When Is A Tax Not a Tax? When the Supremes Says It Is Or Not! (8/2/12)

In National Federation of Independent Business v. Sebelius,  567 U.S. ___ (2012), here, the Supreme Court affirmed the individual mandate as a tax but held that it was not a tax for purposes of the Anti-Injunction Act ("AIA"), 26 USC 7421(a), here, which prohibits injunctions against a tax assessment or collection.  What's that all about?  I won't try to answer that question in detail, but I will introduce readers to the back ground of the AIA.

The statute is:

§ 7421 - PROHIBITION OF SUITS TO RESTRAIN ASSESSMENT OR COLLECTION
(a) Tax.   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.

In the text book I summarize the AIA as follows:

Injunctions or injunction substitutes (such as declaratory judgments) are not allowed in tax controversies.  § 7421(a) (Also called the Anti-Injunction Act).  The reasons are (1) there is a strong governmental imperative in avoiding interference with the revenue function and (2) there are adequate procedures otherwise provided in which taxpayers can contest tax liabilities without undue burden.

(I have just "lifted" the citation to Section 7421(a) the text from a footnote where it formerly appeared.)

You will note that there are certain statutory exceptions to the prohibition (see the opening "Except as" clause).  The exceptions do not swamp the rule but they are significant.  In the Tax Procedure course we cover some of these exceptions.  For example, the notice of deficiency giving the taxpayer pre-assessment access to the Tax Court for income and estate and gift tax is an exception (see the reference in Section 7421(a) to Sections 6212 and 6213); if the notice is not sent or not properly sent (e.g., to the taxpayer's last known address), the taxpayer may enjoin any IRS assessment and attempt to collect the tax.  (We will study also certain more efficient alternatives to remedying this particular problem, but the injunction suit is available.)  There are other statutory exceptions, but for present purposes just note that there is a general prohibition on injunction suits unless there is an exception.  There is also a judicially-created exception applicable only in rare cases of clear unconstitutionality, but again that should not detract from the general rule.  I discuss the AIA and the exceptions in the texts as follows:  (i) footnoted version, pp. 525 ff; (ii) nonfootnoted version, pp. 387 ff.  (I also mention in the footnotes the AIA in discussing the exceptions, such as the exception for failure to send a proper notice of deficiency.

Where applicable, the AIA means that a tax cannot be enjoined.  This will mean, generally, that the, for taxes other than those requiring a notice of deficiency, the taxpayer must first pay the tax and then litigate the taxpayer's liability for the tax.  As applicable to the individual mandate which does not require a notice of deficiency, that would mean that a taxpayer / citizen must first pay the tax which does not kick in until 2014 and then litigate liability.

In National Federation, the plaintiffs sought to enjoin implementation of the individual mandate in the Patient Protection and Affordable Care Act ("ACA").  The individual mandate is not in the IRC and is identified as in the statute as a penalty, collected by the IRS, for failing to acquire health insurance.  The Supreme Court held that the "penalty", which unconstitutional as an exercise of the commerce clause, was constitutional as a tax under the taxing power.  But, in order to get there, the Court first had to decide that the penalty was not a tax for purpose of the AIA.

I won't discuss how the Court concluded that the penalty was to be tested constitutionally under the taxing power, but will address what the Court said about the AIA and why the individual mandate penalty was not a tax subject the AIA.

Essentially, for purposes of the AIA, the Court said that the term "tax" in the AIA is not coextensive with the constitutional taxing power.  Rather, tax in the AIA means an exaction that Congress intended to make subject to the prohibition on injunctions.  Since it is a statutory term and not a constitutional term in issue, the prohibition should only apply to those exactions which Congress thought was a tax that should be enjoined.  By labeling the exaction a penalty, Congress determined that it should not be subject to the AIA.  That it is a tax under the constitutional taxing power, does not mean that it is a tax subject to the AIA.  In this sense, Congress by its action in labeling the exaction a penalty determined that it did not intend the AIA to apply and therefore it does not apply.  (The foregoing is my general summary of the nature of the holding.)

I cut and paste the majority's entire discussion of this issue below, for your further edification.

II 

Before turning to the merits, we need to be sure we have the authority to do so. The Anti-Injunction Act provides that "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." 26 U.S.C. §7421(a). This statute protects the Government's ability to collect a consistent stream of revenue, by barring litigation to enjoin or otherwise obstruct the collection of taxes. Because of the Anti-Injunction Act, taxes can ordinarily be challenged only after they are paid, by suing for a refund. See Enochs v. Williams Packing & Nav. Co., 370 U.S. 1, 7-8, 82 S. Ct. 1125, 8 L. Ed. 2d 292 (1962). 

The penalty for not complying with the Affordable Care Act's individual mandate first becomes enforceable in 2014. The present challenge to the mandate thus seeks to restrain the penalty's future collection. Amicus contends that the Internal Revenue Code treats the penalty as a tax, and that the Anti-Injunction Act therefore bars this suit. 

The text of the pertinent statutes suggests otherwise. The Anti-Injunction Act applies to suits "for the purpose of restraining the assessment or collection of any tax." §7421(a) (emphasis added).  Congress, however, chose to describe the "[s]hared responsibility payment" imposed on those who forgo health insurance not as a "tax," but as a "penalty." §§5000A(b), (g)(2). There is no immediate reason to think that a statute applying to "any tax" would apply to a "penalty." 

