Daily Tax Update - June 28, 2012: US Supreme Court Upholds Health Care Law

US SUPREME COURT UPHOLDS HEALTH CARE LAW:  Today, in Nat’l Fed’n of Indep. Bus. v. Sebelius, the US Supreme Court, in a 5-4 decision, upheld key provisions of the Patient Protection and Affordable Care Act (the “Act”) enacted in 2010, including the individual mandate to purchase health insurance coverage.  In an opinion by Chief Justice Roberts, the Court upheld the individual mandate under Congress’s power to lay and collect taxes under Article I of the Constitution.  The Court did so even though most of the arguments surrounding the case concerned the question whether the individual mandate is a valid exercise of Congress’s power under the Commerce Clause. 

  • The Act’s individual mandate requires most individuals to maintain minimum health insurance coverage.  For individuals who are not exempt and who do not receive coverage through an employer or government program, the requirement is satisfied by purchasing insurance from a private company.  Starting in 2014, those individuals who do not comply with the mandate must make a “shared responsibility payment” to the federal government.
    • The Supreme Court held that the individual mandate is not a valid exercise of Congress’s power under the Commerce Clause or the Necessary and Proper Clause.
    • However, the Court concluded that the individual mandate could be construed as imposing a tax on those who do not have health insurance and, thus, upheld the individual mandate as within Congress’s power under the Taxing Clause.
      • The Court noted that the payment required by the individual mandate was not so high that it left no choice but to buy health insurance, that payment was not limited to willful violations, and that the IRS collected the payment through the normal means of taxation.
      • The Court found that the payment required as a result of failing to comply with the individual mandate did not have to be read as punishing unlawful conduct, but it could be interpreted as imposing a tax on those who do not obtain insurance.
  • The other key provision ruled on by the Supreme Court was the Act’s Medicaid expansion.  The Act increases the number of individuals the States must cover under Medicaid, but provides that, if a State does not comply with the Act’s new coverage requirements, it may lose all of its federal funding for Medicaid.
  • The Court held that the Act’s Medicaid expansion violates the Constitution by threatening States with the loss of their existing Medicaid funding if they decline to comply with the expansion.
  • The Court held that the Act could be remedied by precluding the application of the provision permitting the withdrawal of existing Medicaid funds and stated that the other provisions of the Act would not be affected.
  • In an unusual (but not unprecedented procedure), the four dissenting Justices (Scalia, Kennedy, Thomas and Alito) signed together as authors.  The usual procedure is for one Justice to sign and others to join in that opinion.
  • As a result of the Supreme Court’s decision, the tax provisions included in the 2010 health care legislation remain intact, including:
    • Section 7701(o), which codified the economic substance doctrine, along with the related strict liability penalty. 
    • Beginning in 2013, a new 3.8-percent Medicare contribution tax on interest, dividends, capital gains, and other investment income for individuals making more than $200,000 a year and couples making more than $250,000.  Also, an increase to the Medicare payroll tax by 0.9 percentage points to 2.35 percent on wages above $200,000 for individuals and $250,000 for married couples filing jointly.
    • Beginning in 2018, a 40-percent excise tax on so-called Cadillac health insurance plans.
    • Modification to the cellulosic biofuel producer credit to exclude fuels with significant water, sediment, or ash content, such as black liquor, effective January 1, 2010.
    • An excise tax on medical device sales equal to 2.3 percent of the price of the device.
  • The decision can be accessed via: National Federation of Independent Business v. Sebelius.
  • For additional information, contact Matthew Zinn - mzinn@steptoe.com.

MISCELLANEOUS GUIDANCE RELEASED:

Notice 2012-45 provides guidance regarding the treatment of certain government bonds for purposes of determining whether a foreign corporation is a passive foreign investment company (PFIC).

TAX BILL INTRODUCED JUNE 27TH:

H.R.6031: To amend the Internal Revenue Code of 1986 to extend the production and investment tax credits for wind facilities and to modify the foreign tax credit rules applicable to major integrated oil companies which are dual capacity taxpayers.
Sponsor: Rep Blumenauer, Earl [OR-3] (introduced 6/27/2012)      Cosponsors (14)
Latest Major Action: 6/27/2012 Referred to House committee. Status: Referred to the House Committee on Ways and Means.

INTERNAL REVENUE SERVICE - CIRCULAR 230 DISCLOSURE:  As provided for in Treasury regulations, advice (if any) relating to federal taxes that is contained in this communication (including attachments) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement addressed herein.

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