No. 95-2289

 

In re: Juvenile Shoe *

Corporation of America, *

*

 Debtor, *

*

United States of America, *

*

 Appellee, * Appeal from the United States

* District Court for the

v. * Eastern District of Missouri.

*

Juvenile Shoe Corporation *

of America, *

*

Appellant, *

*

Unsecured Creditors Committee, *

James S. Cole, *

*

 Trustees. *

 

Submitted: September 12, 1996

 Filed: November 7, 1996

 

Before BEAM, HEANEY, and MORRIS SHEPPARD ARNOLD, Circuit Judges.

 

HEANEY, Circuit Judge.

This appeal presents the question of whether a fifteen percent flat

tax levied on funds reverted to an employer from an over-funded employee

pension plan constitutes an excise tax or a nonpecuniary-loss penalty for

purposes of establishing priority in a bankruptcy proceeding. The

bankruptcy court held that the tax levied pursuant to 26 U.S.C. § 4980

(1988) constitutes a nonpecuniary-loss penalty. The district court

reversed and we now affirm. 
 Section 4980 defines an "employer reversion" as "the amount 1

of cash and the fair market value of other property received

(directly or indirectly) by an employer from the qualified plan."

26 U.S.C. § 4980(c)(2)(A) (1988). 

 26 U.S.C. § 4980(a)-(b) provides: 2

(a) Imposition of tax

 There is hereby imposed a tax of 15 percent

of the amount of any employer reversion from

a qualified plan.

(b) Liability for tax

 The tax imposed by subsection (a) shall be

paid by the employer maintaining the plan.

2

I.

In 1989, Juvenile Shoe Corporation ("Juvenile Shoe") separated its

employee pension plan into two separate plans: one for retired employees,

and the other for active employees. Juvenile Shoe then liquidated the

retiree plan, paying out the amount due to each plan participant and

beneficiary under the plan's provisions. After the payout, surplus funds

in the amount of $2.3 million remained, which Juvenile Shoe reverted to

itself for corporate use. Twenty-two days after the reversion, Juvenile 1

Shoe declared bankruptcy. 

Shortly thereafter, the Internal Revenue Service (IRS) filed an

unsecured priority claim with the bankruptcy court for a reversion tax

against Juvenile Shoe pursuant to 26 U.S.C. § 4980. The IRS asserted that 2

the assessment constitutes an excise tax and therefore is entitled to
 Section 507(a)(7) provides, in relevant part: 3

(a) The following expenses and claims have priority

in the following order:

. . . .

 (7) Seventh, allowed unsecured claims of

governmental units, only to the extent that

such

claims are for-

. . . . 

(E) an excise tax on-

 (i) a transaction occurring

before the date of the filing of

the petition for which a return,

if required, is last due, under

applicable law or under any

extension, after the three years

before the date of the filing of

the petition . . . . 

11 U.S.C. § 507(a)(7)(E)(i) (1988). Under section 4980(c)(4),

employer reversions must be reported on a return and would

therefore be governed by this section if determined to be an excise

tax.

3

seventh priority under section 507(a)(7) of the Bankruptcy Code. The

3

bankruptcy plan committee
 The matter was argued before a magistrate judge by consent of 4

the parties pursuant to 28 U.S.C. § 636(c)(3) (1992).

4

representing Juvenile Shoe's unsecured creditors stipulated to the amount

owed under section 4980 but disputed that the assessment constitutes an

excise tax; rather, the committee argued that the assessment constitutes

a nonpecuniary-loss penalty and that it should be subordinated to the

claims of other unsecured creditors. The IRS filed a motion for summary

judgment. The bankruptcy court agreed with the committee that the section

4980 tax constitutes a penalty and subordinated the claim to other

unsecured creditors. The IRS appealed the decision to the district court,4

which reversed and remanded for further proceedings. The bankruptcy plan

committee now appeals.

II.

The Supreme Court recently addressed the issue raised in this appeal

relating to a different statutory assessment. In United States v.

Reorganized CF & I Fabricators, Inc., ("Reorganized CF & I"), 116 S. Ct.

2106, 2110 (1996), the Court determined that the tax imposed under 26

U.S.C. § 4971 (1988) on an employer that under funds an employee pension

plan constitutes a nonpecuniary-loss penalty for purposes of priority in

bankruptcy proceedings. To
5

determine whether an assessment is an excise tax or a penalty, a court

looks beyond the assessment's label to "the operation of the provision."

