Obamacare and Frivolous Return Penalties

[LPC]

As many of you know, the oral arguments before the Supreme Court today were on the issue of whether the federal courts have jurisdiction to consider challenges to the individual mandate under the Affordable Care Act (aka Obamacare) because the anti-injunction act (IRC section 7421(a)) prohibits any court from enjoining the assessment or collection of any tax. One of the arguments that has been made is that the penalty that is imposed by IRC section 5000B, which is to be assessed and collected in the same manner as an assessable penalty under subchapter B of chapter 68, is not really a "tax."

One of the assessable penalties imposed by subchapter B of chapter 68 is the frivolous tax submission penalty imposed by section 6702.

There are several cases in which tax nuts have tried to get injunctions against the imposition of a frivolous return penalty, and which have failed because the courts have ruled that the anti-injunction act applies to the frivolous return penalty.

If the Supreme Court rules that the anti-injunction act doesn't apply to the individual mandate because it's a penalty and not a tax, is it possible that tax nuts will be able to file for declaratory judgments on frivolous return penalties?

Obviously, a lot depends on how the court explains its decision, and I think it's quite likely that the Supreme Court will confirm that the anti-injunction act does apply.

But it would be weird if an issue of national and historical importance also changed the litigation tactics of tax nuts.

[Famspear]

Double check: I think the citation is section 5000A(b)(1).

Following up on what Dan wrote, section 5000A(g)(1) provides:

The penalty provided by this section shall be paid upon notice and demand by the Secretary, and except as provided in paragraph (2), shall be assessed and collected in the same manner as an assessable penalty under subchapter B of chapter 68.

Regarding assessable penalties under subchapter B of chapter 68, Internal Revenue Code section 6671 provides (in part):

6671(a) PENALTY ASSESSED AS TAX. --The penalties and liabilities provided by this subchapter [i.e., subchapter B of chapter 68] shall be paid upon notice and demand by the Secretary, and shall be assessed and collected in the same manner as taxes. Except as otherwise provided, any reference in this title [i.e., in the Internal Revenue Title, the Internal Revenue Code of 1986 as amended, separately codified as title 26 of the United States Code] to "tax" imposed by this title shall be deemed also to refer to the penalties and liabilities provided by this subchapter [i.e., subchapter B of chapter 68, consisting of section 6671 through section 6725].

And this brings us to the Anti-Injunction Act, Internal Revenue Code section 7421(a):

Except as provided in sections 6015(e), 6212(a) and (c), 6213(a), 6225(b), 6246(b), 6330(e)(1), 6331(i), 6672(c), 6694(c), and 7426(a) and (b)(1), 7429(b), and 7436, no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any person, whether or not such person is the person against whom such tax was assessed.

This is just a part of what is before the Court this week.

[Famspear]

I believe that there is indeed some wiggle room here for those who want to argue that the section 5000A(b)(1) penalty is NOT a "tax" for purposes of section 7421(a), simply because the 5000A(b)(1) penalty is not a penalty imposed under subchapter B of Chapter 68. It may be assessed and collected in the same manner as penalty under subchapter B, etc., but perhaps that does not make it a "tax" for purposes of section 7421(a).

[Famspear]

Another tidbit: Internal Revenue Code section 6665(a) provides (in part):

6665(a) ADDITIONS TREATED AS TAX. --Except as otherwise provided in this title --

[ . . . ]

(2) any reference in this title to "tax" imposed by this title shall be deemed also to refer to the additions to the tax, additional amounts, and penalties provided by this chapter [i.e., Chapter 68, consisting of section 6651 through section 6751].

There is no reference here to Chapter 48 (where section 5000A) is located.

EDIT: Had the Congress, in section 5000A(b)(1), used the word "tax" instead of "penalty," then those who would argue that the Anti-Injunction Act applies by virtue of section 6665(a)(2) would have a pretty strong argument, I think.

EDIT 2: Actually, now that I think about it some more, I think that if the Congress has used the word "tax" in section 5000A(b)(1), the Anti-Injunction Act would arguably be more likely to apply -- without regard to section 6665(a)(2). It's late. Time to go to bed.

[Famspear]

One way to look at the dispute is to look at the inflections of the word "collect" (in this case, "collected" and "collection"). Does the phrase "collected in the same manner" implicate only the process by which the Internal Revenue Service, an agency of the Department of the Treasury, "collects" -- or does that phrase also implicate the word "collection" as used in the phrase in section 7421(a) regarding a "suit for the purpose of restraining the [ . . . ] collection of any tax" (which deals with the subject matter jurisdiction of courts over a certain kind of federal tax case)?

