• No health insurance triggers taxes, not penalties, panel rules
  • Bankruptcy law raises taxes in individual bankruptcies

Tax liabilities for not obtaining health insurance under the Affordable Care Act (ACA) have priority status over the claims of other creditors in an individual’s bankruptcy, an appeals court has ruled.

The historic Health Care Act’s individual mandate had required Americans to purchase health insurance or make a so-called shared responsibility payment (SRP). But, the U.S. 6th Circuit Bankruptcy Appeals Panel said that because the SRP was a tax rather than a penalty, it was entitled to payments before other unsecured creditors in the chapter’s bankruptcy. 13.

The case stemmed from two separate bankruptcies of Ohio residents who did not have health insurance in 2017 and 2018 and had not initiated the SRP. A Republican-backed tax bill eliminated SRPs for people who did not get health insurance after Dec. 31, 2018.

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A lawyer for the debtors did not respond to a request for comment. A government spokesman declined to comment.

In Monday’s ruling, the panel overturned U.S. Bankruptcy Judge Arthur Harris of the Northern District of Ohio, who oversaw the two Chapter 13 cases. Harris ruled in April 2021 that the Internal Revenue Service claims for incurred SRPs did not have priority and were to be treated the same as other unsecured claims.

Under Chapter 13 of the Bankruptcy Act, claims filed in a bankruptcy of an individual by a government unit for pre-bankruptcy income tax or for an excise tax on a transaction before the bankruptcy have priority over the claims of other creditors.

The debtors had argued that the SRP is a penalty, not a tax, and is therefore not covered by the provision of the bankruptcy law that provides for priority status. The panel, however, held that a penalty is only applied for an “unlawful act” and that failure to obtain health insurance is not illegal under the ACA; it’s just choosing to pay the costs of not doing it.

“The Panel cannot ignore that the Supreme Court has already explained that a sanction is a ‘punishment for an illegal act or omission’ and that failure to obtain insurance in accordance with the individual warrant does not constitute unlawful act or omission,” U.S. Bankruptcy Appeal Panel Judge Alan Stout, who wrote the ruling, wrote.

The U.S. Supreme Court in June rejected a Republican attempt to strike down the ACA, preserving former Democratic President Barack Obama’s health care law for the third time since it was signed into law in 2010.

US Bankruptcy Appeals Board Chief Judge Scott Dales disagreed with the majority opinion, saying he viewed the SRP more as a penalty than a tax.

The case is Internal Revenue Service v. Howard D. Juntoff et al, Bankruptcy Appeal Panel of the 6th Circuit, No. 21-8011.

For debtors: Marcel Duhamel of Vorys Sater Seymour and Pease and Joseph Romano of The Romano Law Firm

For the IRS: Marie Wicks of the US Department of Justice

(Update: The title of this story has been updated to reflect that the panel ruled that tax obligations have priority in Chapter 13 bankruptcy)

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