Reorganized CF & I, 116 S. Ct. at 2106. The Court defined a tax as "a

pecuniary burden laid upon individuals or property for the purpose of

supporting the government." Id. at 2113 (quoting New Jersey v. Anderson,

203 U.S. 483, 492 (1906)). A penalty, in contrast, is "an exaction imposed

by statute as punishment for an unlawful act." Id. (citing United States

v. La Franca, 282 U.S. 568, 572 (1931)). Applying the Reorganized CF & I

standard to section 4980, we are persuaded that the provision levies an

excise tax for the purpose of bankruptcy prioritization. 

To determine the purpose of section 4980, we begin by looking at the

statutory language. See Connecticut Nat'l Bank v. Germain, 503 U.S. 249,

254 (1992). Although the section is located under Subtitle D, labeled

"Miscellaneous Excise Taxes," section 4980 makes no reference to its

provision specifically as an "excise tax." We are not guided by the

placement of the statute because the placement of a provision in the

Internal Revenue Code gives no inference of legislative construction. See

Reorganized CF & I, 116 S. Ct. at 2113; see also 26 U.S.C. § 7806(b)

(1988). Moreover, in the bankruptcy context, courts apply well-established

principles that Congress must specifically abrogate if Congress intends to

alter the way a court conducts statutory interpretation. See Reorganized

CF & I, 116 S. Ct. at 2113 (citing Midatlantic Nat'l Bank v. New Jersey

Dep't of Envtl. Protection, 474 U.S. 494, 501 (1986)). The labelling

included in the enactment is not conclusive as to the nature of an

assessment. See City of New York v. Feiring, 313 U.S. 283, 285 (1941)

(holding that a court places no weight on the label of a tax, but looks to

the "incidents" of the statute to determine whether the levy is a tax for

the purpose considered). 

The language of section 4980 does not provide conclusive evidence

that Congress intended a means of interpreting whether
 In reaching its conclusion, the Fourth Circuit used a test

5

similar to Reorganized CF & I for determining whether a levy

constitutes an excise tax or a penalty. The court concluded that

taxes are "pecuniary burdens laid upon individuals or their

property, regardless of their consent, for the purpose of defraying

the expenses of the government or of undertakings authorized by

it." In re C-T of Virginia, Inc., 977 F.2d at 139 (quoting City of

New York v. Feiring, 313 U.S. 283, 285 (1941)). A penalty, by

contrast, is "[a]n enactment which has as its purpose the

punishment of conduct perceived as wrongful . . . regardless of the

terminology employed by the legislature." Id. at 139 (quoting In

6

section 4980 levies an excise tax distinct from the established rules for

that purpose in the bankruptcy context. Absent a clear statement

demonstrating congressional intent to place authoritative weight on the

statutory labelling of section 4980, we next look to the "operation of the

provision."

As discussed by the district court, the tax levied by section 4980

recaptures revenue that is lost to the government and discourages employers

from reverting excess funds from employee pensions. In re Juvenile Shoe

Corp. of Am., 180 B.R. 206, 209 (E.D. Mo. 1995) (citing H.R. Rep. No. 881,

101st Cong., 2d Sess. 52 (1990) reprinted in 1990 U.S.C.C.A.N. 2017, 2066).

Under the Internal Revenue Code, Congress granted a corporate tax exemption

to employers for placing money in an employee pension fund. See 26 U.S.C.

§ 401(a) (1988). As the pension fund grows, it includes earnings on the

money that would have been taken as tax revenue at the corporate tax rate

had it not been placed in the pension fund. Although the employer must pay

the corporate tax rate on funds reverted from the pension plan, see 26

U.S.C. § 11 (1988), the employer earns interest while the funds are in the

pension plan, and the government is denied the use of the tax revenue

during the same period forcing the government to borrow from other sources

to fund its operations. Capturing the tax benefit the employer received

at the expense of the government has the same purpose and similar effect

as assessing the tax prior to the employer's placement of the funds in the

pension plan. See In re C-T of Virginia, Inc., 977 F.2d 137, 140 (4th Cir.

1992) (holding in a pre-Reorganized CF & I decision that section 4980

operates primarily to generate revenue), cert. denied, 507 U.S. 1004

(1993).5
re Kline, 403 F. Supp. 974, 978 (D. Md. 1975)).

