Taxes – Do We Know One When We See One?

As we approach the half-way point of 2012, an important court case that will dramatically affect the healthcare industry is about to be decided. Next month, the United States Supreme Court is scheduled to decide the constitutionality of the Affordable Care Act. The Supreme Court has heard oral arguments on and may decide the following issues:

1) Whether the penalty for noncompliance with the individual mandate is equivalent to a tax.
2) Whether the individual mandate is legal.
3) Whether the individual mandate is illegal, whether the rest of the Affordable Care Act is also illegal or whether it is severable from the individual mandate.
4) Whether Congress illegally required states to expand the Medicaid program.

Unfortunately, due to the various burdens employers and state governments face in complying with the Affordable Care Act, not all of these issues may be decided as soon as we hope. If the Supreme Court determines the penalty for noncompliance with the individual mandate is the equivalent of a tax, there is a reasonable chance the Court may also rule that since the tax has not yet been paid by anyone, no decision can be made at this time regarding its constitutionality. In fact, this conclusion has already been reached by the Fourth Circuit U.S. Court of Appeals.

The Anti Injunction Act, a federal tax law enacted in 1867, essentially states that a taxpayer cannot challenge a tax until the tax is first paid. Since any penalties to be paid for noncompliance with the individual mandate provisions will not occur until tax returns are filed 2015, a decision that the mandate is equivalent to a tax may result in a delay in ruling on all remaining legal challenges to the Affordable Care Act, effectively kicking the can down the road for a few more years.

One of the more unusual aspects over this decision is that both the government and the petitioners agree that the Anti Injunction Act does not bar the Supreme Court from moving forward with the other issues of the case. In fact, the government is not a party to the litigation on this specific issue.

The Supreme Court appointed an outside lawyer to argue the case for invoking the Anti Injunction Act when oral arguments were heard in March. The court-appointed attorney argued that the health care law’s mandate penalty is a tax or the equivalent of a tax for three reasons:

• Congress directed that the individual mandate penalty be assessed and collected in the same manner as taxes.
• Congress provided that penalties are included in taxes for assessment purposes.
• The individual mandate penalty bears the key indicia of a tax (e.g., the penalty is part of the Internal Revenue Code, any liability is paid with a noncompliant individual’s income tax return and any payment is made to the United States Treasury and part of the general revenues of the government).

Government lawyers and those of the petitioners agree for different reasons that the Anti Injunction Act should not apply. The government’s position is that the penalty is not the kind of tax that triggers the Anti-Injunction Act. Petitioners argue that the penalty is not a tax, which mirrors the Administration’s position when it was calling for passage of the Affordable Care Act. In addition, the States that are party to the litigation argue that the Anti Injunction Act does not apply to them regardless of whether the penalty is a tax.

Trying to understand the positions the various parties have taken on this issue highlights both the complexity of the legal process and the confusion those of us following this case (who are not lawyers) have in understanding the Affordable Care Act and the various challenges to it. I think it also explains why many of the arguments for and against the law tend to be emotional in nature. Here is to hope that the Supreme Court ultimately decides the fate of the Affordable Care Act based solely on constitutional principles.

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