Recommended Podcasts

Podcast: Disputing Tax: 2021 IRS Enforcement Priorities

In this episode of Ropes & Gray’s podcast series Disputing Tax, Isabelle Farrar, an associate in the tax controversy group, is joined by Kat Gregor, a tax partner and tax controversy group co-founder, and Elizabeth Smith, counsel in the tax controversy group, to examine some potential areas of focus for IRS enforcement efforts in 2021.

Read More


Subscribe to our podcast

Disputing Tax: Quarterly Newsletter

We are pleased to announce that our quarterly newsletter “Disputing Tax” is now available online.

Click here to read the full Newsletter.

Podcast: Texas v. United States of America

Time to Listen: 19:27 Practices: Tax, Tax Controversy, Health Care

In this Ropes & Gray podcast, Isabelle Farrar, a senior associate in the tax controversy group is joined by Harvey Cotton, a principal in the tax and benefits group, and Elizabeth Smith, counsel in the tax controversy group, to discuss the December 2018 decision from the Northern District of Texas in Texas v. United States. This case deals with the constitutionality of the Individual Mandate in the Patient Protection and Affordable Care Act.

Listen to Tax Controversy Podcast


Isabelle FarrarIsabelle Farrar: Hello, and thanks for joining us today on this Ropes & Gray podcast. I’m Isabelle Farrar, a senior associate in the tax controversy group. Joining me today are Harvey Cotton, a principal in the tax and benefits group, and Elizabeth Smith, counsel in the tax controversy group.

In today’s podcast, we’re discussing the December 14th decision from the Northern District of Texas in Texas v. United States. This case deals with the constitutionality of the Individual Mandate in the Patient Protection and Affordable Care Act (or ACA). Specifically, the case determined that the Individual Mandate was unconstitutional because the 2017 Tax Cuts and Jobs Act (the TCJA) had lowered to zero dollars the penalty for failure to comply with the Individual Mandate. Because the Supreme Court had earlier upheld the constitutionality of the Mandate as a valid exercise of Congress’ taxing power, the District Court reasoned that a zero dollar tax could not be justified as within that taxing power.

In 2012, in National Federation of Independent Business v. Sebelius (or NFIB), the Supreme Court determined the Individual Mandate was constitutional because the Mandate’s penalty was in fact a tax enacted under Congress’ taxing power. Now, with the TCJA lowering the Mandate’s penalty to zero dollars, the District Court held there was no tax, and as a result, the Individual Mandate was deemed unconstitutional. The District Court went one step further, though, and determined that the ACA as a whole was inseverable from that unconstitutional clause, and struck down the entire ACA.

This Texas case thus touches on both the TCJA’s interaction with the ACA and the operation of the severability doctrine in the context of Congress’ taxing power.

Harvey, what’s been going on since the decision?

Harvey CottonHarvey Cotton: Not a whole lot. On December 30th, the District Court granted a motion to stay its decision voiding the entirety of the ACA, while the decision is being appealed. The District Court felt that voiding the ACA suddenly, without giving lawmakers time to respond, would cause unnecessary chaos for patients, providers, insurance carriers, and federal and state governments. As a result, the equities weighed in favor of a stay. The appellate process began on January 3rd when the defendants filed a notice of appeal with the 5th Circuit Court of Appeals. Citing the federal government shutdown, the Department of Justice filed a motion to delay its response to the House of Representative’s motion to intervene in the case. The 5th Circuit granted the motion on January 11th. The DOJ response is now due on January 27th. Many believe the case will eventually reach the Supreme Court.

Isabelle Farrar: Thanks. Turning back to the December 14th decision: In its decision, the District Court undertook three key analyses: First, standing. Second, the constitutionality of the Individual Mandate. And third, the severability of the Individual Mandate from the remainder of the ACA.

Let’s start with the first, standing. Elizabeth, could you briefly explain Article III standing for those who are wondering what it’s all about?

