The United States Supreme Court (the “Supreme Court”) will hear oral arguments in Texas v. California during the upcoming fall term with a decision likely to be issued in 2021. At issue in the case is the constitutionality of the individual mandate penalty imposed by Internal Revenue Code Section 5000A(c) which was established by the Patient Protection and Affordable Care Act (the “ACA”). Also at issue is whether the individual mandate is severable from the rest of the ACA if the individual mandate is found to be unconstitutional.
When the Supreme Court upheld the individual mandate as constitutional in 2012 in National Federation of Independent Businesses v. Sebelius, the Supreme Court concluded that the individual mandate penalty was a constitutional exercise of Congress’ power to lay tax. The basis for the plaintiffs‘ suit in Texas v. California stems from the Tax Cuts and Jobs Act of 2017 (the “TCJA“) which included a provision, effective for months beginning after December 31, 2018, that set the penalty under Section 5000A(c) to zero. Therefore, the argument is that the individual mandate is unconstitutional as currently constructed due to the TCJA amendment.
There are three specific issues before the Supreme Court in Texas v. California:
From a tax perspective, it is the third issue that has become a topic of interest. If the Supreme Court was to strike down the ACA, the contention is that such a ruling would invalidate the income taxes established pursuant to the ACA, specifically:
Some contend that a Supreme Court ruling invalidating the ACA based on a finding that the individual mandate, as currently constructed, is unconstitutional would create income tax credit refund claims for taxpayers who paid the Medicare and/or Net Investment Income taxes in prior tax years for which the statute of limitations has not closed. Of immediate interest are those taxpayers who filed their 2016 income tax returns by the original due date, April 15, 2017. Such taxpayers would need to file a protective refund claim by July 15, 2020 (postponed due date for time-sensitive actions occurring between April 1, 2020 and July 14, 2020 pursuant to IRS Notice 2020-23) to preserve a refund claim should the Supreme Court’s ruling retroactively invalidate the concerned taxes.
It should be noted that even if the Supreme Court holds that the individual mandate is unconstitutional and strikes down the ACA upon finding that the individual mandate is not severable, the TCJA amendment of Section 5000A(c) did not become effective until the 2019 tax year. Therefore, many believe that even if the Supreme Court rules in favor of those challenging the ACA, the invalidation would not impact tax years prior to 2019. Nonetheless, many are advancing the thought to file a protective refund claim for tax years prior to the 2019 tax year.
If you are interested in discussing this issue, please contact your FGMK tax advisor.
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