Appellate Court Finds ACA Mandate Unconstitutional, Remands as to Severability

• Date: 01 March 2020
• DOI: http://doi.org/10.1002/npc.30695
• Published date: 01 March 2020

Bruce R. Hopkins’ NONPROFIT COUNSEL

March 2020 3

THE LAW OF TAX-EXEMP T ORGANIZATIONS MONTHLY

Bruce R. Hopkins’ Nonpr ofit Counsel DOI:10.10 02/n pc

fourth penalty were not met because the IRS did not show

timely supervisory approval (Belair Woods, LLC v. Commis-

sioner). The opinion turned on the concept that the term

determination of a penalty has an “established meaning

in the tax context and denotes a communication with a

high degree of concreteness and formality.”

A dissent (four judges) rejected this reliance on the

word determination. There it is written that, “[w]hile the

opinion of the Court does yeoman’s work in its attempt

to identify the initial determination that requires written

approval, the text of [the IRC provision] simply cannot

bear the weight.” This dissent is of the view that the

letter and report set forth the necessary determination

and that, because the requisite supervisory approval of

them was not obtained, the IRS failed to meet its burden

of production as to the penalties asserted.

The analysis of another dissent (seven judges) turned

on the word initial. In this view, the letter with the

attachments “embodied an ‘initial determination’ that

required written supervisory approval.” The majority

opinion was said to frustrate the purpose of the statute,

which is to “undo the determinations of individual agents

who make unapproved assertions of penalty liability.”

This dissent wrote that the court majority “effectively

holds that the letter did not require supervisory approval

because the letter lacked supervisory approval.” ◆

APPELLATE COURT

FINDS ACA MANDATE

UNCONSTITUTIONAL,

REMANDS AS TO

SEVERABILITY

The US Court of Appeals for the Fifth Circuit, by

decision dated December 18, held that the individual

mandate of the Patient Protection and Affordable Care

Act, enacted in 2010, is unconstitutional because it can

no longer be justified as a tax and, as to the severability

issue, remanded the case to the district court “to provide

additional analysis of the provisions of the ACA” (State

of Texas et al. v. United States).

Background

The opinion by the district court is summarized

in the February 2019 issue. The Fifth Circuit agreed

with the district court that this remains a “live case or

controversy” and that the plaintiffs have standing to

bring this challenge.

The constitutional law backdrop is also discussed

in the February 2019 issue. Briefly, the ACA’s individual

mandate was found constitutional by the US Supreme

Court in 2012 by reason of Congress’s power of

taxation. As part of the Tax Cuts and Jobs Act enacted

in 2017, Congress reduced the tax penalty associated

with the mandate to zero. The district court held that,

inasmuch as the mandate no longer triggers a tax (as of

2019), the sanction (the shared-responsibility payment)

is zero, and thus the constitutionality of the mandate

cannot be upheld under Congress’s tax power. The

district court also held that, because the mandate is so

“interwoven” with the ACA’s other provisions, the entire

ACA is unconstitutional.

Individual Mandate

The appellate court’s view as to the constitutionality

of the mandate tracked that of the district court.

The Fifth Circuit majority wrote that “[n]ow that the

shared responsibility payment amount is set at zero, the

provision’s saving construction is no longer available.”

The court of appeals quoted the district court as

“properly” observing that the “only reading available is

the most natural one.” Pursuant to that reading, the Fifth

Circuit stated, the “individual mandate is unconstitutional

because, under [the Supreme Court’s decision], it finds no

constitutional footing in either the Interstate Commerce

Clause or the Necessary and Proper Clause.”

Severability

The Fifth Circuit extensively analyzed the severability

doctrine, leading it to two conclusions. One conclusion is

that the “meticulous analysis required by the severability

doctrine defies reliance on presumptions or generalities.”

The other conclusion is that “[s]everability analysis is at

its most demanding in the context of sprawling (and

amended) statutory schemes like the one at issue here,”

concerning over 900 pages of legislative text and 10 titles.

This issue, the appellate court continued, “involves a

challenging legal doctrine applied to an extensive, complex,

and oft-amended statutory scheme,” highlighting the

“need for a careful, granular approach to carrying out

the inherently difficult task of severability analysis in

the specific context of this case.” The court was “not

persuaded that the approach to the severability question

set out in the district court opinion satisfies that need.”

The court of appeals concluded that the severability

analysis in the district court opinion is incomplete in two

ways. First, the opinion “gives relatively little attention

to the intent of the 2017 Congress, which appears in

the analysis only as an afterthought despite the fact that

the 2017 Congress had the benefit of hindsight over the

2010 Congress: it was able to observe the ACA’s actual

implementation.” Second, the lower-court opinion

“does not do the necessary legwork of parsing through

the over 900 pages of the post-2017 ACA, explaining

how particular segments are inextricably linked to the

individual mandate.”

The Fifth Circuit thus directed the district court to

“employ a finer-toothed comb on remand and conduct a

more searching inquiry into which provisions of the ACA