Elizabeth ScottElizabeth Smith: Sure. As a quick overview, the District Court, as an Article III court, is a court of limited jurisdiction. This means that, as a first step, “standing” has to be established showing that the District Court can hear the case. In order to establish standing, plaintiffs must have: first, suffered an injury-in-fact; second, an injury fairly traceable to the challenged conduct of the defendant; and third, an injury likely to be redressed by a favorable decision.


Isabelle Farrar: So how did the District Court deal with the issue of standing in this case?

Elizabeth Smith: An interesting point to note is that this case was brought initially by 20 states, with two individual plaintiffs later joining the lawsuit. The District Court’s standing analysis focused on these two individuals. The two individual plaintiffs are Texas residents. Both of them challenged the Individual Mandate as being unconstitutional for forcing them to purchase ACA-compliant health insurance against their will. This forced purchase of health insurance was the “injury-in-fact” from which the two plaintiffs wanted the District Court to grant relief.

That injury-in-fact is rather abstract, though, since the TCJA lowered the financial penalty to zero dollars for failing to comply with the ACA’s individual mandate beginning in 2019. As a general matter, under Supreme Court precedent, an injury-in-fact must be particularized and concrete, not conjectural or hypothetical.

Isabelle Farrar: On what basis, then, did the District Court find that the individual plaintiffs had standing?

Elizabeth Smith: The District Court was primarily animated by the idea that, even in the absence of a penalty, an injury-in-fact still existed due to the individual plaintiffs being deterred from exercising their constitutional rights. Although beginning in 2019, the individual plaintiffs would not face a financial penalty if they failed to purchase ACA-compliant health insurance, they alleged that their desire to follow the law nonetheless forced them to purchase health insurance against their wills. From a legal standpoint, this is arguably an over broad approach as to what qualifies as a concrete injury. Practically speaking, and absent proof of lying, this would mean that any individual who feels compelled to obey any law is arguably a party with standing to challenge that law on constitutional grounds.

There is a possible argument that while no actual injury exists now—when the financial penalty is zero dollars—it could exist in the future. The penalty remains in the U.S. Code and thus it could be raised to a value above zero dollars at any time. But the Supreme Court has held previously that “allegations of possible future injury are not sufficient” and “threatened injury must be certainly impending to constitute injury-in-fact.” The former thus cuts against this case’s reasoning and the latter argument doesn’t work right now since there is no legislation currently pending to raise the penalty above zero dollars.

Isabelle Farrar: Getting more into the details of the case, Harvey, could you explain why the District Court held that the Individual Mandate was unconstitutional?

Harvey Cotton: That’s a big question, and I think it’s helpful first to understand this case in the context of NFIB. NFIB was the 2012 Supreme Court decision you mentioned earlier that upheld the Individual Mandate as constitutional. At that time, the Individual Mandate had imposed a financial penalty on all Americans who failed to purchase health insurance. Specifically, the payment was the greater of 695 dollars, or a 2.5 percent share of a family’s household annual income, subject to certain limits.

In NFIB, the Supreme Court split on many issues but the ultimate question was whether the Individual Mandate was constitutional under either or both of the Constitution’s Commerce Clause or Congress’ taxing power. In the majority opinion, written by Chief Justice Roberts, the Supreme Court held that the Individual Mandate, despite being described as a penalty, was in fact a tax. In reaching this holding, the Court looked at various factors including that:

  • It was paid into the Treasury when taxpayers filed their returns;
  • It did not apply to individuals who do not pay federal income taxes because their household income is under the filing threshold in the Internal Revenue Code;
  • Payment was determined by familiar factors, such as taxable income, number of dependents, and joint filing status; and finally
  • The IRS assessed and collected it in the same manner as a tax.

Given Congress’ traditionally broad powers of taxation, the Individual Mandate, with its accompanying financial penalty, was held constitutional as a tax.

Isabelle Farrar: Was there a dissenting opinion in NFIB?

Harvey Cotton: Yes, there was a dissenting opinion, which was accompanied by another opinion from Chief Justice Roberts. In addition to writing the majority opinion, the Chief Justice also wrote an individual opinion. This individual opinion was similar to the four-justice dissent, taking the view that the Individual Mandate could not be justified under the Commerce Clause because the Commerce Clause could not be used to regulate inactivity, namely the decision not to purchase health insurance.

