Court Opinion

ID: 6339573
Source: CourtListenerOpinion
Date Created: 2022-05-11 17:00:31.162577+00
Date Added: 2024-06-11T15:49:11.537350
License: Public Domain

PRECEDENTIAL

        UNITED STATES COURT OF APPEALS
             FOR THE THIRD CIRCUIT
                  ____________

                       No. 21-1858
                      ____________

In re: ROBERT SZCZYPORSKI; BONNIE SZCZYPORSKI,
                                    Debtors

                          Robert Szczyporski,
                                                Appellant

                      ____________

      On Appeal from the United States District Court
          for the Eastern District of Pennsylvania
                 (D.C. No. 2:20-cv-03133)
      District Judge: Honorable Joseph F. Leeson, Jr.
                       ____________

                Argued on January 27, 2022

  Before: HARDIMAN, SHWARTZ, and SMITH, Circuit
                     Judges.

                   (Filed: May 11, 2022)

Sergey Joseph Litvak [argued]
Litvak Legal Group, PLLC
3070 Bristol Pike
Building One, Suite 204
Bensalem, PA 19020
          Counsel for Debtor-Appellant Robert Szczyporski

David A. Hubbert
Pooja A. Boisture [argued]
Ellen P. DelSole
United States Department of Justice
Tax Division
950 Pennsylvania Avenue, NW
P.O. Box 502
Washington, DC 20044
          Counsel for Defendant-Appellee Internal Revenue
Service
                         ___________

                  OPINION OF THE COURT
                       ____________

HARDIMAN, Circuit Judge.

       This appeal involves the interaction of two federal laws:
the Patient Protection and Affordable Care Act (ACA) and the
Bankruptcy Code.

       The ACA requires certain individuals to maintain
“minimal essential [health insurance] coverage” throughout
the year (the Individual Mandate). 26 U.S.C. § 5000A(a). A
person subject to the Individual Mandate who fails to maintain
the required insurance for one month or more is assessed a
“shared responsibility payment.” Id. § 5000A(b)(1). Though
described by the statute as a “penalty,” id., the payment is

                               2
collected by the Internal Revenue Service along with one’s
federal income tax return. Id. § 5000A(b)(1)–(2).

       Whether the payment is a “penalty” or a “tax” remains
contested. In NFIB v. Sebelius, 567 U.S. 519 (2012), the
Supreme Court held that the shared responsibility payment is a
tax for constitutional purposes, id. at 570, but is not a tax for
purposes of the Anti-Injunction Act, id. at 546. This appeal
requires us to decide whether the shared responsibility
payment is a tax for bankruptcy purposes. If it is, we must also
determine whether it is entitled to priority under the
Bankruptcy Code.

                               I

        In July 2019, Robert and Bonnie Szczyporski (Debtors)
filed a Chapter 13 bankruptcy petition. The IRS filed a proof
of claim against their estate for various unpaid taxes and
interest, including a $927.00 shared responsibility payment the
Debtors owed for failing to maintain health insurance in 2018.
The IRS’s proof of claim characterized the payment as an
“EXCISE” tax entitled to priority. The Debtors objected to the
IRS’s claim, arguing that the shared responsibility payment
was not a tax. They claimed it was a penalty not entitled to
priority.

        The Bankruptcy Court confirmed the Debtors’
repayment plan in February 2020, but reserved decision on
their objection to the IRS’s proof of claim. After briefing from
the parties and a hearing, the Bankruptcy Court held: (1) under
NFIB v. Sebelius, the shared responsibility payment is a tax—
not a penalty—for bankruptcy purposes; and (2) the payment
is entitled to priority under Section 507(a)(8) of the Bankruptcy
Code, 11 U.S.C. § 507(a)(8), as either an income or an excise

                               3
tax. In re Szczyporski, 617 B.R. 529, 531–32 (Bankr. E.D. Pa.
2020).

       The District Court affirmed. In re Szczyporski, 531 F.
Supp. 3d 934, 936 (E.D. Pa. 2021). The Court found Sebelius’s
analysis dispositive but explained that it would also find the
payment to be a tax for bankruptcy purposes under the
functional examination we used in In re United Healthcare
Systems, Inc., 396 F.3d 247 (3d Cir. 2005). In re Szczyporski,
531 F. Supp. 3d at 939–40.

