In re: George J. McPherson

A question may be headed to the Sixth Circuit, where debtors hope to create a circuit split.

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Case Type:
Case Status:
21-8011/8012 (Consolidated) (6th Circuit, Mar 21,2022) Published
Sixth Circuit BAP reversed Bankruptcy Court's holding that the penalty imposed on a taxpayer under the Affordable Care Act (26 U.S.C. Sec. 5000A) ("ACA") was not a tax on or measured by income but was instead a penalty. The BAP found that the shared responsibility payment (SRP) imposed by the ACA was a tax and entitled to priority under Bankruptcy Code Section 507(a)(8). Congress had lowered the penalty to zero so the issue no longer had financial consequence. The BAP noted the SRP is located in the Internal Revenue Code.
Procedural context:
Two Chapter 13 debtors objected to proofs of claim filed by the IRS which claims sought to have the SRP declared a tax and requested priority status under Bankruptcy Code Sec. 507(a)(8). The Bankruptcy Court had confirmed the plans in both Chapter 13 cases. Both plans provided less than a 22% distribution to unsecured creditors. After briefing, the Bankruptcy Court issued a consolidated memorandum opinion granting both debtors' objections to the IRS claims. The IRS timely appealed. While first appealing to the District Court Court, the IRS then changed course and moved the appeals to the BAP.
There were no factual issues on appeal. The BAP considered the appeal solely on issues of law and reviewed the decision of the Bankruptcy Court de novo. In tax years 2017 and 2018, the ACA provided that non-exempt individuals who did not have minimum essential coverage for one or more months had to make an SRP. The monthly SRP amount owed was determined by a formula. the debtors did not maintain health insurance for 9 and 12 months respectively. The SRP liability is measured by the number of months the debtors lacked health insurance. The SRP was between $1,000 and $1,500, approximately, in the two cases. There was a dissent by one member of the BAP who stressed that courts must be sparing in permitting priority treatment (as the IRS sought) because every decision granting priority to one creditor reduces the amount available for other creditors.
Croom, Dales (dissenting) and Stout (opinion author)

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