In Re: United

Opinions of the United

2005 Decisions States Court of Appeals

for the Third Circuit

1-24-2005

In Re: United

Precedential or Non-Precedential: Precedential

Docket No. 03-4768

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PRECEDENTIAL

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

No. 03-4768

IN RE: UNITED HEALTHCARE SYSTEM, INC., Debtor

THE RECONSTITUTED COMMITTEE OF

UNSECURED CREDITORS OF THE UNITED HEALTHCARE

SYSTEM, INC.,

Appellant

v.

STATE OF NEW JERSEY DEPARTMENT OF LABOR

On Appeal from the United States District Court

for the New Jersey

(D.C. Civ. No. 03-01024)

District Judge: Honorable Joseph A. Greenaway, Jr.

Argued October 28, 2004

Before: SCIRICA, Chief Judge, FISHER, and

GREENBERG, Circuit Judges.

(Filed January 24, 2005)

Dennis J. O’Grady (argued)

J. Alex Kress

Riker, Danzig, Scherer, Hyland & Perretti

One Speedwell Avenue

Headquarters Plaza

Morristown, NJ 07962

Attorneys for Appellant

Peter C. Harvey

Attorney General of New Jersey

Patrick DeAlmeida

Assistant Attorney General

Mala S. Narayanan (argued)

Deputy Attorney General

Office of Attorney General of New Jersey

Department of Law & Public Safety

Richard J. Hughes Justice Complex

Trenton, NJ 08625

Attorneys for Appellee

OPINION OF THE COURT

GREENBERG, Circuit Judge.

On this appeal, we must determine whether a non-profit

organization’s obligation to reimburse the New Jersey Department of

Labor (“NJDOL”) for unemployment compensation benefits NJDOL

paid to its former employees is an “excise tax” under the Bankruptcy

Code. United Healthcare System, Inc. (“United”) was a non-profit

healthcare services corporation that owing to its non-profit status

under New Jersey law was permitted to elect to reimburse NJDOL

retrospectively for any unemployment compensation benefits NJDOL

actually paid to its former employees. United elected to pursue this

reimbursement option instead of paying the quarterly unemployment

contribution payments New Jersey law requires of most New Jersey

employers. Following this election, United filed for bankruptcy. Both

before and after United’s bankruptcy filing, NJDOL paid

unemployment compensation benefits to former United employees.

NJDOL believes that its claim for reimbursement for the benefits it

paid is entitled to priority under 11 U.S.C. § 507(a)(8)(E) which

grants a priority to claims for excise taxes. The bankruptcy court and

the district court agreed with NJDOL. For the reasons we explain

below, we conclude that NJDOL’s reimbursement claim is not

entitled to priority under section 507(a)(8)(E) because the

reimbursement obligation is not a tax for bankruptcy purposes under

2

that section. We therefore will reverse.1

I. FACTUAL AND PROCEDURAL BACKGROUND

There are no relevant facts in dispute on this appeal. United,

which operated as the Children’s Hospital of New Jersey, provided

healthcare services in New Jersey. It obviously had financial

difficulties as it filed a bankruptcy petition seeking reorganization

under Chapter 11 of the Bankruptcy Code on February 19, 1997, and

then on March 8, 1997, terminated the employment of most of its

employees. NJDOL processed and, where appropriate, paid the

unemployment compensation claims of United’s former employees.

Because United had elected to reimburse NJDOL for unemployment

benefits actually paid rather than to make quarterly contributions to

the state unemployment compensation fund, NJDOL sought

repayment of the benefits it paid to former United employees. United,

however, did not reimburse NJDOL for substantial benefits it paid on

United’s behalf.

As a part of United’s reorganization plan, the appellant,

Reconstituted Committee of Unsecured Creditors of United

Healthcare System, Inc. (“the Committee”), succeeded to various

rights and duties of United. In the bankruptcy proceedings, NJDOL

submitted claims for the unemployment benefits it paid to former

United employees for which it had not been reimbursed. NJDOL

sought $941,302.30 (including interest) as reimbursement for

unemployment benefits NJDOL paid to United employees whose

employment United terminated “pre-petition” (prior to the filing of

the bankruptcy petition).2 NJDOL also sought reimbursement for

unemployment compensation benefits it paid to United employees

whose employment United terminated after the bankruptcy filing.

1

In two earlier cases we made determinations arising from

United’s bankruptcy but neither is related to this case. In re United

Healthcare Sys., Inc., 200 F.3d 170 (3d Cir. 1999); In re United

Healthcare Sys., Inc., 185 F.3d 863 (3d Cir. 1999) (table).

2

The addition of other unpaid “pre-petition” obligations brought

NJDOL’s total pre-petition based claim to $1,156,170.00, but these other

pre-petition obligations are not subject to this appeal.

3

With interest, this “post-petition” claim amounted to $8,223,160.94.3

NJDOL sought priority status for both the pre-petition and post-

petition claims under section 507(a)(8)(E). The Committee objected

to the granting of priority status for these claims, arguing that they

should be classified as general unsecured claims.

On December 30, 2002, the bankruptcy court concluded that

these pre-petition and post-petition reimbursement claims were

entitled to priority as excise taxes under section 507(a)(8)(E).4 In re

United Healthcare Sys., Inc., 282 B.R. 330 (Bankr. D.N.J. 2002). The

Committee appealed from this order to the district court which, by an

unpublished order on November 13, 2003, affirmed without opinion

the bankruptcy court’s order. On December 12, 2003, the Committee

appealed to this court.

II. JURISDICTION AND STANDARD OF REVIEW

The bankruptcy court had jurisdiction under 28 U.S.C. §§

157(b) and 1334. The district court had appellate jurisdiction

pursuant to 28 U.S.C. § 158(a)(1) and we have jurisdiction under 28

U.S.C. §§ 158(d) and 1291. Exercising the same standard of review

as the district court, “[w]e review the bankruptcy court's legal

determinations de novo, its factual findings for clear error and its

exercise of discretion for abuse thereof.” In re Trans World Airlines,

Inc., 145 F.3d 124, 130-31 (3d Cir. 1998) (citing In re Engel, 124 F.3d

567, 571 (3d Cir. 1997), and Fellheimer, Eichen & Braverman, P.C. v.

Charter Technologies, Inc., 57 F.3d 1215, 1223 (3d Cir. 1995)).

Inasmuch as the parties agree that there are no relevant facts in

dispute, our review encompasses only the legal determinations of the

3

NJDOL also claimed priority status for $79,266.90 resulting

from post-petition obligations based on the employment of a few

employees after United ceased its operations. The bankruptcy court held

that this claim deserved priority status as an administrative expense

incurred by the bankruptcy estate, a determination not challenged on this

appeal.

4

The bankruptcy court determined, however, that NJDOL’s claim

for reimbursement of these payments should not be classified as an

employment tax under 11 U.S.C. § 507(a)(8)(D), nor as an

administrative expense (except for the $79,266.90 described in supra

note 3). These determinations are not at issue on this appeal.

4

bankruptcy court as affirmed by the district court. We will employ a

de novo review of those legal determinations.

