St. John’s University School of Law
American Bankruptcy Institute Law Review Staff
Under the Affordable Care Act (“ACA”), the Internal Revenue Service (the “IRS”) is entrusted with collecting a “shared responsibility payment” from an individual who must maintain health insurance coverage if he or she fails to maintain coverage for one month or more. In In re Szczyporski, the United States Court of Appeals for the Third Circuit held that the shared responsibility payment is a tax entitled to priority under Title 11 of the United States Code (the “Bankruptcy Code”). In July 2019, Robert and Bonnie Szczyporski (the “Debtors”) filed voluntary petitions for relief under Chapter 13 of the Bankruptcy Code. The IRS filed a proof of claim against the Debtors for unpaid taxes and interest, including a $927.00 shared responsibility payment. The IRS’s proof of claim described the shared responsibility payment as an excise tax entitled to priority.  The Debtors objected to the proof of claim, arguing that the shared responsibility was not a tax, but a penalty not entitled to priority under the Bankruptcy Code. The Bankruptcy Court of the Eastern District of Pennsylvania disagreed with the Debtors and held that the shared responsibility payment is a tax entitled to priority under the Bankruptcy Code as either an income or excise tax.  On appeal, the District Court of the Eastern District of Pennsylvania affirmed the Bankruptcy Court, holding that the shared responsibility payment is a tax for bankruptcy purposes, entitled to priority only as an “income tax, but not as an excise tax.” On subsequent appeal by the Debtors, the United States Court of Appeals for the Third Circuit affirmed the District Court, holding the payment is a tax for bankruptcy purposes and is entitled to priority as an income tax.
The Bankruptcy Code does not define “tax,” so the court examined the shared responsibility payment as an exaction. According to the Third Circuit, in determining whether an exaction is a tax for bankruptcy purposes, a court must analyze “the operation of the provision” and its effects. In that regard, the court balanced the characteristics of the exaction by considering the following six Lorber-Suburban factors adopted by the Third Circuit in In re United Healthcare System, Inc.:
(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.
According to the Third Circuit, the six factors are not exhaustive, and a court should consider any relevant factors.Here, according to the Third Circuit, all of the Lorber-Suburban factors indicated that the shared responsibility payment is a tax. Furthermore, the court found that three other relevant factors supported its conclusion, namely: the shared responsibility payment is not exchanged for a government benefit, the payment is calculated and administered like a tax, and the payment lacks typical penal characteristics. 
Having concluded that the shared responsibility payment is a tax, the court then addressed whether the tax is entitled to priority under the Bankruptcy Code. The court noted that the statute grants priority to traditional income taxes and taxes that are calculated based on the taxpayer’s income.  According to the court, the shared responsibility payment fits into the second category as a tax that is measured by income because the amount of the payment is determined by a taxpayer’s household income. Consequently, the court concluded that the shared responsibility payment was entitled to priority under the Bankruptcy code.
The shared responsibility payment is a tax entitled to priority in the Third Circuit. This is not a uniform rule in the U.S. Indeed, some courts have held the shared responsibility payment is not a tax and thus not entitled to priority.  Moreover, other courts have held the payment is a tax, but is not entitled to priority because it was not “an excise tax on a transaction” or “a tax on or measured by income.”  Thus, the treatment of a claim for a shared responsibility payment is different depending on the jurisdiction in which a bankruptcy case is pending.
 See In re Szczyporski, 34 F.4th 179, 183 (3d Cir. 2022).
 Id. at 190.
 Id. at 183.
 Id. at 184.
 Id. at 190.
 Id. at 185.
 Id. (citing United States v. Reorganized CF & I Fabricators of Utah, Inc., 518 U.S. 213, 220-221 (1996) (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)).
 Id. (citing In re United Healthcare Sys. Inc., 396 F.3d 247, 253 (3d Cir. 2005))
 Id. at 187 (“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. Second, it was imposed by Congress. Third, it was levied for the public purpose of ‘expand[ing] health insurance coverage.’ Fourth, it was imposed under Congress's taxing power. Fifth, it is universally applicable to all taxpayers subject to the Individual Mandate who fail to maintain minimum health insurance coverage. And sixth, granting priority status to the IRS will not disadvantage similarly situated private creditors (since there are none).”) (citations omitted).
 Id. (explaining if the conclusion is not supported by the finding that the Lorber-Suburban factors apply, there are other relevant factors courts can consider to that support their finding).
 Id. at 188.
 Id. (explaining how the payment is based on income stating, “when the 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”).
 Id. at 190.
 Id. at 184 (noting that the priority status of the shared responsibility payment has been litigated since at least 2018 and various courts have ruled in different ways).
 Id.; see also In re Albracht, 617 B.R. 851, 854 (Bankr. E.D.N.C. 2020).
Id.; see also IRS v. Alicea, 634 B.R. 54, 64 (E.D.N.C. 2021); IRS v. Huenerberg, 623 B.R. 841, 845 (E.D. Wis. 2020); In re Vallejo, 2021 WL 5702699, at *3–7 (Bankr. D. Ariz. Nov. 23, 2021); In re Jones, 610 B.R. 663, 669 (Bankr. D. Mont. 2019).