Professional Tax Research Solutions from the Founder of Kleinrock. tax and accounting research
Parker Tax Pro Library
Accounting News Tax Analysts professional tax research software Like us on Facebook Follow us on Twitter View our profile on LinkedIn Find us on Pinterest
federal tax research
Professional Tax Software
tax and accounting
Tax Research Articles Tax Research Parker's Tax Research Articles Accounting Research CPA Client Letters Tax Research Software Client Testimonials Tax Research Software Federal Tax Research tax research

Accounting Software for Accountants, CPA, Bookeepers, and Enrolled Agents

CPA Tax Software



In-Depth: Supreme Court Upholds Premium Tax Credits to Individuals in States with Federal Exchanges.

(Parker Tax Publishing July 2, 2015)

In King v. Burwell, 2015 PTC 210 (S. Ct. 2015), the Supreme Court upheld the use of tax credits for health insurance purchased on any Exchange created under The Patient Protection and Affordable Care Act (ACA), be it federal or state. In one of the most serious challenges to the ACA to date, the Court, in a 6-3 decision, reasoned that the statute's context and structure compelled this conclusion.


President Obama's signature health care legislation, sometimes referred to as "Obamacare," adopts a series of interlocking reforms designed to expand coverage in the individual health insurance market. First, the ACA bars insurers from taking a person's health into account when deciding whether to sell health insurance or how much to charge. Second, it generally requires each person to maintain insurance coverage or make a payment to the IRS. And third, under Code Sec. 36B, the ACA gives refundable tax credits to individuals with household incomes between 100 percent and 400 percent of the federal poverty line in order to make the insurance more affordable. The requirement to maintain insurance coverage applies only when the cost of buying health insurance, minus the amount of the tax credits, is less than 8 percent of an individual's income.

In addition to those reforms, the ACA requires the creaof an "Exchange" in each state, which is essentially a marketthat allows people to compare and purchase insurplans. The law gives each state the opportunity to establish its own Exchange, but provides that the federal government will establish "such Exchange" through the Department of Health and Human Services (HHS) if the state does not.

Under Code Sec. 36B, the amount of a taxpayer's tax credit depends in part on whether the taxpayer has enrolled in an insurance plan through "an Exchange established by the State under section 1311 of the Patient Protection and Affordable Care Act." In 2013, the IRS issued Reg. Sec. 1.36B-2, which provides that a taxpayer is eligible for a tax credit if the taxpayer is enrolled in an insurance plan through "an Exchange," which the regulation defines as an Exchange serving the individual market regardless of whether the Exchange was established and operated by a state or by the federal government through HHS. When the regulation was issued, 16 states and the District of Columhad established their own Exchanges; the other 34 states elected to have HHS do so.

King v. Burwell

David King is a resident of Virginia. He and three other Virginia residents did not want to pur-chase health insurance. Virginia did not establish its own Exchange; thus, it was covered by the Federal Exchange program. Under Reg. Sec. 1.36B-2, Virginia's Exchange qualified as an Exchange established by a state, so that King and the others were eligible to receive tax credits. That would make the cost of buying insurance less than 8 percent of their income, which would subject them to the ACA's coverage requirement. Therefore, Reg. Sec. 1.36B-2 required King and the others to either buy health insurance they did not want, or make a payment to the IRS. They filed suit in district court challenging the validity of Reg. Sec. 1.36B-2. The district court dismissed the suit, holding that the statute unambiguously made tax credits available to individuals enrolled through a Federal Exchange.

The taxpayers appealed and the Fourth Circuit, in King v. Burwell, 2014 PTC 364 (4th Cir. 2014), affirmed the district court. The court found the statutory language ambiguous and subject to multiple interpretations. As a result, under Chevron U. S. A. Inc. v. Natural Resources Defense Council, Inc., 467 U. S. 837 (1984), the court concluded that deference should be given to the IRS guidance under Code Sec 36B as a permissible exercise of the agency's discretion. Under the Chevron analysis, a court applies a two-step framework in which it asks whether a statute is ambiguous and, if so, whether an agency's interpretation of the statute is reasonable. In this case, the Fourth Circuit found the IRS's interpretation of Code Sec. 36B under Reg. Sec. 1.36B-2 to be reasonable.

The same day that the Fourth Circuit issued its decithe D.C. Circuit vacated Reg. Sec. 1.36B-2 in Halbig v. Burwell, 2014 PTC 456 (D.C. Cir. 2014), holding that the ACA "unambiguously restricts" the tax credits to State Exchanges.

