On March 2, 2020, the United States Supreme Court accepted an appeal by several state attorney generals regarding the Patient Protection and Affordable Care Act (“ACA”) 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 founded largely on the elimination of the individual shared responsibility payment (commonly known as the individual mandate penalty) for 2019 and later years under the 2017 Tax Cuts and Jobs Act.
If the ACA is found to be unconstitutional in its entirety, several taxes established by the ACA could be deemed null and void, which includes: the 3.8% Net Investment Income Tax, the 0.9% Additional Medicare Tax, and the individual shared responsibility payment. Alternatively, the Court could decide that only portions of the ACA are unconstitutional and leave the tax provisions in place since Congress has the authority to impose taxes.
We are unsure what the final result will be. The Supreme Court has announced it will issue a decision either at the end of 2020 or, more likely, in 2021. Depending on when the decision is issued, it will likely be too late to file a refund claim for ACA taxes and penalties paid for 2016, and potentially for 2017. The time period to file a refund claim for tax year 2016 (originally due April 15, 2020, but postponed to July 15, 2020, under Notice 2020-23, for a 2016 return not otherwise extended) will pass before this matter is resolved.
Due to the pending litigation, taxpayers have options to put a hold on the claim while the issue continues to be litigated. One option is to file a protective refund claim with the Internal Revenue Service (“Service”). General Counsel Memorandum (GCM) 38786 describes circumstances where the filing of a protective claim is proper when the statute of limitations period will otherwise expire. These circumstances include pending litigation or an expected change in the law or regulations which would impact the Service’s actions on the claim. A protective refund claim is intended to preserve a taxpayer’s right to claim a refund after the related issue is resolved.
If you would like to learn more about filing a protective refund claim, contact your HCVT tax professional.