Business Law

In re Miller (Bankr. M.D. Ga.); In re Vallejo (Bankr. D. Az.)

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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:


Writing a month apart, two bankruptcy courts addressed the issue of whether the “Shared Responsibility Payment” (SRP), which citizens are required by the Internal Revenue Code (IRC) to pay if they do not maintain a minimal standard of health care insurance, is entitled to payment as a priority claim in a Chapter 13 case. The courts agreed that the SRP was not an “excise tax on a transaction” entitled to priority under Bankruptcy Code § 507(a)(8)(E) but disagreed on whether it was “a tax on or measured by income” entitled to priority under § 507(a)(8)(D), with the court in Arizona finding it was not and the court in Georgia finding it was. In re Miller, 2021 WL 4994424 (Bankr. M.D. Ga., October 26, 2021) and In re Vallejo, 2021 WL 5702699 (Bankr. D. Az., November 23, 2021).

To view the opinions, click here and here.


The underlying facts in the cases were similar. In each, the chapter 13 debtor had not maintained the required health care insurance for two years (2016 and 2017) and the IRS had assessed the SRP “tax” for each year. The IRS filed a proof of claim in each case for the unpaid SRP’s, asserting the claims were entitled to priority under both § 507(a)(8)(D) and (E). Both priority claims drew objections, by the Chapter 13 Trustee in Arizona and by the debtors in Georgia, asserting that the SRP was not an excise tax on a transaction, nor was it a tax on or measured by income.

The court in Miller ruled that the failure to maintain health insurance was not a “transaction” and therefore could not be an excise tax on a transaction. A transaction requires some affirmative activity, not inaction such as not maintaining health insurance. In reaching this conclusion, the court employed statutory construction to conclude that Congress included the phrase “on a transaction” to modify excise tax; if it had intended that all excise taxes would be entitled to priority, the modifier would be superfluous. It also cited numerous other bankruptcy level cases which have ruled there were “transactions” in other circumstances and found they all required some positive action to qualify, not failing to act. Having determined there was no transaction, the Miller court declined to rule on whether the SRP was an excise tax.

The court in Vallejo reached the same conclusion that there was no qualifying transaction, relying primarily on a case from the Ninth Circuit, In re George, 361 F. 3d 1157 (9th Cir. 2004), where the circuit ruled that failure to purchase workers’ compensation insurance was “the absence of a transaction” and therefore not an excise tax on a transaction. The Vallejo court found no reason to distinguish not purchasing health insurance from not purchasing workers’ compensation insurance. It did conclude, however, that the SRP was an excise tax, relying on bankruptcy case authority from Montana, which in turn relied on George. In summary, both courts agreed that the SRP was not an excise tax on a transaction to qualify for priority.

To decide whether the SRP was a tax on or measured by income, both courts looked at the wording of the IRC. Before 2018 the SRP was calculated as either a percentage of the taxpayer’s household income above the return filing threshold or a flat dollar amount, whichever is greater; individuals who earned less than the return filing threshold were exempt. (After the passage of the Tax Cuts and Jobs Act, the SRP fell to $0.) The objecting parties made similar arguments in both cases, asserting (1) that because there was a floor and a ceiling the tax could not be measured solely by income and (2) because other factors, such as household size marital status and even some costs such as property taxes, were used to measure the tax, it was not truly measured by income.

The Miller court rejected those arguments. It first noted that other provisions of the IRC set thresholds and ceilings to determine whether federal returns must be filed, yet those provisions are about taxes measured by income. Also, in determining how much tax is due from any filer, additional factors such as dependents, marital status and deductions always come into play. The court specifically rejected reliance on a case from Ohio, In re Juntoff, 2021 WL 1522206 (Bankr. N.D. Ohio Apr. 15, 2021), which stated that because members of Indian Tribes are exempt from the SRP payments, the IRC could no more mean the tax was based on income than the tax was based on whether one was a member of a tribe. The problem with that authority was it failed to “differentiate the factors of an individual’s SRP responsibility [at all] from the factors that contribute to an individual’s federal tax income responsibility.” Finding the SRP similar to all taxes measured by income, the Miller court found a priority claim under subsection D.

To the contrary, the court in Vallejo found the reasoning in Juntoff compelling. There, the court had noted the many other factors, aside from income, which figured into the measurement of the SRP payment amount, including the number of adults and children in a household without health insurance, the number of months each was without insurance, that the flat tax was different for an uninsured adult versus an uninsured child, and the national average cost of certain health insurance plans. Income alone had little to do with measuring the tax due. Aside from this case which the court found persuasive, it observed that the IRS Form 1040 is broken down into different subsections, one entitled “Income” and another entitled “Other Taxes.” The SRP is listed under “Other Taxes”, not “Income.” Similarly, the IRC itself is broken down into different subtitles. Subtitle A concerns “Income Taxes.” Subtitle D concerns “Miscellaneous Excise Taxes.’’ the SRP is listed under Subtitle D, not A. Therefore, both Form 1040 and the IRC recognize that the SRP is not an income tax; it is not entitled to priority.


It is a reach to assert that not buying health insurance is a qualifying “transaction” for the purposes of § 507(a)(8)(E). Both courts agree, as do the majority of bankruptcy courts which have written on this issue. Whether it is measured by income is a harder question. Note, subsection D does not say “solely” by income and it is undeniable that income is one of the factors which determine the amount due. Although this issue may be trending toward mootness, since Congress reduced the tax to zero under the last administration, I predict some cases will make their way to appellate courts. That both FORM 1041 and the IRC categorize the SRP as “Other” or “Miscellaneous” may work against the IRS in those appeals.

This submission 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.

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