        The District Court also agreed that the shared
responsibility payment is entitled to priority, but only as an
“income tax” under Section 507(a)(8)(A). Id. at 943; 11 U.S.C.
§ 507(a)(8)(A). The Court concluded the payment is not
entitled to priority as an excise tax, since it is not a tax “on a
transaction” as required by Section 507(a)(8)(E). In re
Szczyporski, 531 F. Supp. 3d at 942. The Debtors filed this
timely appeal.

                                II

       The Bankruptcy Court had jurisdiction over the
Debtors’ objection to the IRS proof of claim under 28 U.S.C.
§§ 157(b) and 1334. The District Court had appellate
jurisdiction under 28 U.S.C. § 158(a)(1). We have jurisdiction
to review the District Court’s order under 28 U.S.C. §§ 158(d)
and 1291. We exercise plenary review over the District Court’s
legal conclusions. In re Friedman’s Inc., 738 F.3d 547, 551–
52 (3d Cir. 2013).

                                4
                               III

       The IRS has litigated the priority status of the shared
responsibility payment since at least 2018, with mixed results.
Some district and bankruptcy courts have held that the payment
was not entitled to priority, either because the payment (1) was
a penalty, and not a tax, for bankruptcy purposes1 or (2) was
not “an excise tax on a transaction” or “a tax on or measured
by income,” as required for priority under § 507(a)(8).2 Two
courts held, like the Bankruptcy Court here, that the payment
may be entitled to priority as either an excise or income tax. In
re Cousins, 601 B.R. 609, 621 (Bankr. E.D. La. 2019); In re
Gabbidori, 2020 WL 3566538, at *1 (Bankr. S.D. Fla. June 4,
2020). And two other courts held, like the District Court here,

1
 In re Albracht, 617 B.R. 851, 854 (Bankr. E.D.N.C. 2020); In
re Bailey, 2019 WL 2367180, at *5 (Bankr. E.D.N.C. May 24,
2019), vacated as moot, 2019 WL 7403930 (E.D.N.C. Nov. 22,
2019); In re Parrish, 583 B.R. 873, 881 (Bankr. E.D.N.C.
2018), vacated as moot, 2018 WL 6273577, at *3 (E.D.N.C.
Nov. 30, 2018).
2
  IRS v. Alicea, 634 B.R. 54, 64 (E.D.N.C. 2021) (payment is
not entitled to priority as an excise or income tax), appeal
docketed, No. 21-2220 (Oct. 22, 2021); IRS v. Huenerberg, 623
B.R. 841, 845 (E.D. Wis. 2020) (payment is not entitled to
priority as an excise tax); In re Vallejo, 2021 WL 5702699, at
*3–7 (Bankr. D. Ariz. Nov. 23, 2021) (payment is not entitled
to priority as an excise tax on a transaction or income tax); In
re Jones, 610 B.R. 663, 669 (Bankr. D. Mont. 2019) (payment
is not entitled to priority as an excise tax on a transaction and
IRS’s income tax argument “would likely fail”).

                               5
that the payment was entitled to priority as an income tax.3
Among the courts of appeals, the Fifth Circuit concluded in a
non-precedential opinion that the payment is not entitled to
priority as an excise tax because it is not assessed on a
transaction. In re Chesteen, 799 F. App’x 236, 240–41 (5th Cir.
2020).

       In our view, the shared responsibility payment is a tax
“on or measured by income.” So we join those courts that hold
the shared responsibility payment is entitled to priority in
bankruptcy under Section 507(a)(8)(A).

                              IV

       “The Bankruptcy Code does not define ‘tax.’” United
Healthcare, 396 F.3d at 252 (citing United States v.
Reorganized CF & I Fabricators of Utah, Inc., 518 U.S. 213,
220 (1996)). When determining whether an exaction is a tax
for bankruptcy purposes, the Supreme Court instructs us to
“look[] behind the label placed on the exaction” to “the
operation of the provision” and the exaction’s “actual effects.”
CF & I Fabricators, 518 U.S. at 220–21 (citation omitted).

