a different conclusion. In Camilli, which was decided six years before DeRoche, 20 the Ninth Circuit held that an Arizona employer’s obligation to reimburse the “Special 21 Fund” administered by the Industrial Commission of Arizona (“ICA”) was an excise tax 22 entitled to priority under the Bankruptcy Code. 94 F.3d at 1334. Although the facts of 23 Camilli are similar to those of George, the underlying state statutes that gave rise to the 24 5 During oral argument, the IRS sought to distinguish George on the ground that the 25 discussion of the “transaction” requirement in that case was unnecessary to the ultimate outcome and therefore dicta. This argument fails because it disregards how the Ninth 26 Circuit has defined the law of the circuit. United States v. McAdory, 935 F.3d 838, 843 (9th Cir. 2019) (“Where a panel confronts an issue germane to the eventual resolution of 27 the case, and resolves it after reasoned consideration in a published opinion, that ruling becomes the law of the circuit, regardless of whether doing so is necessary in some strict 28 logical sense. . . . In other words, well-reasoned dicta is the law of the circuit . . . .”) (citations, brackets, and internal quotation marks omitted). 1 exactions differ in ways that are critical to the analysis here. In Camilli, the debtor failed 2 to secure worker’s compensation insurance for her employees. Id. at 1332. After one of 3 the employees was injured, the ICA stepped in to pay the injured employee’s claim, which 4 payments “act[ed] as a judgment against the employer” under Arizona law. Id. at 1332- 5 33. During Camilli’s bankruptcy, the ICA sought priority for its claim as an excise tax 6 under 11 U.S.C. § 507(a)(8)(E). Id. The dispute mainly turned on whether Camilli made 7 a “voluntary” decision not to purchase worker’s compensation insurance. Id. at 1333. But 8 the court reasoned that this was not “an accurate description of the legal effect of Camilli’s 9 failure to procure workers’ compensation insurance in Arizona, even if that failure could 10 be considered to be a ‘voluntary’ act.” Id. “The source of Camilli’s obligation to repay 11 the workers’ compensation benefits in this case was not her failure to obtain insurance, but 12 the statutorily-created obligation to reimburse the Special Fund once the Fund paid benefits 13 to an uninsured employee” and was “wholly beyond the control of the debtor.” Id. 14 Therefore, after considering other relevant factors, the Court held that the reimbursement 15 obligation was an excise tax entitled to priority. Id. at 1334. 16 In contrast, DeRoche concerned where the “transaction” point was for an Arizona 17 employer who did not carry worker’s compensation insurance, which required the ICA to 18 step in and pay the claim of an injured employee. 287 F.3d at 753. There, the court 19 specifically rejected the ICA’s argument (which the IRS effectively makes in this case)6 20 that the requisite “transaction” occurs upon the assessment of the tax: “First, it would be 21 odd to construe the word ‘transaction’ in the phrase ‘an excise tax on a transaction’ to refer 22 to the act of the Commission in assessing the excise tax. A transaction giving rise to a tax 23 is ordinarily an act external to the taxing authority. But under the Commission’s definition, 24 the transaction giving rise to the tax is the very act of assessing that tax. A tax on a tax is 25 the fabled ultimate dream of a taxing authority, but we know (or hope we know) that this 26 is a fable.” Id. at 756. “Second, a fundamental characteristic of a typical excise tax is that 27
