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 appe al presents the question of whether a fifteen percent flat tax levied on funds reverted to an employer from an over-funded employee pension plan constitu tes an excise tax or a nonpecuniary-loss penalty for purpos es of establishing priority in a bankruptcy proceeding. Th e bankruptcy court held that the tax levied pursuant to 26 U.S.C. § 498 0 (1988 ) constitutes a nonpecuniary-loss penalty. The district cour t 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 receive d (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 ta x 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 it s employee pension plan into two separate plans: one for retired employees, and t he other for active employees. Juvenile Shoe then liquidated th e reti ree plan, paying out the amount due to each plan participant an d beneficiary under the plan's provisions. After the payout, surplus funds in the amount of $2.3 million remained, which Juvenile Shoe reverted t o itself for corporate use. Twenty-two days after the reversion, Juvenile 1 Shoe declared bankruptcy.

Sho rtly thereafter, the Internal Revenue Service (IRS) filed a n unsecured priority claim with the bankruptcy court for a reversion ta x against Juvenile Shoe pursuant to 26 U.S.C. § 4980. The IRS a sserted that 2 the ass essment constitutes an excise tax and therefore is entitled t o

### 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 o f governmental units, only to the extent tha t such claims are for-

. . . . (E) an excise tax on-

(i) a transaction occurrin g before the date of the filing of the petition for which a retur n, if required, is last due, under applicable law or under an y extension, after the three yea rs before the date of the filing of the petition . . . .
11 U.S.C. § 507(a)(7)(E)(i) (1988). Under section 4980(c)(4) , emp loyer reversions must be reported on a return and woul d 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. Th e 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
owe d under section 4980 but disputed that the assessment constitutes a n excise tax; rather, the committee argued that the assessment constitutes
a nonpe cuniary-loss penalty and that it should be subordinated to th e 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 othe r unsecured creditors. The IRS appealed the decision to the distr ict court, 4 which reversed and re manded 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 2 6 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 cour t 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 pecunia ry burden laid upon individuals or property for the purpose o f supporting the government." Id. at 2113 (quoting New Jersey v. Anderson , 203 U.S. 483, 492 (1906)). A penalty, in contrast, is "an exaction impose d by statute as punishm ent 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 a n 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, labele d "Misce llaneous Excise Taxes," section 4980 makes no reference to it s provis ion specifically as an "excise tax." We are not guided by th e plac ement of the statute because the placement of a provision in th e Internal Revenue Code gives no inference of legi slative construction. See Re organized CF & I , 116 S. Ct. at 2113; see also 26 U.S.C. § 7806(b ) (1988). Moreover, in the bankruptcy context, courts apply well-establishe d principles that Congress must specifically abrog ate 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 Jerse y Dep't of E nvtl. Protection , 474 U.S. 494, 501 (1986)). The labellin g included in the enactment is not conclusive as to the nature of a n
assessme nt. See City of New York v. Feiring , 313 U.S. 283, 285 (1941 ) (holding that a court places no weight on the la bel of a tax, but looks to the "incidents" of th e statute to determine whether the levy is a tax for the purpose considered).

The language of section 4980 does not provide conclusive evidenc e that Congress intended a means of interpreting whether

### In reaching its conclusion, the Fourth Circuit used a tes t 5 

### similar to Reorganized CF & I for determining whether a lev y constitutes an excise tax or a penalty. The court concluded that taxe s are "pecuniary burdens laid upon individuals or thei r property, regardless of their consent, for the purpose of de fraying the ex penses of the government or of undertakings authorized b y it." In re C-T of Virginia, Inc. , 977 F.2d at 139 (quoting City of New Yo rk v. Feiring , 313 U.S. 283, 285 (1941)). A penalty, b y contra st, is "[a]n enactment which has as its purpose th e punishment of conduct perceived as wrongful . . . regardless of the terminology employed by the legislature." Id. at 139 (quoting In 6 section 4980 levies a n excise tax distinct from the established rules for that purpose in the bankruptcy context. Absent a clear statemen t demonstrating congressional intent to place authoritative weight on th e statutory labelling of section 4980, we next loo k to the "operation of the provision."

As disc ussed by the district court, the tax levied by section 498 0 recaptures revenue that is lost to the government and discourages employer s fromreverting 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 in1990 U.S.C.C.A.N. 2017, 2066)

. Under the Internal Revenue Code, Congress granted a corporate tax exemptio n to employers for placing money in an employee pe nsion 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 pa y the corporate tax rate on funds reverted from the pension plan, see 2 6 U.S.C. § 11 (1988), the employer earns interest while the funds are in the pen sion plan, and the government is denied the use of the tax revenu e 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 pla cement of the funds in the pension plan. See In re C-T of Virginia, Inc. , 977 F.2d 137, 140 (4th Cir

. 1992) (hol ding in a pre- Reorganized CF & I decision that section 498 0 operat es primarily to generate revenue), cert. denied , 507 U.S. 100 4 (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 re capture the revenue lost to the government, Congress chose a flat tax o n 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 reflec t the government's loss of revenue, the government chose the efficiency and simplicity of a flat rate. See In re C-T of Vir ginia, Inc. , 128 B.R. 628, 630-31 (Bankr. W.D. Va. 1991). Appellants argue that the assessment i s penal because the rate of tax exceeds the benefi t derived; yet the General Ac counting Office submitted a report to a congressional subcommitte e considering an increase in the tax rate under section 4980 that showed tha t in many c ases a 15% tax is not sufficient to recapture tax benefit s received by an employ er. H.R. Rep. 881, 101st Cong., 2d Sess. 52 (1990), reprinted in 1990 U.S.C.C.A.N. 2017, 2066.

