On November 9, 2021, the Tax Court issued a Memorandum Opinion in the case of Knox v. Commissioner (T.C. Memo. 2021-126). The primary issue presented in Knox was whether the petitioners are entitled to a premium tax credit (PTC) and, if they are not, whether they are required to repay advance premium tax credit (APTC) payments of the PTC.
Held: Yup and yeppers.
Background to Knox v. Commissioner
The petitioners were (and perhaps still are) old Hoosiers. I’m not sure this ultimately matters, but Judge Jones thought it important enough to mention, so we faithfully report it here. For 2015 they reported $59,000 of Social Security benefits, of which $17,000 and $15,000 were attributable to lump-sum payments relating to 2013 and 2014, respectively.
From March through December 2015, Mrs. Knox enrolled in two separate policies through the health insurance marketplace provided by All Savers Insurance Co. (All Savers). Mrs. Knox received the benefit of monthly APTC payments under both policies.
The first All Savers policy covered the Knoxes from March 1 to May 11, 2015. For March and April, the monthly premium was $1,456, of which $1,286 was APTC paid on behalf of Mrs. Knox. For May 1 to May 11 the first All Savers policy premium was $517, of which $456 was APTC.
During the period when the first All Savers policy was in effect, Mrs. Knox received the benefit of APTC totaling $3,028. Ultimately, between the two All Savers policies, Mrs. Knox received a total benefit of $7,332 in APTC ($3,028 on the first policy plus $4,304 on the second) for 2015. Mr. and Mrs. Knox, did not want to report any excess APTCs to a fox, or in a box, or eating lox wearing socks while each one balks about reporting. Thus, did not report any excess APTCs on their 2015 Form 1040, nor did they attach the required Form 8962 (Premium Tax Credit). The Knoxes made an IRC § 86(e) election for a portion of their Social Security benefits.
In a notice of deficiency dated, the IRS determined that the petitioners must repay $7,332 of excess APTCs and pay an accuracy-related penalty under IRC § 6662 of $1,466.
Statutory and Regulatory Framework: IRC § 36B
Congress enacted the Patient Protection and Affordable Care Act (ACA), to “improve access to and the delivery of health care services for all individuals, particularly low income, underserved, uninsured, minority, health disparity, and rural populations.” Section 1401 of the ACA (124 Stat. at 213) created IRC § 36B, which provides certain specified taxpayers a Federal income tax credit equal to the PTC amount for the taxable year. The PTC subsidizes the cost of health insurance purchased through a health insurance exchange.
The PTC is generally available to taxpayers with a household income of at least 100% but not more than 400% of the Federal poverty line. The Federal poverty line for any given enrollment period is the most recently published poverty line as of the first day of the regular enrollment period for coverage for that calendar year.
The PTC is based upon a number of factors, including the taxpayer’s family size and household income. Household income is 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 were required to file a Federal income tax return.
As a reminder, MAGI must never be confused with MAGA, or the three wise men. One does wonder if Congress ever considered the modified gross income of couples (MAGIC).
Ah, the small joys of bemused wonderment…
Payment of APTCs
If someone cannot afford monthly health insurance premiums during the year, providing the credits after the end of the year is of little use. Accordingly, APTCs are paid directly to an insurance provider during the year, and taxpayers are required to reconcile any APTCs received with the eligible credit amount on Form 8962, which is filed with their Federal income tax returns.
MAGI and Social Security Benefits
Pursuant to IRC § 86(d)(1), Social Security benefits are generally received by the taxpayer as a monthly benefit under Title II of the Social Security Act. Whether and to what extent Social Security benefits are included in a taxpayer’s gross income (i.e., the taxable amount of Social Security benefits received) is calculated pursuant to a statutory formula set forth in IRC § 86.
If the taxpayer receives a lump-sum Social Security benefit attributable to a prior year, the taxpayer may make an election under IRC § 86(e) to limit the amount of the benefit that is included in gross income for the year of receipt.
IRC § 36B and its accompanying regulations are silent regarding the potential impact of an IRC § 86(e) election on the calculation of MAGI. However, IRC § 36B and the underlying regulations provide that a taxpayer’s MAGI must be increased by Social Security benefits received in a taxable year that were “not included in gross income under IRC § 86 for the taxable year.”
In Johnson, 152 T.C. at 128, the Tax Court recently addressed whether MAGI includes all Social Security benefits received during a taxable year. In that case the taxpayer received Social Security disability benefits in tax year 2014 as a lump-sum payment attributable to both the 2013 and 2014 tax years. After receiving a notice of deficiency on account of excess APTCs, the taxpayer filed an amended return and made an IRC § 86(e) election. The Tax Court ultimately held that the taxpayer had to include in his MAGI all of the Social Security benefits received in the taxable year, irrespective of the IRC § 86(e) election.
Calculating the Knoxes’ MAGI
The Knoxes’ MAGI for purposes of IRC § 36B is calculated by increasing their adjusted gross income ($19,000) by the portion of the Social Security benefits received in a taxable year that is not included in gross income ($54,000)—approximately $73,000. The Federal poverty line is roughly $16,000; thus, the Knoxes’ MAGI was 461% above the poverty line, which, if you’re keeping score at home, is 61% too much. Consequently, the full amount of the APTCs they received during 2015 must be included as a tax liability on their return.
Oliver Twist Asks for More (Equitable Relief)
Mr. and Mrs. Knox argued that the penalty would force them to live in a box with a fox, and, thus, they sought equitable relief as have many petitioners caught in this unfortunate circumstance having naught. While the Tax Court was sympathetic to their plight, it declined to “ignore the law to achieve an equitable end.” Mr. and Mrs. Knox received an advance of credit to which they were not entitled and were liable for the $7,332 deficiency.
- Pub. L. No. 111-148, 124 Stat. 119 (2010). ↑
- Id. sec. 5001, 124 Stat. at 588. ↑
- IRC § 36B(a), (b), and (c); see McGuire v. Commissioner, 149 T.C. 254, 258-260 (2017). ↑
- See Treas. Reg. § 1.36B-2(a). ↑
- IRC § 36B(c)(1); Treas. Reg. § 1.36B-2(b)(1). ↑
- See IRC § 36B(d)(3)(B). ↑
- IRC § 36B(d)(2). ↑
- McGuire v. Commissioner, 149 T.C. at 260. ↑
- IRC § 36B(f); ACA § 1412, 124 Stat. at 231; see also Johnson v. Commissioner, 152 T.C. 121, 124 (2019). ↑
- IRC § 86(a)-(d); see Johnson, 152 T.C. at 126. ↑
- IRC § 86(e)(1); see Johnson, 152 T.C. at 126. ↑
- See Johnson, 152 T.C. at 127. ↑
- IRC § 36B(d)(2)(B)(iii); see Treas. Reg. § 1.36B-1(e)(2). ↑
- Id. at 122. ↑
- Id. at 123. ↑
- Id. at 128. ↑
- See IRC § 36B(d)(2)(B); Treas. Reg. § 1.36B-1(e)(2)(iii); see also Johnson, 152 T.C. at 126, 129. ↑
- See IRC § 36B(c)(1)(A), (f)(2)(A). ↑
- See Grant v. Commissioner, T.C. Memo. 2018-119. ↑
- See Commissioner v. McCoy, 484 U.S. 3, 7 (1987); Johnson, 152 T.C. at 128-129; McGuire, 149 T.C. at 262. ↑