Shared responsibility payments are excise or income taxes holding priority status for bankruptcy purposes.
Unpaid shared responsibility payments (SRPs) hold priority status, making such payments unable to be discharged in bankruptcy proceedings. The Eastern District of Louisiana held that the SRP is a tax and not a penalty and may be categorized as either an excise tax or an income tax—both of which afford priority status (In the Matter of Cousins (Debtors), April 10, 2019, Magner, E.).
SRP. Under the Patient Protection and Affordable Care Act (ACA) (P.L. 111-148), taxpayers may pay the SRP instead of retaining minimal essential health insurance coverage. The debtors argued that the SRP is not a priority claim because the IRS labels it a penalty. However, the IRS contended that the SRP’s label does not identify it as a tax or a penalty. The burden falls on the IRS to prove that the SRP falls within the definition of priority claims.
Tax or penalty. The Bankruptcy Code allows for the discharge of all debts except for those listed as priority claims. A "tax" is "a pecuniary burden laid upon individuals or property for the purpose of supporting the government," while a "penalty" is an "exaction imposed by statute as a punishment for an unlawful act." Internal Revenue Code (IRC) section 5000A(a) requires individual tax payers to maintain minimum essential coverage unless an exception applies, but taxpayers may make an SRP to the government when filing a tax return without incurring any other consequences. The SRP was enacted to provide an incentive to maintain required coverage.
While the IRC refers to the SRP as a penalty, the Supreme Court has held that whether the IRC labels a liability as a "tax" or "penalty" does not control—instead, the function is the determining factor. Refusing to purchase health insurance and paying an assessment instead does not constitute an unlawful act, which is a strong indication that the SRP is not a penalty. Further, legislative history shows that Congress referred multiple times to the SRP’s ability to raise revenue. Thus, the SRP should be considered a tax.
Priority status. The court then sought to answer whether the SRP is entitled to priority status. The court determined that the SRP is found in a section of the IRC titled "Miscellaneous Excise Taxes." Further, because the SRP is assessed when a taxpayer exercises his or her right to remain uninsured, or is a tax imposed "upon the exercise of a right or privilege," the SRP could be an excise tax. The SRP could also be considered an income tax, as it is based on an individual’s income level. Though it does not fit neatly into either category, the court held that both would afford the SRP priority status.
The case is No. 18-10739.
Attorneys: Rachel Thyre Anderson (The Law Office of Rachel Thyre Anderson, LLC) for John D. Cousins and Allison J. Cousins. Kelly Logan Massey (Dean Morris, LLC) for The Bank of New York Mellon f/k/a The Bank of New York.
Companies: The Bank of New York Mellon f/k/a The Bank of New York
Cases: CaseDecisions IndividualMandateNews PenaltyNews LouisianaNews NewsFeed
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