[Arthur Rubin]

I thought all the lower courts agreed that it wasn't a tax. If it were a tax, not only would the lower courts not have jurisidiction under the anti-injunction act, but there would be no question about the constitutionality of the mandate.

[The Observer]

The interesting thing is the tap dance that the Obama administration is doing before the Court in trying to have it both ways in terms of the penalty qualifying unde the Anti-Injunction Act.

[LPC]

I thought all the lower courts agreed that it wasn't a tax.

No, one of the circuit courts (the 4th, in Liberty University v. Geithner) ruled that it was a tax, and so the anti-injunction act applied, and the court had no jurisdiction to consider the merits.

If it were a tax, not only would the lower courts not have jurisidiction under the anti-injunction act, but there would be no question about the constitutionality of the mandate.

I would agree. If the penalty is a tax for purposes of the AIA, then you would think that it would also be a tax purposes of the constitution, and it would be game over on the merits.

[Cpt Banjo]

If it were a tax, not only would the lower courts not have jurisidiction under the anti-injunction act, but there would be no question about the constitutionality of the mandate.

I disagree. If it's a tax, it's either a direct tax or an indirect tax (i.e., a duty, impost, or excise). An indirect tax has always been based upon an event, such as the importation of goods, the transfer of property, or the receipt of income. The mandate, however, taxes inactivity -- the failure to have health insurance. It has been argued by some scholars that this may make it a direct tax that must be apportioned.

It's true that the Supreme Court has said in dictum that the only direct taxes are capitations and taxes imposed on the mere ownership of property. But the Court has never before faced a tax on inactivity, so the category of direct taxes may be broader.

[.]

Hmm, doesn't seem quite that clear-cut at all:

... the solicitor general had to argue that the word "tax," as used in the Anti-Injunction Act, has a different meaning than the word "tax" found in the Constitution. Again, tomorrow, he will argue that the individual mandate is constitutional even if it is not supported by the Commerce Clause and Necessary & Proper Clause, because it is a lawful exercise of Congress's power to "tax."

In fairness to the solicitor general, this is a theoretically defensible argument: in reviewing jurisdiction, the Court must consider what the Anti-Injunction Act's framers meant by "tax"; in reviewing constitutionality, the Court must consider what the Founding Fathers meant by "tax." It's the sort of theoretical argument that only a law professor could love. In the real world, however, it's a bit tough to swallow. Justice Alito cut to the chase, in the Court's first question to the solicitor general:

General Verrilli, today you are arguing that the penalty is not a tax. Tomorrow you are going to be back and you will be arguing that the penalty is a tax. Has the Court ever held that something that is a tax for purposes of the taxing power under the Constitution is not a tax under the Anti-Injunction Act?

This sort of legal hair-splitting might well cost the government a bit of credibility—not just today, but throughout this case, among any justices still undecided on the merits of the case. The government already has squandered much credibility by its duplicitous handling of the constitutional issues from the very beginning: President Obama told television audiences that the individual mandate isn't a tax; then his Justice Department argued in the lower courts that it was a tax, and therefore constitutional; then his Office of Management and Budget told Congress—just weeks ago—that it isn't a tax; and now his solicitor general will argue to the justices that it is a tax, for constitutional purposes (but not jurisdictional purpose).

http://www.weeklystandard.com/blogs/oba ... 34507.html

The whole article is interesting reading.

And, as everyone knows, it all depends on Justice Kennedy. Fortunately, he has evinced that he has some understanding of federalism and the Constitution. Unlike the blithering moron currently in the White House, who has forced his own Solicitor General to take generally ridiculous positions due to his need to posture politically.

It probably goes without saying that I prefer that this entire nanny-state monstrosity be tossed out summarily on its ear for whatever reason they care to agree on, and there are many good ones.

If it isn't, I look forward to the day when it will be found by some future Supreme Court that I must provide evidence of purchasing enough broccoli, engaging in sufficient exercise, or purchasing a sufficiently "green" car, lest I incur some tax "penalty" in the interest of whatever action the then-current bunch of liberal do-gooders think will aid in perfecting mankind.

After all, everyone knows and the Supreme Court will have held that if you don't buy broccoli or a health-club plan or a car that runs on carrots, you have affected interstate commerce, so you can be compelled to comply with whatever diktats issue at their pleasure or pay a "penalty."

At that point, I'll become a TP. Not by arguing USC provisions, but by leaving the country for somewhere like Australia which is not quite as far down the road to ruin as we are.

[Famspear]

...This sort of legal hair-splitting might well cost the government a bit of credibility—not just today, but throughout this case, among any justices still undecided on the merits of the case. The government already has squandered much credibility by its duplicitous handling of the constitutional issues from the very beginning....

