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ACA Challenges Continue with Oklahoma Court Invalidating Section 36B Regs.
(Parker Tax Publishing October 18, 2014)

Adding to the tumult surrounding the survival of "Obamacare," a federal court in Oklahoma struck down the IRS regulation interpreting the Affordable Care Act (ACA) as permitting premium subsidies in states with federally established health care Exchanges. Oklahoma v. Burwell, 2014 PTC 515 (E.D. Okla. 9/30/14).

The state of Oklahoma challenged the Patient Protection and Affordable Care and Act (ACA) on the grounds that the use of the word "Exchange" in Reg. Sec. 1.36B-2 is contrary to Code Sec. 36B. Two other federal courts, the D.C. Circuit and the Fourth Circuit, have ruled on this very issue, but taking opposing positions.

Under Code Sec. 36B, a premium assistance credit is available for insurance purchased through an Exchange. Code Sec. 36B includes language that could be interpreted as limiting the availability of the premium assistance credit to taxpayers who enroll in qualified health plans on state-established Exchanges. However, in 2012, the IRS issued Reg. Sec. 1.36B-2, which interpreted Code Sec. 36B to allow credits for insurance purchased on either a state or a federally established Exchange. The IRS's broader interpretation of "Exchange" has significant implications with respect to the individual mandate. The individual mandate requires individuals to maintain minimum essential healthcare coverage and, in general, enforces that requirement with a penalty.

In Halbig v. Burwell, 2014 PTC 363 (D.C. Cir. 7/22/14), the court held that the ACA unambiguously restricts the insurance subsidy to insurance purchased on state Exchanges. A contradictory decision was issued just hours later by the Fourth Circuit in King v. Burwell, 2014 PTC 364 (4th Cir. 7/22/14). The Fourth Circuit held that, because the statutory language of Code Sec. 36B is ambiguous and subject to multiple interpretations, deference should be given to the IRS guidance as a permissible exercise of the agency's discretion.

Section 1311 of the ACA delegates primary responsibility for establishing Exchanges to individual states. However, because Congress cannot require states to implement federal laws, if a state refuses or is unable to set up an Exchange, Section 1321 of the ACA provides that the federal government, through the Department of Health and Human Services (HHS), will establish and operate such an Exchange within the state.

A case challenging the validity of a regulation must be analyzed under the two-step framework set forth in Chevron U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837 (1984). Under Chevron, a court first looks to the plain meaning of the statute to determine if Congress's intent is clear in the statute regarding the question presented. If the statute speaks directly to that issue, that is the end of the inquiry, and a government agency is not afforded deference with respect to a challenged regulation. However, if the statute is susceptible to multiple interpretations (i.e., it is ambiguous or is silent on an issue), then the next step is to defer to the agency's interpretation, so long as it is based on a permissible construction of the statute.

In the instant case, the Oklahoma challenged the ACA on the grounds that the IRS regulations under Code Sec. 36B are invalid because they are contrary to the statutory language of the ACA.

The Eastern District Court of Oklahoma held, consistent with Halbig, that Reg. Sec. 1.36B-2(a)(1) is invalid. The court found that the IRS regulation did not satisfy the first step of the Chevron test because the statute is unambiguous in that the tax subsidy is provided only with respect to state Exchanges. The court relied heavily on precedent from the Tenth Circuit regarding the Chevron doctrine's first step, stating that the circuit has taken the position that courts should not rewrite a statute if the language is clear and says what it means. Making a connection to the analysis in Halbig, the court found the statute clearly says that a federally established Exchange does not mean the same as an Exchange established by a state, even though there may be similarities. The court reasoned that, compared to the Fourth Circuit's analysis in King, concluding that the word "Exchange" could be interpreted as either one set up by a state or by the federal government, the D.C. Circuit's interpretation was stronger because an "Exchange established by a State" unquestionably does not mean the same as an Exchange set up by someone other than a state. The court concluded with statements regarding the high-profile nature of the issue and stressed that its role is to produce a proper legal decision on statutory interpretation and pointed to the importance of upholding the democratic process where laws are made by those who are politically accountable.

OBSERVATION: The court order from this case is currently stayed pending an appeal to the Tenth Circuit.

For a discussion of the rules relating to the Code Sec. 36B insurance subsidy, see Parker Tax ¶102,610. (Staff Editor Parker Tax Publishing)

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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