Writing about the so-called individual mandate under the Affordable Care Act (a.k.a. ACA or Obamacare) seems like beating a dead horse now that Congress has repealed the penalty for taxpayers who didn’t purchase health insurance.
In bankruptcy circles, a Fifth Circuit opinion on the individual mandate is noteworthy in case future administrations resurrect some form of universal health care with penalties for those who do not buy insurance.
The $695 Appeal
A taxpayer failed to purchase health insurance for himself in 2016. The taxpayer filed a chapter 13 petition, prompting the IRS to file a $695 claim for failure to purchase health insurance. The government sought priority under Section 507(a)(8)(E)(i). That section affords an eighth priority for “an excise tax on a transaction” for which a tax return was due within three years of bankruptcy.
Bankruptcy Judge Jerry A. Brown of New Orleans decided that the exaction was a penalty, not a tax, and thus was not entitled to priority. Judge Brown did not reach the question of whether the exaction, even if it were a tax, was entitled to priority as an “excise tax on a transaction” under Section 507(a)(8)(E)(i).
The district court reversed on appeal, believing that the exaction was more like a tax than a penalty. According to the Fifth Circuit’s per curiam opinion on February 20, the district court did not explain why it was an “excise tax on a transaction.”
The debtor appealed and won a reversal in the Fifth Circuit’s non-precedential opinion.
The Individual Mandate and Its Status
Until it was effectively repealed by reducing the exaction to $0 in 2017, the individual mandate was imposed by 26 U.S.C. § 5000A(a) (2016).
Upholding the constitutionality of the individual mandate in the ACA, 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).
Some lower courts nonetheless ruled that the exaction was not automatically entitled to priority in view of the Bankruptcy Code’s definitions of priority tax claims.
The Fifth Circuit did not reach the question of whether Sibelius meant that the exaction was a tax, because the appeals court concluded that the individual mandate was not “an excise tax on a transaction” under Section 507(a)(8)(E)(i).
Citing circuit authority, the appeals court said that an excise tax under Section 507(a)(8)(E) in general terms is a tax imposed on the manufacture, sale or use of goods or an occupation or activity. The various definitions of excise tax, the circuit court said, all refer to “some type of activity.”
The appeals court said that the individual mandate imposes an exaction for “a person’s inactivity in not procuring the requisite insurance.” The court went on to say that “such failure to act would not have been activity but inactivity.”
Because it was not an excise tax on a “transaction,” the Fifth Circuit reversed the district court, holding that the exaction was not entitled to priority under Section 507(a)(8)(E)(i).
The government had contended for the first time on appeal that the exaction was entitled to priority under 507(a)(8)(A) as a “tax . . . measured by income.” The appeals court declined to entertain the argument, saying it had been waived by the government.
To read ABI reports on lower court decisions holding that the individual mandate did not result in priority claims, click here and here.
Writing about the so-called individual mandate under the Affordable Care Act (a.k.a. ACA or Obamacare) seems like beating a dead horse now that Congress has repealed the penalty for taxpayers who didn’t purchase health insurance.
In bankruptcy circles, a Fifth Circuit opinion on the individual mandate is noteworthy in case future administrations resurrect some form of universal health care with penalties for those who do not buy insurance.
The $695 Appeal
A taxpayer failed to purchase health insurance for himself in 2016. The taxpayer filed a chapter 13 petition, prompting the IRS to file a $695 claim for failure to purchase health insurance. The government sought priority under Section 507(a)(8)(E)(i). That section affords an eighth priority for “an excise tax on a transaction” for which a tax return was due within three years of bankruptcy.
Bankruptcy Judge Jerry A. Brown of New Orleans decided that the exaction was a penalty, not a tax, and thus was not entitled to priority. Judge Brown did not reach the question of whether the exaction, even if it were a tax, was entitled to priority as an “excise tax on a transaction” under Section 507(a)(8)(E)(i).
The district court reversed on appeal, believing that the exaction was more like a tax than a penalty. According to the Fifth Circuit’s per curiam opinion on February 20, the district court did not explain why it was an “excise tax on a transaction.”