The Affordable Care Act’s penalty for individuals who don’t have health insurance is a tax that the Internal Revenue Service can collect ahead of other creditors in a bankruptcy, the Sixth Circuit ruled.
The levy, known as the Shared Responsibility Payment, has “several tax-like qualities,” the US Court of Appeals for the Sixth Circuit said in its Monday opinion. Additionally, the law that governed the individual mandate “keys a taxpayer’s amount owed to household income,” the court said. The court’s ruling falls in line with decisions out of the Third and Fourth Circuits.
The finding is key for the IRS because US bankruptcy law offers priority to “unsecured claims of governmental units . . . [for] a tax on or measured by income,” the court said.
From 2014 to 2018, the ACA mandated most Americans to purchase health insurance. If they failed to do so, they were required to pay a levy, known as the Shared Responsibility Payment. Though the penalty was abolished beginning in tax year 2019, it stirred up legal confusion over whether the payment was a penalty or tax under the law, which would determine whether the IRS would have priority in collecting the payment in a bankruptcy.
If the court decided the fine was a penalty, the IRS wouldn’t be entitled to any payment priority in a bankruptcy.
This issue stems from the bankruptcy of appellant Howard D. Juntoff, who opted out of the health plan and didn’t pay the penalty in 2018. After he declared bankruptcy, the IRS filed a proof of claim in bankruptcy court in an effort to collect the penalty.
The agency asked for priority above other creditors, arguing that claims from governmental units for taxes measured by income are entitled to priority, according to the filing. But the bankruptcy court denied the request, finding the penalty did not meet that standard.
Juntoff argued that the payment was not “measured by income” as “taxpayer liability turns on factors besides income, such as whether the taxpayer purchased health insurance,” according to the filing.
Lawyers for Juntoff didn’t respond immediately to requests for comment.
This case is IRS v Howard Juntoff, 6th Cir. App., No. 22-3312, 7/31/23.