III. DISCUSSION

A. A Non-Profit Employer’s Reimbursement Obligation

Under New Jersey Law

New Jersey law requires most employers to make quarterly

contributions to the state’s Unemployment Compensation Fund. N.J.

Stat. Ann. § 43:21-7 (West 2004).5 This standard statutory obligation

requires an employer to make quarterly contributions to the fund,

regardless of whether the state has paid or will pay unemployment

benefits to its former employees. See id. We have classified an

employer’s obligation to make state unemployment compensation

contributions as a tax for bankruptcy purposes. In re Wm. Akers, Jr.,

Co., 121 F.2d 846, 851 (3d Cir. 1941); see also Sipe v. Amerada Hess

Corp., 689 F.2d 396, 402 (3d Cir. 1982) (stating that “it cannot be

seriously disputed that the unemployment compensation and disability

benefits contributions mandated by New Jersey law are ‘taxes’ within

the meaning of the Tax Injunction Act”).

Our inquiry, however, does not end with our recognition of the

status of unemployment compensation contributions thereby

permitting us to affirm the district court’s order affirming the

bankruptcy court. We cannot do so because, as a non-profit employer,

United did not make contributions and thus we are concerned only

tangentially with the status of contributions. Instead, as we have

indicated it opted, pursuant to N.J. Stat. Ann. § 43:21-7.2 (West

2004), to reimburse NJDOL for any unemployment compensation

benefits NJDOL actually paid to former United employees.6 This

5

Section 43:21-7 reads, in relevant part, “[e]mployers other than

governmental entities, whose benefit financing provisions are set forth

in section 4 of P.L. 1971, c. 346 (C. 43:21-7.3), and those nonprofit

organizations liable for payment in lieu of contributions on the basis set

forth in section 3 of P.L. 1971, c. 346 (C. 43:21-7.2), shall pay to the

controller for the unemployment compensation fund, contributions . . .

.”

6

Section 43:21-7.2 provides, “[n]otwithstanding any other

provisions of the Unemployment Compensation Law, for payments of

5

provision presents non-profit employers with a choice as it provides

that a non-profit employer either “shall pay contributions” to the fund

or elect to reimburse NJDOL for benefits actually paid to former

employees in lieu of contributions.

This statutorily-provided choice brings New Jersey law in

compliance with the Federal Unemployment Tax Act (“FUTA”), 26

U.S.C. § 3301 et. seq., which established a federal “excise tax” equal

to a certain percentage of the total wages paid by an employer in a

calendar year. 26 U.S.C. § 3301. An employer’s FUTA obligation is

calculated based on “employment,” as that term is defined in the Act.

Service performed for a non-profit organization classified as such

under the federal income taxation statutes is excepted, however, from

the term “employment” for federal unemployment tax purposes. 26

U.S.C. § 3306(c)(8).7 Wages paid for services performed in the

employment of a qualifying non-profit organization, therefore, do not

give rise to any federal unemployment tax.

In addition to establishing the federal unemployment tax,

FUTA governs many aspects of state unemployment compensation

systems, including how state unemployment compensation laws treat

non-profit organizations. Each state must provide organizations

exempted from federal unemployment tax pursuant to 26 U.S.C. §

3306(c)(8) with the opportunity to elect to make reimbursement

payments in lieu of contributions. 26 U.S.C. § 3309(a). Accordingly,

as we have explained, New Jersey has provided qualifying non-profit

organizations with this option.

contributions by employers, benefits paid to individuals in the employ

of nonprofit organizations . . . shall be financed in accordance with the

following provisions . . . .” Additionally, N.J. Stat. Ann. § 43:21-19(f)

(West 2004) provides separate definitions for “contributions” and for

“payments in lieu of contributions.” “Contributions” is defined as “the

money payments to the State Unemployment Compensation Fund. . . .”

Id. “Payments in lieu of contributions” is defined as “the money

payments to the State Unemployment Compensation Fund by employers

electing or required to make payments in lieu of contributions . . . .” Id.

7

New Jersey law does not except service to a non-profit employer

from its definition of “employment.” See N.J. Stat. Ann. § 43:21-19(i)

(West 2004).

6

B. Classification of a New Jersey Non-Profit Employer’s

Reimbursement Obligation under the Bankruptcy Code

The Bankruptcy Code provides priority status to certain

claims. 11 U.S.C. § 507. Unsecured claims of governmental units

may be entitled to priority, but only if the statute expressly grants

priority to the type of claim asserted. 11 U.S.C. § 507(a)(8)

(providing that “[t]he following expenses and claims have priority in

the following order: . . . (8) Eighth, allowed unsecured claims of

governmental units, only to the extent that such claims are for--”).

Section 507(a)(8)(E) affords priority status to an unsecured claim of a

governmental unit to the extent it is for:

an excise tax on – (i) a transaction occurring before

the date of the filing of the petition for which a

return, if required, is last due, under applicable law

or under any extension, after three years before the

date of the filing of the petition; or (ii) if a return is

not required, a transaction occurring during the

three years immediately preceding the date of the

filing of the petition.

The bankruptcy court determined, and the district court agreed, that

NJDOL’s claims for reimbursement of the unemployment benefits it

paid to United’s former employees are claims for excise taxes

afforded priority under section 507(a)(8)(E).

The Committee argues that the bankruptcy court and the

district court erred in determining that the reimbursement obligation

is an excise tax under section 507(a)(8)(E) because they failed to

recognize that federal and New Jersey unemployment compensation

laws distinguish between for-profit and non-profit employers and

establish different obligations for each. The Committee argues that

the obligation reserved for non-profit employers creates a debt

obligation, and is not a tax. Conducting its own analysis of the non-

profit obligation, the Committee concludes that the non-tax

characteristics of the obligation outweigh any of its characteristics

suggesting it is a tax. The Committee alternatively argues that if the

obligation is a tax for bankruptcy purposes, it is not an excise tax,

and even if it is an excise tax, it is not the type of excise tax entitled

to priority under section 507(a)(8)(E).

On the other hand, NJDOL contends that the bankruptcy and

7

district courts ruled correctly. Emphasizing the close relationship

between reimbursement payments and unemployment compensation

contributions, it argues that they are functional equivalents; that the

reimbursement option is simply an alternative method to pay a tax.

To support this argument, NJDOL points out that if a non-profit

employer does not elect the reimbursement alternative, it is liable to

make contributions. NJDOL also argues that because federal

unemployment taxes are considered excise taxes, and given the close

relationship between federal unemployment taxes and state

unemployment taxes, the reimbursement payments also must be

excise taxes. In summary, NJDOL concludes that the tax-like

characteristics of the reimbursement payments predominate.

Responding to the Committee’s alternative argument, NJDOL

argues that the reimbursement obligation precisely fits into the

excise tax category contained in section 507(a)(8)(E).

1. Definition of “Excise Tax” Under the Bankruptcy Code

For us to affirm the order of the district court and thus

uphold the reasoning or at least the order of the bankruptcy court, we

must agree that the obligation to reimburse NJDOL is characterized

properly as an excise tax as that term is used in the Bankruptcy

Code. A determination whether the obligation is a tax, excise or

otherwise, is implicit in the determination of whether an obligation

is an excise tax.8

The Bankruptcy Code does not define “tax,” “excise” or

“excise tax.” United States v. Reorganized CF&I Fabricators of

Utah, Inc., 518 U.S. 213, 220, 116 S.Ct. 2106, 2111 (1996).