 Originally, section 4980 imposed a 10% tax. See 26 U.S.C. 6

§ 4980 (Supp. IV 1986). Congress had raised the rate to 15% at

the time of the reversion in this case. The rate is now 20%. 26

U.S.C. §4980(a) (1994).

 Congress prefers that over-funded benefits remain in 7

pension plans to ensure the financial stability of the funds or

go to the pension beneficiaries. H.R. Rep. No. 881, 101st Cong.,

2d Sess. 52 (1990), reprinted in 1990 U.S.C.C.A.N. 2017, 2065-66.

As appellant points out, over-funded pension benefits given to

the pension beneficiaries are not assessed a reversion tax. See

26 U.S.C. § 4980(c)(2)(B)(i).

7

To recapture the revenue lost to the government, Congress chose a

flat tax on the amount reverted to the corporation. See 26 U.S.C. §

4980(a) (1988); H.R. Rep. No. 881, 101st Cong., 2d Sess. 52 (1990)

6

reprinted in 1990 U.S.C.C.A.N. 2017, 2066. Although Congress could have

enacted a tax based on a complex formula that would more accurately reflect

the government's loss of revenue, the government chose the efficiency and

simplicity of a flat rate. See In re C-T of Virginia, Inc., 128 B.R. 628,

630-31 (Bankr. W.D. Va. 1991). Appellants argue that the assessment is

penal because the rate of tax exceeds the benefit derived; yet the General

Accounting Office submitted a report to a congressional subcommittee

considering an increase in the tax rate under section 4980 that showed that

in many cases a 15% tax is not sufficient to recapture tax benefits

received by an employer. H.R. Rep. 881, 101st Cong., 2d Sess. 52 (1990),

reprinted in 1990 U.S.C.C.A.N. 2017, 2066.

The Reorganized CF & I definition of a penalty requires that the

exaction be imposed "as punishment for an unlawful act." Although Congress

disfavors the reversion of pension plan funds to employers, it has not

7

made such reversions unlawful, instead
 Congress specifically allows employers to revert funds from

8

pension plans upon termination under section 4980 if an overfunding

occurred to "actuarial error." H.R. Rep. No. 391(I), 100th Cong.,

1st Sess., 110, reprinted in 1987 U.S.C.C.A.N. 2313-1, 2313-84.

Congress has also considered providing a mechanism for allowing

employers to revert pension surpluses without requiring them to

terminate the pension plans. Id. at 2313-85.

8

giving employers that inadvertently over fund their employee pension plans

the right to revert the overfunding. See H.R. Rep. No. 881, 101st Cong., 8

2d Sess. 52 (1990), reprinted in 1990 U.S.C.C.A.N. 2017, 2066. Further,

as noted by the Fourth Circuit, the fact that an excise tax on alcohol,

tobacco, or certain conduct also affects behavior in a fashion intended by

Congress does not make the tax a penalty. In re C-T of Virginia, Inc., 977

F.2d at 140 n.8; cf. Sonzinsky v. United States, 300 U.S. 506, 513 (1937)

(noting that "a tax is not any less a tax because it has a regulatory

effect"). Because we determine that, for the reasons above, section 4980

primarily raises revenue for the operation of the government, it fits the

Supreme Court's definition of an excise tax.

Despite our determination that the legislative history of section

4980 is inconclusive, it nonetheless provides support for our conclusion

that Congress intended to levy an excise tax on employer reversions. In

considering the statute, Congress described the assessment as a "nondeductible excise tax on a reversion occurring upon the termination of a

qualified plan." Tax Reform Act of 1986, Pub. L. No. 99-514, 1986

U.S.C.C.A.N. (100 Stat.) 4075, 4570. Further, the relevant provision in

the Tax Reform Act of 1986 is captioned: "Excise tax on reversion of

qualified plan assets to employer." Id., 100 Stat. at 2478. Also, the

conference agreement for changing the section 4980 tax from 10% to 15%

refers to the levy as an "excise tax" four times in the
 Section 4971 imposes a flat tax rate of 10% on any amount an 9

employer under funds an employee pension fund. See Employee

Retirement Income Security Act of 1974, 88 Stat. 935, (codified at

29 U.S.C. § 1001 (1988)). If the employer does not correct the

underfunding within the statutory period, section 4971(b) increases

the tax to 100%. 

 The Court also noted that, even after paying the 100% tax for 10

under funding the plan, the employer remained liable for claims by

the Pension Benefit Guarantee Corporation for the entire amount of

the underfunding under 29 U.S.C. § 1362(b)(1)(A) (1988).