      For that reason, we apply “a functional examination that
balances the characteristics” of the exaction to determine
whether it is a tax for bankruptcy purposes. United Healthcare,

3
  In re Miller, 634 B.R. 641, 646 (Bankr. M.D. Ga. 2021)
(concluding the payment is an income tax, but not an excise
tax); In re Juntoff, 2022 WL 830901, at *12–13, *13 n.16
(B.A.P. 6th Cir. Mar. 21, 2022) (holding the payment is a tax
measured by income without addressing whether it is an excise
tax).

                               6
396 F.3d at 255. In making our determination, we may consider
the six Lorber-Suburban factors, which ask whether the
exaction is

        (1) an involuntary pecuniary burden,
        regardless of name, laid upon individuals or
        property; (2) imposed by, or under authority
        of the legislature; (3) for public purposes,
        including the purposes of defraying expenses
        of government or undertakings authorized by
        it; (4) under the police or taxing power of the
        state[;] . . . [(5)] universally applicable to
        similarly situated entities; and [(6)] whether
        granting priority status to the government will
        disadvantage private creditors with like
        claims.

United Healthcare, 396 F.3d at 253 (internal quotation marks
omitted) (first quoting In re Lorber Indus. of Cal., Inc., 675
F.2d 1062, 1066 (9th Cir. 1982), then quoting In re Suburban
Motor Freight, Inc., 36 F.3d 484, 488–89 (6th Cir. 1994)).

        But these “six factors [do not] constrain our inquiry”;
we can consider “any relevant factor.” Id. at 255. For example,
we can consider whether the payer received a particularized
benefit. A payment made without regard for any “benefits
bestowed by the [g]overnment on a taxpayer” is indicative of a
tax, while “a payment . . . exchanged for a government benefit
not shared by others” is generally not a tax. Id. at 260 (citing
Nat’l Cable Television Ass’n, Inc. v. United States, 415 U.S.
336, 340–41 (1974)). And we can consider whether the
government can alter the exaction, since the “ability to
manipulate the assessment also is characteristic of a tax.” Id.
(citing Nat’l Cable, 415 U.S. at 341).

                               7
       In sum, our examination of an exaction under United
Healthcare is a “flexible” one that “allows us to consider the
characteristics of the obligation in light of the evolving
treatment of priority claims under the Bankruptcy Code.” Id. at
256.

                                A

       The District and Bankruptcy Courts held that the
Supreme Court’s determination that the shared responsibility
payment is a tax for constitutional purposes is dispositive in the
bankruptcy context. In re Szczyporski, 531 F. Supp. 3d at 939;
In re Szczyporski, 617 B.R. at 531. We disagree.

        While the Supreme Court’s analysis in Sebelius shares
features with our functional examination in United Healthcare,
the analyses are not identical. Explaining why the shared
responsibility payment is a tax for constitutional purposes, the
Supreme Court observed that the payment (1) is administered
like a tax, Sebelius, 567 U.S. at 563–64, and (2) lacks common
characteristics of a penalty, id. at 566–68. But the Court did not
address the Lorber-Suburban factors or other factors we have
previously said were relevant for bankruptcy. See United
Healthcare, 396 F.3d at 255–56, 260. Nor did Sebelius “rel[y]
significantly on Bankruptcy Code Section 507 jurisprudence”
as the IRS argues. See IRS Corr. Br. 23. The Supreme Court
references only two cases from the bankruptcy context in its
analysis. It cites United States v. Sotelo, 436 U.S. 268, 275
(1978), as the fourth case in a string of citations establishing
that the “penalty” label is not determinative, Sebelius, 567 U.S.
at 565. And it quotes CF & I Fabricators only to establish that
a penalty necessarily entails “punishment for an unlawful act
or omission,” id. at 567 (quoting CF & I Fabricators, 518 U.S.
at 224). Neither reference is essential to the Court’s holding.

                                8
       Moreover, the constitutional and bankruptcy contexts
call for conflicting presumptions. “[E]very reasonable
construction must be resorted to, in order to save a statute from
unconstitutionality.” Sebelius, 567 U.S. at 563 (opinion of
Roberts, C.J.) (quoting Hooper v. California, 155 U.S. 648,
657 (1895)). But for purposes of bankruptcy priority,
“provisions allowing preferences must be tightly construed.”
Howard Delivery Serv., Inc. v. Zurich Am. Ins. Co., 547 U.S.
651, 667 (2006) (citations omitted). These conflicting
presumptions suggest that an exaction could function as a tax
for the broader purpose of constitutional validity, but not
within the narrower confines of bankruptcy priority.