Nonetheless when necessary a court determines under federal law

whether an obligation is a “tax” for bankruptcy purposes. City of

New York v. Feiring, 313 U.S. 283, 285, 61 S.Ct. 1028, 1029

(1941); State of New Jersey v. Anderson, 203 U.S. 483, 491-92, 27

S.Ct. 137, 140 (1906). When state law, however, creates the

obligation at issue, a court looks to that law to ascertain its attributes

so that the court can determine its characterization under federal

bankruptcy law. Feiring, 313 U.S. at 285, 61 S.Ct. at 1029.

8

Because we determine that the reimbursement obligation at issue

is not a tax, we need not address the Committee’s argument that even if

the obligation is a tax, it is not an excise tax or the kind of excise tax

entitled to priority.

8

In Anderson, the State of New Jersey sought priority status

for payments, alleged to be franchise taxes, owed to the state.

Distinguishing between taxes and contractual debts, the Supreme

Court determined that “[g]enerally speaking, a tax is a pecuniary

burden laid upon individuals or property for the purpose of

supporting the government.” 203 U.S. at 492, 27 S.Ct. at 140.

Based on that characterization, the Supreme Court determined that

the obligation owed to the state was, in fact, a franchise tax

deserving priority. Id. at 493, 27 S.Ct. at 140. The Court stated that

“this imposition is in no just sense a contract. The amount to be

paid, fixed by the statute, is subject to control and change at the will

of the state.” Id. The Supreme Court later relied on the Anderson

definition of a tax to determine that the obligation to pay sales tax

qualified as a tax deserving priority status. Feiring, 313 U.S. at 287-

88, 61 S.Ct. at 1030-31. The Court determined that “[a] pecuniary

burden so laid upon the bankrupt seller for the support of

government, and without his consent thus has all the characteristics

of a tax entitled to priority.” Id. at 287, 61 S.Ct. at 1030.

The Court decided Anderson and Feiring at a time when the

priority treatment of government obligations was broader than now

under bankruptcy law.9 Today, a government obligation must fall

under one of the specific categories of section 507(a)(8) to receive

priority. Since Anderson and Feiring, courts have attempted to

formulate and apply a definition of “tax” that recognizes the

precedent of Anderson and Feiring but also accommodates the

evolution of the law governing priority of government obligations.

The bankruptcy court applied the tests resulting from what

we believe are the three most frequently cited courts of appeals

decisions to have engaged in this process, In re Lorber Industries of

California, Inc., 675 F.2d 1062 (9th Cir. 1982), In re Suburban

Motor Freight, Inc., 998 F.2d 338 (6th Cir. 1993) (“Suburban I”),

9

In Anderson, the Court explained that the version of the

Bankruptcy Act in operation granted priority status to “all taxes legally

due and owing by the bankrupt to the United States, state, county,

district, or municipality.” Anderson, 203 U.S. at 487-88, 27 S.Ct. at 138.

The Supreme Court decided Feiring during the operation of the

Bankruptcy Act as amended in 1938. At that time, the Act awarded

priority status to “taxes legally and owing by the bankrupt to the United

States or any State or any subdivision thereof.” Feiring, 313 U.S. at 285,

61 S.Ct. at 1029.

9

and In re Suburban Motor Freight, Inc., 36 F.3d 484 (6th Cir. 1994)

(“Suburban II”). In Lorber, the Court of Appeals for the Ninth

Circuit faced the issue whether sewer use fees constituted taxes

entitled to priority. Building on the “pecuniary burden laid upon

individuals or property for the purpose of supporting the

government” standard the Supreme Court established in Anderson,

the court developed a four-part test to determine whether an

obligation is a tax for bankruptcy purposes: (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.” Lorber, 675 F.2d at 1066

(quoting Dungan v. Dep’t of Agric., State of California, 332 F.2d

793 (9th Cir. 1964)). When the court applied this test to the sewer

use fees at issue, it determined they were more like non-tax fees or a

contractual debt than a tax. Lorber, 675 F.2d at 1067. The court

observed that the use fees were assessed proportionately to use, and

concluded that because the charges resulted from the voluntary act

of producing wastewater for disposal, they were classified better as

debt.10 Id. The court determined that its characterization of the use

fees as contractual debt was consistent with the history and purpose

of the bankruptcy laws, which had narrowed the reach of the priority

tax category over time. Id. at 1067-68.

In Suburban I the Court of Appeals for the Sixth Circuit was

dissatisfied with the four-part Lorber test and sought to narrow its

reach. The court found the Lorber test to be overly broad,

determining that its factors did not significantly narrow the pool of

government obligations that could be characterized as taxes.

Concerned that courts were relying too heavily on the “public

purpose” Lorber factor, the court observed that if that factor is

determinative, all money collected by the government would qualify

as a “tax” because all money collected by the government is used for

public purposes in some way. Suburban I, 998 F.2d at 341. The

court commented that “[t]he threat of the Lorber reasoning . . . is that

the Government automatically wins priority for all money any debtor

owes it, regardless of the nature of the payments.” Id. Such an

advantage could “eliminate all distinction between ‘taxes’ and

10

It must be acknowledged that much the same thing could be

said about sales taxes as the greater the purchases of taxable items or

services the greater the tax owed.

10

‘fees’” and would allow the government to “prevail consistently

against private creditors with arguably equal claims.”11 Id. To

address its concern that the Lorber test is overly broad, in Suburban

II the court added two factors to the Lorber analysis: (1) whether the

obligation is “universally applicable to similarly situated entities”;

and (2) whether granting priority status to the government will

“disadvantage private creditors with like claims.” Suburban II, 36

F.3d at 488-89.

In Suburban I, the court determined that premium payments

to Ohio’s workers’ compensation fund are taxes. After observing

that the state law demanded compulsory payments and did not allow

employers to purchase private insurance,12 the court concluded that

the additional factors it set forth to determine if an obligation is a tax

had been satisfied and that the obligation in question was a tax for

bankruptcy purposes. Suburban I, 998 F.2d at 342. The court stated,

“[i]f the State had an optional participation program, or allowed

employers to purchase private liability insurance, it would be unfair

and without statutory justification to call state-collected premiums

‘taxes’ and put the [state] ahead in line while leaving unpaid private

insurers to languish along with the rest of the unsecured creditors.”13

Id.

In Suburban II, the obligation before the court was money

owed to the Ohio Bureau of Workers’ Compensation for payments

the Bureau made to workers’ compensation claimants. Suburban II,

11

Ironically, the government had lost in Lorber.

12

Ohio law did permit employers to self-insure. Suburban I, 998

F.2d at 341.

13

The Court of Appeals for the Fourth Circuit’s opinion in New

Neighborhoods, Inc. v. West Virginia Workers’ Compensation Fund,

886 F.2d 714 (4th Cir. 1989), influenced the court in Suburban I. The

Court of Appeals for the Sixth Circuit elected to follow the “relatively

balanced approach” of New Neighborhoods. Suburban I, 998 F.2d at

341. In New Neighborhoods, the court determined that contributions to

West Virginia’s workers’ compensation scheme are taxes. New

Neighborhoods, 886 F.2d at 720. In reaching this conclusion, the court

analyzed the nature of the obligation, considered its insurance-like

characteristics, and also recognized that the bankruptcy laws limit the

availability of priority claims.