Reorganized CF & I, 116 S. Ct. at 2113-14.

9

opening paragraph. H.R. Conf. Rep. No. 1104, 100th Cong., 2d Sess. 129

(1988), reprinted in 1988 U.S.C.C.A.N. 5048, 5189. 

In contrast, section 4971, the provision examined in Reorganized CF

& I, provides a clear example of an assessment that constitutes a

nonpecuniary-loss penalty. The Court focused on the "obviously penal

9

character" of its provisions, particularly the one that levies a tax

equivalent to 100% of the funding deficiency. Reorganized CF & I, 116 S.

Ct. at 2113. Section 4971 was not enacted to generate or recapture

10

revenue for the operation of the government. The statute imposes a tax on

conduct that does not deny the government any tax revenue. In fact, when

an employer fails to fund a pension plan on time, the government benefits

by receiving tax revenue early because the employer cannot claim a tax

exemption on the amount under funded until it places the funds into the

employee pension fund. 

Unlike the law at issue here, the intent of the section 4971 is to

deter all underfunding of employee pension plans. See Reorganized CF & I,

116 S. Ct. at 2114 (citing H.R. Rep. No. 807, 93d Cong. 2d Sess. 28 (1974).

In addition, the conduct taxed pursuant to section 4971 is prohibited by

federal law. See 29 U.S.C. § 1001 (1988) (setting forth the minimum

federal standards for pension funding levels). As the Court pointed out,

Congress's clear intention was to penalize employers who fail to comply

with
 As noted by the Supreme Court, the Bankruptcy Reform Act of 11

1994, 108 Stat. 4132 § 304(c) (codified at 11 U.S.C. § 507 (1996)),

added a new seventh priority, moving the relevant provision from

seventh (section 507(a)(7)) to eighth (section 507(a)(8)).

Reorganized CF & I, 116 S. Ct. at 2109 n.1. Our determination that

section 4980 operates as an excise tax applies equally to the new

prioritization scheme.

10

statutory pension funding requirements. Reorganized CF & I, 116 S. Ct. at

2114 (quoting H.R. Rep. No. 93-807, p. 28 (1974)) ("The bill provides new

and more effective penalties where employers fail to meet the funding

standards."). 

III.

Accordingly, because the primary operation of section 4980 is to

support the government rather than to penalize an unlawful act, we affirm

the district court and hold that the assessment constitutes an excise tax

entitled to seventh priority under 11 U.S.C. § 507(a)(7).11

BEAM, Circuit Judge, dissenting.

The government requested a stay in this matter pending the Supreme

Court’s decision in United States v. Reorganized CF&I Fabricators, Inc.,

116 S. Ct. 2106 (1996), asserting that the decision would “in all

likelihood control the outcome of this case.” Reorganized CF&I determined

that an identical tax assessment under an almost identical statute was,

indeed, a nonpecuniary loss penalty for purposes of priority in a

bankruptcy proceeding. The government, recovering from its surprise,

reversed its field and now attempts to distinguish this case from

Reorganized CF&I. I disagree with this tactic and also disagree with the

court’s analysis of the nature and character of the fifteen percent

assessment under the standards established in Reorganized CF&I. 
11

The court depends largely upon its belief that the fifteen percent

assessment compensates the government for pecuniary loss resulting from

taxes not collected on the excess funds directed into the pension plan but

now returned to the employer. This reasoning is flawed.

First, ordinary income taxes are levied upon the returned funds. Tax

revenues are collected on both the initial amounts directed into the fund

and accrued earnings, if any.

Second, the penalty is assessed whether or not the employer has

actually enjoyed tax benefits and without regard to whether there has been

any revenue loss by the government. A company operating at a loss would

have no benefit from a deduction for funds directed into the plan. If the

plan has had no earnings because of the nature of its investments, there

would be no tax losses by the government from untaxed income within the

plan. Also, the flat rate penalty is assessed without regard to the length

of time the returned funds have been held by the plan. 

Third, had the returned funds been directed to employees instead of

the coffers of the employer, no assessment would have been levied at all.

Thus, in reality, there is no discernible relationship between the penalty

and revenue purportedly lost by the government.

I agree with the bankruptcy court that the assessment is simply a

penalty. I would reverse.

A true copy.

Attest:

 CLERK, U. S. COURT OF APPEALS, EIGHTH CIRCUIT.