At the risk appearing to be doing some (inconsequential) hair splitting myself: Strictly speaking, neither side in these cases needs to be "credible," in the narrow sense. Credibility is a term that comes to my mind with respect to believability on factual issues.

I think that what each side is striving for -- in the oral arguments and the briefs -- is to persuade the Court about how the various constitutional and statutory texts should be interpreted.

The justices will not necessarily be put off by legal hair-splitting. It's what they live for. Seriously.

[.]

I don't necessarily endorse the logic or efficacy of anything said in the Weekly Standard article, and, you're quite right, hair-splitting is something they thrive on, but, this issue is sort of foundational, no?

I find it a bit sad that we've come to a point where a matter of this momentous importance depends on the vote of one Justice.

[Famspear]

...An indirect tax has always been based upon an event, such as the importation of goods, the transfer of property, or the receipt of income. The mandate, however, taxes inactivity -- the failure to have health insurance. It has been argued by some scholars that this may make it a direct tax that must be apportioned....

The other side of that argument might be that even prior to Obamacare, the Congress had taxed inactivity -- for example, in Internal Revenue Code section 4971 (relating to the tax on a failure to do something: a failure to meet certain minimum funding standards in connection with a section 412 plan). In that case, a failure to pay the liability for certain required contributions to the plan by the end of a given year results in the imposition of a tax. This is, arguably, a tax imposed for failure to engage in an economic activity.

And, on the "penalty" side, the Code is full of provisions imposing penalties for economic inactivity -- in the sense of the failure to affirmatively do something that certainly involves economic activity, such as failure to timely pay a tax.

Of course, taxing economic inactivity under either section 5000A (the Obamacare individual mandate) or section 4971 could be ruled unconstitutional. And the mere fact that that the courts might not have much of a problem (in terms of constitutionality) with section 4971 does not necessarily mean that section 5000A would easily pass with flying colors. They're very different provisions with different effects.

[.]

The other side of that argument might be that even prior to Obamacare, the Congress had taxed inactivity -- for example, in Internal Revenue Code section 4971 (relating to the tax on a failure to do something: a failure to meet certain minimum funding standards in connection with a section 412 plan). In that case, a failure to pay the liability for certain required contributions to the plan by the end of a given year results in the imposition of a tax. This is, arguably, a tax imposed for failure to engage in an economic activity.

Oh, c'mon.

I'm not a lawyer, but if you don't have a Section 412 pension plan, you're not required to do squat. Squat, of course, being a very important and highly regarded legal term. (See Blackstone.)

It's certainly not any sort of precedent applicable to the citizenry at large.

[Famspear]

I don't necessarily endorse the logic or efficacy of anything said in the Weekly Standard article, and, you're quite right, hair-splitting is something they thrive on, but, this issue is sort of foundational, no?

I find it a bit sad that we've come to a point where a matter of this momentous importance depends on the vote of one Justice.

Personally, although I agree that it's most likely to come down to a 5-4 decision (and I think it could go either way), I wouldn't be overly shocked if the ruling were to turn out to be 6-3, or even 7-2, that Obamacare (section 5000A mandate and all) is constitutional.

Oh, c'mon.

I'm not a lawyer, but if you don't have a Section 412 pension plan, you're not required to do squat....

"Oh, c'mon." You're helping me make one of my points: They're very different provisions with very different effects.

But that does not change the fact that in court, you have to be careful about constructing and presenting arguments that "prove too much," as we say in the legal profession. The argument (and some people are making this argument) that Congress simply cannot constitutionally tax economic inactivity -- the failure to buy health insurance, in this case -- is a weak argument. If you try to make that argument in open court without anticipating and dealing with the counter-arguments that the other side will easily recognize (e.g., nothing in the Constitution says that an excise must be limited to taxing an "activity" and no court has ruled that taxing "inactivity" violates the Constitution), you're not doing your best.

[Quixote]

If the government is counting on the Court finding that the penalty is authorized by the congressional taxing power, it's in trouble. Taxes are for raising revenue. Penalties for engaging in a prohibited activity (and presumably for refraining from engaging in a mandated activity) are not taxes; they are regulatory penalties. Bailey v. Drexel Furniture Co., 259 U.S. 20 (1922) is still good law, isn't it?

[Famspear]

If the government is counting on the Court finding that the penalty is authorized by the congressional taxing power, it's in trouble. Taxes are for raising revenue. Penalties for engaging in a prohibited activity (and presumably for refraining from engaging in a mandated activity) are not taxes; they are regulatory penalties. Bailey v. Drexel Furniture Co., 259 U.S. 20 (1922) is still good law, isn't it?

