Virginia Lawyers Weekly VA Lawyers Weekly
Where the Affordable Care Act, or ACA, required individuals who failed to comply with its mandate to pay a “shared responsibility payment,” or SRP, to the Internal Revenue Service through their annual income tax returns, the SRP should be considered as a “tax” and not a penalty under the bankruptcy code. Although the ACA identifies the SRP as a “penalty,” the bankruptcy court considers it a tax.
Background
When first enacted, the Affordable Care Act, or ACA, included a mandate requiring most individuals to maintain health insurance meeting certain minimum requirements. Individuals who failed to do so were required to pay an SRP to the IRS through their annual income tax returns. The ACA identifies the SRP as a penalty rather than a tax.
In National Federation of Independent Business v. Sebelius, 567 U.S. 519 (2012), the Supreme Court upheld the constitutionality of the individual mandate. Although the court determined that the SRP was a penalty, not a tax, for purposes of the Anti-Injunction Act, it concluded that, as a constitutional matter, the SRP could fairly be read as a tax on the uninsured, which the court found was within Congress’s power to impose.
The issue in this case is whether the SRP is a “tax” or a “penalty” when considered in the context of the bankruptcy code, which gives the IRS priority for tax claims but not for penalty claims.
Precedent
The government contends that the NFIB court’s determination that the SRP was a tax for purposes of the constitutional inquiry requires this court to conclude that the SRP is a tax for bankruptcy purposes, while the taxpayers contend that the NFIB court’s determination that the SRP was a penalty for purposes of the Anti-Injunction Act requires it to conclude that the SRP is a penalty for bankruptcy purposes.
The court disagrees with the taxpayers and the dissent that NFIB requires it to treat the SRP as a penalty. While the NFIB court did rely primarily on the statutory label when deciding that the SRP was not a tax for purposes of the Anti-Injunction Act, the court did not hold that the statutory label always controls all statutory questions. Instead, the court indicated that its analysis only governed questions under the Anti-Injunction Act.
The NFIB court never indicated that its analysis of the Anti-Injunction Act issue was breaking new ground or required the overruling of any cases. If the court’s analysis of the Anti-Injunction Act issue had worked such a fundamental change in unrelated areas of the law, it seems likely that the court would have been aware of the change and would have acknowledged the consequences of its decision.
Moreover, the NFIB court relied on two bankruptcy functional-approach cases when concluding that the SRP operates as a tax for constitutional purposes. If the court intended to overrule those cases and hold the statutory label controls all statutory questions, it seems unlikely that the court would rely, without comment, on cases that it had just silently overruled.
Merits
For the purpose of determining claim priority in the context of bankruptcy, an exaction is a tax if it is (a) an involuntary pecuniary burden, regardless of name, laid upon individuals or property; (b) imposed by, or under authority of the legislature; (c) for public purposes, including the purpose of defraying expenses of government of undertakings authorized by it and (d) under the police or taxing power of the state. Applying this functional standard, the court concludes that the SRP qualifies as a tax.
Reversed and remanded.
Concurring opinion
Wilkinson, concurring:
I concur in full in Judge Traxler’s fine majority opinion in this case. Plaintiff’s suit strikes me as a not-too-subtle rearguard action against the ACA and NFIB v. Sebelius. That decision is the law, however, and circumventing it would be as impermissible as overruling it.
Dissenting opinion
Niemeyer, J., dissenting:
Like the majority, I conclude that the answer to the question in this case is provided by NFIB, which specifically addressed the nature of the payment. But I differ with the majority in that I conclude that NFIB requires that the payment be treated as a penalty in the context of the bankruptcy code.
United States v. Alicea, Case No. 21-2220, Jan. 19, 2023. 4th Cir. (Traxler), from EDNC at Wilmington (Flanagan). Pooja Ashok Boisture for Appellant. William Earl Brewer Jr. for Appellees. VLW 023-2-019. 25 pp.