The Texas case thus rests on this dichotomy of Justices: one majority finding that the Individual Mandate was constitutional under Congress’ taxing power, and another majority finding that it was unconstitutional under Congress’ Commerce power. In the Texas case, the District Court reasoned that, with the passing of TCJA and the lowering of the Individual Mandate’s penalty to zero dollars, there no longer existed any constitutional support for that ACA provision.

Isabelle Farrar: Before we discuss how that led to the ACA being invalidated as a whole, is it possible to argue that a zero dollar tax is enough to support Congress’ taxing power since the Individual Mandate’s penalty still exists in the U.S. Code?

Elizabeth Smith: I think that argument probably goes too far. Congress’ taxing power is broad, but not unlimited. It’s true that raising revenue alone does not create a tax. But, as the District Court opinion noted, the NFIB decision considered various factors to assess whether the Individual Mandate was a tax, including whether it raised revenue. The Supreme Court even noted that the “essential feature of any tax” is that it “produces at least some revenue for the government.” Moreover, from a practical standpoint, if all that is necessary for a tax to exist is for it to be in the U.S. Code, then Congress could attach a symbolic zero dollar tax to any legislation to bring that legislation within Congress’ taxing power.

Isabelle Farrar: Assuming the Individual Mandate is unconstitutional, why did the District Court then determine that the entire ACA had to fall as also unconstitutional?

Harvey Cotton: At the heart of this issue is the doctrine of severability. The severability doctrine asserts that a statute’s unconstitutional clause should be severed if this can be done without affecting the intent or execution of the statute as a whole. As a result, the question is one of congressional intent. The reviewing court must analyze Congress’ intent at the time it enacted the relevant statute, and, in an ideal world, the court would be able to find evidence of Congress’ actual intent. In NFIB, the Supreme Court analyzed a different provision of the ACA, the expansion of Medicaid, and noted that the Medicaid Act contained a severability clause. The Supreme Court found that the Medicaid Act’s severability clause’s language explicitly laid out Congress’ intent, and held that striking down the ACA’s Medicaid provision would not threaten the existing Medicaid program. However, in analyzing the rest of the ACA, the Supreme Court applied the traditional “intent” test to find that Congress would have wanted the ACA as a whole to survive, even if one clause were to be found unconstitutional.

In contrast, in this Texas case, the District Court focused on the lack of an applicable severability clause in the individual mandate provisions of the ACA. Although even the District Court admitted that this was not dispositive, it took this as probative of Congress’ intent that the ACA be viewed as an interconnected whole. Through an analysis of the ACA, the District Court highlighted language in which Congress stated that the purpose of the law was to significantly increase health care coverage, to lower health insurance premiums, and to ensure that health insurance policies do not exclude coverage of preexisting conditions. In support of that purpose, Congress described the Individual Mandate as essential to the larger statutory framework. The District Court felt this showed Congress’ belief that the ACA was inextricably tied to the Individual Mandate. Therefore, congressional intent could not be satisfied without the Individual Mandate, and the entire ACA had to be struck down.

Isabelle Farrar: And was the principle of severability correctly applied in this case?

Harvey Cotton: As mentioned earlier, severability is viewed as a matter of congressional intent. There is generally a presumption in favor of severability and the norm is, that whenever possible, courts should not invalidate entire laws. It’s also important to note that the Supreme Court has held that statutes enacted by one Congress cannot bind a later one. In short, Congress is free to accept “the earlier statute but as modified” and show this acceptance either “expressly or by implication.” For example, Congress can show express agreement through official statements. Or, Congress can show implied agreement by not overturning an earlier statute.