The appellate decisions came down along party lines. The Fourth Circuit opinion was approved 3-0, with all judges having been appointed by a Democratic President. The D.C. Circuit opinion was approved by a 2-1 vote, with the dissenting vote cast by the lone Democrat. The taxpayers in King v. Burwell petitioned the U.S. Supreme Court to review the case and the Court granted certiorari.

Taxpayer and IRS Positions

The heart of the case centered on the dispute over whether Code Sec. 36B authorizes tax credits for individuals who enroll in an insurance plan through a Federal Exchange. King and the other taxpayers argued that a Federal Exchange is not "an Exchange established by the State" as provided by the statute. The phrase "established by the State" would be superfluous, they contended, if Congress meant to extend tax credits to both State and Federal Exchanges. Thus, they said, Reg. Sec. 1.36B-2 contradicts Code Sec. 36B and is invalid.

The IRS countered that Reg. Sec. 1.36B-2 is lawful because the phrase "an Exchange established by the State" should be read to include Federal Exchanges.

High Court Rejects Chevron Analysis

In an opinion written by Chief Justice Roberts, the Supreme Court began its analysis by determining whether or not the two-step framework in Chevron applied. Chevron, the Court observed, is premised on the theory that a statute's ambiguity constitutes an implicit delegation from Conto the agency to fill in the statutory gaps. However, the Court found that Chevron did not provide the appropriate framework in this case.

The tax credits are one of the ACA's key reforms, the Court noted, and whether they are available on Federal Exchanges is a question of deep economic and political significance. The Court reasoned that had Congress wished to assign this question to an agency, it would have done so expressly. The Court found it unlikely that Congress would have delegated this decision to the IRS, which has no expertise in crafting health insurance policy. Thus, the Court concluded that Chevron was inapplicable in this case. Rather, the court said, its task was to decide the correct reading of Code Sec. 36B and in doing so, the words had to be read in their context and with a view to their place in the overall statutory scheme.

OBSERVATION: Because the Supreme Court concluded that Congress intended for premium tax credits to be available on federal exchanges and did not intend to give the IRS discretion in the matter, the IRS will not be able to reverse its position on the issue under future administrations unless the underlying statute is changed or the Supreme Court reverses itself.

Court Looks to Act's Context and Structure

The Court agreed with the Fourth Circuit that, when read in context, the phrase "an Exchange established by the State under section 1311 of the Patient Protection Affordable Care Act" is ambiguous and could either be limited in its reach to State Exchanges or it could refer to all Exchanges. The Court focused on what happens if a state chooses not to establish an Exchange. In that case, the court noted, the ACA directs the Secretary of HHS to establish "such Exchange." The Court found that by using the words "such Exchange," the statute indicates that State and Federal Exchanges should be the same. But State and Federal Exchanges would differ in a fundamental way, the Court observed, if tax credits were available only on State Exchanges because insurance under a State Exchange would be more affordable as a result. The Court noted that another provision in the statute requires that all Exchanges create outreach programs to distribute information on the tax credits. This provision would make little sense, the Court said, if tax credits were not available on Federal Exchanges.

The Court looked to the broader structure of the ACA to determine whether one of Code Sec. 36B's permissible meanings produced a substantive effect that was compatible with the rest of the law. The Court noted that, under the taxpayers' reading of the statute, the ACA would not work in a state with a Federal Exchange because one of its three major reforms - the tax credits - would not apply. And a second major reform - the coverage requirement - would not apply in a meaningful way because so many individuals would be exempt from the requirement without the tax credits. The Court found that the combination of no tax credits and an ineffective coverage requirement could well push a state's individual insurance market into a death spiral. The Court said it was implausible that Congress meant the ACA to operate in such a manner.

Finally, the Court said that the structure of Code Sec. 36B itself suggested that tax credits were not limited to State Exchanges. Together, Code Sec. 36B(a), which allows tax credits for any "applicable taxpayer," and Code Sec. 36B(c)(1), which defines that term as someone with a household income between 100 percent and 400 percent of the federal poverty line, appeared to make anyone in the specified income range eligible for a tax credit. The Court rejected the taxpayers' interpretation of that provision as being limited to states that had set up a State Exchange.

OBSERVATION: In 2014, approximately 87 percent of people who bought insurance on a Federal Exchange did so with tax credits. If the tax credits did not apply, virtually all of those people would become exempt from the coverage requirement, and one study predicted that premiums would increase by 47 percent and enrollment would decrease by 70 percent.

