Obamacare Fee Doesn’t Get Tax Priority in Bankruptcy

By Diane Davis

An IRS penalty under Obamacare for failing to have health insurance is not a tax and isn’t entitled to priority treatment in Chapter 13 bankruptcy, the U.S. Bankruptcy Court for the Eastern District of Louisiana held.

The Affordable Care Act’s individual mandate is a “penalty designed to deter citizens from living without health insurance,” Judge Jerry A. Brown wrote Feb. 9.

The mandate requires most to pay a fee at tax time if they don’t have coverage, the court said.

It has been a flash-point for years in the partisan political fight over the health law. The U.S. Supreme Court upheld the mandate in 2012, but the penalty was repealed in the new tax law, effective 2019.Bankruptcy Code Section 507(a)(8)(E)(i) gives the government priority status in bankruptcy only if unsecured claims are for “an excise tax.”

To determine if ACA’s mandate is a tax or a penalty, the court looked at whether its purpose was to support the government or punish certain conduct, the court said.

After John Chesteen, Jr. filed Chapter 13, the IRS filed a priority tax claim of $5,795 for unpaid 2015 and 2016 taxes. The IRS also listed an additional $695 as an “excise tax.”

Chesteen objected, arguing it was a penalty and not entitled to priority status in his bankruptcy.

The IRS urged the court to consider the similarities between the individual mandate penalty and trust fund recovery penalties that have been classified as non-dischargeable priority taxes for bankruptcy purposes.

The court rejected the IRS’s argument, concluding that an exaction, or a demand for payment, is designed to deter conduct, not to financially support the government.

Congress even labeled the ACA individual mandate as a penalty, not a tax in 26 U.S.C. § 5000A 18 times, the court said.

Rachel Thyre Anderson, Covington, La., represented Chesteen; Trustee S.J. Beaulieu, Jr., Metairie, La., represented himself.

The case is In re Chesteen , 2018 BL 45636, Bankr. E.D. La., No. 17-11472 SECTION “B” CHAPTER 13, 2/9/18 .

To contact the reporter on this story: Diane Davis in Washington at ddavis@bloomberglaw.com

To contact the editor responsible for this story: Jay Horowitz at jhorowitz@bloomberglaw.com

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