Health Reform WK-EDGE ISRP is a penalty, not tax, for bankruptcy purposes
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Friday, April 13, 2018

ISRP is a penalty, not tax, for bankruptcy purposes

By David Yucht, J.D.

An individual shared responsibility payment (ISRP) mandated by the Affordable Care Act (ACA) is a penalty for bankruptcy purposes, not a tax. As a result, an ISRP debt is not given priority status, but is a regular debt under the Bankruptcy Code (In re: Parrish, April 6, 2018, Humrickhouse, S.).

Bankrupt debtor owed ISRP. A debtor filed a chapter 13 bankruptcy petition in 2017. Her 2016 federal tax return, indicated that she owed a $664 ISRP from her failure to obtain health insurance as required by the ACA. The Internal Revenue Service (IRS) assessed her in the amount of $664, and filed a bankruptcy proof of claim in that amount. The IRS indicated that this debt should be paid off prior to other debts because of its priority status as a debt for nonpayment of an excise tax. The debtor filed an objection to the IRS claim contending that the ISRP is not an excise tax, but is instead a penalty that is not entitled to priority under the Bankruptcy Code.

ISRP is a penalty for bankruptcy purposes. The bankruptcy court found that the most natural reading for bankruptcy purposes is that the ISRP is a penalty and therefore not a priority debt under the Bankruptcy Code. The judge noted that in National Federation of Independent Business v. Sebelius, the U.S. Supreme Court concluded that the ISRP is a penalty for purposes of the Anti-Injunction Act, but could reasonably be characterized as a tax for purposes of constitutionality (see Court upholds ACA, but modifies Medicaid expansion, July 2, 2012). The bankruptcy court adopted a rule of law that considers the purpose of a tax to be the support of government; a penalty, however, serves as an exaction for a discouraged act or omission. The bankruptcy court found that the primary purpose of the ISRP is to encourage people to buy insurance by penalizing those who do not. Its revenue-generating component is incidental, despite the Supreme Court’s constitutional characterization. The court also determined that the relatively mild consequences for failure to pay the ISRP distinguish it from a tax.

The case is No. 17-02341-5-SWH.

Attorneys: William F. Braziel, III (Janvier Law Firm, PLLC) for Angela Boykin Parrish.

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