The Tax Court in Brief – January 2nd – January 6th, 2023
Freeman Law’s “The Tax Court in Brief” covers every substantive Tax Court opinion, providing a weekly brief of its decisions in clear, concise prose.
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Tax Litigation: The Week of January 2nd, 2022, through January 6th, 2023
- Mining v. Comm’r, T.C. Memo. 2023-1| January 4, 2023 | Marshall, J. | Dkt. No. 4989-20
- XC Foundation v. Comm’r, T.C. Memo. 2023-3| January 5, 2023 | Lauber, J. | Dkt. No. 9189-21X
Henry v. Comm’r, T.C. Memo. 2023-2| January 5, 2023| Ashford, J. | Dkt. No. 18832-18
Summary: From early 2015 and through 2016 Marie Henry (“Henry”) was unemployed and in a terrible financial, physical, and mental state. To get by, she made early withdrawals from a retirement plan. She was enrolled in health insurance coverage provided by Blue Cross Blue Shield (Blue) for the first 11 months of 2016 through the Health Insurance Marketplace (Marketplace). The Marketplace determined that Henry was eligible for premium tax credit and the Advanced Premium Tax Credit for her coverage, so she received the benefit of monthly APTC payments, totaling $7,205. The Marketplace sent to the IRS and to petitioner a 2016 Form 1095−A, Health Insurance Marketplace Statement, which reflected Henry’s coverage information under Blue. The letter directed her to file a tax return if the form showed she received the benefit of the APTC and complete and attach to the return Form 8962, Premium Tax Credit (PTC), which is used to figure the amount of PTC and reconcile it with the APTC. Henry filed a 2016 Form 1040, U.S. Individual Income Tax Return, reporting or claiming: head of household, one exemption for herself and one dependency exemption for her son, total income (and adjusted gross income (AGI)) of $91,274 (consisting of taxable pensions and annuities of $68,750 and taxable Social Security benefits of about $26,524), itemized deductions, income tax withholding from the pensions, and claimed refund of $5,846. Henry did not complete Form 8962 or attach it to the 2016 return. The IRS issued to Henry petitioner a notice of deficiency determining that (1) since she received the benefit of APTC payments totaling $7,205, she was required to include Form 8962, Premium Tax Credit with the 2016 return and (2) on the basis of her modified AGI (MAGI), she was no longer eligible for the PTC and must repay the APTC payments in their entireties.
Key Issues: Whether Henry was entitled to a premium tax credit and, if she was not, whether she is required to repay APTC payments of the PTC under section 36B.1?
Primary Holdings: No, she was not entitled to a PTC, and yes, she is required to repay. Henry’s household income of for the applicable period was 598% of the federal poverty level (FPL). Thus, because her household income exceeded 400% of the FPL, she was not entitled to the PTC or any APTC.
Key Points of Law:
Deficiency Determination. In general, the IRS’s determination set forth in a notice of deficiency is presumed correct, and the taxpayer bears the burden of proving otherwise. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).
Affordable Care Act. The ACA statutory scheme, among other things, (1) mandates that individuals maintain health coverage (or incur a penalty for not maintaining qualifying health coverage), (2) creates health insurance exchanges that are administered by either state governments or the federal government, and (3) provides a refundable credit to offset the cost of health coverage for those who qualify. ACA §§ 1311, 1321(c), 1401, 1501, 124 Stat. at 173, 186, 213, 242.
ACA Credit. As to the credit, ACA § 1401 created section 36B, which allows an “applicable taxpayer” a refundable credit equal to the PTC amount of the taxpayer for the taxable year. Id. at § 36B(a), (b), and (c). Under section 36B(c)(1)(A), an “applicable taxpayer” is (and thus the PTC is generally available to) someone whose household income for the taxable year equals or exceeds 100% of the Federal Poverty Line (FPL) but does not exceed 400% of the federal poverty level (FPL). See also Treas. Reg. § 1.36B-2(b)(1). Section 36B defines household income applicable for these purposes. See ACA § 36B(d)(1), (2)(A), (2)(B)(iii); see also Treas. Reg. § 1.36B-1(e), (e)(2). The FPL is defined in ACA § 36B(d)(3), and each year’s FPL is published in the Federal Register. See Knox v. Commissioner, T.C. Memo. 2021-126, at *5–6; Treas. Reg. § 1.36B-1(h).
Remittance of APTC. If a taxpayer is unable to afford the monthly premiums for his or her health coverage, Treasury may reduce the monthly premium amount by remitting APTC payments directly to the taxpayer’s qualified health plan. ACA § 1412(c)(2)(A), 124 Stat. at 232. The qualified health plan must then reduce the monthly premium charged to the taxpayer by the amount of the APTC received. ACA § 1412(c)(2)(B), 124 Stat. at 232–33; see also McGuire, 149 T.C. at 260–61. Because a taxpayer’s income for a calendar year may ultimately differ from the income estimate used to determine the APTC, after the close of that calendar year the taxpayer must reconcile the APTC payments made on his or her behalf with the eligible credit amount. A taxpayer does this by completing the Form 8962 and including this form with his or her filed tax return. See ACA § 36B(f); see Henry McGuire v. Commissioner, 149 T.C. 254, 261 (2017); Treas. Reg. § 1.36B-4. If the total amount of the APTC is more than the amount to which the taxpayer is ultimately entitled, the taxpayer owes the excess credit back to the federal government and it is reflected on the return as an increase in tax. ACA § 36B(f)(2); McGuire, 149 T.C. at 261; Treas. Reg. § 1.36B-4(a)(1).
400% Federal Poverty Level. For a taxpayer with income greater than 400% of the FPL, there is no limit to the amount of the increase in tax; he or she is not eligible for the PTC and must reflect the total amount of APTC payments made on his or her behalf as a tax liability on his or her return. See ACA § 36B(f)(2); McGuire, 149 T.C. at 261; Treas. Reg. § 1.36B-4(a)(4) (example 5).
Insights: This court illustrates that the Tax Court is not a court of equity. The Tax Court, in an objective manner, applied the ACA statutory framework to the facts to sustain the IRS’s determination of deficiency. The outcome—while harsh given Henry’s struggles at the time—was precisely in line with the statutory authority that the Tax Court must enforce. The opinion also illustrates the complexities of applying the income and federal poverty level formulas to the premium tax credit and the Advanced Premium Tax Credit for health insurance coverage under the Affordable Care Act. In 2015 and 2016, Marie Henry was struggling, and when her taxable income was estimated for purposes of the Advance Premium Tax Credit, her income was likely in a zone that may not have had adverse tax consequences later on. But, in 2016 and while receiving the APTCs, she withdrew amounts from retirement accounts that elevated her taxable income to well over the federal poverty level such that, in the look-back required for these purposes, she was not in fact eligible for the APTC or the PTC, which resulted in a deficiency.
