oy yes, the healthcare penalty is unconstitutional

8/7/2019 Oy Yes, the Healthcare Penalty is Unconstitutional

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Oy Yes, the Healthcare PenaltyIs Unconstitutional

By Steven J. Willis and Nakku Chung

We appreciate the opportunity to reply to twoworthy defenders of the Patient Protection andAffordable Care Act (P.L. 111-148) (the act). Prof.Calvin H. Johnson kindly provided a copy of hisletter1 many weeks ago, but anticipating a longerresponse from Prof. Edward D. Kleinbard, we de-layed responding. While others have promised amore detailed analysis, we feel the need to answerthe pointed Kleinbard comments.2 Our disagree-ment with Kleinbard is mostly philosophical, so westart there and later deal with specifics.

Congress has limited enumerated powers. We

view the limitations seriously. We understand thatmuch academic literature disagrees. Kleinbard rec-ognizes few, if any, important limitations on con-gressional power — either to tax or to regulatecommerce. He joins the academic majority in sup-porting Congress’s role in solving problems, includ-ing those it created. While he would limitcongressional power to choose our televisionshows, he provides no reasoning for his limitationsother than that they are his. Fundamentally, that isthe issue. Do we follow the limitations on congres-sional power found in the Constitution or do welargely ignore them, opting for a living-documentapproach that bends (some might say breaks) over

time? Neither viewpoint is provable. Both are hon-est approaches to American law; yet they differfundamentally, which colors this debate.

We proceed from the general to the specific.

Defenders Have the Real Burden

According to Kleinbard, opponents of the actmust prove three things.3 What they are is lessimportant than his approach. Putting aside theniceties of federal procedural rules, act opponents

must prove nothing. Act defenders have the real burden. They must justify the penalty under anenumerated power. Further, they must show it isnot contrary to limitations of either the justifying orany overlapping powers.

‘The Constitution Is First a Tax Document’

We agree with Johnson on this point. Our nation began with a revolution focused on taxes and theirrelationship to representation. As we explainedearlier, the Articles of Confederation collapsed fromthe lack of money and taxes. Congress had thepower to request taxes from the early states; how-ever, it had no way to enforce them. Some statespaid. Most did not. Congress had limited power toissue money. It did so, but it had no way of backingthe money with anything of value or even withenforceable taxing powers. Ever heard the expres-sion, ‘‘It’s not worth a Continental’’? It refers tocurrency issued by the United States of NorthAmerica in 1779.4 By the end of the war, it wasworth approximately 2.5 percent of its face amount.Why? It was largely worthless because Congresshad no real power to tax, and without the realpower to tax, it could not pay its debts. The 1787Constitutional Convention organized for many rea-sons, but among the greatest were money and

taxation.5 Rights, armies, commerce — none of thatmatters if the government has no money to operate.

Kleinbard elevates the commerce power over thetaxing power, which is a conventional modernviewpoint. We disagree. As explained in our earlierarticle, we believe that the taxing power limitations— because they apply specifically to raising money— limit the commerce power to the extent of anyoverlap. Also, Kleinbard treats uniformity as a‘‘flyspeck’’ and apportionment as a nonexistentlimitation. Again, we disagree. Both limitationswere critical to the Constitutional Convention and

both remain important. Dismissing them as anti-

quated or rooted in racism is a clever way of defending the healthcare act; however, we find thearguments unconvincing. The limitations remain in

1Calvin H. Johnson, ‘‘Healthcare Penalty Need Not Be Ap-portioned Among the States,’’ Tax Notes, July 19, 2010, p. 335,Doc 2010-15557, 2010 TNT 137-7.

2Edward D. Kleinbard, ‘‘Constitutional Kreplach,’’ Tax Notes,Aug. 16, 2010, p. 755, Doc 2010-15640, 2010 TNT 159-3.