The Court concluded that, while the taxpayers' arguments were strong, the ACA's context and structure compelled the conclusion that Code Sec. 36B allows tax credits for insurance purchased on any Exchange created under the statute. Those credits are necessary, the Court said, for the Federal Exchanges to function like their State Exchange counterparts and avoid the type of result that Congress plainly meant to avoid.

Justice Scalia's Dissent

Justices Scalia, Thomas, and Alito filed a dissenting opinion, written by Justice Scalia. The Justices criticized the Majority's holding that when the ACA says "Exchange established by the State" it means "Exchange established by the State or the Federal Government," calling such a reading "absurd." According to the Justices, words no longer have meaning if an Exchange that is not established by a state is considered established by the state. Under all the usual rules of interpretation, the Justices said, the IRS should lose this case. But, the Justices lamented, normal rules of interpretation yielded to the overriding principle of the present Court: The Affordable Care Act must be saved.

The Justices accused the majority of rewriting the law and coming up with argument after "feeble argument" to support its contrary interpretation of the phrase "Exchange established by the State." With respect to the Majority's observation that the law would make little sense if no tax credits were available on Federal Exchanges, the Justices said that even if this were true, it would show only oddity, not ambiguity. According to the Justices, laws often include unusual or mismatched provisions, and they noted it would be amazing if the provisions of the 900 page statute all lined up perfectly with each other. The dissenting Justices stated it is entirely natural for slight mismatches to occur when lawmakers draft a single statutory provision to cover different kinds of situations. Reading the ACA as a whole, the Justices concluded, leaves no doubt about the matter: "Exchange established by the State" means what it looks like it means.

Significance of Supreme Court Decision for the Future of ACA

Having survived what may be its last major challenge in the courts, the ACA's implementation is expected to continue uninterrupted through the 2016 election. Key pieces that are still being phased in include the employer mandate (effective for employers with 100 or more employees in 2015 and for employers with 50-99 employees in 2016) and various reporting requirements that had been temporarily delayed by the IRS.

The next existential challenge for the ACA will likely come in the political arena, as numerous Republican presidential candidates and party leaders have vowed to make repeal a central issue in the 2016 elections. (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.

Parker Tax Pro Library - An Affordable Professional Tax Research Solution.

Professional tax research

We hope you find our professional tax research articles comprehensive and informative. Parker Tax Pro Library gives you unlimited online access all of our past Biweekly Tax Bulletins, 22 volumes of expert analysis, 250 Client Letters, Bob Jennings Practice Aids, time saving election statements and our comprehensive, fully updated primary source library.

Parker Tax Research

Try Our Easy, Powerful Search Engine

A Professional Tax Research Solution that gives you instant access to 22 volumes of expert analysis and 185,000 authoritative source documents. But having access won’t help if you can’t quickly and easily find the materials that answer your questions. That’s where Parker’s search engine – and it’s uncanny knack for finding the right documents – comes into play

Things that take half a dozen steps in other products take two steps in ours. Search results come up instantly and browsing them is a cinch. So is linking from Parker’s analysis to practice aids and cited primary source documents. Parker’s powerful, user-friendly search engine ensures that you quickly find what you need every time you visit Our Tax Research Library.

Parker Tax Research Library

Dear Tax Professional,

My name is James Levey, and a few years back I founded a company named Kleinrock Publishing. I started Kleinrock out of frustration with the prohibitively high prices and difficult search engines of BNA, CCH, and RIA tax research products ... kind of reminiscent of the situation practitioners face today.

Now that Kleinrock has disappeared into CCH, prices are soaring again and ease-of-use has fallen by the wayside. The needs of smaller firms and sole practitioners are simply not being met.

To address the problem, I’ve partnered with a group of highly talented tax writers to create Parker Tax Publishing ... a company dedicated to the idea that comprehensive, authoritative tax information service can be both easy-to-use and highly affordable.

Our product, the Parker Tax Pro Library, is breathtaking in its scope. Check out the contents listing to the left to get a sense of all the valuable material you'll have access to when you subscribe.

Or better yet, take a minute to sign yourself up for a free trial, so you can experience first-hand just how easy it is to get results with the Pro Library!


James Levey

Parker Tax Pro Library - An Affordable Professional Tax Research Solution.

    ®2012-2018 Parker Tax Publishing. Use of content subject to Website Terms and Conditions.

IRS Codes and Regs
Tax Court Cases IRS guidance