11

36 F.3d at 486. These reimbursement payments were due to the

Bureau because the employer failed to pay premiums and also failed

to pay claims while it was self-insured. Id. The court refused to

extend its holding in Suburban I, which afforded priority status to

claims for unpaid premiums, to the obligation in Suburban II, which

involved reimbursement claims. Id. at 487-88. After applying the

Lorber test and the two additional factors derived from Suburban I,

the court determined that because the employer’s liability resulted

solely from its default, the obligation failed the universality test of

Suburban I. Id. at 489. Moreover, the court believed that classifying

the obligation as a priority claim would disadvantage private

creditors with like claims. Id.

The Supreme Court has considered whether an obligation is a

tax in contexts other than bankruptcy. For example, the Court

considered the nature of an obligation owed to a federal agency to

allow it to recoup the cost of regulating a particular industry or

activity. National Cable Television Ass’n, Inc. v. United States, 415

U.S. 336, 94 S.Ct. 1146 (1974). As the Court explained, the

legislative power in enacting a tax may “disregard benefits bestowed

by the Government on a taxpayer.” Id. at 340, 94 S.Ct. at 1149. But

a situation in which a “public agency may exact a fee for a grant

which, presumably, bestows a benefit on the applicant, not shared by

other members of society” is different. Id. at 340-41, 94 S.Ct. at

1149. See also In re Wm. Akers, Jr., Co., 121 F.2d at 850 (quoting

with approval language explaining that taxes cannot be required to

benefit taxpayers proportionately to their tax payments).

Additionally, the government’s ability to manipulate the assessment

to encourage or discourage a certain activity is a characteristic of a

tax. National Cable, 415 U.S. at 341, 94 S.Ct. at 1149.

Returning to the bankruptcy context, the Supreme Court,

after Lorber and Suburban, again addressed the question of whether

an obligation is a tax for bankruptcy purposes. In CF& I Fabricators,

the Court considered whether a federally mandated payment equal to

10 percent of a pension plan funding delinquency is an excise tax

under the bankruptcy laws.14 CF& I Fabricators, 518 U.S. at 215,

14

CF & I Fabricators arose under the pre-1994 Bankruptcy Code.

Under that prior version of the Code, Congress granted excise taxes

seventh priority under section 507. In 1994, Congress moved the

provision to eighth priority, but did not alter the language of the

provision. CF & I Fabricators, 518 U.S. at 216 n.1, 116 S.Ct. at 2109

12

116 S.Ct. at 2109. In reviewing Anderson, Feiring and other

precedent addressing whether a particular obligation is a tax, but

without commenting on the reasoning of Lorber or Suburban, the

Court remarked that “in every one of those cases the Court looked

behind the label placed on the exaction and rested its answer directly

on the operation of the provision using the term in question.” Id. at

220, 116 S.Ct. at 2111. Additionally, the Court observed that “[i]n

each instance the decision turned on the actual effects of the

exactions.” Id. at 221, 116 S.Ct. at 2111. The Court recognized that

it decided Anderson and Feiring before enactment of the 1978

Bankruptcy Code, but concluded that Congress did not reject the

Anderson-Feiring reasoning in enacting the 1978 Code.15 Id. at 224,

116 S.Ct. at 2113. Therefore, the Court proceeded to undertake a

“functional examination” of the obligation at issue and concluded

that its “obviously penal character” signaled that it was a penalty,

and not a tax. Id. at 225, 116 S.Ct. at 2113-14.

We, of course, will follow the lead of the Supreme Court and

accordingly will make a functional examination of the obligation at

issue here that focuses on actual effects and looks behind labels

while recognizing the precedent of Anderson and Feiring.16 While

n.1.

15

The Court recognized a “statement from the legislative history

of the 1978 Act that ‘[a]ll Federal, State or local taxes generally

considered or expressly treated as excise taxes are covered’ by §

507(a)(7)(E).” The Court also recognized, however, that the obligation

that was before it was not expressly called an excise tax and that whether

the obligation is considered generally to be an excise tax was precisely

the question before the Court. CF & I Fabricators, 518 U.S. at 223-24,

116 S.Ct. at 2112-13.

16

Chief Judge Scirica in his dissenting opinion agrees that this

functional examination is the appropriate analysis to employ to

determine whether the reimbursement obligation is a tax for bankruptcy

purposes. He focuses his functional examination, however, on whether

the reimbursement obligation falls into one of four rigid categories: tax;

debt; fee in exchange for a benefit; or a penalty. We believe that a

broader, more fluid approach is necessary to conduct a true functional

analysis. Our task is not to test whether the reimbursement obligation

fits into one of those four categories precisely, though we do characterize

the obligation as a debt, but to look behind labels and to examine the

13

the Lorber-Suburban analysis is helpful in executing this

examination, we do not believe that its six factors should constrain

our inquiry. We believe a functional examination that balances the

characteristics of the obligation at issue will signal whether an

obligation is a tax for bankruptcy purposes, and that an examination

should be flexible enough to allow for consideration of any relevant

factor. The problem with applying only the Lorber-Suburban six-

factor test is that it may prove too rigid to provide an effective

analysis of every potential obligation and thus could preclude

consideration of important characteristics. Also, by employing a

functional examination we preempt the concern that the Court of

Appeals for the Sixth Circuit expressed that the Lorber test produces

overly broad classification of claims as taxes. Moreover, our more

flexible approach allows us to consider the characteristics of the

obligation in light of the evolving treatment of priority claims under

the Bankruptcy Code. We emphasize, however, that the Lorber and

Suburban factors are helpful in undertaking this functional

examination, and at times application of those factors alone

sufficiently may answer the question whether a governmental

obligation is a tax.

2. The Analysis of the Bankruptcy Court Regarding the

Classification of a New Jersey Non-Profit Employer’s

Reimbursement Obligation under the Bankruptcy Code

The bankruptcy court applied the Lorber-Suburban factors to

the reimbursement obligation option and concluded that it satisfied

all six factors. The court stated, “[b]ecause United could not escape

its statutory obligation to make payments to the Unemployment

Compensation Fund, it was subject to an involuntary pecuniary

burden imposed by the legislature as described in the Lorber test.

United was only able to choose how to make the payments, not

whether to make the payments.” 282 B.R. at 337. The court

determined with regard to the public purpose Lorber factor, that New

Jersey enacted the unemployment compensation law for a public

purpose because the fund arrangement protects the public against the

evils associated with unemployment. The bankruptcy court further

determined that the Suburban factors were met. The “universally

applicable” factor was met because “New Jersey [law] requires all

employers to make payments to the unemployment compensation

fund.” Id. at 338. The bankruptcy court also determined that there

operation of the statutory scheme.

14

were no private creditors with like claims because the

unemployment compensation law does not “permit” employers to

obtain private insurance to satisfy their obligations.17 Id.