3Id. at 762.4References to a ‘‘Continental’’ apply to currency issued by

the Continental Congress during the Revolutionary War.5As we quoted before, Washington, Madison, Jefferson, and

many others agree.

Steven J. Willis is a professor of law at the Univer-

sity of Florida Levin College of Law. Nakku Chung isa member of the Florida Bar. They thank Nathan C.Perry, Eric D. Penkert, M. Todd Lewis, and Jose Aliciafor helpful advice and assistance.

Willis and Chung wrote a report (‘‘ConstitutionalDecapitation and Healthcare,’’ Tax Notes, July 12, 2010,p. 169, Doc 2010-11669, or 2010 TNT 133-6) concludingthat the penalty imposed under new section 5000A forfailure to maintain minimum essential healthcare cov-erage is an unconstitutional direct or capitation tax.They respond to a letter from Prof. Calvin H. Johnsonand to more pointed and critical commentary fromProf. Edward D. Kleinbard.

COMMENTARY / VIEWPOINTS

TAX NOTES, November 8, 2010 725


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the Constitution. To us, dealing with them is impor-tant, which goes back to the fundamental philo-sophical debate swirling around the more specificissues regarding the act.

Both Form and Substance Are Relevant

Kleinbard harps on form and substance, alternat-

ing between which one he supports, while accusingus of doing the same.6 We admit we alternate;however, we are entitled to do so. He is not.

In traditional legal thought, he who chooses theform must live with it; yet, he must also defend thesubstance. In contrast, opponents may argue bothways. A statutory drafter (or taxpayer in tax litiga-tion) chooses the form: He makes his bed, so hemust lie in it. However, the drafter cannot violatethe substance or spirit of the law (if such a thing isapparent) by clever formalities. That is the messageof Eisner v. Macomber7 and Pollock v. Farmers’ Loan &Trust Co.,8 to say nothing of Gregory v. Helvering.9

Thus, because Congress labeled the penalty anexcise and put it in subtitle D, we properly construethat against any government claim the penalty is anincome tax. However, Congress cannot defeat theunapportioned direct tax argument (or commerceclause and 10th Amendment arguments) simply

because it placed the penalty in the code. This mayput Kleinbard and other act defenders in an awk-ward place, but that is the way the form andsubstance arguments operate.

Taxing Power Narrower Than Spending Power

Congress’s spending power is largely unlimited.

Its taxing power is subject to what we view as sharplimits: uniformity and apportionment. Just becauseCongress can spend without restriction does notmean it can tax without restriction. Just becauseCongress can create moral hazard through spend-ing does not mean it can resolve the problem bytaxing. Much of Kleinbard’s argument rests on thealleged need for the mandate rather than on itsconstitutionality. He emphasizes the massivegovernment-created safety net for healthcare,10

which appears constitutional under the spendingpower. From that spending power exercise, Klein-

bard suggests the rationality of an insurance man-

date and tax to counter the inevitable moral hazard

created by the government’s safety net, in particularthe new preexisting condition insurance require-ment.

We have no quarrel with whether the solution isrational; instead, we doubt it is constitutional. Ra-tionality is not the test. The government mightrationally limit the number of children a person canhave, as some governments indeed do. That wouldalso limit safety net costs. Or the government mightrationally mandate daily multivitamins and floss-ing, with a tax on the failure to comply. No onewould suggest that those rational solutions wouldsatisfy the U.S. Constitution, which brings us to thespecific issues rather than the philosophical.

Tax Apportionment LivesWe dealt with this, but Kleinbard repeats the

argument.11 Within academia his analysis has sup-port, but we doubt that many people outside agree.Apportionment was part of the three-fifths compro-mise; however, it had many other antecedents.

