ACA’s Shared Responsibility Payment is Priority Tax Debt

Posted by NCBRC - March 6, 2019

The District Court for the Eastern District of Louisiana determined that the tax assessment for failure to maintain health insurance under the Affordable Care Act is a nondischargeable priority tax debt under section 507(a)(8)(A)(iii), rather than a penalty dischargeable in bankruptcy under section 523(a)(7) and 1328(a). United States v. Chesteen, No. 18-2077 (E.D. La. Feb. 25, 2019).

As the chapter 13 debtor, John Chesteen, pointed out on appeal, the shared responsibility payment at issue is described numerous times in the ACA as a penalty and is collected the same way other tax penalties are collected. The district court noted, however, that statutory descriptions, while informative, are not dispositive of whether a payment is a tax or a penalty. Rather, courts rely on the underlying purpose of the payment. A “tax” is a burden placed on the taxpayer for the financial support of the government, and a “penalty” is a punishment of an unlawful act.

The district court turned to the decision in National Federation of Independent Business v. Sebelius, 567 U.S. 519, 546 (2012), where the Court found that the shared responsibility assessment was a penalty for purposes of the Anti-Injunction Act, but left open the possibility of it being treated as a tax for constitutional purposes. The Sebelius Court identified the following factors as supporting a finding that the payment is a tax: 1) it is paid along with the taxpayer’s regular income tax filing 2) it does not apply to those who do not pay federal taxes, and 3) it is determined by familiar factors such as taxable income, number of dependents, and joint filing status.

The Chesteen court found that the shared responsibility payment more closely resembles a tax adhering to the benefit of government coffers, than a penalty. In so holding, the court relied on the facts that the payment is not required as a result of unlawful activity and its deterrent effect, standing alone, is not determinative. Failure to make the payment does not subject the taxpayer to criminal consequences and, in fact, taxpayers may choose to make the payment rather than obtain more expensive insurance. The court concluded that, despite statutory language labeling the assessment a penalty, it functions more as a tax. It reversed the contrary decision of the bankruptcy court.

Chesteen ED La Feb 2019

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