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Tax implications, federal district court and constitutionality of Affordable Care Act

Tax implications, constitutionality of ACA

The U.S. District Court for the Northern District of Texas on December 14, 2018, issued a decision striking down the Patient Protection and Affordable Care Act (ACA).

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The case is: Texas v. United States, 4:18-cv-00167-O (N.D. Tex. December 14, 2018). Read the district court’s decision

The court held that, following passage of the U.S. tax law referred to as the “Tax Cuts and Jobs Act of 2017” (TCJA), the “individual mandate provision” in the ACA is unconstitutional and the remaining provisions of the ACA are inseverable and are, therefore, invalid. 

At the same time, the court refused a request for an injunction by the plaintiffs, so the ACA will continue in full force and effect until after an appeal is decided. The Department of Health and Human Services has indicated in a press release that it will continue to enforce the ACA. Attorneys General from several states and industry group leaders confirmed that an appeal would be filed with the U.S. Court of Appeals for the Fifth Circuit. 

Importantly, it is not expected that the case will be resolved in the coming months; indeed, it could take years.

KPMG observation

As noted above, the nature of the decision leaves the ACA in force for now.  As a result, all current taxes enacted as part of the ACA likewise remain in effect, pending appeal of the case.

Depending upon the outcome of that appeal, the case could eventually end up before the U.S. Supreme Court. Ultimately, a number of different outcomes are possible. The decision could be upheld in full, reversed in part (i.e., an appellate court could decide that the individual mandate is unconstitutional but is severable from all or part of the law and the rest of the law stands), or reversed in full. 

If the decision ultimately were to be upheld in full (i.e., without modification), it would have far-reaching implications, resulting in a rollback of all provisions of the ACA—including all of the taxes and fees contained in the ACA. These include, for example, the additional “HI” tax on high-income individuals as well as a variety of healthcare industry taxes and fees.

It is not clear, however, what the potential impact of the case ultimately being upheld might be on tax provisions contained in a separate bill that was enacted in conjunction with the ACA—the “Health Care and Education Reconciliation Act of 2010,” Pub. L. No. 111-152. Tax provisions included in this separate bill include: the medical device excise tax (Code section 4191), the 3.8% tax on net investment income (section 1411), and the codification of the economic substance doctrine (section 7701(o)). 

 

For more information, contact a tax professional in KPMG's Washington National Tax practice:

Lori Robbins | +1 (202) 533-3491 | lorirobbins@kpmg.com

Monica Coakley | +1 (615) 248-5639 | mcoakley@kpmg.com

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