The bankruptcy court recognized that the Court of Appeals

for the First Circuit directly had addressed whether a non-profit

employer’s obligation to reimburse a state unemployment

compensation fund amounted to an excise tax for bankruptcy

purposes in In re Boston Regional Medical Center, Inc., 291 F.3d

111 (1st Cir. 2002) (“Boston Regional I”). In that case, the court

reached a result opposite of that of the bankruptcy court here,18

concluding that a non-profit employer’s choice to make payments in

lieu of contributions creates a kind of obligation different than a tax.

The court illuminated a distinction between the obligation to make

quarterly contributions and the obligation to reimburse for benefits

actually paid. Employers reimbursing the state are not “sustain[ing]

a government undertaking as a whole,” but instead only are

compensating the state for the cost that particular employer caused

the state to incur.19 Id. at 122.

17

The bankruptcy court used the word “permit.” Perhaps the

word “authorize” might have been better as it is possible that outside of

the aegis of the unemployment compensation laws a private insurance

company could insure a non-profit employer for losses attributable to its

reimbursement obligations. We hasten to add, however, that we do not

predicate our result on this probably theoretical possibility.

18

The Court of Appeals for the First Circuit considered the

Massachusetts statute creating the commonwealth’s reimbursement

option. We note that Chief Judge Scirica cites Boston Regional I in his

dissent but does not attempt to distinguish that case which is inconsistent

with his result.

19

In a later decision involving the same debtor, the same court

determined that mandatory payments to Massachusetts’ Uncompensated

Care Pool are taxes for bankruptcy purposes. In re Boston Regional

Medical Ctr., Inc., 365 F.3d 51 (1st Cir. 2004) (“Boston Regional II”).

The court distinguished the payments to the Uncompensated Care Pool

from the unemployment compensation reimbursement payments because

the former are “geared to sustain, as a whole, the stated governmental

undertaking of providing access to health care for low-income uninsured

and under-insured residents.” Id. at 61.

15

According to the bankruptcy court, this distinction did not

cause the reimbursement obligation to fail the Lorber-Suburban test.

The bankruptcy court stated, “[t]he fact that employers paying

contributions absorb a greater share of the cost, does not mean that

payments in lieu of contributions are not universal, and therefore not

taxes. The payment burden of many tax statutes falls unevenly on

taxpayers.” 282 B.R. at 338. Also, the bankruptcy court disagreed

with the Court of Appeals for the First Circuit’s conclusion that the

legislative history of FUTA supported a conclusion that the

reimbursement obligation is not a tax.

In Boston Regional I, the court of appeals acknowledged that

a reasonable argument could be made that payments in lieu of

contributions could be called taxes. Boston Regional I, 291 F.3d at

121-22. What “tip[ped] the scales” for the court was the

commonwealth’s ability to require a non-contributory employer to

post a bond to secure payments required by it. Id. at 122. Because

the commonwealth did not require a bond of the non-profit

employer, the court determined that the commonwealth, and not the

class of general unsecured creditors, should endure the result of its

decision to risk that benefits would not be repaid. Id. at 123. The

ability to require a bond made the commonwealth something more

than an involuntary creditor, thus undermining a traditional policy

reason behind affording priority status to governmental obligations.

Id. at 122-23. In this case, the bankruptcy court acknowledged that

New Jersey law permits NJDOL to require a bond, and that if a bond

were required, “a surety with the same claim as the government

could be disadvantaged if the government claim received priority,”

but concluded that the tax-like characteristics of the reimbursement

obligation outweighed this one non-tax-like characteristic. 282 B.R.

at 340-41.

In its decision, the bankruptcy court relied on the district

court’s opinion in In re Sacred Heart Hospital of Norristown, 209

B.R. 650 (E.D. Pa. 1997). In that case, the district court, after

applying the Lorber-Suburban factors, concluded that a non-profit

employer’s obligation to reimburse the Pennsylvania Unemployment

Compensation Fund is an excise tax entitled to priority. Id. at 658.

The district court stated: “Payments in lieu of contributions are

excise taxes and entitled to priority in bankruptcy. First, without a

doubt the payments are ‘involuntary.’ See 43 P.S. § 781(a)(1)

(‘[e]ach employer shall pay contributions . . .’) . . . Simply stated, all

employers–for-profit and nonprofit–must pay them.” Id. at 656.

16

The district court reasoned in Sacred Heart that the reimbursement

payments benefit the public because the provision of unemployment

compensation benefits protects all taxpayers from demands that

unemployed persons otherwise would make on the welfare system.

Id. at 656. The district court also held, “the law satisfies the two

‘public purpose’ factors articulated by the Sixth Circuit in Suburban

II. The obligation is universally imposed on all employers. . . .

Further, . . . there are no private creditors with claims sufficiently

similar to violate the bankruptcy policy of equal distribution.”20 Id.

at 656.

3. Functional Examination of a New Jersey Non-Profit

Employer’s Reimbursement Obligation

After making an independent analysis predicated on a

functional examination such as that applied in CF & I Fabricators,

we have determined that United’s obligation to reimburse NJDOL

for unemployment compensation benefits is not a tax for bankruptcy

purposes. We acknowledge that this case is close, given that

reimbursement payments and quarterly contributions are

complementary. But the fact remains that while reimbursement

payments are related to unemployment compensation contributions,

they are not the same obligation. Though we characterized the

contribution obligation as a tax in In re Wm. Akers, Jr., Co.,

United’s duty to reimburse NJDOL is a different kind of obligation

as it is better characterized, in view of its direct correlation to

20

The district court in In re Sacred Heart distinguished

unemployment reimbursement obligations from workers’ compensation

premiums in its analysis. In re Sacred Heart, 209 B.R. at 657-58. The

district court discussed a line of cases holding that worker’s

compensation premiums are not taxes where the state law at issue

provided employers with the option to subscribe to a state fund, to obtain

private insurance, or to self-insure. Id. The reasoning behind this line

of cases is that where a state does not monopolize coverage, the state

looks more like just another private participant and less like a taxing

authority. Id. The district court observed that the Commonwealth of

Pennsylvania “monopolizes” the unemployment compensation system

because employers do not have a private insurance or self-insurance

option. Id. While this observation may be correct, and may support the

conclusion that unemployment compensation contributions are taxes, it

does not speak to the heart of the matter before us, the nature of the

function or effect of the reimbursement obligation.

17

payments NJDOL made by reason of United having terminated

employees, as an alternative to paying taxes rather than as an

alternative method to pay a tax.

While we agree with the conclusion of the Court of Appeals

for the First Circuit that a non-profit employer’s reimbursement

obligation is not a tax, we support our conclusion with different

emphasis. We do not believe that NJDOL’s ability to require a bond

to secure an employer’s payment dictates a conclusion that this

obligation is not a tax.21 Instead, we believe that a broader

examination of the nature of the reimbursement obligation reveals its

non-tax character.