        The Supreme Court held in Sebelius that an exaction can
be a “tax” for constitutional purposes but not for certain
statutory purposes. Compare 567 U.S. at 543–46 (shared
responsibility payment is not a tax under the Anti-Injunction
Act); with id. at 563–74 (shared responsibility payment is a tax
under the Constitution). Accordingly, there is no reason to
conclude that Sebelius’s constitutional analysis is controlling
in the context of the Bankruptcy Code.4

4
  Several other courts agree. See In re Juntoff, 2022 WL
830901, at *5; IRS v. Alicea, 634 B.R. at 61–62; In re Albracht,
617 B.R. at 854; In re Jones, 610 B.R. at 666; In re Bailey,
2019 WL 2367180, at *2; In re Parrish, 583 B.R. at 878–79.
But see In re Vallejo, 2021 WL 5702699, at *2 (noting that
Sebelius authoritatively construed the payment as a tax, but not
necessarily a tax entitled to priority in bankruptcy); In re
Cousins, 601 B.R. at 615–16 & n.26 (observing that, while “a
determination for constitutional purposes may differ from one
based on § 507(a),” because the “[Sebelius] Court applied the

                               9
                               B

       The Supreme Court’s Sebelius analysis is not
dispositive in the bankruptcy context, but we find it persuasive.
Based on the functional examination of the shared
responsibility payment’s actual effects and operation, we
conclude that the payment is a tax for bankruptcy purposes. See
United Healthcare, 396 F.3d at 255–56.

       All six of the Lorber-Suburban factors indicate that the
payment is a tax. First, the payment is an involuntary pecuniary
burden upon individuals who fail to maintain minimum health
insurance coverage. See 26 U.S.C. § 5000A(b)(1). Second, it
was imposed by Congress. See id. Third, it was levied for the
public purpose of “expand[ing] health insurance coverage.”
Sebelius, 567 U.S. at 567. Fourth, it was imposed under
Congress’s taxing power. Id. at 570. Fifth, it is universally
applicable to all taxpayers subject to the Individual Mandate
who fail to maintain minimum health insurance coverage. See
26 U.S.C. § 5000A(b)(1). And sixth, granting priority status to
the IRS will not disadvantage similarly situated private
creditors (since there are none). See In re Jones, 610 B.R. 663,
667 (Bankr. D. Mont. 2019). The Lorber-Suburban factors
suffice to establish that the shared responsibility payment is a
tax. See United Healthcare, 396 F.3d at 256.

       The Debtors argue that the fifth and sixth Lorber-
Suburban factors are not satisfied. They are, for the reasons we
described. But even if they were not, our conclusion is
supported by other relevant factors. The shared responsibility

same test [as required in bankruptcy], the Court’s analysis
controls”).

                               10
payment is not “exchanged for a government benefit not shared
by others.” See id. at 260 (citation omitted). And the
government can—and did—“manipulate the [payment] to
encourage or discourage” health insurance purchases. See id.
at 254 (citation omitted); Budget Fiscal Year, 2018, Pub. L.
No. 115-98, § 11081, 131 Stat. 2054, 2092 (2017) (codified at
26 U.S.C. § 5000A(c)) (reducing the shared responsibility
payment to $0 beginning in 2019).

       Moreover, as the Supreme Court observed in Sebelius,
the shared responsibility payment is calculated and
administered like a tax: it (1) “is paid into the Treasury by
taxpayers when they file their tax returns”; (2) “does not apply
to individuals who do not pay federal income taxes because
their household income is” too low; (3) is calculated using
factors familiar to the tax context, such as “taxable income,
number of dependents, and joint filing status”; (4) “is found in
the Internal Revenue Code and enforced by the IRS”; (5) is
“assess[ed] and collect[ed] . . . in the same manner as taxes”;
and (6) “produces at least some revenue for the [g]overnment.”
Sebelius, 567 U.S. at 563–64 (cleaned up).