28 6 Doc. 11 at 10 (arguing that “the transaction related to the [SRP] occurs when the taxpayer becomes liable for its payment”). 1 it is a discrete, one-time tax based on a single act by the person or entity taxed, such as a 2 sale or an application for a license.” Id. The Ninth Circuit concluded that, for purposes of 3 Arizona’s unemployment scheme, the transaction is “the act of employing a worker without 4 carrying the required insurance when the worker is injured” and the date of the transaction 5 is “the date on which the worker is injured.” Id. at 757. In so concluding, the court 6 recognized that there had to be an opportunity for the employer to avoid the tax because 7 otherwise “the employer is faced with an excise tax that is assessed into the indefinite future 8 regardless of what the employer does.” Id. at 756. Notably, the debtors in DeRoche had 9 also argued that the relevant “transactions” should be tethered to the actions of the ICA, 10 but the court rejected these arguments, reasoning that “[n]one of these transactions is an 11 act (or failure to act) by the tax-payer.” Id. at 757. 12 The broader context of DeRoche demonstrates that it was hiring, in addition to 13 inaction, followed by an injury, that created a “transaction” for purposes of § 507(a)(8)(E). 14 Accord In re Miller, 634 B.R. 641, 645 (Bankr. M.D. Ga. 2021) (rejecting IRS’s reliance 15 on DeRoche for similar reasons and concluding that “[b]ecause the SRP is levied on 16 ‘taxpayers’ choice not to purchase healthcare’ and not the taxpayer’s use of the healthcare 17 system, there is no affirmative action that can qualify as a transaction”). Further, as noted 18 in Camilli, the statute in DeRoche imposed liability based on hiring (an act by the taxpayer) 19 whereas the statute in George did not. Here, similar to George, where the California law 20 at issue imposed liquidated damages (but did not allow liability based on hiring or an 21 employee injury), the relevant provision of the ACA contemplated no mechanism to 22 impose liability other than a failure to obtain insurance. Because there is no “transaction” 23 to anchor the excise tax, the IRS’s claim is not entitled to priority under § 507(a)(8)(E). 24 Other courts have reached the same conclusion. Chesteen, 799 F. App’x at 241 (“The 25 Government does not dispute that some type of activity is required; it instead insists the 26 relevant activity is the ‘taxpayer’s exercise of his or her right to choose not to purchase 27 health insurance.’ But, even assuming arguendo that Chesteen made that choice (a 28 proposition for which there is no record evidence), such failure to act would not have been 1 activity but inactivity.”); Szczyporski, 34 F.4th at 189 n.5 (“[T]he failure to purchase 2 healthcare is not a ‘transaction.’”).7 3 III. Tax On Or Measured By Income Under § 507(a)(8)(A) 4 The bankruptcy court also held that the SRP is not a tax “on or measured by income 5 or gross receipts” because “a taxpayer’s income is not always necessary to determine the 6 SRP to be paid by that individual, and thus cannot be called an income tax under 7 § 507(a)(8)(A).” (Doc. 11-1 at 19-20, citing Juntoff, 2021 WL 1522206 at *4.) 8 On appeal, the IRS contends that the phrase “on or measured by income” in 9 § 507(a)(8)(A) is broader than the traditional test for an income tax. (Doc. 11 at 13.) Given 10 that the SRP “is a tax calculated on the taxpayer’s taxable income” and is not imposed 11 against individuals whose income “fails to meet the minimum filing threshold,” the IRS 12 argues that the “condition for triggering the [SRP] is that the taxpayer’s income fall within 13 a certain range.” (Id.) Thus, the IRS contends that the bankruptcy court erred in analyzing 14 whether the SRP is an “income tax” as opposed to a tax “measured by income.” (Id. at 14.) 15 Brown, in response, relies on the bankruptcy court’s decision in Juntoff to argue that 16 the SRP is not “measured by income” because income is only one of many factors that go 17 into determining the SRP and it is possible to calculate the SRP without using income. 18 (Doc. 12 at 14-15.) Further, Brown argues that “[u]sing income level and an uninsured 19 status to determine if the [SRP] is applicable does not make it an assessment on or measured 20 by income.” (Id. at 15.) 21 In reply, the IRS notes that the Sixth Circuit BAP reversed the bankruptcy court’s 22 decision in Juntoff and held that the SRP is a tax on or measured by income. (Doc. 13 at 23 2.) The IRS concludes that “there is no way to calculate the [SRP] and/or whether a 24 taxpayer is obligated to pay it without measuring the taxpayer’s income at the outset,” thus 25 making the SRP a tax measured by income. (Id. at 8-10.) 