Federal judge allows lawsuit over Obamacare IRS regulation to proceed

WASHINGTON (Legal Newsline) -- A federal judge ruled Tuesday that a lawsuit challenging a major IRS Obamacare regulation may proceed, denying the federal government's motion to dismiss.

In an oral ruling from the bench, Judge Paul Friedman for the U.S. District Court for the District of Columbia also denied a motion for a preliminary injunction sought by one of the plaintiffs, David Klemensic. Klemensic runs a retail flooring business, Ellenboro Floors, in West Virginia.

Friedman, who heard arguments on the motions Monday, put the case on an expedited schedule and declared he would rule on the merits on or before Feb. 15.

"We have been hoping for a quick ruling since we filed this case, and now it looks like we will get it," said Sam Kazman, general counsel for the Competitive Enterprise Institute, which is coordinating the federal suit.

"We are hopeful the forthcoming ruling will invalidate the attempt by the IRS to eliminate the distinction between states that participate in the insurance exchange program and those that do not."

The federal government argued that the lawsuit, filed in May by a group of small business owners, should be dismissed entirely because the challengers lack standing to sue.

The group of small business owners, along with a group of restaurants in Texas and a bank in Kansas, are suing the government over an IRS regulation imposed under the Patient Protection and Affordable Care Act, arguing it will force them to pay exorbitant fines, cut back employees' hours and otherwise severely burden their businesses.

The federal health care law, which was signed into law in 2010, authorizes health insurance subsidies to qualifying individuals in states that created their own health care exchanges.

The plaintiffs argue that last spring, without the authorization of Congress, the IRS vastly expanded those subsidies to cover states that refused to set up such exchanges.

They contend that under the law, businesses in these nonparticipating states should be free of the employer mandate -- a $2,000/employee penalty -- and the scope of the individual mandate should be reduced as well.

But because of the IRS rule, both mandates will be greatly enlarged in scope, depriving states of the power to protect their residents, the plaintiffs argue.

"The IRS rule we are challenging is at war with the act's plain language and completely rewrites the deal that Congress made with the states on running these insurance exchanges," Michael Carvin, partner at Jones Day and who represents the plaintiffs in the lawsuit, said in a previous statement.

Carvin co-argued National Federation of Independent Business v. Sebelius before the U.S. Supreme Court last year. The nation's high court, in its June decision, upheld the constitutionality of most of the PPACA.

Kazman argues that agencies are bound by the laws enacted by Congress.

"The Obamacare statute is vast enough as it is," he said in a statement Friday. "The IRS has no right to expand that statute even more to encompass states that have chosen to opt out of the insurance exchange program."

From Legal Newsline: Reach Jessica Karmasek by email at jessica@legalnewsline.com.