In re Juntoff (6th Cir. BAP)

The following is a case update written by the Hon. Meredith Jury (U.S. Bankruptcy Judge, C.D. CA., Ret.), analyzing a recent decision of interest:

SUMMARY

The Bankruptcy Appellate Panel for the Sixth Circuit (the BAP) recently held that the “shared-responsibility payment” (SRP) assessed under the Affordable Care Act (ACA) for failure to purchase health insurance was a “tax” measured by income for priority purposes in a bankruptcy proceeding. In re Juntoff, 636 B.R. 868 (6th Cir. BAP March 21, 2022).

To view the opinion, click here. 

FACTS

Until amended for tax years 2019 and beyond, the ACA required individuals to either maintain a minimum level of health insurance (“the individual mandate”) or pay a “penalty.” 26 U.S.C. § 5000A. In the relevant tax years here, 2017 and 2018, the ACA provided that such individuals who did not have minimum coverage had to make an SRP with their annual federal tax payment. The debtors here (two cases were consolidated for this appeal, Juntoff and the McPhersons) did not maintain the required health insurance or pay the assessed SRP for the relevant years. When they filed chapter 13 cases, the IRS filed claims for the unpaid SRP’s, asserting that they were priority debts, either as a tax measured by income, accorded priority by § 507 (a)(8)(A) of the Bankruptcy Code, or as an excise tax, given priority by § 507(a)(8)(E).

The debtors objected to the IRS claims, arguing that the SRP was not entitled to priority treatment since it was classified as a penalty, not a tax. The bankruptcy court sustained the objections, ruling the SRP debts were not entitled to priority. The IRS appealed to the BAP, which reversed in this published opinion.

REASONING

The BAP was tasked with first determining whether the SRP was a “tax”, then whether such tax fell within the priority scheme of the Bankruptcy Code. It rejected the IRS’s assertion that the Supreme Court in National Federation of Independent Business v. Sebelius, 567 U.S. 519 (2012) had ruled definitively that it was a tax. Sebelius held that Congress had the constitutional authority to enact the ACA despite the inclusion of the individual mandate and the SRP. However, it did so on a limited basis, determining that if the SRP could possibly be construed as a tax, that was sufficient to find that Congress had the authority to enact the ACA. Since that construction was possible, the authority existed; but the Supreme Court did not explicitly rule the SRP was a tax.

Instead, the Court looked to Sixth Circuit’s “functional examination” to determine whether the SRP fell within the federal definition of a tax in light of the treatment of taxes as priority debt under the Bankruptcy Code. That examination required a four-prong test adopted from the Ninth Circuit which asked whether an exaction was (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, (d) under the police or taxing power of the state.

For bankruptcy priority purposes the Sixth Circuit had added two more factors to that test: (1) that the pecuniary obligation be universally applicable to similarly situated entities and (2) that according priority treatment to the government claim would not disadvantage private creditors with like claims. Applying this now six-part test, the Court ruled that the SRP qualified as a tax, specifically overruling the debtors’ assertions that it was not universally applicable because the ACA provided certain exceptions. Critical to the Court’s final ruling was the Supreme Court’s authority that distinguishes between a tax and a penalty, defining a penalty as “an exaction imposed by statute as punishment for an unlawful act.” Here, the failure to maintain health insurance was not such unlawful act, so the SRP was not a penalty.

Once the Court determined the SRP was tax, it turned to whether it was measured by income to qualify for § 507(a)(8)(A) priority and again answered in the affirmative. It noted that Sibelius had held that the SRP is “calculated as a percentage of household income, subject to a floor… and a ceiling.” Sibelius, 567 U.S. at 539. It then observed that § 507(a)(8)(A) does not require that the tax be calculated solely by measuring income; it was sufficient that the SRP was tied to income, which it unmistakably was. The Court did not need to address the priority assertion under § 507(a)(8)(E).

In sum, the SRP was a tax measured by income, entitled to priority payment in the chapter 13 plans.

AUTHOR’S COMMENTS

Whether the SRP is a priority tax has divided the bankruptcy courts which have ruled on the issue. This appellate authority provides a comprehensive analysis of why it qualifies as a tax, not a penalty, by relying on the Supreme Court’s own definition of penalty as punishment for breaking the law. Not complying with the individual mandate is not a criminal act, so I agree it must be a tax since it cannot be a penalty. Because Congress passed legislation at the end of 2018 that the SRP would be zero going forward, the priority claim question in chapter 13’s will have a limited life. However, since a significant number of chapter 13’s address tax debt going back several years, having sound appellate authority on the priority issue will be useful to bankruptcy courts around the country.

This review was written by the Hon. Meredith Jury (U.S. Bankruptcy Judge, C.D. CA., Ret.), a member of the ad hoc group. Thomson Reuters holds the copyright to these materials and has permitted the Insolvency Law Committee to reprint them. This material may not be further transmitted without the consent of Thomson Reuters.