Patient Protection and Affordable Care Act: Protective Refund Claim

On March 2, 2020, the United States Supreme Court accepted an appeal by several state attorneys regarding the Patient Protection and Affordable Care Act (PPACA) in California v Texas (formerly Texas v US). In Texas v US, the U.S. Court of Appeals declared that the requirement for individuals to carry health insurance was unconstitutional. This decision was based largely on the elimination of the individual shared responsibility payment (commonly referred to as the individual mandate penalty) for 2019 and later years under the Tax Cuts and Jobs Act (TCJA). This Appeals Court decision affirmed an earlier ruling by the federal District Court in Texas, which held the entire PPACA was unconstitutional.

Instead of deciding the issue of whether and what portion of the PPACA could withstand constitutional scrutiny, the Appeals Court remanded the case back to the District Court to determine what other parts of the PPACA, beyond the individual mandate, should be considered as invalid.

Why is this being discussed in a Tax Flash?

If the PPACA is found to be unconstitutional in total, this determination could affect taxes applying to many taxpayers – including the 3.8% Net Investment Income Tax, the 0.9% Additional Medicare Tax, and the individual shared responsibility payment. Additionally, businesses that have been assessed and have paid the employer shared responsibility payment for failing to provide essential minimum health coverage to employees may have an opportunity to recover those amounts.

Alternatively, the Court could decide that only certain portions of the PPACA are invalid but that certain tax provisions continue in effect as a proper execution of the authority of Congress to impose taxes.

We do not know what the final result will be. However, the limitation period to make a claim for refund for calendar year 2016 (originally due April 15, 2020, but extended to July 15, 2020, under Notice 2020-23, for a 2016 return not otherwise extended) will pass before this matter is resolved. The Supreme Court has indicated it will issue a decision either at the end of this year or, more likely, in 2021. At that point, it may be too late to make a claim for PPACA taxes and penalties paid for 2016, and possibly for 2017.

Taxpayers have several options. One is to file a protective refund claim with the IRS. General Counsel Memorandum (GCM) 38786 describes circumstances where the filing of a protective claim is proper, when a refund limitations period will expire. These include pending litigation or an expected change in the law or regulations which would impact the Service’s actions on the claim. A protective claim is intended to preserve a taxpayer’s right to claim a refund after the related issue is resolved. In this case, the Supreme Court’s ruling on the constitutionality of the PPACA may impact how the Service processes these refund claims.

Marcum Recommendation

Consult your Marcum tax professional to discuss the advisability of filing a protective refund claim.

For questions concerning how this issue impacts your situation, contact your Marcum tax professional or contact Michael D’Addio at 203.781.9665 or email Michael.