       Finally, as the Supreme Court also explained, despite its
statutory “penalty” label, the shared responsibility payment
lacks typical penal characteristics. The payment does not
impose a heavy financial burden, has no scienter requirement,
cannot be enforced through punitive means like criminal
prosecution, and is not imposed for an unlawful act. Id. at 566–
68.

                        *      *      *

                              11
      Looking behind the payment’s label to its actual effects,
we hold that the shared responsibility payment is a tax for
bankruptcy purposes.

                                V

        Having determined that the shared responsibility
payment is a tax for bankruptcy purposes, we must decide
whether it is entitled to priority under the Bankruptcy Code.
Only taxes enumerated in Section 507(a)(8) are entitled to
priority status. The IRS argues the shared responsibility
payment should receive priority as either (1) “a tax on or
measured by income or gross receipts,” 11 U.S.C.
§ 507(a)(8)(A), or (2) “an excise tax on . . . a transaction,” id.
§ 507(a)(8)(E)(i)–(ii). We agree with the District Court that the
shared responsibility payment is entitled to priority as “a tax
on or measured by income.” See id. § 507(a)(8)(A).

        As a preliminary matter, we observe that res judicata
does not, as the Debtors argue, bar us from considering the
IRS’s income tax argument. “[A] confirmation order is res
judicata as to all issues decided or which could have been
decided at the hearing on confirmation.” In re Szostek, 886
F.2d 1405, 1408 (3d Cir. 1989); 11 U.S.C. § 1327. But here,
the confirmation order did not decide the priority of the IRS’s
claim because the order expressly provided that the claim’s
priority would be resolved after plan confirmation. Nor did the
order purport to limit the arguments either party could make.
Though the IRS listed the shared responsibility payment as an
“EXCISE” tax on its proof of claim, it argued before the
Bankruptcy Court that the payment was entitled to priority as
either an income or excise tax. Res judicata does not preclude
the IRS from continuing to press that argument here.

                               12
        On the merits, the Debtors contend that the shared
responsibility payment is not an “income tax” entitled to
priority under Section 507(a)(8)(A). We agree that the payment
is not a traditional tax “on” income earned or received. Section
507(a)(8)(A)’s plain language, however, grants priority not
only to traditional income taxes, but also to taxes, like the
shared responsibility payment, whose amounts are calculated
based on the taxpayer’s income.

        “When statutory language is plain and unambiguous,
‘the sole function of the courts . . . is to enforce it according to
its terms.’” In re Visteon Corp., 612 F.3d 210, 220 (3d Cir.
2010) (omission in original) (quoting Lamie v. United States
Tr., 540 U.S. 526, 534 (2004)). Section 507(a)(8)(A) extends
priority status to “a tax on or measured by income or gross
receipts.” 11 U.S.C. § 507(a)(8)(A). The first “or” signals that
the provision applies to two categories of income tax claims,
either of which qualifies for priority status: (1) “a tax on . . .
income” or (2) “a tax . . . measured by income.” See Antonin
Scalia & Bryan A. Garner, Reading Law: The Interpretation of
Legal Texts 121–22 (2012); see also In re Williams, 188 B.R.
331, 337 (E.D.N.Y 1995) (observing that Section 507(a)(8)(A)
is not limited to “income tax[es]”). The shared responsibility
payment fits comfortably within the second category, as “a tax
. . . measured by income.” 11 U.S.C. § 507(a)(8)(A). When the
Debtors incurred the obligation in 2018, its amount was
“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,” Sebelius, 567 U.S. at 539; see
26 U.S.C. § 5000A(c).

       The Debtors counter that income is “only indirectly
considered in the first level of inquiry [along with] other
factors,” so the payment is not “measured by” income. Debtors

                                13
Br. 20. But the statute shows that, when Debtors incurred the
obligation in 2018, the payer’s household income played an
essential role in determining the amount of the shared
responsibility payment owed. 26 U.S.C. § 5000A(c), (e).

