Tax Court in Brief | Manzolillo v. Comm’r | Preclusion for Deficiency Determination, IRS Form 8962 and Premium Tax Credit

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The Tax Court in Brief – October 24th – October 28th, 2022

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 October 24th, 2022, through October 28th, 2022

Manzolillo v. Comm’r, T.C. Memo. 2022-107 | October 24, 2022 | Kerrigan, J. | Dkt. No. 25481-16

Summary: This case regards a deficiency of $4,750 for 2015 based on advance premium tax credit (APTC) benefits that were applied against George Manzolillo and Lucy Manzolillo’s (Petitioners) monthly health insurance premium. Before their marriage on May 16, 2015, Petitioners separately enrolled in health insurance for taxable year 2015 through Aetna Life Insurance Company, which they purchased through the Health Insurance Marketplace. Petitioner husband elected to receive APTC payments of $640 per month for 12 months for a total annual credit of $7,680. Petitioner wife similarly elected to receive APTC payments of $90 for three months—January 1 to March 31, 2015— totaling $270 for the year. Petitioners received a combined APTC benefit of $7,950 in 2015. This amount was paid directly to Petitioners’ insurance company and applied to the cost of their 2015 health insurance premiums. Petitioners timely filed a joint income tax return. They attached to their return Form 8962, Premium Tax Credit, which is used to reconcile the amount of APTC benefit received with the amount the taxpayer was entitled to receive. They reported modified adjusted gross income (MAGI) and claimed a $4,515 PTC for 2015. They claimed erroneously that $3,200 had been paid on their behalf; it was in fact $7,950. Petitioners elected the alternative calculation for year of marriage but failed to complete Part V of Form 8962. After submission of additional information to the IRS, the IRS issued Petitioners a previously frozen refund of $4,187 plus interest. The IRS later audited Petitioners’ 2015 tax return and denied the $7,950 PTC. The IRS issued a notice of deficiency for $7,550. Petitioners informed the IRS that the notice of deficiency did not account for their election regarding the  alternative calculation of the PTC for year of marriage. The IRS then adjusted the deficiency to $4,750. Petitioners claimed that the IRS was precluded from issuing a deficiency notice after previously providing a refund.

Key Issue: Whether Petitioners’ income tax liability must increase by the amount of excess advance premium tax credit benefit that was applied against their monthly health insurance premium.

Primary Holdings:

Yes. The IRS properly adjusted Petitioners’ deficiency, and Petitioners made no effort to show that the IRS’s determinations are incorrect. The Court rejected Petitioners’ contention that the IRS was precluded from issuing them a deficiency notice because they had been issued a refund.

Key Points of Law:

Burdens. Generally, the IRS’s determinations set forth in a notice of deficiency are presumed correct, and taxpayers bear the burden of showing the determinations are erroneous. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). In this case, there was no shifting of the burden under 26 U.S.C. § 7491(a)

Form 8962 and Premium Tax Credit As part of the Patient Protection and Affordable Care Act, section 36B allows a PTC to subsidize the cost of health insurance purchased through a health insurance exchange by taxpayers meeting certain statutory requirements. See Treas. Reg. § 1.36B-2(a). The PTC is generally available to individuals with household incomes between 100% and 400% of the federal poverty line (FPL) amount for the year at issue. Id. at § 36B(c)(1)(A), (d)(3)(B); see McGuire v. Commissioner, 149 T.C. 254, 259 (2017). A taxpayer’s household income is the sum of the MAGI of both spouses. Treas. Reg. § 1.36B-1(e)(1). Recipients can choose to receive the benefits in advance, in which case the payments are made directly to the insurer. See McGuire, 149 T.C. at 260. At year-end a taxpayer who received an APTC must reconcile the amount of the APTC already received with the entitlement amount. See § 36B(f)(2). The taxpayer may do so by completing Form 8962 and filing it with the tax return. If the APTC is greater than the entitlement amount, the taxpayer owes the Government the excess APTC, which will be reflected as an increase in tax. § 36B(f)(2)(A); Keel v. Commissioner, T.C. Memo. 2018-5, at *6.

Alternate Calculation for Taxpayers Who Marry During Tax Year. The regulations provide an alternative calculation to address circumstances where taxpayers such as petitioners are unmarried at the beginning of the taxable year, marry during the year, and file a joint return for the same taxable year. See Treas. Reg. § 1.36B-4(b)(2)(i). Under this method, the taxpayers’ additional tax liability is equal to the excess of the taxpayers’ APTC payments for the taxable year over the amount of the “alternative marriage-year credit.” Id. at subdiv. (ii)(A).

“The alternative marriage-year credit is the sum of both taxpayers’ alternative premium assistance amounts for the pre-marriage months and the premium assistance amounts for the marriage months.” Id. The alternative premium assistance amount for premarriage months is equal to the excess of each taxpayer’s benchmark qualified health plan premium amount over the taxpayer’s required contribution amount. Id. subdiv. (ii)(B). To calculate the premarriage contribution amount, each taxpayer uses “one-half of the actual household income for the taxable year and treats family size as the number of individuals in the taxpayer’s family prior to the marriage.” Id. The marriage months calculation is similar except that the taxpayer’s contribution amount is determined using the taxpayers’ joint household income and family size at the end of the taxable year. Id. subdiv. (ii)(C). Taxpayers calculate the premium assistance amount for the marriage months for each full month they are married. Id.

Preclusion. “A refund is not binding on the Commissioner in the absence of a closing agreement, valid compromise, or final adjudication.” Krantz v. Commissioner, T.C. Memo. 2018-17, at *4. “It is well settled that the granting of a refund does not preclude the Commissioner from issuing a notice of deficiency merely because he accepted a taxpayer’s return and issued a refund.” Id. at *5. “[R]efunds are subject to final audit and adjustment, and thus are not final determinations that would preclude subsequent adjustment” such as a notice of deficiency. Id.

Insight: Just because a taxpayer is issued a refund by the IRS does not preclude the IRS from later auditing the taxpayer and determining additional tax liabilities in relation to the tax matters giving rise to the refund.