Upholding the constitutionality of the individual mandate in the Affordable Care Act, the Supreme Court held that the exaction imposed on taxpayers for failure to purchase health insurance was a “tax.” National Federation of Independent Business v. Sebelius, 567 U.S. 519 (2012).
It follows, does it not, that a claim of the Internal Revenue Service for failure to purchase health insurance is a tax entitled to status as a priority tax claim?
Saying he was not “convinced that the narrow ruling on the constitutional issue extends to the priority scheme of the Bankruptcy Code,” Bankruptcy Judge Jerry A. Brown of New Orleans held that the liability for failure to purchase health insurance is a penalty not entitled to tax priority.
The IRS filed a $695 claim against a chapter 13 debtor for failure to purchase health insurance and sought priority under Section 507(a)(8)(E)(i). That section affords an eighth priority for “an excise tax.”
Judge Brown began from the proposition that the statute’s characterization as a “tax” is not controlling for bankruptcy purposes. He then cited U.S. v. Reorganized CF & I Fabricators of Utah Inc., 518 U.S. 213 (1996), for the notion that a priority tax claim in bankruptcy is “a pecuniary burden laid upon individuals or property for the purpose of supporting the Government.”
Consequently, Judge Brown said that the case turned on whether the “primary, or dominant, purpose of the individual mandate . . . is to support the government or to punish or discourage certain conduct.”
Judge Brown quoted from CF & I for the definition of a tax as “an enforced contribution to provide for the support of the government; a penalty . . . is an exaction imposed by statute as punishment for an unlawful act.” CF & I went on to say that an exaction is a penalty when it “evinces a patently punitive function.”
Applying CF & I to the case at bar, Judge Brown said that the “ACA individual mandate is a penalty designed to deter citizens from living without health insurance.” He buttressed his conclusion by noting how the ACA itself refers to the mandate 18 times as a “penalty” and never calls it a “tax.”
Of perhaps most significance, Judge Brown said that the exaction for not purchasing insurance does not entail the typical consequences flowing from nonpayment of taxes, such as wage garnishments or tax liens. Citing a government website that evidently has been taken down in the last few days, he said that nonpayment is “penalized by having the exaction deducted out of future tax returns.”
The government took the case seriously, because the brief was signed by the deputy assistant attorney general for the Department of Justice, Tax Division, in Washington, D.C.
The repeal of the individual mandate does not moot the issue entirely, because repeal does not become effective until 2019.