Supreme Court ACA Case
In 2020, the U.S. Supreme Court agreed to hear the case of California et al. v. Texas et al. that addressed the constitutional validity of the Affordable Care Act (ACA). On June 17, 2021, the Court issued its 7-2 decision, which leaves the ACA unchanged for 2021 and prior tax years.
The plaintiffs in the case were Texas and 17 other states, plus two individuals. The case focused on the constitutionality of the ACA tax penalty on individuals for not having health insurance, commonly called the “individual mandate,” pursuant to Section 5000A, and how its constitutional status impacted the rest of the ACA.
The questions posed to the Supreme Court were: (1) whether the plaintiffs had standing to challenge the individual mandate; (2) whether reducing the penalty to zero under the Tax Cuts and Jobs Act of 2017 rendered the individual mandate unconstitutional; and (3) if so, whether the individual mandate was severable from the rest of the ACA. The Supreme Court primarily focused on the first issue and, in a departure from the decisions of two lower courts, ruled that the plaintiffs did not have standing to sue. The Supreme Court directed that the case be remanded and dismissed. Consequently, the case has ended, leaving the ACA intact.
ACA Protective Claims
Because of the possibility that the Court would render a decision that would result in refund opportunities for ACA taxes paid in prior years, some taxpayers chose to file ACA protective claims for 2016 and/or 2017 to hold open the statute of limitations for filing a refund claim for those years. The protective claims gave taxpayers the option to file amended 2016 and/or 2017 income tax returns after the Court issued its decision, in the event the decision found the ACA to be unconstitutional in its entirety for the 2016 and 2017 years.
Given the Court’s ruling and the fact that there is no change to the ACA, the following appears to be the impact on taxpayers who filed ACA protective claims for 2016 and/or 2017:
- There is no change to ACA taxes paid in prior years so there currently does not appear to be a basis to file amended Forms 1040 or 1041 unless there is litigation in the future challenging the ACA. The Supreme Court did not rule on the merits of the claim, thus there is the potential for future litigation.
- There does not appear to be any action to be taken on protective claims filed for 2016 or 2017.
Many practitioners may have prepared protective refund claims for their clients to file and clients may be receiving a notice from the IRS regarding the disposition of these claims. Since it has been many months since these protective refund claims were filed and our clients may not recall exactly why they are getting notices from the IRS regarding their 2016 or 2017 income tax returns, it might be a good idea to affirmatively reach out to clients and remind them why they filed the protective claim, explain the results of the case, and advise them that they may receive a letter from the IRS stating that no further action will be taken on their protective claim or that the IRS is rejecting the claim.
Authors: Carol Warley, J.D., CPA-Houston, RSM US, LLP; Anne Bushman, CPA, RSM US, LLP; Jill Harris, CPA, RSM US, LLP; and Rick Allen, CPA-East Texas, Henry & Peters, PC.