Supreme Court’s Rejection of ACA Challenge Sustains NIIT and AMT

The U.S. Supreme Court recently rejected another challenge to the Patient Protection and Affordable Care Act (ACA), ruling in California et al. v Texas et al (California v. Texas) that the states that challenged the law lacked standing to bring the case. As a result, the Net Investment Income Tax (NIIT) and the Additional Medicare Tax (AMT), which are part of the ACA (as amended), are still valid.

Background

The challenge in California v. Texas arises from a 2012 Supreme Court decision regarding the ACA and from changes made to the ACA by the Tax Cuts and Jobs Act (TCJA). In 2012, the Supreme Court held that the individual mandate and related penalty, known as the Shared Responsibility Payment, was constitutional because the penalty was effectively a tax and an exercise of Congress’s taxing power. In 2017, Congress passed the TCJA, which eliminated the Shared Responsibility Payment by reducing it to $0 beginning in 2019.

In California v. Texas, the plaintiffs (Texas and 17 other states), challenged the constitutionality of the individual mandate, arguing that a penalty of $0 was no longer a valid exercise of Congress’s taxing power and that the individual mandate is unconstitutional without the penalty. They further claimed that the individual mandate is not severable from the rest of the ACA and therefore the ACA in its entirety is unconstitutional. In rejecting the challenge, the Supreme Court did not address these arguments but instead held that the states did not have standing because they had not shown that they suffered damages from the individual mandate.

Status of ACA-Related Taxes

The Health Care and Education Reconciliation Act of 2010 (which amended the ACA) enacted both the 3.8 percent NIIT and the 0.9 percent AMT as revenue raisers to help fund the ACA. Had the Supreme Court agreed with the plaintiffs in California v. Texas, the NIIT and the AMT arguably would also be unconstitutional. In such a case, taxpayers that paid those taxes in 2016 and subsequent years would be entitled to a refund of those taxes if they filed a timely refund claim.

Consequently, in order to preserve their ability to claim a refund for NIIT and/or AMT paid in 2016 and 2017, many taxpayers filed a protective claim for refund for 2016 and 2017 pending the outcome of California v. Texas. The Supreme Court’s ruling in California v. Texas means those protective refund claims were filed in vain.

For more information about the Supreme Court’s ruling in California et al. v Texas et al., contact us. We’re here to help.

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