Nothing in the 13th or 14th amendments erases itfrom the Constitution, which twice provides fordirect tax apportionment. Oddly, Kleinbard sug-gests the 14th Amendment does not ‘‘directly re-state’’ the Article I, section 2 language. But it does.Clause 2 provides: ‘‘Representatives shall be appor-tioned among the several States according to theirrespective numbers, counting the whole number of persons in each State, excluding Indians not taxed.’’It lacks the word ‘‘repeal,’’ but it unquestionablychanges the way persons are counted. It restates theprior language — with some significant rewording— stopping at ‘‘Indians not taxed.’’ It eliminates‘‘three fifths of all other Persons.’’ That appears to

be a direct restatement to us.Significantly, the 14th Amendment repeated the

word ‘‘apportioned,’’ although only for purposes of representation. Former slaves now count 100 per-cent, rather than 75 percent, for purposes of repre-sentation. Article I, section 2 previously provided:

Representatives and direct Taxes shall be ap-portioned among the several States which may

be included within this Union, according totheir respective Numbers, which shall be de-termined by adding to the whole Number of free Persons, including those bound to Service

for a Term of Years, and excluding Indians nottaxed, three fifths of all other Persons.

We have studied the article Kleinbard cites,12 aswell as others on the subject. Indeed, we recom-mended that all readers study the article. But we

6Kleinbard, supra note 2, at 760.7252 U.S. 189 (1920).8158 U.S. 601 (1895).9293 U.S. 465 (1935). Probably the most cited of all tax cases,

Gregory stands for the proposition that form controls oversubstance except when substance controls over form. Or viceversa.

10Kleinbard, supra note 2, at 756.

11Id. at 761.12Bruce Ackerman, ‘‘Taxation and the Constitution,’’ 99

Colum. L. Rev. 1 (1999).


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remain unconvinced. First, the amendment repeatsthe need for apportionment in representation. Sec-ond, it clearly changes the older language of ArticleI, section 2 in relation to representation. Third, theamendment does not mention taxes. Fourth, theamendment does nothing to affect the Article I,section 9 direct tax apportionment limitation. Es-

sentially, Kleinbard and others assert that theamendment increased the weight given to formerslaves in terms of representation apportionment,

but — without a single relevant word — reducedthe weight given to all persons to zero for purposesof direct tax apportionment. While the absence of any amendment reference to direct taxes is interest-ing, we do not view it as a hidden repeal, especiallyconsidering the Article I, section 9 apportionmentlimitation. If one were to be absolutely literal, onewould argue the old method continued for taxapportionment but not for representation. We doubtanyone is that literal. Neither Kleinbard nor we

support that reading. A better analysis concludesthat the Article I, section 2 ‘‘actual enumeration’’counts persons as provided in the 14th Amend-ment. The amendment indirectly affects the ArticleI, section 9 requirement that direct taxes be appor-tioned according to the ‘‘census or enumeration,’’

because the enumeration weight changed, but itincreased to 100 percent for all. It did not drop tozero.

Nothing Is Not Activity

Under Kleinbard’s view, anything — or nothing— is activity. Not taking care of ourselves is activity.

Not having flood insurance is activity. We lackdental insurance, as well as mold, funeral, and warinsurance, liability insurance beyond $1 million,insurance in case we die while playing professional

baseball (unlikely to be a problem, but who knows),and a host of other things. If we suffer losses fromnot having these, society and the government willultimately pick up the tab. We probably do not flosssufficiently, so others may have to provide us withfalse teeth if our flossing self-insurance provesinsufficient. Under the Kleinbard view, the govern-ment can mandate we take care of all these things,and it can tax us (at a higher rate on our otherincome) if we fail to comply. His logic rests on thenotion that government creates the moral hazard of always picking up the pieces and thus can mandatethrough the commerce or taxing power that we

behave appropriately. The argument is convenient,although it eviscerates all limitations on congres-sional power.

To be fair, Kleinbard describes self-insurance asactivity. But self-insurance13 is fundamentally ac-cepting personal responsibility — what we view asthe natural state of being alive. Buying insurance,entering contracts, and other forms of commerceinvolve activity — the absence of those actions isinactivity, or nothing. Hence, according to Klein-

bard’s reasoning, Congress may impose excises onnothing . . . or on everything, depending on one’sperspective. We disagree.