       First, individuals who could not afford coverage
because their household income was below a specified level,
id. § 5000A(e)(1), or who had income below the threshold for
filing a tax return, id. § 5000A(e)(2), owed no shared
responsibility payment. Next, taxpayers who could afford
coverage were assessed an amount that depended on their
household income and the number of months the taxpayer (or
other members of his household) were without coverage.
Taxpayers with low incomes owed a flat fee based on an
“applicable dollar amount” set by the IRS. See id.
§ 5000A(c)(1)(A), (c)(2)(A), (c)(3). Taxpayers with high
incomes also owed a flat fee, but it was based on the national
average premium for a qualifying health insurance plan. See id.
§ 5000A(c)(1)(B). Taxpayers with incomes between the low-
income and high-income cut-offs owed an amount based on a
percentage of the taxpayer’s “excess” income above the filing
threshold, up to a maximum of the national average premium.
See id. § 5000A(c)(1)(A), (c)(2)(B)(iii).

        A simple example using the IRS’s payment estimator is
illustrative. See IRS Taxpayer Advocate Service, The
Individual Shared Responsibility Provision Payment
Estimator, https://www.taxpayeradvocate.irs.gov/estimator/
isrp/estimator.htm. Consider a single taxpayer who went
without health insurance for all of 2018. If the taxpayer’s gross
annual income was less than $12,000 (the minimum filing
threshold for 2018), he would not owe any shared
responsibility payment. See 26 U.S.C. § 5000A(e)(2); see also
id. § 6012(a)(1)(A)(i); Rev. Proc. 2018-18 §§ 3.14, 3.24

                               14
(calculating a minimum filing threshold based on the $12,000
standard deduction and $0 personal exemption for 2018). If the
taxpayer’s income was more than $12,000 but less than
$39,800 (the 2018 low-income cut-off for the taxpayer’s filing
status), he would owe the flat dollar amount specified by the
IRS, which was $695. See 26 U.S.C. § 5000A(c)(1)(A),
(c)(2)(A)(i), (c)(3)(A); Rev. Proc. 2017-58 § 3.40 (specifying
an applicable dollar amount of $695 for 2018). If the taxpayer’s
income was more than $147,840 (the 2018 high-income cut-
off for the taxpayer’s filing status), he would owe an amount
equal to the national average health insurance premium, which
was $3,396. See 26 U.S.C. § 5000A(c)(1)(B); Rev. Proc. 2018-
43 § 3.01–.02 (specifying a monthly national average premium
of $283 per individual for 2018).

        If the taxpayer’s income was between the low-income
and high-income cut-offs (between $39,800 and $147,850), he
would owe an amount equal to 2.5 percent of his income above
the $12,000 filing threshold. See 26 U.S.C. § 5000A(c)(1)(A),
(c)(2)(B); id. § 5000A(c)(2)(B)(iii) (2012) (specifying a
penalty of 2.5 percent for 2016 and after). For example, if the
taxpayer’s income was $50,000, he would owe $950 (which is
2.5 percent of $38,000). If the taxpayer’s income was
$100,000, he would owe $2,200 (which is 2.5 percent of
$88,000). Because the amount due under each of these
scenarios is based on the taxpayer’s household income, the
shared responsibility payment is an obligation “measured by
income,” even when the payment is a flat fee rather than a
percentage of income. Accord In re Juntoff, 2022 WL 830901,
at *12.

       That the shared responsibility payment provision is
located in a portion of the Internal Revenue Code titled
“Miscellaneous Excise Taxes,” 26 U.S.C. Subtitle D, does not

                              15
alter our conclusion that the payment is measured by income.
Titles within the Internal Revenue Code have no legal effect.
26 U.S.C. § 7806(b). Nor is the IRS’s initial characterization
of the payment as an “EXCISE” tax on its proof of claim
determinative. Payment obligations may fall under more than
one bankruptcy priority category. See In re Groetken, 843 F.2d
1007, 1013–14 (7th Cir. 1988) (concluding that a state tax on
retailers may be both a tax “on or measured by . . . gross
receipts” and an excise tax).5

                        *      *       *

        For the reasons stated, we hold that the shared
responsibility payment is a tax “measured . . . by income.” As
such, it is entitled to priority under Section 507(a)(8)(A). We
will affirm the District Court’s order.

5
 Even if the shared responsibility payment could be considered
an excise tax, we agree with the District Court’s conclusion
that the payment is not entitled to priority under 11 U.S.C.
§ 507(a)(8)(E) as “an excise tax . . . on a transaction” because
the failure to purchase healthcare is not a “transaction.” See In
re Szczyporski, 531 F. Supp. 3d at 941–42.

                               16