26 Recognizing that the issue presents a close call, the Court agrees with the Sixth 27 7 In Alicea, the Fourth Circuit concluded that it was “unnecessary for us to consider 28 whether the SRP . . . amounts to an excise tax” in light of the court’s ruling in favor of the government on other grounds. 58 F.4th at 165. 1 Circuit BAP in Juntoff, the Third Circuit in Szczyporski, and the Fourth Circuit in Alicea 2 that the SRP qualifies as a tax “on or measured by income” under § 507(a)(8)(A).8 Because 3 this is a question of statutory interpretation, the Court again begins with the relevant 4 statutory text. Hanousek, 176 F.3d at 1120. Under 11 U.S.C. § 507(a)(8)(A), another 5 category of expenses and claims that has priority is: 6 [U]nsecured claims of governmental units, only to the extent that such claims are for . . . a tax on or measured by income or gross receipts for a taxable 7 year ending on or before the date of the filing of the petition . . . . 8 Based on this language alone, it is clear that a “tax on or measured by income or gross 9 receipts” must be broader than an “income tax.” “On or measured by” suggests that the 10 reason for the imposition of the tax need not have anything to do with the taxpayer’s income 11 level (i.e., a tax “on” income”)—instead, so long as the taxpayer’s income level provides 12 one of the considerations for calculating the amount of tax owed (i.e., a tax “measured by” 13 income), the conjunctive text is satisfied. Indeed, to “measure” generally means “to 14 ascertain the extent, dimensions, quantity, [or] capacity” of something. Measure, 15 Dictionary.com, https://www.dictionary.com/browse/measure. See also Corning Inc. v. 16 SRU Biosystems, LLC, 2004 WL 1553575, *6 (D. Del. 2004) (resolving parties’ dispute 17 over “the ordinary definition of the word ‘measure’” and concluding that the ordinary 18 meaning is “to compute, estimate, or ascertain the extent, quantity, dimensions, or capacity 19 of; . . . to take the dimensions of”) (citations omitted).9 Therefore, to be “measured by” 20 income, the calculation of the amount of tax owed simply must include some consideration 21 of the taxpayer’s income. 22 8 In Chesteen, the Fifth Circuit concluded that the government had waived any 23 reliance on § 507(a)(8)(A) and therefore declined to reach whether the SRP could be considered a tax on or measured by income. 799 F. App’x at 242-43. 24 9 Of course, courts should “look to dictionary definitions published at the time that 25 the statute was enacted.” Res. Conservation Grp., LLC v. United States, 597 F.3d 1238, 1243 (Fed. Cir. 2010). See also Dep’t of Human Servs., Div. of Vocational Rehabilitation, 26 Hoopono-Services for the Blind v. U.S. Dep’t of Educ., Rehabilitation Servs. Admin., 46 F.4th 1148, 1155 (9th Cir. 2022) (“[W]e next consult common dictionary definitions to 27 divine the ordinary, contemporary, common meaning at the time the statute was enacted.”) (citations omitted). But here, there is no indication (and the parties do not suggest) that the 28 ordinary meaning of the term “measure” has changed between now and when the operative version of § 507(a)(8)(A) was enacted. 1 The since-rescinded portions of the ACA at issue here require such consideration. 2 Under those provisions, the amount of the SRP is calculated as the lesser of the following 3 options: 4 (A) the sum of the monthly penalty amounts determined under paragraph (2) for months in the taxable year during which 1 or more such failures 5 occurred, or 6 (B) an amount equal to the national average premium for qualified health plans which have a bronze level of coverage, provide coverage for the 7 applicable family size involved, and are offered through Exchanges for plan years beginning in the calendar year with or within which the 8 taxable year ends. 9 26 U.S.C. § 5000A(c)(1) (2017) (emphasis added). Key to the analysis here is the 10 calculation of the monthly payment amount. The monthly payment amount equals one- 11 twelfth of the “greater” of two calculations. Id. § 5000A(c)(2). Option 1 is a flat rate set 12 by Congress; Option 2 is a percentage of the “excess of the taxpayer’s household income 13 for the taxable year over the amount of gross income specified in § 6102(a)(1) [persons 14 required to make returns on income] with respect to the taxpayer for the taxable year,” and 15 that percentage varies depending on the year. Id. § 5000A(c)(2)(A)-(B). Thus, to correctly 16 determine the amount of the SRP, the taxpayer’s income must be considered. NFIB, 567 17 U.S. at 563 (“For taxpayers who do owe the payment, its amount is determined by such 18 familiar factors as taxable income, number of dependents, and joint filing status.”). 