July 14, 2020

Should Taxpayers File Protective Claims in Anticipation of the ACA Being Struck Down?

3 min

The Supreme Court will be considering the constitutionality of the Affordable Care Act (ACA) this coming fall term in California v. Texas (Docket 19-840). The Trump administration is urging the Court to strike down the entire ACA as unconstitutional. If the entire ACA is struck down, it would mean the end of the 3.8% net investment tax on capital gains and the 0.9% increase on Medicare withholding. Furthermore, taxpayers who paid such taxes in the past may be entitled to a refund. Taxpayers must file a protective claim by the deadline for the amended tax return with respect to the applicable tax year. Thus, some eligible taxpayers (and their preparers) may wish to file a protective claim to preserve their right to a refund for the 2016 tax year by the date on which the applicable refund deadline expires this year.

Given the Court's recent rulings, it seems somewhat unlikely that the entire ACA will be struck down as unconstitutional, although the Court has surprised us before. Generally, if a law is held to be unconstitutional, a court will consider whether the unconstitutional component can be removed while leaving the other components intact. This concept is known as "severability." In two recent decisions, the Court has taken an approach favoring severability in considering the Telephone Consumer Protection Act and the Dodd-Frank Act.[1] Unlike the previously mentioned legislation, however, the ACA does not have an express severability clause; nonetheless, Justice Kavanaugh made clear in Barr that there is a strong presumption of severability even in the absence of such a clause. In other words, today's Court is more likely to "use a scalpel rather than a bulldozer in curing [a] constitutional defect," as Chief Justice Roberts stated in Seila Law. Accordingly, the ACA's tax provisions may remain intact even if part of the ACA is held unconstitutional by the Court.

Anyone can file a protective claim, and taxpayers who wish to preserve their right to a refund for the 2016 tax year with respect to which the statute of limitations may soon expire might consider filing such a claim. Accordingly, accountants and business managers might consider filing claims for those clients who may benefit from an amended return, notwithstanding that it appears the Court may sever the provisions, given recent rulings.

Venable stands ready to advise regarding acceptable claim filing procedures.

[1] See Barr v. American Association of Political Consultants, No. 19-631, 591 U.S. _____ (July 6, 2020) (considering the Telephone Consumer Protection Act); Seila Law LLC v. Consumer Financial Protection Bureau, No. 19-7, 591 U.S. _____ (June 29, 2020) (considering the Dodd-Frank Act).