INDIANAPOLIS (AP) _ A federal judge has ruled Indiana and nearly 40 state school districts can sue the Internal Revenue Service over rules it imposed to implement the federal health care overhaul.

WRTV-TV reports (http://bit.ly/1uMqovj ) the judge on Tuesday declined an IRS request to dismiss the 2013 lawsuit by 39 districts.

The lawsuit filed in U.S. District Court in Indianapolis contends the federal health care law doesn't allow financial penalties in states that didn't create their own online insurance marketplaces. Such states instead ceded that task to the federal government.

The lawsuit asks the federal court to issue an injunction blocking the IRS and other federal agencies from applying the law and the penalties it calls for.

A hearing on the lawsuit was set for October.