We question the district court’s treatment in Sacred Heart of

contributions and reimbursement payments as similar for bankruptcy

purposes under the Pennsylvania statute. See In Re Sacred Heart,

209 B.R. at 656. More to the point, we conclude that under the New

Jersey statute at issue here contributions and reimbursement

payments are distinct obligations. According to the New Jersey

statute establishing the contribution obligation, “[e]mployers other

than governmental entities, whose benefit financing provisions are

set forth in section 4 of P.L. 1971, c. 346 (C. 43:21-7.3), and those

nonprofit organizations liable for payment in lieu of contributions on

the basis set forth in section 3 of P.L. 1971, c. 346 (C. 43:21-7.2),

shall pay to the controller for the Unemployment Compensation

Fund, contributions . . . .” N.J. Stat. Ann. § 43:21-7 (emphasis

added). Section 43:21-7.2 provides, “[n]otwithstanding any other

provisions of the Unemployment Compensation Law, for payments

of contributions by employers, benefits paid to individuals in the

employ of nonprofit organizations . . . shall be financed in

accordance with the following provisions . . . .” Additionally, N.J.

Stat. Ann. § 43:21-19(f) (West 2004) provides separate definitions

for “contributions” and for “payments in lieu of contributions.”

21

The Court of Appeals for the First Circuit noted, “[w]e do not

hold that the availability of a surety bond, as in this case, would alone be

sufficient to render an obligation not a tax,” but that combined with the

other reasons before the court, the bond issue was the “decisive factor.”

Boston Regional I, 291 F.3d at 123 n.14. The New Jersey statute also

provides that the state may require a bond. N.J. Stat. Ann. § 43:21-

7.2(h) (West 2004). This circumstance is not determinative, however,

because the state in general may require a bond for the payment of a state

tax. See N.J. Stat. Ann. § 54:49-2 (West 2002).

18

The language of sections 43:21-7.2 and 43:21-19(f)

evidences that, even though under New Jersey law service to a non-

profit employer is not excepted from the definition of

“employment,” see N.J. Stat. Ann. § 43:21-19(i) (West 2004), the

statute does except non-profit employers engaging in “employment”

from the contribution obligation section 43:21-7 creates. Instead,

section 43:21-7.2 contains a different kind of obligation for those

non-profit employers. The bankruptcy court determined that under

the above statutes, all New Jersey employers must “make

payments.” 282 B.R. at 338. That may be true, but the key here is

that contributory payments are a different obligation than

reimbursement payments.22

Having concluded that contributions and reimbursement

payments are different obligations, we next consider the nature of

the reimbursement obligation. One major characteristic of the

reimbursement obligation is that payments in lieu of contributions

reimburse NJDOL for unemployment benefits actually paid and do

not raise funds to support a general governmental undertaking.23 In

contrast, quarterly contribution payments do support a general

governmental undertaking. An employer paying the quarterly

contribution tax is helping to create a fund from which NJDOL

appropriately pays benefits. A contributory employer is obligated to

22

The legislative history of section 43:21-7.2 and of FUTA

support our conclusion that the New Jersey statute creates two different

obligations. According to the Senate Report accompanying FUTA,

“[s]tate programs would be required to permit nonprofit organizations

the option of reimbursing the state for unemployment compensation

payments attributable to service for them rather than paying regular state

unemployment compensation taxes.” S. Rep. No. 91-752, 1970

U.S.C.C.A.N. 3606, 3609. Similarly, the sponsor statement to the bill

that created the non-profit reimbursement obligation in New Jersey

states, “the nonprofit organizations are afforded a choice to either elect

to pay contributions or to make reimbursement to the fund for benefits

paid.” Sponsor Statement, N.J. Stat. Ann. § 43:21-7.2, Laws of 1971,

Ch. 346, Bill No. A2501 (1971).

23

The reimbursement payments arguably are used for a

government-sponsored purpose. If, however, the standard is whether

monies collected are used for any government-sponsored purpose, it is

hard to imagine any claim held by a government that would not qualify

as a tax.

19

contribute even if it does not actually use the government program,

here unemployment compensation benefits paid to former

employees. A payment in lieu employer, however, only reimburses

NJDOL for payments NJDOL has made to its former employees.

We disagree with the bankruptcy court that this distinction is

immaterial; in fact, this distinction is crucial in unveiling the

operation and actual effect of the reimbursement obligation. The

bankruptcy court’s focus on its observation that “[t]he payment

burden of many tax statutes falls unevenly on taxpayers” is

misplaced. 282 B.R. at 338. The issue is not whether some

taxpayers pay more or less, but rather whether an entity is paying

taxes or incurring some other type of obligation. Again, the relevant

distinction is not whether some pay more or less, but whether some

are paying to sustain a general governmental undertaking while

others only are reimbursing the system for exactly the benefits paid

to their former employees.24

Thus, rather than a tax, the reimbursement obligation is more

like a promise in exchange for the privilege of employing

individuals in the state without being required to pay state

unemployment compensation contributions. The state will allow a

non-profit employer to conduct business without making

contributions to the state unemployment compensation fund, and the

state will pay the unemployment compensation benefits due to the

non-profit employer’s former employees, but this creates a debt, and

the state insists on being repaid.

NJDOL’s observation that if the reimbursement option is not

selected, a non-profit employer must make contributions does not

undermine this point. Rather than address the nature of the

reimbursement payments, this argument only highlights the statutory

scheme granting non-profit employers with a choice unavailable to

other employers. We similarly reject NJDOL’s argument that

because federal unemployment taxes are considered excise taxes,

and given the close relationship between federal unemployment

taxes and state unemployment taxes, the reimbursement payments

24

Even if, as explained by NJDOL, contributions and

reimbursements once paid are intermingled in the same state fund, that

fact does not negate the reality that employers electing to make

reimbursement payments pay only for the benefits disbursed from the

fund by reason of their termination of employees.

20

also must be excise taxes. The role of FUTA as germane to our

inquiry is limited to its mandate that states must provide non-profit

employers with a reimbursement obligation option. That mandate

still leaves open the question surrounding the nature of this

obligation.

While National Cable was decided in a different context, its

reasoning is transferable, and it further illuminates the non-tax

character of the reimbursement obligation. See, e.g., In re Jenny

Lynn Mining Co., 780 F.2d 585 (6th Cir. 1986) (applying reasoning

of National Cable to determine whether strip mining permit

obligation is an excise tax entitled to bankruptcy priority); In re

Trism, Inc., 311 B.R. 509 (8th Cir. BAP 2004) (borrowing reasoning

of National Cable to determine whether a highway user fee is an

excise tax entitled to priority). In National Cable, the Supreme

Court pointed out that a “disregard [of] benefits bestowed by the

Government on a taxpayer” is indicative of a tax. National Cable,

415 U.S. at 340, 94 S.Ct. at 1149. The government’s ability to

manipulate the assessment also is characteristic of a tax. Id. at 341,

94 S.Ct. at 1149. In contrast, a situation in which a payment is

exchanged for a government benefit not shared by others indicates

that the debt is not for a tax. Id. at 340-41, 94 S.Ct. at 1149.

NJDOL, in demanding reimbursement, may not disregard the

benefits it bestowed. In fact, the reimbursement obligation directly

is linked to the benefits it paid. Non-profit employers enjoy a

benefit not shared by other employers, as they may operate in the

state without making quarterly contributions to the state

unemployment compensation fund. Additionally, the state cannot

manipulate a reimbursement obligation to encourage or discourage

certain activity. Again, under the reimbursement program, the

government pays out benefits, and the non-profit employer simply

refills the government’s coffers.