Hylton Is Easy to MisconstrueThe Supreme Court did not issue a majority

opinion in Hylton v. United States; instead, each of the five justices wrote separately. One declined tocomment because he was not present for argument.Another commented only briefly because he hadparticipated in the lower proceeding. Two justicespostulated that a tax that could not be fairly appor-tioned would not be a direct tax. According to

Justice Chase, the only direct taxes are on land or

capitation; hence, he did not reach the point hedescribed in dicta: whether an impossible-to-fairly-apportion tax could be direct. Justice Iredell aloneheld the carriage tax to be indirect because it couldnot fairly be apportioned. The fifth, Justice Patter-son, said, ‘‘If it be a direct tax, it is unconstitutional,

because it has been laid pursuant to the rule of uniformity, and not to the rule of apportionment.’’14

While none of the opinions was as clear asmodern opinions, that statement contemplates thepossibility of a direct tax being unconstitutional

because it was not apportioned. Even if we were tostipulate what a single justice held and anotherspeculated, we reach our same conclusion. Clearly acapitation can be fairly apportioned — just applythe same dollar amount to every relevant person.But it can also be unapportioned and thus uncon-stitutional.

Johnson and other act defenders focus on JusticeIredell’s unfortunate language. What the justicemeant to say is not fully clear. If he meant what hesaid, we believe he was mistaken. Apportionmentwas hotly debated in the Constitutional Conven-tion. Like it or hate it, no one doubts apportionmentwas meant to have teeth. Delegates wanted it to

13The choice of a word can mean so much. Kleinbard’s term‘‘self-insurance’’ connotes commerce. It is sufficiently neutralsuch that it suggests an appropriate ‘‘activity’’ for Congress totax, regulate, and discourage. Our term, ‘‘self-reliance,’’ sug-gests something altogether different: not just inactivity and thelack of commerce, but also the type of responsibility to whichmany strive. It suggests a state no one would rationally want todiscourage. Indeed, some great American literature has focusedon the theme of self-reliance.

14 Hylton v. United States, 3 U.S. 1 (3 Dall.) 171, 176 (1796)(Patterson, J.).





prevent populous but land-poor states from impos-ing too much tax on unpopulated but land-richstates. But a flat land tax (per value or per acre)cannot be fairly apportioned by population. Just asthe number of carriages in 1796 varied from state tostate, each of which varied in population, theamount of land varies in each of the 50 states, asdoes the population.

Ignoring the possibility of exempt lands andexempt persons, a $1-per-acre tax would amount to$524.02 per person in Alaska but merely 63 centsper person in Rhode Island. That would not beproperly apportioned and would be unconstitu-tional. It also does not appear any more ‘‘fair’’ thana $1-per-carriage direct tax would have been in1796. The carriage tax was an excise, yet everyoneagrees the land tax would be direct. It cannot befairly apportioned under the Justice Iredell conceptof fair, but it remains a direct tax. No one suggeststhat the unfairness of the level acreage tax wouldconvert the tax into an excise. While that argumentmay flow from Justice Iredell’s broad language,nothing he or any of the other justices wrote sug-gested they would go that far. Act defenders rou-tinely rely on Justice Iredell’s opinion; however,they do so out of context.