This is a salient point because while the District Court seemed to focus primarily and almost exclusively on Congress’ intent when it enacted the ACA in 2010, it ignored Congress’ intent when it amended the ACA with the TCJA in 2017. Yet by amending the ACA, the focus should be on the intent of the later Congress, since its actions superseded the former. During the TCJA’s passage, Congress could have chosen to eliminate the entire ACA if it had wanted to, but instead it chose only to lower the penalty of the Individual Mandate to zero dollars. Moreover, Congress did not eliminate the penalty, which remains in the U.S. Code.

The District Court’s reasoning thus seems logically inconsistent. On the one hand, it stated that Congress felt the Individual Mandate was so crucial to the ACA as a whole that Congress would have preferred the invalidation of the entire ACA over preserving the unoffending portions. Yet on the other hand, the District Court’s reasoning also assumes that Congress, in spite of the Individual Mandate’s importance to the ACA, chose not to eliminate the ACA outright, but instead decided to amend only a single, crucially important provision of the ACA.

Elizabeth Smith: To add to that, Harvey, the ACA is a very broad statute, and there are numerous provisions that have nothing to do with insurance and the Individual Mandate. Even a cursory examination of the ACA sections reveals this. Within the ACA’s 900-plus pages, there are sections that deal with posting calorie counts in restaurants and food establishments, sections that deal with the awarding of grants or contracts to entities that are attempting to create or to improve methods of collecting performance information on drugs, and sections that outline what information pharmaceutical manufacturers that provide drug samples to doctors or hospitals have to provide to the Department of Health and Human Services.

All of this is meant to highlight just how comprehensive the ACA is. It seems like a stretch to say that every single one of these sections was so deeply interconnected with the Individual Mandate that striking down that provision necessitated all of them being struck down as well. Even the District Court seemed to acknowledge this in stating that its conclusion was made “without marching through every nook and cranny of the ACA’s 900-plus pages.”

Isabelle Farrar: Harvey, what are your thoughts on the practical effects of invalidating the ACA as a whole?

Harvey Cotton: Well Isabelle, as you noted in the introduction, aside from uncertainty about the future of the ACA, there are no actual consequences yet since the decision is stayed pending appeal. However, if upheld, changes to the accessibility and affordability of health care in the United States would be sweeping. Millions of people gained access to health insurance under the ACA due to a combination of Medicaid coverage expansion and the creation of healthcare marketplaces that provide health insurance premium subsidies for low-income individuals. In the absence of the ACA, many of these individuals may be unable to afford their current plan. Furthermore, people with preexisting conditions could have their current coverage placed in jeopardy due to coverage exclusions or an increase in premium rates. Young adults who are currently covered until age 26 as dependent children under their parents’ health care plan may be required to find their own health insurance.

Even outside the health insurance market, there would be significant changes, many of which people might be unaware are even part of the ACA. These include the requirement that certain nursing mothers be given privacy breaks to breastfeed or pump while at work. This latter provision was one of the rare pieces of legislation that unanimously passed through committee without controversy. Imagine that! In short, every component of the ACA, both popular and controversial, would need to be re-legislated or abandoned by Congress, hurting current beneficiaries, many, if not all, of whom have come to recognize the role that healthcare coverage plays in their lives and the lives of their families, neighbors, friends and colleagues.

Isabelle Farrar: Thank you, Harvey and Elizabeth, for joining us today in discussing Texas v. United States. We’ll be back soon to discuss the next case of the quarter. Please visit the Tax Controversy Newsletter webpage at disputingtax.com, or of course, ropesgray.com for additional news and commentary about other notable tax developments as they arise. Thank you for listening.

Update: On December 19, 2019, in a split decision in Texas v. United States, the Fifth Circuit held that the Individual Mandate (“Mandate”) of the Patient Protection and Affordable Care Act (“ACA”) became unconstitutional when Congress zeroed out the penalty, but vacated the district court’s decision that the ACA itself was unconstitutional without the Mandate. The Fifth Circuit remanded the case to the lower court for further analysis of the Mandate’s severability from the ACA. Subsequently, the democratic states and the House of Representatives petitioned the Supreme Court to review the decision. Please click here to read an article drafted by the tax controversy group for additional information on this decision.  

Cookie Settings