Individual mandate payment is a priority debt in bankruptcy

A bankruptcy court applies the Supreme Court holding that the payment is a tax, not a penalty.
By Paul Bonner

The 2012 Supreme Court case that upheld the Sec. 5000A requirement to maintain minimum essential health coverage (National Federation of Independent Business v. Sebelius, 567 U.S. 519 (2012)) also established that the shared-responsibility payment (SRP) for failure to comply with the requirement is a tax rather than a penalty, which makes it a priority debt in bankruptcy proceedings, a federal bankruptcy court held.

Facts: The debtor in the Chapter 13 case, Robert Szczyporski, objected to the IRS's priority claim to a $2,000 SRP he was assessed for 2018.

Issues: Szczyporski claimed that the SRP was a penalty, not a tax, and was therefore not entitled to priority under the Bankruptcy Code.

Sec. 5000A, enacted as part of the Patient Protection and Affordable Care Act, P.L. 111-148, is commonly referred to as the "individual mandate." Under it, taxpayers and their dependents who were applicable individuals were required to have minimum effective health care coverage for months beginning after 2013 or pay an SRP (which Sec. 5000A repeatedly refers to as a "penalty") with their income tax return for each month of noncompliance. The SRP was reduced to $0 for months beginning after Dec. 31, 2018, by Section 11081 of the law known as the Tax Cuts and Jobs Act, P.L. 115-97.

Sections 507(a)(8)(A) and (E) of the Bankruptcy Code (Title 11) generally give priority to claims of governmental units for income or excise taxes if the requirements of Section 507 are met.

Szczyporski argued that Sebelius did not address the SRP in the context of bankruptcy and that the SRP could be shown to be a penalty for that purpose under a functional analysis performed in accordance with In re United Healthcare Systems, Inc., 396 F.3d 247 (3d Cir. 2005).

Holding: The bankruptcy court rejected Szczyporski's argument, finding, as the government argued, that the Court in Sebelius did perform such an analysis, and United Healthcare did not mandate a different result.

In Sebelius, the Supreme Court found that the SRP was a tax because (in years before 2019) it was based on taxpayers' adjusted gross income; it was not so large as to effectively force individuals to obtain coverage; its applicability was not limited to willful violations; and it was collected solely by the IRS under its normal tax collection procedures.

As to whether the SRP, as a tax, is a priority debt, the bankruptcy court said, the U.S. Constitution authorizes only four types of taxes: duties, excise taxes, income taxes, and direct taxes. Since the SRP is neither a duty nor a direct tax, it must be an income or excise tax, making it in either case a priority debt under Section 507(a)(8) of the Bankruptcy Code.

  • In re Szczyporski, No. 19-14584 (Bankr. E.D. Pa. 6/23/20)

— By Paul Bonner, a JofA senior editor.


Get your clients ready for tax season

Upon its enactment in March, the American Rescue Plan Act (ARPA) introduced many new tax changes, some of which retroactively affected 2020 returns. Making the right moves now can help you mitigate any surprises heading into 2022.


Black CPA Centennial, 1921–2021

With 2021 marking the 100th anniversary of the first Black licensed CPA in the United States, a yearlong campaign kicked off to recognize the nation’s Black CPAs and encourage greater progress in diversity, inclusion, and equity in the CPA profession.