When a US District Judge in Texas ruled in 2018 that the Affordable Care Act had been rendered retroactively unconstitutional in its entirety by the Tax Cuts and Jobs Act, a number of advisers rushed to file claims for refunds for years where clients had paid the net investment income tax under IRC §1411.  The Supreme Court has now decided the fate of those refund claims, overturning the lower court decision in a 7-2 decision and keeping the entire Affordable Care Act in force.[1]

The case arose once Congress reduced the amount due under IRC §5000A for individuals who failed to maintain minimum essential coverage to zero in the Tax Cuts and Jobs Act.  The plaintiffs argued that this change was fatal to the entire Affordable Care Act (which would include the net investment income tax under IRC §1411), as the Supreme Court, in an opinion authored by Justice Roberts, had found the mandate constitutional because it represented a tax on those who failed to obtain insurance rather than making a failure to maintain insurance illegal.

While the trial court had ruled this caused the entire law to be rendered invalid, the Fifth Circuit had sent the case back to the trial court to give reasons why the entire law, rather than just the mandate, had to be rendered invalid by this change.[2]  However, before that decision came down the case was appealed to the U.S. Supreme Court who agreed to hear the case.

The opinion, authored by Justice Breyer, joined by Justices Sotomayor, Kagan, Kavanaugh and Barrett along with Chief Justice Roberts, begins by outlining the basic claim of the plaintiffs:

As originally enacted in 2010, the Patient Protection and Affordable Care Act required most Americans to obtain minimum essential health insurance coverage. The Act also imposed a monetary penalty, scaled according to income, upon individuals who failed to do so. In 2017, Congress effectively nullified the penalty by setting its amount at $0. See Tax Cuts and Jobs Act of 2017, Pub. L. 115–97, §11081, 131 Stat. 2092 (codified in 26 U. S. C. §5000A(c)).

Texas and 17 other States brought this lawsuit against the United States and federal officials. They were later joined by two individuals (Neill Hurley and John Nantz). The plaintiffs claim that without the penalty the Act’s minimum essential coverage requirement is unconstitutional. Specifically, they say neither the Commerce Clause nor the Tax Clause (nor any other enumerated power) grants Congress the power to enact it. See U. S. Const., Art. I, §8. They also argue that the minimum essential coverage requirement is not severable from the rest of the Act. Hence, they believe the Act as a whole is invalid.[3]

Justice Breyer does not keep the reader in suspense, as the opinion immediately goes on to give the result the majority arrived at and what they did not decide:

We do not reach these questions of the Act’s validity, however, for Texas and the other plaintiffs in this suit lack the standing necessary to raise them.[4]

Essentially, the Court decided the case on a technicality—but one that may mean no party will be able to bring a case before the Court to decide the specific issues of constitutionality of the mandate or, if the mandate is unconstitutional, require the entire Affordable Care Act, including the Net Investment Income Tax, to be rendered retroactively invalid.

The opinion notes:

The Constitution gives federal courts the power to adjudicate only genuine “Cases” and “Controversies.” Art. III, §2. That power includes the requirement that litigants have standing. A plaintiff has standing only if he can “allege personal injury fairly traceable to the defendant’s allegedly unlawful conduct and likely to be redressed by the requested relief.” DaimlerChrysler Corp. v. Cuno, 547 U. S. 332, 342 (2006) (internal quotation marks omitted); see also Lujan v. Defenders of Wildlife, 504 U. S. 555, 560–561 (1992). Neither the individual nor the state plaintiffs have shown that the injury they will suffer or have suffered is “fairly traceable” to the “allegedly unlawful conduct” of which they complain.[5]

The opinion first looks at the two individual plaintiffs who complain about the requirement to maintain coverage that is provided in IRC §5000A.  But the Court found that there’s no harm to ignoring the requirement—and thus no real harm to the plaintiffs:

Their problem lies in the fact that the statutory provision, while it tells them to obtain that coverage, has no means of enforcement. With the penalty zeroed out, the IRS can no longer seek a penalty from those who fail to comply. See 26 U. S. C. §5000A(g) (setting out IRS enforcement only of the taxpayer’s failure to pay the penalty, not of the taxpayer’s failure to maintain minimum essential coverage). Because of this, there is no possible Government action that is causally connected to the plaintiffs’ injury—the costs of purchasing health insurance. Or to put the matter conversely, that injury is not “fairly traceable” to any “allegedly unlawful conduct” of which the plaintiffs complain. Allen v. Wright, 468 U. S. 737, 751 (1984). They have not pointed to any way in which the defendants, the Commissioner of Internal Revenue and the Secretary of Health and Human Services, will act to enforce §5000A(a). They have not shown how any other federal employees could do so either. In a word, they have not shown that any kind of Government action or conduct has caused or will cause the injury they attribute to §5000A(a).[6]