Contribution and reimbursement payments are distinct

obligations with different sets of accompanying rules. They do not

create one obligation that is applied to all New Jersey employers.

Reimbursement payments are made in lieu of, or instead of,

contributions. Reimbursement payments thus are something

different than contributions, and the issue is whether those payments

are excise taxes. Our functional examination reveals that

reimbursement payments are not taxes, and therefore cannot be

classified as excise taxes entitled to priority under section

21

507(a)(8)(E).

IV. CONCLUSION

For the reasons stated above, the order of the district court of

November 13, 2003, will be reversed and the case will be remanded

to that court, which in turn shall remand the matter to the bankruptcy

court to reverse its order granting NJDOL’s claim priority and for

further proceedings consistent with this opinion.

22

SCIRICA, Chief Judge, dissenting.

In this difficult and close case, I respectfully dissent. At

issue is whether the New Jersey Department of Labor’s

(“NJDOL”) claim seeks recovery of an excise tax that would

entitle it to bankruptcy priority under 11 U.S.C. § 507(a)(8)(E).

New Jersey’s unemployment compensation fund is a

general social welfare program paid for by contributions from

both for-profit and non-profit employers. Like the for-profit

employer, the non-profit employer’s required contribution

funds the New Jersey statute’s objective – to ameliorate

“economic insecurity due to unemployment.” N.J.S.A. § 43:21-

2. For this reason, the non-profit employer’s contribution more

closely resembles a tax than other kinds of government

assessments, such as debt obligations, fees in exchange for

benefits, or penalties. In my view, the distinction between the

contributory payment and the reimbursement obligation is one

of degree rather than kind. Because both forms of

unemployment contribution constitute a tax for bankruptcy

purposes, I would affirm the judgment of the District Court.

I.

In United States v. Reorganized CF & I Fabricators of

Utah, Inc., the Supreme Court conducted a “functional

examination” to determine whether the levy in question was

entitled to bankruptcy priority because it more closely

resembled a tax than another form of government assessment.

518 U.S. 213, 224-25 (1996). In my view, the question is

whether the non-profit employer’s reimbursement obligation

here functions more like a tax than another kind of assessment,

such as a debt, a fee in exchange for a benefit, or a penalty.

A. Debt obligation

The Supreme Court has distinguished tax obligations

from ordinary debt because unlike debt, taxes are involuntary.

N.J. v. Anderson, 203 U.S. 483, 492 (1906); See also In re

Boston Reg’l Med. Ctr., Inc., 291 F.3d 111, 120 (1st Cir. 2002)

(citing Anderson, 203 U.S. at 492). The non-profit employer’s

reimbursement obligation here lacks the distinguishing

characteristics of debt. It is not a voluntary obligation, nor is it

23

based on express or implied contract.25 Rather it is mandated

by statute.26 The 1970 FUTA amendment required formerly

excluded non-profit employers to pay the contributory tax or to

make reimbursement payments in its place. Although not

identical in form, the 1970 FUTA amendment imposed on non-

profit employers a burden similar to that imposed on for-profit

employers – an obligation to fund New Jersey’s unemployment

25

The majority holds the reimbursement obligation more

closely resembles a debt, likening the non-profit’s obligation to a

“promise in exchange for the privilege of employing individuals in

the state without being required to pay state unemployment

compensation contributions.” While this is plausible, I believe

these are the very characteristics of debt that the reimbursement

obligation lacks – it is not made voluntarily nor is it pursuant to a

contractual agreement.

26

Before 1970, non-profit organizations did not pay the

unemployment compensation tax or contribute to state

unemployment compensation funds. 26 U.S.C. § 3306(c)(8)

excluded from “covered” employment “service performed in the

employ of a religious, charitable, educational, or other [tax exempt]

organization.” See Pub. L. 86-778, § 533, 74 Stat. 984; Cal. v.

Grace Brethren Church, 457 U.S. 393, 398 n.6 (1982). Congress

amended FUTA in 1970, requiring state unemployment plans to

cover employees of non-profit organizations and obligating non-

profit employers to contribute to the state unemployment

compensation fund. See 26 U.S.C. § 3309(a)(1). The 1970

amendment extended state participation to non-profit organizations

because it recognized that “unemployment affects a substantial

number of their employees[.]” S. Rep. No. 91-752, at 48-49,

reprinted in 1970 U.S.C.C.A.N. 3606, 3617-18 (1970). But at the

same time, the federal scheme sought to minimize the cost to the

non-profit employer, limiting its obligation to the actual amount

that former employees cost the unemployment compensation fund.

See id. (“These [non-profit] organizations, which are often

dependent upon charitable contributions, should not be required to

share in the costs of providing benefits to workers in profit-making

enterprises.”).

24

payments furthering the goals of the unemployment

compensation regime.

B. Fee in Exchange for a Benefit

The non-profit employer’s reimbursement obligation

functions more like a tax than a fee in exchange for a benefit.

The Supreme Court has distinguished tax obligations from

government fees in exchange for benefits or for services

rendered. See Nat’l Cable Television Ass’n, Inc. v. United

States, 415 U.S. 336, 340-42 (1974); see also County

Sanitation District No. 2 of Los Angeles County v. Lorber

Indus. of Cal. (In re Lorber), 675 F.2d 1062 (9th Cir.1982)

(holding that sewer and water user fees imposed for voluntary

use of system are not taxes); In re Adams, 40 B.R. 545, 548

(E.D. Pa. 1984) (“The ‘inherent character’ of the charges are

premised upon an implied agreement to pay for the water and

sewer services furnished.”).

National Cable held that costs imposed by the Federal

Communications Commission (“FCC”) on certain broadcasters

to cover the expenses of FCC oversight did not constitute a tax.

The Court’s distinction between tax and fee rested on whether

the obligation imposed on the regulated entity supported the

FCC’s function “to safeguard the public interest in the

broadcasting activities of members of the industry” or

supported a “benefit” of “value to the recipient.” National

Cable, 415 U.S. at 341-42. The Court found the predominant

feature of the imposed cost was to benefit the broadcasters, not

the public – hence it was a fee, not a tax.27 There were three

27

FCC oversight benefitted the cable operators by, for

example, enabling them to broadcast without interference.

National Cable, 415 U.S. at 343. In addition, the Court remanded

for a recalculation of the fee because it determined that the fees

imposed by the FCC were too broadly calculated. Id. The FCC

had imposed all of the costs of regulating cable television systems

to the industry and none to the general public. Id. at 341-42. As a

result, the fee schedule in question resembled a tax because the

value of the fee was greater than the service provided to the

recipient. Id.

25

major factors that informed the holding in National Cable: (1)

whether payment of the assessment is voluntary, that is,

whether it could be avoided by not taking advantage of the

government service, id. at 340; (2) whether the government

assessment is in exchange for a specific government service

that benefits the entity paying in a manner “not shared by other

members of society,” id. at 341; and (3) whether the

government assessment is collected to compensate the

government for the expense of providing the service to the

entity, but not to raise revenues to cover the cost of providing

the service for others. Id. at 341-42.