An acreage tax could be proportional to thepopulation, but the rate would be far from uniform(which is not a requirement of direct taxes). If Congress imposed a $366,013,154 tax on Alaska, itwould be $1 per acre and $524.02 per person. Aproportionate tax for Rhode Island would also be$524.02 per person; hence, the state’s total would be$551,902,580.18 or $834.16 per acre. Essentially, this

would be a proportional capitation. Yet, viewed as adirect tax on land, it would appear unfair: $1 forsome and $834 for others. Fairness, however, is notlogically the test. On that point, Justice Iredell wasmistaken. Taken at face value, the justice’s wordswould cause the direct tax apportionment require-ment to apply mostly when it does not matter.Essentially, it would be illusory. That cannot becorrect, despite how many times academics want torepeat it. Even Justice Iredell acknowledged a tax onland is direct. If one substitutes land for carriages inhis example — and that of Justice Chase — the taxis just as unfair; yet they both considered a tax on

land as direct. Hence, one cannot fairly take thewords out of the context of a tax on carriages.

In the text accompanying note 9, Kleinbardquoted Justice Chase’s Hylton opinion regarding thereach of a capitation: To wit, a capitation is imposed‘‘without regard to property, profession, or anyother circumstance.’’ Puzzlingly, he left out twoparts of the quotation. The justice prefaced hisremarks with ‘‘I am inclined to think, but of this I donot give a judicial opinion,’’ and he ended with his

belief that a direct tax includes a tax on ‘‘LAND,’’which he put in all capital letters.

Realization Is a Red Herring for This MatterKleinbard harshly criticizes our discussion of the

16th Amendment realization requirement. He cor-rectly points out — as we acknowledged — thewidespread academic criticism of the requirement.

He comes close to mocking our reliance on thewords ‘‘derived from’’ as the constitutional basis forrealization. Indeed, he claims to be unfamiliar withliterature discussing it. But the Supreme Court in

Macomber specifically highlighted ‘‘derived from’’as critical words. Whether academics traditionallyfocus on the source of the realization requirementstrikes us an unimportant: The Supreme Court sawit. Two passages from Macomber prove the point:

The government . . . placed chief emphasisupon the word ‘‘gain,’’ which was extended toinclude a variety of meanings; while the sig-nificance of the next three words was either

overlooked or misconceived. ‘‘Derived fromcapital’’ ; ‘‘the gain derived from capital,’’ etc.Here we have the essential matter: not a gainaccruing to capital; not a growth or increment of value in the investment; but a gain, a profit,something of exchangeable value, proceeding

from the property, severed from the capital,however invested or employed, and coming in,

being ‘‘derived’’ — that is, received or drawn bythe recipient (the taxpayer) for his separate use,

benefit and disposal — that is income derivedfrom property. Nothing else answers the de-scription.15 [Emphasis in the original.]

The dividend normally is payable in money. . . and when so paid, then only . . . does thestockholder realize a profit or gain which be-comes his separate property, and thus deriveincome from the capital that he or his pre-decessor has invested.16 [Emphasis added.]

Many academics question the wisdom of requir-ing realization, but no one properly denies thesource of the realization requirement being thewords ‘‘derived from.’’

Kleinbard rejects Macomber, and favorably citesothers who call it ‘‘archaic.’’ We agree, although weuse a less harsh adjective. The early decision spoke

of ‘‘labor and capital’’ as the source of income. Thatwas consistent with the facts; however, many sub-sequent decisions have properly broadened thatlanguage, rendering it archaic (to use the MichaelGraetz phraseology). Similarly, Macomber describedrealization by discussing severability, which was

15Eisner v. Macomber, 252 U.S. 189, 207 (1920).16Id. at 209.





legitimate considering the facts. Again, later deci-sions properly broadened the realization trigger,also rendering the Macomber language archaic. Butnone of that has anything to do with our use of thedecision. We primarily use Macomber for its pro-phetic warning about a future Congress’s attempt todisguise a direct tax as another type of tax to pass

constitutional muster. This was the same warningfor which we cited Pollock : Courts should examinethe substance of a tax, not simply its form. Klein-

bard fails to heed this warning, as we illustrate below. Calling Macomber — or Pollock — archaicsays nothing about their prophetic wisdom, whichproved to be correct.

Further, realization is not the most important testfor an income tax. As we discussed at length, whatmatters instead is the existence of income — anaccession to wealth. Other than mocking the lengthof our discussion on income and calling it ‘‘convo-luted,’’ Kleinbard mentions it not at all.

