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What’s a Tax for Bankruptcy Law Purposes?  

Author:  Erik M. Jensen.

Source: Volume 39, Number 04, Summer 2022 , pp.49-64(16)

Journal of Taxation of Investments

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In 2012, the Supreme Court, in NFIB v. Sebelius, decided that the shared responsibility payment (SRP) required to be made under the Patient Protection and Affordable Care Act by many persons who didn’t acquire minimum essential health insurance was a tax authorized by the Taxing Clause of the Constitution, even though Congress had called the SRP a penalty. In recent years a similar issue has arisen in the bankruptcy context: Is the SRP a tax that may not be eligible for discharge in bankruptcy—it may, that is, be a “priority” under Bankruptcy Code Section 507(a)(8)—or is it a potentially dischargeable penalty? Many cases have considered these questions, coming to dramatically different conclusions. This article focuses on the Third Circuit’s 2022 decision in In re Szczyporski, concluding that the SRP is a tax “measured by income”—and therefore a priority. Although the SRP was reduced to zero by the Tax Cuts and Jobs Act of 2017, so that the SRP’s characterization for bankruptcy purposes won’t be a future issue, what courts have said about the statutory distinction between taxes and penalties can continue to matter for the characterization of other governmental charges.

Keywords: tax versus penalty, bankruptcy, Bankruptcy Code, In re Szczyporski, shared responsibility payment (SRP), bankruptcy priority, National Federation of Independent Business (NFIB) v. Sebelius, excise tax on a transaction, tax on or measured by income, P

Affiliations:  1: Case Western Reserve University School of Law.

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