The Re organized CF & I definition of a penalty requires that th e exaction be imposed "as punishment for an unlawful act." Although Congres s disfavors the reversion of pension plan funds to employers, it has no t 7 made such reversions unlawful, instead

### Congress specifically allows employers to revert funds fro m 8 

### pension plans upon termination under section 4980 if an over funding 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

. Cong ress has also considered providing a mechanism for allowin g empl oyers to revert pension surpluses without requiring them t o terminate the pension plans. Id. at 2313-85.
8 giving employers that inadvertently over fund th eir 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 note d by the Fourth Circuit, the fact that an excise tax on alcohol , tobacco, or certain conduct also affects behavio r in a fashion intended by Congress does not make the tax a penalty. In re C-T of Virginia, Inc. , 97 7 F.2d at 140 n.8; cf. Sonzinsky v. United States , 300 U.S. 506, 513 (1937) (no ting that "a tax is not any less a tax because it has a regulator y effect"). Because we determine that, for the reasons above, section 4980 primarily raises reve nue for the operation of the government, it fits the Supreme Court's definition of an excise tax.
Despi te our determination that the legislative history of sectio n 4980 is inconclusive, it nonetheless provides support for our conclusion that Congress intended to levy an excise tax on employer reversions. In consid ering the statute, Congress described the assessment as a "non

deductible excise tax on a reversion occurring upon the termination of a qualified plan." Tax Reform Act of 1986, Pub. L. No. 99-514, 198 6 U.S.C.C.A.N. (100 Stat.) 4075, 4570. Further, the relevant provision in the Tax R eform Act of 1986 is captioned: "Excise tax on reversion o f qualifi ed plan assets to employer." Id. , 100 Stat. at 2478. Also, th e confe rence agreement for changing the section 4980 tax from 10% to 15 % refers to the levy as an "excise tax" four times in the

### Section 497 1 imposes a flat tax rate of 10% on any amount an 9 

### employ er under funds an employee pension fund. See Employe e Retirement Income Security Act of 1974, 88 Stat. 935, (codified at 29 U.S.C. § 1001 (1988)). If the employer does not correct th e underfunding within the statutory period, section 4971(b) in creases the tax to 100%. The Court also noted that, even after paying the 100% tax for 10 

### under funding the plan, the em ployer 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 p aragraph. H.R. Conf. Rep. No. 1104, 100th Cong., 2d Sess. 12 9 (1988), reprinted in 1988 U.S.C.C.A.N. 5048, 5189.

In contra st, section 4971, the provision examined in Reorganized CF & I , pro vides a clear example of an assessment that constitutes a nonpecun iary-loss penalty. The Court focused on the "obviously pena l 9 char acter" of its provisions, particularly the one that levies a ta x equivalent to 100% of the funding deficiency. Reorganized CF & I , 116 S. Ct. at 2113. Section 4971 was not enacted to generate or recaptur e 10 revenue for the operation of the government. Th e 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 re ceiving tax revenue early because the employer cannot claim a ta x exemption on the amount under funded until it places the funds into th e employee pension fund.

Unlik e the law at issue here, the intent of the section 4971 is t o 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 federa l law. See 29 U.S.C. § 1001 (1988) (setting forth the minimu m federal standards for pension funding levels). As the Court pointed out, Con gress's clear intention was to penalize employers who fail to compl y with

### As noted by the Supreme Court, the Bankruptcy Reform Act of 1 1 

### 1994, 108 Stat. 4132 § 304(c) (codified at 11 U.S.C. § 507 ( 1996)), add ed a new seventh priority, moving the relevant provision fro m seventh (section 507(a)(7)) to eighth (section 507(a)(8))

. Reorganized CF & I , 116 S. Ct. at 2109 n.1. Our determinati on that section 4980 operates as an excise tax applies equally to the new prioritization scheme.
10 statutory pension funding requirements. Reorgan ized CF & I , 116 S. Ct. at 2114 (quoting H.R. Re p. No. 93-807, p. 28 (1974)) ("The bill provides new and mor e effective penalties where employers fail to meet the fundin g standards.").

III.
Accordingly, because the primary operation of section 4980 is t o support the governmen t rather than to penalize an unlawful act, we affirm the district court an d 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 gove rnment requested a stay in this matter pending the Suprem e Court’s decision in United States v. Reorganized CF&I Fabricators, Inc. , 116 S. C t. 2106 (1996), asserting that the decision would “in al l likelihood control the outcome of this case.” R eorganized CF&I determined tha t an identical tax assessment under an almost identical statute was , indee d, a nonpecuniary loss penalty for purposes of priority in a bankrup tcy proceeding. The government, recovering from its surprise , rever sed its field and now attempts to distinguish this case fro m Reorganized CF&I . I disagree with this tactic and also disagree with the court’s analysis of the nature and character of the fifteen percen t assessment under the standards established in Reorganized CF&I

.

### 11 The cour t depends largely upon its belief that the fifteen percen t assessment compensates the government for pecuniary loss resulting fro m taxes not collected on the excess funds directedinto 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 collecte d on both the initial amounts directed into the fund and accrued earnings, if any.

Second, t he penalty is assessed whether or not the employer ha s actually enjoyed tax benefits and without regardto 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 direc ted 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 th e plan. Also, the flat rate penalty is assessed without regard to the lengt h of time the returned funds have been held by the plan.

Third, ha d the returned funds been directed to employees instead of the coffers of the em ployer, no assessment would have been levied at all. Thus, in reality, there is no discernible relati onship 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.