A second bankruptcy court has held that the exaction for failure to purchase health insurance under the Affordable Care Act is a penalty not entitled to tax priority under Section 507(a)(8).
In an opinion on April 6, Bankruptcy Judge Stephani W. Humrickhouse of Raleigh, N.C., held that National Federation of Independent Business v. Sebelius, 567 U.S. 519 (2012), “does not mandate the conclusion that the [individual mandate] is a tax for purposes of Section 507(a).” Sebelius upheld the constitutionality of the individual mandate, concluding that it could reasonably be interpreted as a tax for the purposes of constitutionality.
Bankruptcy Judge Jerry A. Brown of New Orleans similarly concluded in February in In re Chesteen, 17-11472, 2018 WL 878847, 2018 BL 45636 (Bankr. E.D. La. Feb. 9, 2018), that Sebelius was not controlling in terms of the characterization of the individual mandate under the Bankruptcy Code. Both Judges Humrickhouse and Brown then ruled that the exaction was a penalty, not a tax, because the dominant or primary purpose of the mandate was not to fund the government but to discourage Americans from living without health insurance.
Because the exaction is a penalty, both judges held that it is not entitled to priority as an excise tax, contrary to the government’s argument.
The repeal of the individual mandate does not moot the issue because repeal does not become effective until 2019.
To read ABI’s discussion of Chesteen, click here.