Opinion ID: 6325239
Heading Depth: 2
Heading Rank: 3

Heading: The SRP is a Tax “Measured by Income.”

Text: Section 507(a)(8)(A) grants priority for certain prepetition income and gross receipts taxes due within the three-year period before the petition date. More specifically as it pertains here, a governmental unit’s claim is entitled to priority “only to the extent that [it is for] a tax on or measured by income. . . .” 11 U.S.C. § 507(a)(8)(A)(i). The Bankruptcy Code does not clarify what it means for a tax to be “on or measured by income,” nor have the Supreme Court or the Sixth Circuit written on the issue. And, as one bankruptcy court explained, “[t]he legislative history on this aspect of § 507(a)(7)(A) is scant and does not elucidate the meaning of this phrase.” In re O.P.M. Leasing Services, Inc., 60 B.R. 679, 680 (Bankr. S.D.N.Y. 1986). The bankruptcy court concluded that the SRP is not a tax on or measured by income. Juntoff, 2021 WL 1522206, at -11. The court stated that, while the ACA provides that the SRP is calculated using a formula that takes into consideration the taxpayer’s income, “[c]alculation of the shared responsibility payment depends on a complicated formula for which income is at most one of many factors to be considered” and “income [does not] come into play for everyone subject to the” SRP, such as the McPhersons (who paid a flat amount rather than a portion of their income). Id. at -10. Based on these premises, the court reasoned: “To the extent that the income plays a role in determining whether one is exempt from the shared responsibility payment, it would be no more correct to say that the shared responsibility payment is measured by income than it would be to say that the shared responsibility payment is measured by membership in an Indian Tribe or any other criteria justifying an exemption under the statute.” Id. at . Finally, the court distinguished other cases holding that the SRP is a tax entitled to priority under § 507(a)(8)(A), finding they “do not appear to have applied the standard of tight construction under Howard Delivery [547 U.S. 651].” Id. (citing In re Szczyporski, 531 F. Supp. 3d 934 (E.D. Pa. 2021) and Matter of Cousins, 601 B.R. 609 (Bankr. E.D. La. 2019)). Nos. 21-8011/8012 In re Juntoff Page 21 In re McPherson While Debtors’ argument on appeal essentially echoes the bankruptcy court’s analysis, the IRS contends that the bankruptcy court erred by interpreting § 507(a)(8)(A) too narrowly in finding it is intended to apply only to traditional income taxes. The IRS argues that § 507(a)(8)(A) includes two categories—taxes “on” income and taxes “measured by” income— and Subsection (A), therefore, covers a broad array of taxes that are not limited to the narrower group of solely income taxes. (IRS Br. at 22 (citing In re Williams, 173 B.R. 459, 463 (Bankr. E.D.N.Y. 1994), aff’d, 188 B.R. 331 (E.D.N.Y. 1995), and In re Greektown Holdings, LLC, No. 08-53104, 2013 WL 2285763, at  (Bankr. E.D. Mich. May 16, 2013) (citing Williams).) The IRS avers that the SRP is both a tax “on” and “measured by” income and cites two cases to explain when a tax can be deemed to be on or measured by income or gross receipts, In re O.P.M. Leasing Servs., Inc., 60 B.R. 679, and Raiman v. State Bd. of Equalization (In re Raiman), 172 B.R. 933 (B.A.P. 9th Cir. 1994). In O.P.M., the bankruptcy court concluded that Texas’s franchise tax as applied to corporations doing business in and outside of Texas was a capital-based exaction apportioned by gross receipts (earned in Texas as a percentage of overall receipts) but measured by capital, because the percentage of gross receipts earned in Texas would be multiplied by the amount of the entity’s capital to calculate the tax owed—subject to a minimum tax. 60 B.R. at 682-83. Thus, the state’s tax claim was not entitled to priority treatment under § 507(a)(7)15 because unpaid franchise taxes under the Texas statute were not taxes “on or measured by income or gross receipts.” The court explained: The mere mention of gross receipts in the [statutory] formula does not automatically activate § 507(a)(7)(A) and accord the State priority status. The State, however, makes precisely such an argument, ascribing an extraordinarily broad meaning to the word “measure” to encompass the word “allocate.” This interpretation would emasculate the words of § 507(a)(7)(A), and would render the strict construction of the § 507(a)(7)(A) priority statute meaningless. The gross receipts ratio has no impact on the measurement of the tax as it relates to capital, and thus the tax in actuality is not on or measured by gross receipts. 