Courts Have Struck Down Other Taxes

We frequently hear the argument that the courtshave not struck down a tax case in 50 years.Sometimes the time period is longer. Kleinbard sayshe’s unfamiliar with any such cases. We gave oneillustration: Commissioner v. Indianapolis Power &Light Co.,17 which he ignored. Although the case didnot directly involve a statute (other than section 61),it involved the government’s interpretation of thetaxing power.18 The government claimed mere de-posits were income because of the great likelihood

(almost certainty) they would someday result inincome. The Supreme Court disagreed. Deposits arenot income until they produce an accession towealth. This is exactly what is involved with thehealthcare penalty. Congress wants to tax people

because they have the ability to pass on costs toothers. As we have explained, however, such a tax ispremature. The possibility or even probability thatsomeone might benefit by passing on his medicalcosts does not mean he is wealthier — at least notyet. Indianapolis Power was not wealthier until itsold some electricity. People without health insur-ance are not wealthier until they pass on their costs

to others. The healthcare ‘‘tax’’ is thus premature.

Similarly, we now cite United States v. Bliss Dairy,Inc.19 In a lengthy dissent, Justice Stevens com-plained that the majority and the government ‘‘fab-ricated’’ income. Essentially, the justice madeaccession to wealth and realization arguments. Hewas almost convincing and was technically correct.However, Justice O’Connor, writing for the major-ity, essentially explained the case as an error-correction decision. Prior actions benefited thetaxpayer in ways unintended by law but allowed bythe courts; thus, it was incumbent on the courts tofix the problem they created. They did so with anaccounting device. Because the taxpayer and thegovernment effectively pretended the taxpayer pre-viously had a deduction when it actually incurredno expense, the taxpayer must later pretend it hadincome. Critically, the pretend deduction came first.The logic supporting the error-correction tax benefitrule would not work in reverse — if the pretendincome came first. In that scenario, we would faceIndianapolis Power, Glenshaw Glass,20 and Macomber.

We would then conclude that the imposition of a taxon an unrealized accession to wealth is unconstitu-tional. Without the pretend income, we wouldnever face the need for a pretend deduction.

If Kleinbard wants more examples, we can prob-ably find them. However, since he and others claimto know of none, we think two should suffice todisprove his point.

Penalty Does Not ‘Operate’ as an Income Tax

Kleinbard suggests the mandate is an income tax because, among other reasons, it appears in thecode. But a large majority of the code deals with

excises and other nonincome taxes. Indeed, even asubstantial portion of subtitle A, labeled ‘‘IncomeTax,’’ deals with excises. Hence, his assertion thatthe healthcare penalty must be an income tax be-cause it is in the code is befuddling. Being in thecode may plausibly support an argument that it is atax; however, it is contrary to an argument that it isan income tax. Statistically, it is a much strongerpredictor that the thing is other than an income tax.

More significantly, Kleinbard argues the mandate‘‘operates’’ as an income tax. With mild sarcasm, heexplains how the penalty is a percentage of incomeand that that ‘‘is exactly how an income tax oper-ates.’’21 Once again, he is incorrect. That is how anincome tax rate operates. Income taxes operate onincome — undeniable accessions to wealth, clearly

17493 U.S. 203 (1990).18Technically, the case dealt with the reach of section 61

rather than the reach of the 16th Amendment; however, thewords are identical and courts routinely find the section taxesall the Constitution permits. Hence, a decision interpretingsection 61 is essentially a decision interpreting the 16th Amend-ment.

19460 U.S. 370 (1983). For a fuller explanation of Bliss Dairyand ‘‘fabricated income,’’ see Steven J. Willis, ‘‘The Tax BenefitRule: A Different View and a Unified Theory of Error Correc-tion,’’ 42 Fla. L. Rev. 575 (1990).

20Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 431 (1955).21Kleinbard, supra note 2, at 760.





They saw it as legal but wrong. They were just asimperfect as the next guy, but this time they did nottake advantage of the system merely because theycould. They resisted the temptation — what econo-mists call moral hazard.

Far too many people abuse the tax system and itsloopholes. As tax professors, we might be accusedof teaching people how to abuse it.22 But not every-one does so just because everyone can. Whether anyparticular individuals will abuse the healthcaresystem by paying the penalty rather than by buyinginsurance, or by not paying the penalty and takingadvantage of the act’s lax enforcement rules, is

beside the point. One cannot assume all people willabuse the system. We suggest many will not. Thosewho disagree rely on a cynical view of humanity.We prefer to believe in mankind’s inherent potentialfor good. Fundamentally, the act rests on the cynicalapproach. As Kleinbard explains, it creates moralhazard — temptation — and then it attempts to taxthat temptation and thus reduce it. Arguing the

penalty is a tax on income rests on the belief that allpeople will succumb to temptation. We find thethought depressing and not quite correct. At thevery least, it is premature.

Does the ability to abuse the system exist? Noquestion, it does. Will many people take advantageof that ability? Unfortunately, yes, many will. Willeveryone who can abuse the system do so? Cer-tainly not. Some people will lack insurance forreasons that are not particularly important to thisdiscussion. Some will do so because they willself-insure and can afford to do so. Others will beoffended by the requirement that they purchase

insurance. Others will be negligent and still otherswill have personal reasons. Some of those peopleare good, honorable people who do and will takecare of their own responsibilities — people whowould never deliberately abuse the system. Yes,people exist who view the requirement of insuranceas offensive and who view a system that so easilyfacilitates abuse as a net loss of wealth to society asa whole and to them personally.

Thus, the ability to abuse the system inherent inthe act does not itself create wealth to individualtaxpayers. Indeed, we submit it creates negativevalue. Regardless, surely it is not something Con-

gress can constitutionally tax under the 16thAmendment, because no income exists until it ex-ists. As the Indianapolis Power Court explained, evennear certainty of the income is insufficient to sup-port taxation: The accession to wealth requirementinsists on certainty.

The ‘Tax’ Is Not ‘Unquestionably’ Uniform

We did not discuss in depth the penalty’s uni-formity or lack thereof. Kleinbard asserts that thetax is ‘‘unquestionably’’ uniform. We remain uncon-vinced. The penalty is partially a function of insur-ance costs in various markets, which vary.23 It doesnot appear to be uniform.

Some Lesser DetailsAt footnote 37, Kleinbard accuses us of not

dealing with some code sections. He is wrong oneach. We dealt with section 305 in footnote 69.Kleinbard correctly notes ‘‘stock dividends are infact includable in many cases (section 305(b) and(c)).’’ We noted those exceptions; however, becausethey deal with constructive receipt and dispropor-tionate distributions — both traditional realizationevents — they are irrelevant to his point (realizationand Macomber being archaic) and support ours:Congress enacted the general Macomber holdingand provided exceptions consistent with it.

Kleinbard asserts that we ‘‘overlooked’’ section1256, which is part of the mark-to-market rules; yet,we discussed the rules at page 192. Granted, weonly cited section 475, which imposes the mark-to-market accounting method, but which also refer-ences to section 1256 exceptions. We did notoverlook the section 1256 special rules, despite theprofessor’s concerns. We described them as ‘‘unim-portant.’’ While mark-to-market tax accounting is of questionable constitutionality, we left that argu-ment to others. The rules of section 475 as well asthose of section 1256 deal with accrual taxpayerswho voluntarily enter specific regulated markets.