19 Admittedly, the alternatives in the statute do create situations where the taxpayer’s income 20 is not directly part of the calculation of the final payment amount—for example, where the 21 national average premium amount is less than the calculated monthly penalty amount, or 22 the flat-rate calculation is greater than the income percentage. Nevertheless, the correct 23 determination of the SRP amount must account for the taxpayer’s income, even if it does 24 not ultimately dictate the final payment amount. It follows that the SRP is a tax “on or 25 measured by income” and is thus entitled to priority under § 507(a)(8)(A). Accord Alicea, 26 58 F.4th at 165-66 (“[T]he bankruptcy statute gives priority to claims for taxes measured 27 by income, not to claims for taxes triggered by a particular income level. Even if income 28 has nothing to do with triggering liability for the SRP, the amount owed for the SRP is 1 measured by income. . . . That some taxpayers are not required to pay the SRP does not 2 change the fact that when the SRP must be paid, the amount to be paid is measured by the 3 taxpayer’s income.”); Szczyporski, 34 F.4th at 188-89 (concluding that the SRP “fits 4 comfortably” as a tax measured by income because “the payer’s household income played 5 an essential role in determining the amount of the [SRP] owed”); Juntoff, 636 B.R. at 885 6 (“[W]hile a taxpayer may be obligated to pay a flat amount rather than a percentage of their 7 income, making that determination requires a taxpayer to input their income into a 8 calculation.”). 9 The Court also agrees with the Sixth Circuit BAP’s conclusion in Juntoff that this 10 conclusion does not run afoul of Howard Delivery’s directive (which Brown heavily 11 emphasizes throughout his brief) to tightly construe the priorities in the Bankruptcy Code. 12 Even when applying the requisite tight construction, the SRP remains a tax measured by 13 income. Juntoff, 636 B.R. at 885 (“Section 507(a)(8)(A) does not require that the tax be 14 calculated solely or primarily by measuring income. While the Panel recognizes that 15 Howard Delivery requires that we ‘tightly construe’ the priority classes, we reject the 16 contention that Congress intended the phrase ‘measured by income’ to require that a tax 17 must be “measured by income only’ to fit in § 507(a)(8)(A).”) (citations omitted). 18 Finally, although the bankruptcy court correctly noted that SRPs are characterized 19 as “Miscellaneous Excise Taxes” rather than “Income Taxes” under the Internal Revenue 20 Code (Doc. 11-1 at 23), the Court is unpersuaded that this characterization changes the 21 analysis. As discussed above, the question is not whether the SRP is a tax “on” income but 22 whether it is a tax “measured by” income. Szczyporski, 34 F.4th at 189 (“That the shared 23 responsibility payment provision is located in a portion of the Internal Revenue Code titled 24 ‘Miscellaneous Excise Taxes’ does not alter our conclusion that the payment is measured 25 by income. Titles within the Internal Revenue Code have no legal effect.”) (internal 26 citations omitted). An excise tax can be measured by income, even if it is not a tax on 27 income. 28 … 1 Accordingly, 2 IT IS ORDERED the judgment of the bankruptcy court is reversed. This action is 3 || remanded to the bankruptcy court for proceedings consistent with this decision. 4 IT IS FURTHER ORDERED that the Clerk of Court terminate this action. 5 Dated this 27th day of February, 2023. 6 7 fm ee” 8 f t _o—— Dominic W. Lanza 9 United States District Judge 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28
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