In my view, only the last consideration favors reversal

here. As the majority notes, the reimbursement obligation

does not support the costs of other employers’ former workers

or of administering the unemployment compensation fund.

Instead, a non-profit employer only reimburses the state for the

costs imposed by its own former employees. Nevertheless the

statutory purpose of the obligation is to benefit the former

employees and the public good, not the employer.

Moreover, application of the first and second factors

supports the view that this reimbursement obligation is a tax.28

Considering the first factor, there is no voluntary act here.

National Cable stated that a fee (as opposed to a tax) “is

incident to a voluntary act, e.g., a request that a public agency

permit an applicant to practice law or medicine or construct a

house or run a broadcast station.” Id. at 340. If the non-profit

28

In re Sacred Heart Hosp. of Norristown held that

reimbursement obligations to the Pennsylvania unemployment

compensation fund constituted a tax entitled to priority for

bankruptcy purposes. 209 B.R. 650 (E.D. Pa. 1997). After

considering who benefits from the reimbursement obligation and

whether it is voluntary, the court concluded that “the payments are

used to benefit the public generally because compensating

unemployed workers reduces the chances of their becoming poor

and making demands on the federal and state welfare systems and

thus all taxpayers” and that the reimbursement obligation is

“without a doubt . . . ‘involuntary.’” Id. at 656.

26

employer does not elect to reimburse, then it must contribute in

the same manner as a for-profit employer. That is, the non-

profit employer either pays the contributory tax or elects to

make payments in lieu of the tax, but it cannot evade its

responsibility to the unemployment compensation fund

altogether. The non-profit employer is not a voluntary

“applicant” for “benefits,” but rather, a required participant in

the unemployment compensation program.

Considering the second factor, the non-profit employer

does not enjoy a “benefit” that is “not shared by other members

of society.” In this case, the most direct “recipient of the

benefit” is the former employee that receives payments from

the unemployment compensation fund. These payments also

benefit the public interest, helping to reduce the strain on

society that unemployment would otherwise cause. But the

payments do not grant an affirmative benefit on the non-profit

employer. In National Cable, by contrast, the broadcasters’

fees benefitted themselves, at least in part, by paying for the

administrative cost of FCC oversight.

It would be inaccurate to characterize the “benefit” of

the reimbursement obligation as the ability to operate in New

Jersey without having to pay the contributory tax. Such a

characterization differs from the fee-for-benefit scheme in

National Cable, where cable broadcasters paid a fee in

exchange for the benefits of FCC oversight. In National Cable

the Supreme Court cited as an example of a fee-for-benefit, “a

request that a public agency permit an applicant to practice law

or medicine or construct a house or run a broadcast station.”

Id. at 340. But here, it is difficult to conceptualize the

reimbursement obligation as a license, permit, or operating

fee.29 In short, the paradigm fee in exchange for a benefit,

under National Cable, is an applicant that pays in exchange for

29

The differences between In re Jenny Lynn Mining Co., 780

F.2d 585 (6th Cir. 1986), and this case are instructive. Unlike the

reimbursement obligation here, the government assessment in In re

Jenny Lynn Mining Co. directly benefitted the applicant by

licensing it to engage in operating a strip mine.

27

administrative oversight or for a license to engage in a certain

business activity. An unemployment reimbursement obligation

– which supports a general social welfare program – does not

comfortably fit into that model.

The majority views this differently, holding that the non-

profit employer enjoys the “benefit” that it “may operate in the

state without making quarterly contributions to the state

unemployment compensation fund.” Nonetheless, before 1970,

non-profit employers had no obligation to the unemployment

compensation fund at all. I find more persuasive the view that,

instead of bestowing a benefit, the 1970 FUTA amendment

imposed on non-profit employers a new burden to support the

unemployment compensation fund, with the option to pay the

quarterly tax or reimburse the state for costs.

C. Penalty

The reimbursement obligation functions more like a tax

than a penalty. The Supreme Court distinguished taxes from

penalties on the basis that a tax supports government policies

while a penalty punishes unlawful activity. Reorganized CF &

I Fabricators, 518 U.S. at 224. The non-profit employer’s

reimbursement obligation is clearly not a penalty on unlawful

activity. It is a burden imposed on non-profit entities lawfully

engaged in employment.30

30

It bears noting that failure to give the reimbursement

obligation priority in bankruptcy will likely increase non-profit

employers’ operating costs – a result contrary to the federal and

state legislative objectives. See S. Rep. No. 91-752, at 48-49,

reprinted in 1970 U.S.C.C.A.N. 3606, 3617-18 (1970) (stating

intent to minimize cost to non-profit organizations because they

“are often dependent upon charitable contributions”). NJDOL may

require from non-profit organizations “a bond or other security . .

. for the payment of any taxes, interest, and penalties imposed

pursuant to any state tax law[.]” N.J.S.A. 54:49-2. This allows

New Jersey to shield itself, in advance, from an unpaid

reimbursement obligation. Generally, not requiring a bond lowers

the costs to non-profit employers of doing business in New Jersey.

Allowing payments in lieu of the contributory tax and not requiring

28

II.

The final issue is whether the non-profit employer’s

reimbursement obligation constitutes an excise tax on a pre-

petition transaction under 11 U.S.C. § 507(a)(8)(E). 31 The

statute requires that reimbursement obligations constitute an

“excise tax” on “a transaction,” “occurring before the date of

the filing of the petition.” The Bankruptcy Code provides no

definition of “excise” or “excise tax.” Reorganized CF & I

Fabricators, 518 U.S. at 220. In determining whether a tax is

an “excise tax,” courts have used a range of definitions, some

broader than others. In the context of bankruptcy priority, the

non-profit employer’s reimbursement obligation constitutes an

excise tax on a transaction – a tax on the act of employing

workers. See In re Suburban Motor Freight, Inc., 998 F.2d

338, 340 n.3 (6th Cir. 1993) (noting that an excise tax may be

based upon a transaction or act of employing); see also In re

Deroche, 287 F.3d 751, 757 (9th Cir. 2002) (“act of employing

a worker without carrying required insurance” constitutes a

“transaction” under 11 U.S.C. § 507(a)(8)(E)); 9E Am. Jur. 2d

Bankruptcy § 3099 (“For priority purposes, an ‘excise tax’

covers practically any tax which is not an ad valorem tax and

which is imposed on the performance of an act, the engaging in

an occupation, or the enjoyment of a privilege.”). All of the

employment that contributed to United Healthcare’s

reimbursement obligation occurred pre-petition. Therefore, the

reimbursement obligation is an excise tax on a pre-petition

a bond both reduce the cost of non-profit employers’ obligations.

See Amy L. Henrich, Preferential Treatment of Charities Under

the Unemployment Insurance Laws, 94 Yale L.J. 1472, 1478 n.35

(1985) (“The present value of a future debt obligation decreases as

the payment is deferred into the future.”) .

If the reimbursement obligation is not entitled to priority in

bankruptcy proceedings, NJDOL may well require a bond from

non-profit employers. Requiring a bond works against FUTA’s

stated objective to minimize the cost of non-profit organizations’

participation in the unemployment compensation scheme.

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The majority did not have to reach this issue.

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transaction.

For these reasons, I would have affirmed the judgment

of the District Court.

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