by The shared-responsibility payment required by the Affordable Care Act is not an “excise tax on a transaction” subject to priority treatment under section 507(a)(8)(E)(i). United States v. Chesteen, No. 19-30195 (5th Cir. Feb. 20, 2020) (unpublished).
In his chapter 13 bankruptcy schedules, Mr. Chesteen listed a $695.00 debt to the government based on his failure to make his 2016 shared-responsibility payment (SRP). His proposed plan did not provide for payment of the debt. The government amended its proof of claim to include the debt as “an excise tax on a transaction” entitled to priority under section 507(a)(8)(E)(i) and requiring repayment under section 1322(a)(2). Mr. Chesteen countered that the debt was not a tax but a penalty that did not enjoy priority under the Code. The bankruptcy court agreed with Mr. Chesteen. In re Chesteen, No. 17–11472, 2018 WL 878847, at *3 (Bankr. E.D. La. 9 Feb. 2018). On appeal, the district court reversed, finding the SRP had been enacted under Congress’s taxing powers. United States v. Chesteen, No. 18–2077, 2019 WL 1499532, at *2–3 (E.D. La. 25 Feb. 2019). Neither the bankruptcy court nor the district court addressed the issue of whether the SRP was an “excise tax on a transaction” under section 507(a)(8)(E)(i).
On appeal, the government argued that National Federation of Independent Business v. Sebelius, 567 U.S. 519 (2012) (NFIB), which held that the SRP was a constitutional exercise of Congress’s taxing powers, mandates that the court treat the SRP as a priority tax which must be paid in full under either section 507(a)(8)(E)(i) (excise tax on a transaction), or section 507(a)(8)(A) (tax on or measured by income). Mr. Chesteen, on the other hand, pointed to United States v. Reorganized CF & I Fabricators of Utah, Inc., 518 U.S. 213, 224 (1996), as differentiating between taxes designed to help the government and those designed to punish noncompliant taxpayers. He argued that, under that case, the SRP functions as a penalty rather than a tax.
The Fifth Circuit narrowed the question to whether the SRP fits either of the Code provisions relied on by the government. It began with the caveat that because bankruptcy generally strives to treat creditors fairly and evenly, provisions granting priority to one debt over others “must be tightly construed.”
Turning to whether the SRP is an excise tax, the court found such taxes relate to use of products (i.e. cigarette tax) or exercise of privilege (i.e. licensing fees) and involve action on the part of the taxpayer. The SRP is not based on any of the activities to which excises taxes are attached, but rather, is based on the taxpayer’s failure to act. The court rejected the government’s argument that the debtor’s failure to act is an exercise of choice, finding that excise tax requires affirmative action. The court found that the SRP debt is not an excise tax on a transaction within the meaning of section 507(a)(8)(E)(i), and is therefore, not entitled to priority.
The court declined to address the government’s argument that the SRP is a tax under section 507(a)(8)(A) based on the taxpayer’s income, because the government failed to raise the issue in the courts below. The court recognized that there may be discretionary exceptions to the waiver rule when the issue was developed in the lower courts, or where the issue is one of law not requiring a developed factual record. It declined to exercise that discretion here stating, “Chesteen was not afforded the opportunity in bankruptcy court to develop and contest the tax-on-income ground the Government now asserts is a ground for our affirming; that ground was not implicit in the excise-tax-on-a-transaction ground the Government raised as its claim’s basis; and the record was not otherwise adequately developed because, as discussed infra, the bankruptcy court was denied the opportunity to rule on the tax-on-income ground.” The government’s attempt to persuade the court to address the argument as one based solely on law and therefore not requiring development of a record below suffered an even worse defeat as the government did not raise that argument until oral argument.
Likewise, the court rejected as waived the government’s argument by elimination. Under that argument, the government listed four types of taxes permitted under the Constitution: direct, income, excise and duties. The government reasoned that because the SRP was neither a direct tax nor a duty, it must be either an excise tax or income tax. Therefore, under either category, it is entitled to priority. The court declined to exercise its discretion to address this waived argument for the same reasons it refused to address the government’s argument supporting its income tax argument discussed above. The court expressed antipathy for the government’s late insertion of these arguments, noting that these issues are recurring subjects in such cases and should not have been neglected below.
(The court noted at the outset that Congress amended the ACA to reduce the SRP to $0, and the Fifth Circuit has ruled on its constitutionality based on that amendment. This case pre-dated those actions.)
The court reversed the decision of the district court.