15 Congress renumbered subpart § 507(a)(7) as § 507(a)(8) in the Bankruptcy Reform Act of 1994 (Pub. L. No. 103-394, 108 Stat. 4106 (Oct. 22, 1994)). Nos. 21-8011/8012 In re Juntoff Page 22 In re McPherson Id. at 682. The IRS contends that O.P.M. supports its argument because, similar to the conclusion in O.P.M. that the tax at issue was “measured by” capital even though a flat rate could apply, calculating the SRP also requires choosing between a flat rate or a percentage of the taxpayer’s taxable income, making the SRP a tax “measured by income.” In Raiman, 172 B.R. 933. the appellate panel decided that a California sales tax statute on personal property retailers constituted a tax on or measured by gross receipts for purposes of § 507(a)(7)(A). The debtor argued that “the tax assessment was not on ‘gross receipts’ since a taxpayer is allowed to make certain exclusions from her total receipts. In other words, Debtor insists that in order to be afforded priority pursuant to Section 507(a)(7)(A) . . . the tax must be one which is measured by all receipts received by a taxpayer, without any items or transactions excluded.” Id. at 937. The court disagreed, finding no reason to believe “that Congress intended the term ‘gross receipts’ to have a strict federal definition rigidly limited to those situations where a tax is imposed on total receipts without exclusion.” Id. at 939. Rather, the court concluded, “the California tax is in a true sense ‘measured by’ gross receipts. That is, the amount of the taxpayer’s total receipts is an integral initial component of the formula with reference to which the amount of the tax is determined, and not merely a method of apportioning liability for a tax already calculated in some other fashion.” Id. at 939-40. The IRS contends that, as in Raiman, the SRP is a tax under the plain language of § 507(a)(8)(A) because a taxpayer’s income is an integral initial component of the formula to determine their SRP liability. The Panel agrees that the SRP is a tax “measured by” income. As the Supreme Court explained in Sebelius, the SRP is “calculated as a percentage of household income, subject to a floor based on a specified dollar amount and a ceiling based on the average annual premium the individual would have to pay for qualifying private health insurance.” 567 U.S. at 539. While certain taxpayers are exempted from having to pay the SRP, all non-exempt taxpayers (i.e., all those facing tax liability) have their SRP payment calculated using a formula that measures the tax in part by consideration of their income. And, while a taxpayer may be obligated to pay a flat amount rather than a percentage of their income, making that determination requires a taxpayer to input their income into a calculation. Stated differently, it is impossible to discern a Nos. 21-8011/8012 In re Juntoff Page 23 In re McPherson non-exempt taxpayer’s liability for the SRP without factoring their income into the analysis, making the SRP a tax “measured by” the taxpayer’s income. See also In re Miller, 634 B.R. 641, 645 (Bankr. M.D. Ga. 2021) (internal citations omitted) (“The calculation of a taxpayer’s SRP is either a flat fee or a percent of an individual’s income, whichever is greater. . . . The flat fee [] is paid only when it is higher than the percentage that would be paid out of an individual’s income. Therefore, even the flat fee is measured by a taxpayer’s income to quantify his or her responsibility.”). Section 507(a)(8)(A) does not require that the tax be calculated solely or primarily by measuring income. While the Panel recognizes that Howard Delivery, 547 U.S. 651, requires that we “tightly construe” the priority classes, we reject the contention that Congress intended the phrase “measured by income” to require that a tax must be “measured by income only” to fit in § 507(a)(8)(A). As such, the discussion in Raiman on how to interpret Congress’s intent regarding the phrase “gross revenue” is instructive.16