Premium Tax Credit Saga – New Developments And Dilemmas

On Friday (11/7/14), the US Supreme Court granted cert in King v. Burwell, 759 F.3d 358, No. 14-1158 (4th Cir., 7/22/14). This is the case where the court found the IRS regulations allowing individuals to claim a premium tax credit (PTC), even if they obtain coverage on a federal exchange rather than a state exchange. In contrast, in Halbig v. Burwell, 758 F.3d 390, No. 14-5018 (DC Cir., 7/22/14), a divided court found the IRS regulation invalid. The King and Halbig decisions were issued on the same day in July.

In September 2014, the Eastern District Court of Oklahoma issued a decision, State of Oklahoma v. Burwell, No. CIV-11-30-RAW (ED Ok, 9/30/14), finding the regulations invalid.

The DC Court of Appeals vacated its July decision, agreeing to hear the case en banc. Now, with the US Supreme Court agreeing to hear the case, there is no need for the DC appeals court to rehear the case.

So, perhaps we’ll have resolution of the issue by mid-2015, after most 2014 returns claiming the PTC have been filed. Given the millions of individuals involved and significant dollars, even if the Court finds the regulations invalid, it doesn’t seem likely that the government will be able to get money back from those who obtained insurance on the federal exchange (because their state did not have an exchange) and claimed a PTC. In addition to the practicality issues, there would be equity issues: (1) if people had known they were not eligible for a PTC, they may not have purchased the insurance in the first place, and (2) the unfairness of people in a state with an exchange getting subsidized health insurance when people in a state without an exchange may not (meanwhile, employees in all states who have employer-provided coverage get the longstanding subsidy of the income exclusion for employer-provided health insurance). The second equity issue might raise an equal protection challenge* although I think it would be a weak one because perhaps Congress had a plausible reason for only allowing a PTC on a state exchange because it wanted to encourage states to set up exchanges and manage more of the health care system.

There is also an issue here for return preparers. The Halbig case which the government lost was vacated; the King case which the government won still stands, although the Court will hear the case. The Administration says the PTC is available to anyone who purchased insurance on any exchange in 2014 (Dept of Justice release of 7/22/14). Thus, it seems that now, anyone eligible for the PTC can claim it on their 2014 return. What if the government loses the US Supreme Court case? Unless the Administration says otherwise, it would then seem that 2014 returns filed after that date could not claim the PTC and individuals would have to repay what they obtained in advance.  Would there be an obligation to amend 2014 returns? What should practitioners tell those individuals? Practitioners serving individuals who are otherwise PTC-eligible, but in states without an exchange face filing dilemmas. It would be helpful for the IRS to provide specific guidance for 2014 to address this issue.

For more on the litigation, see my 10/18/14 blog post.

What do you think about all of this?

* A recent case included a helpful summary of the equal protection issue at the federal level: “A tax classification is “constitutionally valid if `there is a plausible policy reason for the classification, the legislative facts on which the classification is apparently based rationally may have been considered to be true by the governmental decisionmaker, and the relationship of the classification to its goal is not so attenuated as to render the distinction arbitrary or irrational.” Id. at __, 132 S. Ct. at 2080 (quoting Nordlinger v. Hahn, 505 U.S. 1, 11 (1992)). There is deemed to be a plausible policy reason “if `there is any reasonably conceivable state of facts that could provide a rational basis for the classification.” Id. at __, 132 S. Ct. at 2080 (quoting FCC v. Beach Commc’ns, Inc., 508 U.S. 307, 313 (1993)). Moreover, “because the classification is presumed constitutional, the ‘burden is on the one attacking the legislative arrangement to negative every conceivable basis which might support it.” Id. at __, 132 S. Ct. at 2080-2081 (quoting Doe, 509 U.S. at 320).” Field, TC Memo 2013-111.

Original Post By:  Annette Nellen

Annette Nellen, CPA, Esq., is a professor in and director of San Jose State University’s graduate tax program (MST), teaching courses in tax research, accounting methods, property transactions, state taxation, employment tax, ethics, tax policy, tax reform, and high technology tax issues.

Annette is the immediate past chair of the AICPA Individual Taxation Technical Resource Panel and a current member of the Executive Committee of the Tax Section of the California Bar. Annette is a regular contributor to the AICPA Tax Insider and Corporate Taxation Insider e-newsletters. She is the author of BNA Portfolio #533, Amortization of Intangibles.

Annette has testified before the House Ways & Means Committee, Senate Finance Committee, California Assembly Revenue & Taxation Committee, and tax reform commissions and committees on various aspects of federal and state tax reform.

Prior to joining SJSU, Annette was with Ernst & Young and the IRS.

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