Agreeing with a nonprecedential opinion from the Fifth Circuit and the majority on a recent decision from the Sixth Circuit Bankruptcy Appellate Panel, the Third Circuit held that the “penalty” imposed on a taxpayer for failure to purchase health insurance under the Affordable Care Act (a/k/a ACA or Obamacare) is a “tax” afforded priority under Section 507(a)(8).
The Fifth Circuit opinion is U.S. v. Chesteen (In re Chesteen), 799 F. App’x 236, 241 (5th Cir. Feb. 20, 2020). To read ABI’s report, click here. The BAP opinion from the Sixth Circuit is In re Juntoff, 636 B.R. 868 (B.A.P. 6th Cir. Mar. 21, 2022). Click here to read ABI’s report on Juntoff.
At least for the time being, the decisions on the ACA lack broad significance because Congress lowered the “penalty” to zero after the taxes were assessed in the cases that went up on appeal. However, the courts’ analyses will provide guidance for legislators in the future if they adopt a new form of health care built on the ACA and invoke another individual mandate intended to be (or intended not to be) a priority tax.
Typical Facts
In 2018, the debtor did not purchase health insurance under the so-called individual mandate, which the ACA referred to as a “penalty” and a “shared responsibility payment.” The debtor filed a chapter 13 petition in 2019.
The Internal Revenue Service filed a $927 priority proof of claim for unpaid taxes resulting from the failure to purchase health insurance in 2018. The debtor objected to the claim, contending that the exaction was not a tax and was not entitled to priority.
The bankruptcy court ruled that the exaction was a tax, not a penalty, and was entitled to priority.
The district court upheld the judgment by holding that the exaction was a tax on income entitled to priority. The debtor appealed to the circuit.
In his May 11 opinion, Circuit Judge Thomas M. Hardiman said that his panel was tasked with deciding whether the exaction was a tax for bankruptcy purposes and, if it was, whether the tax was entitled to priority.
Governing Law
In National Federation of Independent Business v. Sebelius, 567 U.S. 519 (2012), the Supreme Court held that the shared responsibility payment was a tax for constitutional purposes but was not a tax for the Anti-Injunction Act. However, Judge Hardiman said that the ACA “exaction could function as a tax for the broader purpose of constitutional validity, but not within the narrower confines of bankruptcy priority.”
“Accordingly,” Judge Hardiman said, “there is no reason to conclude that Sebelius’s constitutional analysis is controlling in the context of the Bankruptcy Code.”
Following other Supreme Court authority in characterizing an exaction as a “tax,” Judge Hardiman said that the Third Circuit conducts a “functional analysis.” Of special significance, he said, is whether the exaction confers any benefit on the taxpayer not enjoyed by everyone else.
Under the Third Circuit’s governing analysis adopted in 2005 from a 1982 Ninth Circuit opinion, Judge Hardiman said that the exaction was not exchanged for a benefit not shared by others. Furthermore, he said, it was calculated and administered like a tax. In addition, the exaction “lacks typical penal characteristics.”
Judge Hardiman therefore held that the exaction “is a tax for bankruptcy purposes.”
Priority Status?
Next, Judge Hardiman confronted the question of whether the tax was entitled to priority under Section 507(a)(8) as either “a tax on or measured by income” or “an excise tax on . . . a transaction.”
Judge Hardiman conceded that the payment was not a traditional tax on income. Still, he said, the plain language of the statute gives priority not only to income taxes but also to taxes “whose amounts are calculated based on the taxpayer’s income.”
The debtor’s income “played an essential role” in deciding the amount of the tax, Judge Hardiman said. He therefore held that the exaction was entitled to priority as a tax “measured by income,” even though the relevant provision in the IRS Code was titled “Miscellaneous Excise Taxes.”
Judge Hardiman said that titles within the IRS Code “have no legal effect.”
If the exaction were found to be an excise tax, Judge Hardiman said in a footnote that it would not be entitled to priority because the failure to purchase health insurance was not a “transaction.”
Agreeing with a nonprecedential opinion from the Fifth Circuit and the majority on a recent decision from the Sixth Circuit Bankruptcy Appellate Panel, the Third Circuit held that the “penalty” imposed on a taxpayer for failure to purchase health insurance under the Affordable Care Act (a/k/a ACA or Obamacare) is a “tax” afforded priority under Section 507(a)(8).
The Fifth Circuit opinion is U.S. v. Chesteen (In re Chesteen), 799 F. App’x 236, 241 (5th Cir. Feb. 20, 2020). To read ABI’s report, click here. The BAP opinion from the Sixth Circuit is In re Juntoff, 636 B.R. 868 (B.A.P. 6th Cir. Mar. 21, 2022). Click here to read ABI’s report on Juntoff.
At least for the time being, the decisions on the ACA lack broad significance because Congress lowered the “penalty” to zero after the taxes were assessed in the cases that went up on appeal. However, the courts’ analyses will provide guidance for legislators in the future if they adopt a new form of health care built on the ACA and invoke another individual mandate intended to be (or intended not to be) a priority tax.