A federal district court judge has ruled in favor of the federal government in a lawsuit claiming the IRS did not have the authority under the Affordable Care Act to write rules providing tax credits to individuals purchasing health insurance on the new health insurance exchanges.

The IRS issued a final rule in May 2012 implementing the premium tax credit provision of the Affordable Care Act, in which it interpreted the ACA as authorizing the agency to grant tax credits to individuals who purchase insurance on either a state-run health insurance exchange or a federal exchange such as the one that has been available on the problem-prone HealthCare.gov site for people in states that have not set up state exchanges.

The plaintiffs in the lawsuit, who include the conservative advocacy organization, the Competitive Enterprise Institute, contended that the IRS’s interpretation was contrary to the statute, which, they asserted, authorizes tax credits only for individuals who purchase insurance on state-run exchanges, but not on federal exchanges. The plaintiffs in the case, known as Jacqueline Halbig, et al v. Kathleen Sebelius, et al, claimed that the rule promulgated by the IRS exceeded the agency’s statutory authority and was arbitrary, capricious and contrary to law, in violation of the Administrative Procedure Act.

The U.S. District Court for the District of Columbia heard oral arguments in the case last month and a judge on the court tossed out the lawsuit Wednesday, agreeing with the federal government that the law made clear that the tax credits should be available on both state-run and federally run health insurance exchanges. 

“In sum, the Court finds that the plain text of the statute, the statutory structure, and the statutory purpose make clear that Congress intended to make premium tax credits available on both state-run and federally-facilitated exchanges,” wrote U.S. District Judge Paul Friedman. “What little relevant legislative history exists further supports this conclusion and certainly—despite plaintiffs’ best efforts to suggest otherwise—it does not undermine it.”

Sam Kazman, general counsel for the Competitive Enterprise Institute, said he planned to appeal the judge’s ruling.

“The court’s ruling today delivers a major blow to the states that chose not to participate in the Obamacare insurance exchange program,” Kazman said in a statement Wednesday. “It is also a blow to the small businesses, employees and individuals who live in those states as well. In upholding this IRS regulation that is contrary to the law enacted by Congress, this decision guts the choice made by a majority of the states to stay out of the exchange program. It imposes Obamacare penalties on employers and on many individuals in those states, penalties that Congress never authorized, putting their livelihoods and the jobs of their employees at risk. Worst of all, it gives a stamp of approval to the Administration’s attempt to substitute its version of Obamacare for the law that Congress enacted.”