Congress's decision to label this exaction a "penalty" rather than a "tax" is significant because the Affordable Care Act describes many other exactions it creates as "taxes." See Thomas More, 651 F. 3d, at 551. Where Congress uses certain language in one part of a statute and different language in another, it is generally presumed that Congress acts intentionally. See Russello v. United States, 464 U.S. 16, 23, 104 S. Ct. 296, 78 L. Ed. 2d 17 (1983). 

Amicus argues that even though Congress did not label the shared responsibility payment a tax, we should treat it as such under the Anti-Injunction Act because it functions like a tax. It is true that Congress cannot change whether an exaction is a tax or a penalty for constitutional purposes simply by describing it as one or the other. Congress may not, for example, expand its power under the Taxing Clause, or escape the Double Jeopardy Clause's constraint on criminal sanctions, by labeling a severe financial punishment a "tax." See Child Labor Tax Case, 259 U.S. 20, 36-37, 42 S. Ct. 449, 66 L. Ed. 817 (1922); Department of Revenue v.Kurth Ranch, 511 U.S. 767, 779, 114 S. Ct. 1937, 128 L. Ed. 2d 767 (1994). 

The Anti-Injunction Act and the Affordable Care Act, however, are creatures of Congress's own creation. How they relate to each other is up to Congress, and the best evidence of Congress's intent is the statutory text. We have thus applied the Anti-Injunction Act to statutorily described "taxes" even where that label was inaccurate. See Bailey v. George, 259 U.S. 16, 42 S. Ct. 419, 66 L. Ed. 816, 1922-2 C.B. 342, T.D. 3347 (1922) (Anti- Injunction Act applies to "Child Labor Tax" struck down as exceeding Congress's taxing power in Drexel Furniture). 

Congress can, of course, describe something as a penalty but direct that it nonetheless be treated as a tax for purposes of the Anti-Injunction Act. For example, 26 U.S.C. §6671(a) provides that "any reference in this title to 'tax' imposed by this title shall be deemed also to refer to the penalties and liabilities provided by" subchapter 68B of the Internal Revenue Code. Penalties in subchapter 68B are thus treated as taxes under Title 26, which includes the Anti-Injunction Act. The individual mandate, however, is not in subchapter 68B of the Code. Nor does any other provision state that references to taxes in Title 26 shall also be "deemed" to apply to the individual mandate. 

Amicus attempts to show that Congress did render the Anti-Injunction Act applicable to the individual mandate, albeit by a more circuitous route. Section 5000A(g)(1) specifies that the penalty for not complying with the mandate "shall be assessed and collected in the same manner as an assessable penalty under subchapter B of chapter 68." Assessable penalties in subchapter 68B, in turn, "shall be assessed and collected in the same manner as taxes." §6671(a). According to amicus, by directing that the penalty be "assessed and collected in the same manner as taxes," §5000A(g)(1) made the Anti-Injunction Act applicable to this penalty.
The Government disagrees. It argues that §5000A(g)(1) does not direct courts to apply the Anti-Injunction Act, because §5000A(g) is a directive only to the Secretary of the Treasury to use the same "'methodology and procedures'" to collect the penalty that he uses to collect taxes. Brief for United States 32-33 (quoting Seven-Sky, 661 F. 3d, at 11). 

We think the Government has the better reading. As it observes, "Assessment" and "Collection" are chapters of the Internal Revenue Code providing the Secretary authority to assess and collect taxes, and generally specifying the means by which he shall do so. See §6201 (assessment authority); §6301 (collection authority). Section 5000A(g)(1)'s command that the penalty be "assessed and collected in the same manner" as taxes is best read as referring to those chapters and giving the Secretary the same authority and guidance with respect to the penalty. That interpretation is consistent with the remainder of §5000A(g), which instructs the Secretary on the tools he may use to collect the penalty. See §5000A(g)(2)(A) (barring criminal prosecutions); §5000A(g)(2)(B) (prohibiting the Secretary from using notices of lien and levies). The Anti-Injunction Act, by contrast, says nothing about the procedures to be used in assessing and collecting taxes. 

Amicus argues in the alternative that a different section of the Internal Revenue Code requires courts to treat the penalty as a tax under the Anti-Injunction Act. Section 6201(a) authorizes the Secretary to make "assessments of all taxes (including interest, additional amounts, additions to the tax, and assessable penalties)." (Emphasis added.) Amicus contends that the penalty must be a tax, because it is an assessable penalty and §6201(a) says that taxes include assessable penalties. 

That argument has force only if §6201(a) is read in isolation. The Code contains many provisions treating taxes and assessable penalties as distinct terms. See, e.g., §§860(h)(1), 6324A(a), 6601(e)(1)-(2), 6602, 7122(b). There would, for example, be no need for §6671(a) to deem "tax" to refer to certain assessable penalties if the Code already included all such penalties in the term "tax." Indeed, amicus's earlier observation that the Code requires assessable penalties to be assessed and collected "in the same manner as taxes" makes little sense if assessable penalties are themselves taxes. In light of the Code's consistent distinction between the terms "tax" and "assessable penalty," we must accept the Government's interpretation: §6201(a) instructs the Secretary that his authority to assess taxes includes the authority to assess penalties, but it does not equate assessable penalties to taxes for other purposes. 

The Affordable Care Act does not require that the penalty for failing to comply with the individual mandate be treated as a tax for purposes of the Anti-Injunction Act. The Anti-Injunction Act therefore does not apply to this suit, and we may proceed to the merits.

There are some fairly technical provisions of the Code cited.  In the Tax Procedure Class, we will return to discuss this opinion when discussing the AIA and can put those Code sections in their proper context.