Reliance on Bailey is problematic. See, for example, United States v. Kahriger, 345 U.S. 22 (1953), overruled on other grounds, Marchetti v. United States, 390 U.S. 39 (1968).

From the U.S. Supreme Court (in a federal estate tax case):

....It has long been settled that an Act of Congress which on its face purports to be an exercise of the taxing power, is not any the less so because the tax is burdensome or tends to restrict or suppress the thing taxed. In such a case it is not within the province of courts to inquire into the unexpressed purposes or motives which may have moved Congress to exercise a power constitutionally conferred upon it[....]

---from Fernandez v. Wiener, 326 U.S. 340, 66 S. Ct. 178, 45-2 U.S. Tax Cas. (CCH) ¶10,239 (1945) (bolding added).

However, the issue in this passage from Fernandez v. Wiener was related to the interplay between the Tenth Amendment and the Congressional taxation power, so I guess this passage is not directly on point. (Is either side in this case making arguments about the Tenth Amendment? I don't know.) Also, in the case of Obamacare, the "purposes or motives" of the Congress were most definitely expressed. And, of course, with section 5000A the Congress is not trying to "restrict or suppress" an activity; the Congress is trying to encourage an activity (buying health insurance) by penalizing (or taxing?) the failure to engage in the activity.

[.]

I'm guessing that the Founders sought to limit federal regulation of interstate commerce to voluntary interstate commerce and that almost everyone since has understood that simple principle.

The idea that anyone could be compelled to either buy some product or pay a penalty under the guise of regulation of "interstate commerce" under the terms of the Constitution would have been total anathema to them, no matter the exigencies of any particular market.

If we lose that very simple, elementary principle, then we're done. Cooked. Thereafter, no limit on government power will be even subject to serious litigation because it may have some vague nexus to interstate commerce, precisely the opposite proposition upon which this country was founded.

Next year, broccoli. Then, cauliflower. How about carrots? All of that stuff is good for you. Just wait until the celery and rutabaga lobbyists get their act together. Then, health clubs. How about calorie counting? That's good for you, too, especially in view of out of control health care costs caused by "reform." The exercise machine makers can't be far behind in the federal gravy train.

And, of course, you simply must have solar panels. Didn't think that you'd be required to cultivate some algae for weekly collection? Sorry, joke's on you. Then, who knows? Anything is possible, and lawyers will think it up. Organic mushrooms or brussel sprouts, anyone? How about requirements to live in less than X square feet per person? Maximum number of pets? There's absolutely no end to the possibilities for compulsion. The EPA already regulates lawn mower emissions, maybe the next step is to regulate the size of your lawn.

Not even the Filburn (317 U.S. 111) wheat-growing-for-on-farm-use case from 70 years ago held that Filburn could be required to either grow wheat and/or engage in any commerce, interstate or otherwise.

[Arthur Rubin]

That's one thing you could say about HillaryCare; it was funded as a tax, even though, as written, a person with 2 S-Corps would pay twice as much. It's the nationalization of the health care industry without payment that bothered me.

[rogfulton]

If it isn't, I look forward to the day when it will be found by some future Supreme Court that I must provide evidence of purchasing enough broccoli, engaging in sufficient exercise, or purchasing a sufficiently "green" car, lest I incur some tax "penalty" in the interest of whatever action the then-current bunch of liberal do-gooders think will aid in perfecting mankind.

After all, everyone knows and the Supreme Court will have held that if you don't buy broccoli or a health-club plan or a car that runs on carrots, you have affected interstate commerce, so you can be compelled to comply with whatever diktats issue at their pleasure or pay a "penalty."

Sounds like you are equating forcing me to pay for your broccoli with me paying for you to see a doctor about your cold, as pre-Obamacare medical costs work.

If your analogy holds, I might not object too much if that brings the price of broccoli down because more people are paying for it, including you paying for your own. But don't expect me to be too happy when the price goes up, because you continue to get your broccoli on my dime.

Don't get me wrong, I don't think I should be paying for anyone's broccoli or doctor's visits. I don't know anyone who thinks it's fair for working people to pay for anything for strangers.

For Conservatives (with a capital C) to be against a plan that is so similar to what the Republican party previously proposed seems to be the height of hypocrisy and political sniping at a time when the country deserves better from both sides of the aisle.

I wish I had the link but recently, through a link on fark.com, I read an article that reported the insurance industry in America posted record profits for the fourth quarter 2011. This was after portions of Obamacare went into effect.

Rhetorical question: is all this caviling simply anti-Obama political posturing?

Not even the presumptive Republican nominee could maintain his support of a plan modelled after the one he gladly signed. Why isn't he holding up the success of the MA plan as a model for other states to build on? IIRC, he used to.