The government won the IRS Open three sets to love, when the Sixth Circuit sided with the Third and Fourth Circuits by holding 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).
In a nonprecedential opinion, the Fifth Circuit agreed with the Third and the Fourth, so perhaps the score was four to zip. However, the issue is not without controversy. There was a dissenter on the Fourth Circuit and on the Sixth Circuit Bankruptcy Appellate Panel.
The opinions have little ongoing practical significance, because Congress lowered the “penalty” to zero in 2017. However, the decisions will provide guidance if Congress in the future decides to adopt some form of universal health care with penalties for those who do not purchase insurance.
For the tax years 2014 to 2018, the ACA contained the so-called individual mandate requiring individuals to purchase health insurance. Those who did not were assessed a “penalty,” as the ACA called it. The amount of the penalty varied. It was zero for low-income taxpayers and was capped for people with high incomes.
For the 2018 tax year, the debtor did not purchase health insurance. In bankruptcy, the Internal Revenue Service filed a proof of claim and asserted that the claim was entitled to priority as a tax under Section 507(a)(8)(A).
The bankruptcy court denied priority status, believing that the exaction was not a “tax on or measured by income,” the words employed by Section 507(a)(8)(A). In a 2/1 opinion, the Sixth Circuit BAP reversed. In re Juntoff, 636 B.R. 868 (B.A.P. 6th Cir. Mar. 21, 2022). Click here to read ABI’s report on Juntoff.
The IRS fended off the debtor’s appeal to the Sixth Circuit in a July 31 opinion by Circuit Judge Jeffrey S. Sutton.
We will not beat a dead horse on an issue that may never again arise among the circuits. Judge Sutton’s analysis differed little from those in the other two circuits.
The ACA called the exaction a “penalty,” which would not be entitled to bankruptcy priority, but Judge Sutton began from the proposition that labels are informative but not dispositive. The Supreme Court’s decision in National Federation of Independent Business v. Sebelius, 567 U.S. 519 (2012), was likewise informative. There, 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. For some judges, the “tax” label assigned by Sebelius was persuasive.
Judge Sutton undertook a functional analysis to decide whether the exaction “works” more like a tax or a penalty “imposed on lawbreakers.” He found “several tax-like qualities,” including the collection mechanism by the IRS. Likewise, the failure to purchase health insurance was not illegal, nor did the exaction require mens rea. Similarly, the exaction didn’t look like a penalty because it did not “enormously” exceed the cost of insurance.
Judge Sutton found “company” in the Third and Fourth Circuits, coupled with the lack of a contrary opinion by any other circuit.
Having found that the exaction was a tax, Judge Sutton assigned priority status to the claim because he readily found that the exaction was measured by income, the second part of the standard required by Section 507(a)(8)(A).
Other Authorities
The nonprecedential opinion from the Fifth Circuit 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 Third Circuit opinion is In re Szczyporski, 34 F.4th 179 (3d Cir. May 11, 2022). To read ABI’s report, click here.
The split decision in the Fourth Circuit is U.S. v. Alicea, 58 F.4th 155 (4th Cir. Jan. 19, 2023). To read ABI’s report, click here.
The government won the IRS Open three sets to love, when the Sixth Circuit sided with the Third and Fourth Circuits by holding 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).
In a nonprecedential opinion, the Fifth Circuit agreed with the Third and the Fourth, so perhaps the score was four to zip. However, the issue is not without controversy. There was a dissenter on the Fourth Circuit and on the Sixth Circuit Bankruptcy Appellate Panel.
The opinions have little ongoing practical significance, because Congress lowered the “penalty” to zero in 2017. However, the decisions will provide guidance if Congress in the future decides to adopt some form of universal health care with penalties for those who do not purchase insurance.