The ACA and Premium Tax Credits

Originally published by Matthew Roberts.

Abrego v. Comm’r, T.C. Memo. 2020-87 | June 16, 2020 | Copeland, J. | Dkt. No. 23713-17

• Opinion

Short Summary:  During 2015, Mr. Abrego was a driver and, in his spare time, ran a small business preparing tax returns, mostly for friends and family members.  Mrs. Abrego was a housekeeper.  Although Mr. Abrego was eligible for Medicare during 2015, the Abregos nevertheless purchased private health insurance because they expected to receive the premium assistance tax credit (PTC) under the Patient Protection and Affordable Care Act (ACA).  The health plan the Abregos enrolled in required them to pay monthly premiums of $1,029.01.

Under the ACA, the U.S. Department of Treasury offset the cost of the Abregos’ plan premiums by making monthly advance PTC payments to the plan on the Abregos’ behalf.  Thus, Treasury paid the plan 10 monthly installments of $921 for a total of $9,210 during 2015.  During those 10 months, the Abregos paid the difference, or $108.01 per month.

The Abregos filed their 2015 tax return on January 24, 2017.  They did not request an extension of time to file because they expected to receive a refund.  On their return, the Abregos left blank Line 69, Net Premium Tax Credit.  The Abregos also failed to attach to their return Form 8962, Premium Tax Credit, which is used to reconcile the amount of the advanced PTC a taxpayer receives with the amount of the PTC to which the taxpayer is ultimately entitled.

The IRS issued the Abregos a notice of deficiency determining that the Abregos:  (1) received advanced PTC payments of $9,210, but (2) were not entitled to any PTC for 2015, and (3) were responsible for repaying the excess of advanced PTC paid on their behalf for 2015, $9,210, over the PTC to which they were entitled, zero.  Moreover, the IRS determined that the Abregos were ineligible for the PTC because their income exceeded 400% of the federal poverty line for a family of two in California, where they resided.

Key Issue:  Whether the Abregos:  (1) received excess advance payments of the premium assistance tax credit (commonly known as the premium tax credit or PTC) allowed under section 1412 of the ACA, which in turn increased their tax due by the amount of the excess, subject to the limitations set forth in Section 36B(f)(2)(B); and (2) are liable for the addition to tax under Section 6651(a)(1) for filing their 2015 tax return late.

Primary Holdings: 

• The Abregos are liable: (1) for repayment of $2,500 of the advanced PTC; (2) for the addition to tax under Section 6651(a)(1) for filing their 2015 return late.

Key Points of Law:

• Generally, the Commissioner’s determinations in a notice of deficiency are presumed correct, and the taxpayer bears the burden of proving that those determinations are erroneous. Rule 142(a)(1); Welch v. Helvering, 290 U.S. 111, 115 (1933).
• The ACA, section 1401, created Section 36B, which provides that taxpayers meeting certain requirements are eligible for the PTC, which subsidizes the cost of their health insurance purchased through a health insurance exchange. Reg. § 1.36B-2(a).  A recipient can elect to receive PTC payments in advance on the basis of an estimate of the amount of PTC for which the recipient will be eligible and whereupon monthly payments are made throughout the year directly from Treasury to the recipient’s insurer.  ACA, sec. 1412.
• Taxpayers are generally eligible for the PTC if their HHI is at least 100% but not more than 400% of the amount equal to the FPL for the applicable year. 36B(c)(1)(A).  HHI is specifically defined for this purpose.  Sec. 36B(d)(2)(A); see also Treas. Reg. § 1.36B-1(e)(1).  Eligibility is also contingent on enrollment in a qualified health plan.  Sec. 36B(b)(2)(A).  
• HHI means the sum of the taxpayer’s modified adjusted gross income (MAGI) plus the MAGI of family members: (1) for whom the taxpayer properly claims deductions for personal exemptions; and (2) who are required to file a federal income tax return under Section 1.  36B(d)(2)(A).  An individual’s MAGI is his or her AGI increased by:  (1) amounts related to foreign earned income and housing costs which were excluded from gross income under Section 911; (2) tax-exempt interest; and (3) the amount of any Social Security benefits which were not included in gross income under Section 86.  Sec. 36B(d)(2)(B).
• Section 162(l) permits self-employed taxpayers to deduct all or a portion of their health insurance premiums paid during the tax year for the taxpayer and certain members of the taxpayer’s family. The deduction is limited to the taxpayer’s earned income from a trade or business with respect to which the health insurance plan is established.  162(l)(2)(A).
• The amount of PTC a taxpayer is entitled to is calculated by comparing the premium for the plan the taxpayer selected to a PTC amount calculated against a benchmark plan premium. If the actual plan premium is less than the calculated PTC amount, then the PTC will cover the entire plan premium.  If the plan premium is more than the calculated PTC amount, then the PTC will cover only the calculated PTC amount. 
• At the end of the year a taxpayer who received an advanced PTC is instructed by the IRS to use Form 8962 to reconcile: (1) the amount of the advanced PTC (which was based on the estimated eligibility) the taxpayer received during the year with (2) the amount of PTC to which the taxpayer is actually entitled (which is based on HHI when the taxpayer files his or her annual income tax return).  See Section 36B(f)(2).  If the amount of the advanced PTC is more than the amount of PTC to which the recipient is ultimately entitled, the taxpayer owes the excess credit back to the Government, which is reflected as an increase in tax.  36B(f)(2)(A); Keel v. Comm’r, T.C. Memo. 2018-5.
• However, the increase in tax for excess advanced PTC is limited to a maximum of $2,500 if the taxpayer’s HHI is at least 300% but less than 400% of the FPL. 36B(f)(2)(B)(i).  If a recipient is wholly ineligible for the PTC because the recipient’s HHI was more than 400% of the FPL, then the entire amount of already paid advanced PTC must be included as a tax liability on the recipient-taxpayer’s tax return.  Sec. 36B(c)(1)(A), (f)(2)(B).
• Section 6651(a)(1) imposes an addition to tax for the late filing of a return absent a showing by the taxpayers of reasonable cause and lack of willful neglect. The penalty is calculated as 5% of the amount required to be shown as tax on the return for each month, not to exceed 25% in the aggregate.  6651(a)(1).  Reasonable cause exists if the taxpayer exercised ordinary business care and prudence but nevertheless could not file or pay the tax when due.  U.S. v. Boyle, 469 U.S. 241, 245 (1985).  Circumstances that may constitute “reasonable cause” include (among other things) unavoidable postal delays, the timely filing of a return with the wrong IRS office, the death or serious illness of a taxpayer or a member of his immediate family, a taxpayer’s unavoidable absence from the United States, or reliance on erroneous advice from a competent tax advisor or IRS officer.  Marrin v. Comm’r, 147 F.3d 147, 152 (2d Cir. 1998), aff’g, T.C. Memo. 1997-24; McMahan v. Comm’r, 114 F.3d 366, 369 (2d Cir. 1997), aff’g T.C. Memo. 1995-547.  However, there is no legal basis for a position that filing late is excusable because a refund is expected.

Insight:   The Abregos case shows the difficulty of determining with specificity, at least in some cases, whether a taxpayer qualifies for the advanced PTC and PTC.  In addition, it stands for the position that it may difficult to support a reasonable cause defense for abatement or waiver of penalties where the taxpayer anticipated a refund but that belief later turns out to be untrue.

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