United States District Court, D. Massachusetts
MEMORANDUM & ORDER
Nathaniel M. Gorton United States District Judge.
bankruptcy appeal arises from a dispute regarding the
priority of a creditor's claim in a bankruptcy
proceeding. The Internal Revenue Service (“IRS”
or “appellant”) and joint debtor-appellees Thomas
E. Daley and Nicole E. Daley (collectively, “the
Daleys” or “appellees”) disagree as to
whether the liability imposed by an early withdrawal from a
qualified retirement plan is 1) a tax, 2) compensation for
actual pecuniary loss or 3) compensation for non-pecuniary
loss. Appellees made early withdrawals from a qualified
retirement plan in 2012 and 2013. Pursuant to 26 U.S.C.
§ 72(t), they incurred charges of $6, 693 in 2012 and
$10, 351 in 2013 (collectively, “the 10%
exaction”). Those charges were equal to approximately
10% of the amounts withdrawn by appellees from a qualified
retirement plan in 2012 and 2013.
before the Court is the appeal of the IRS from a United
States Bankruptcy Court (“Bankruptcy Court”)
opinion holding that the 10% exaction is compensation for
non-pecuniary loss and thus subject to a general unsecured
Background and Procedural History
July, 2015, appellees filed for bankruptcy protection under
Chapter 13 of the Bankruptcy Code. In March, 2016, the IRS
filed its fifth amended proof of claim No. 1
(“POC”) in the amount of $44, 149, of which $28,
431 was categorized as “Unsecured Priority
Claims”. The amount of the Unsecured Priority Claim
attributable to § 72(t) is $6, 693 for the tax year 2012
and $10, 351 for the tax year 2013.
2017, the Bankruptcy Court allowed the Daleys' motion for
summary judgment and denied the IRS's cross-motion for
summary judgment. The Bankruptcy Court held that the charges
against the Daleys attributable to § 72(t) are penalties
that do not compensate the IRS for a pecuniary loss and thus
its claims are characterized as unsecured general claims. On
May 22, 2017, appellant filed an appeal in this Court.
States district courts have jurisdiction to hear
“appeals from final judgments, orders, and decrees . .
. of bankruptcy judges.” 28 U.S.C. § 158(a)(1). In
reviewing an appeal from an order of a bankruptcy court, a
district court reviews de novo conclusions of law but must
accept the bankruptcy judge's findings of fact unless
they are clearly erroneous. TI Fed. Credit Union v.
DelBonis, 72 F.3d 921, 928 (1st Cir. 1995).
individual who makes an early withdrawal from certain
qualified retirement accounts must include the withdrawn
money in gross income for that year. 26 U.S.C. §
408(d)(1). Taxpayers must contribute an additional exaction
“equal to 10 percent of the portion of such amount
which is includible in gross income.” 26 U.S.C. §
avers that the 10% exaction is either a tax or a penalty for
actual pecuniary loss and as such should be properly
characterized as an unsecured priority claim. The Daleys deny
that characterization and maintain that the decision of the
Bankruptcy Court characterizing the 10% exaction as an
unsecured general claim should be affirmed. They contend that
because the 10% exaction is not intended as recompense for an
actual pecuniary loss, it is not entitled to priority status
as an unsecured priority claim.
Liability Imposed by § 72(t) Is Not a Tax for Bankruptcy
claims that the 10% exaction should be classified as a
priority claim because it is a “tax on or measured by
income or gross receipts.” 11 U.S.C. §
507(a)(8)(A). It is purportedly a tax on income because it
surcharges an additional 10% of the amount included in the
taxpayer's gross income that has been withdrawn from a
qualified retirement account.
on Nat'l Fed'n of Indep. Bus. v. Sebelius, 132
S.Ct. 2566, 2596 (2012), the IRS also contends that the
standard for determining whether an exaction is a tax or
penalty for purposes of determining priority of claim in a
bankruptcy proceeding is not whether the exaction deters
certain conduct but rather whether it is a “punishment
for an unlawful act or omission.” The Daleys deny those
characterizations and maintain that the standard for
determining whether an exaction is a tax or penalty is
whether the purpose of the exaction is to deter taxpayers
from taking certain actions or to compensate the government
for lost revenue.
determining whether an exaction is a tax or penalty for
purposes of establishing priority of claim in a bankruptcy
proceeding, the United States Supreme Court has held that
courts interpreting the Internal Revenue Code should place no
weight on the “tax” label in the statute but
rather make determinations based “directly on the
operation of the provision using the term in question.”
United States v. Reorganized CF & I Fabricators of
Utah, Inc.,518 U.S. 213, 220 (1996) (“CF &
I”). As a result, the characterization of the ...