‘Individual mandate’ payment is not a priority bankruptcy debt

A district court held that the shared-responsibility payment (SRP) of Sec. 5000A, popularly known as the “individual mandate” to maintain qualifying health care insurance coverage, is not a priority debt in bankruptcy proceedings, widening a split among courts on the issue.

Facts: Gary and Jody Huenerberg filed a Chapter 13 bankruptcy petition in 2017. Their debts included a $6,503 claim by the IRS for unpaid taxes, $1,043 of which was attributable to an SRP for the 2016 tax year. The IRS proof of claim characterized the SRP as an excise tax entitling it to priority status under the Bankruptcy Code, 11 U.S.C. Section 507(a)(8)(E)(i), and payment in full under 11 U.S.C. Section 1322(a)(2). The Huenerbergs objected to the SRP as a priority claim, arguing it was a penalty, not a tax.

The bankruptcy court held the SRP was not a priority debt (In re Huenerberg, 590 B.R. 862 (Bankr. E.D. Wis. 2018)). It noted the Supreme Court had determined in National Federation of Independent Businesses v. Sebelius, 567 U.S. 519 (2012), that the SRP is not a penalty (despite the statute’s repeatedly referring to it as one) but a tax (and therefore constitutionally permissible under Congress’s taxing authority). The bankruptcy court attempted to reconcile that holding with other Supreme Court cases’ functional analyses of the tax/penalty dichotomy in the bankruptcy context.

The bankruptcy court rebutted the Huenerbergs’ arguments for penalty treatment based on recent holdings of two bankruptcy courts in North Carolina and Louisiana (both vacated or reversed) as deviating from the Supreme Court’s functional-analysis cases. However, it held that even if the SRP is a tax, it is not an excise tax within the meaning of 11 U.S.C. Section 507(a)(8)(E). The court noted that the statute refers to a taxable “transaction” and rejected the IRS’s argument that an individual’s failure to obtain or maintain insurance coverage is such a transaction.

Issues: Sec. 5000A(b), before amendment by the law known as the Tax Cuts and Jobs Act (TCJA), P.L. 115-97, required taxpayers and their dependents who were applicable individuals to have minimum effective health care coverage each month or pay the prescribed SRP with their income tax return for the tax year including that month or months. The TCJA reduced the SRP to zero for months beginning after Dec. 31, 2018.

Bankruptcy Code Section 507(a)(8)(E) includes as a debt for priority order of repayment an excise tax on a transaction that occurred before the date of the bankruptcy petition filing and for which any required return was due within three years before the petition filing date.

The IRS argued again before the district court that the SRP is an excise tax, citing In re Szczyporski, 617 B.R. 529 (Bankr. E.D. Pa. 2020); see “Tax Matters: Individual Mandate Payment Is a Priority Debt in Bankruptcy,” JofA, Oct. 2020. In that case, a bankruptcy court in Pennsylvania relied upon the Supreme Court’s analysis in Sebelius to determine that a debtor’s SRP was an excise tax priority debt. The IRS also pointed to two other bankruptcy cases that reached similar holdings to that of Szczyporski. In addition, the IRS again urged the court to interpret the Bankruptcy Code’s reference to a “transaction” subject to an excise tax broadly, citing In re Groetken, 843 F.2d 1007 (7th Cir. 1988). Alternatively, the IRS argued, the SRP is entitled to priority treatment as an unpaid tax, even if it is not an excise tax.

Holding: The district court affirmed the bankruptcy court’s holding that the SRP is not an excise tax and therefore not a priority debt in bankruptcy. The court considered several definitions of “excise tax,” finding that they all shared a common understanding that an excise tax is a tax on an affirmative act, such as the purchase of a particular good or service, or engaging in a specific activity or occupation. The SRP, on the other hand, is “a tax for inaction,” as the Supreme Court noted in Sebelius, one lacking, as the bankruptcy court had also observed, a “transaction” as called for in the Bankruptcy Code definition, the district court stated. The court declined to read “transaction” as expansively as the IRS advocated, stating that “broadly does not mean that one must interpret ‘transaction’ to include non-transactions; broadly does not mean without limit.”

The court also rejected the IRS’s argument that the SRP is subject to priority treatment simply as an unpaid tax because, the court observed, the Bankruptcy Code treats only certain types of taxes and other government claims as priority debts.

• Huenerberg, No. 18-cv-1617 (E.D. Wis. 10/22/20)

— By Paul Bonner, a JofA senior editor.