These are best described as excises, although theyare nominally labeled income taxes. As such, theyare irrelevant to a discussion of Macomber or consti-tutionally required realization. To the extent theyinvolve income, the issue of mark-to-market ac-counting is robust in accounting circles. Many ac-countants believe the factors of ready markets, easyvaluation, typical short-term ownership, and rela-tively small transfer costs combine to justify markto market as part of the accrual method of account-ing. Under that view (with which we have somesympathy), the rules would be consistent with

Macomber’s realization requirement if it were rel-

evant (which it is not, because the rules involveexcises).

Kleinbard then asserts that we ‘‘fail to appreci-ate’’24 the ‘‘reach’’ of section 475(f). We are unsurewhat that means. The provision is elective, which

22Steven J. Willis, ‘‘Masks, Magic and Games: The Use of TaxLaw as a Policy Tool,’’ 4 Am. J. Tax Pol. 41 (1985).

23See Joel Alicea, ‘‘Obamacare and the Excise Tax,’’ NationalReview Online, Sept. 1, 2010.

24Kleinbard, supra note 2, at note 37.





eliminates any constitutional issue. We read hisarticle on the subject, so we acknowledge that heappreciates the area more than we do. It remainsirrelevant, however.

Kleinbard also discusses section 4942 (which wecovered) as if it supports his argument. The sectionimposes an excise on a private foundation’s incomeaccumulation. Because it applies to entities, weeasily distinguish it from the healthcare penalty,which applies to individuals, who may be thesubject of a capitation. Kleinbard gratuitously ridi-cules our argument with his footnote 36 ‘‘add insultto realization injury’’ comment discussing the use of mark-to-market rules in measuring foundation in-come. But he is wrong. As he states in footnote 39,section 4942 applies to entities and is an excise, notan income tax. Hence the argument is irrelevant towhether realization is an income tax requirement.We agree that mark-to-market rules may apply aspart of an excise on entities.

Oy KreplachKleinbard tells an interesting story about an eth-nic meat pie. Apparently, he argues that if the partsof a thing are acceptable, then so, too, must be thewhole. Or perhaps his point is the opposite . . . or

both. Whichever, the whole is not always the sum of the parts. Sometimes it is more, and sometimes it isless. Kleinbard’s metaphor demonstrates an unusualunderstanding of economics, accounting, and sci-ence. His 1997 mark-to-market article25 was aboutthe whole mattering more than the parts, so at onepoint he viewed the point more traditionally: Es-sentially, what is true of meat pies may not be trueof an entire economy. Any accountant understandsthe matching principle and how the whole picturecan be very different from the sum of the parts.Economists routinely deal with macro rather thanmicro issues, which are not at all the same. Physicistscannot reconcile quantum mechanics with relativity,

because one cannot view the parts separately fromthe whole, at least not without altering them. Tax lawand economic substance are no different.

We agree that mandatory health insurance for all,sold by the government, may be constitutional26;however, that does not mean part of that wholewould necessarily be constitutional. Enacting partof such a whole, as Congress did, converts the

analysis into a much more complicated matter,raising taxing power limitations, as well as issuesinvolving the commerce clause and the 10th

Amendment. Sometimes form matters, but sub-stance matters, too. Inconveniently for Kleinbardand defenders of the act, the healthcare acts alsoincluded enactment of the economic substance doc-trine.27 As the Supreme Court taught us in bothPollock and Macomber, we must look to the truth andsubstance of what is being ‘‘taxed’’ when analyzinga ‘‘tax.’’ Oy, indeed.

25Edward D. Kleinbard and Thomas L. Evans, ‘‘The Role of Mark-to-Market Accounting in a Realization-Based Tax Sys-tem,’’ 75 Taxes 788 (1997).

26We did not stipulate its constitutionality; instead, we listedit as a plausible alternative to the method chosen.

27The economic substance codification was part of the HealthCare and Education Reconciliation Act of 2010 (P.L. 111-152), notthe Patient Protection and Affordable Care Act (PPACA, P.L.111-148), which enacted the penalty provision at issue.



oy yes, the healthcare penalty is unconstitutional

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