To put it simply, the individuals are stuck in a “Catch-22” for a challenge—without a penalty under IRC §5000A there’s no way they can be harmed by the government for failing to comply with the toothless mandate.  But their challenge is based on the lack of a tax after the TCJA changes and the importance the existence of that tax had on the validity of the law in the majority opinion in  National Federation of Independent Business v. Sebelius, 567 U. S. 519 (2012).

The opinion also notes that the relief requested must be tied to that injury:

To consider the matter from the point of view of another standing requirement, namely, redressability, makes clear that the statutory language alone is not sufficient. To determine whether an injury is redressable, a court will consider the relationship between “the judicial relief requested” and the “injury” suffered. Allen, 468 U. S., at 753, n. 19. The plaintiffs here sought injunctive relief and a declaratory judgment. The injunctive relief, however, concerned the Act’s other provisions that they say are inseverable from the minimum essential coverage requirement. The relief they sought in respect to the only provision they attack as unconstitutional—the minimum essential coverage provision—is declaratory relief, namely, a judicial statement that the provision they attacked is unconstitutional. See App. 61–63 (“Count One: Declaratory Judgment That the Individual Mandate of the ACA Exceeds Congress’s Article I Constitutional Enumerated Powers” (boldface deleted)); 340 F. Supp. 3d, at 619 (granting declaratory judgment on count I as to §5000A(a)); 352 F. Supp. 3d, at 690 (severing and entering partial final judgment on count I).

Remedies, however, ordinarily “operate with respect to specific parties.” Murphy v. National Collegiate Athletic Assn., 584 U. S. ___, ___ (2018) (THOMAS, J., concurring) (slip op., at 3) (internal quotation marks omitted). In the absence of any specific party, they do not simply operate “on legal rules in the abstract.” Ibid. (internal quotation marks omitted); see also Mellon, 262 U. S., at 488 (“If a case for preventive relief be presented, the court enjoins, in effect, not the execution of the statute, but the acts of the official, the statute notwithstanding”).[7]

The states fair no better for standing, as the Court continued to look at how the change to IRC §5000A (a statute that is unenforceable and is not being enforced) created damages to them:

As with the individual plaintiffs, the States also have failed to show how this injury is directly traceable to any actual or possible unlawful Government conduct in enforcing §5000A(a). Cf. Clapper v. Amnesty Int’l USA, 568 U. S. 398, 414, n. 5 (2013) (“plaintiffs bear the burden of . . . showing that the defendant’s actual action has caused the substantial risk of harm” (emphasis added)). That alone is enough to show that they, like the individual plaintiffs, lack Article III standing.[8]

Justice Thomas pens a concurring opinion where he argues that he agrees with the result based on the case presented by the parties, but does not foreclose a possible standing option for the states as proposed in the dissent authored by Justice Alito—but notes that the states did not argue for standing as Justice Alito proposed it, so it would not be appropriate to consider it in this case.[9]

We should expect the IRS to begin denying those claims for refund that were based on the hope that this case would have resulted in the retroactive repeal of the net investment income tax.  And it appears advisers will not need to be concerned with filing additional protective claims unless some plaintiff can come up with damages that give rise to a standing to ask for relief tied to the changes made to IRC §5000A.

[1] California v. Texas, US Supreme Court, Case No. 19-840, June 17, 2021, https://www.supremecourt.gov/opinions/20pdf/19-840_6jfm.pdf (retrieved June 17, 2021)

[2] Brent Kendall and Jess Bravin, “Supreme Court Leaves Affordable Care Act Intact,” Wall Street Journal, June 17, 2021 10:42 am ET, https://www.wsj.com/articles/supreme-court-leaves-affordable-care-act-intact-11623938948?mod=e2tw (retrieved June 17, 2021 08:10 am MST, subscription required)

[3] California v. Texas, US Supreme Court, Case No. 19-840, June 17, 2021

[4] California v. Texas, US Supreme Court, Case No. 19-840, June 17, 2021

[5] California v. Texas, US Supreme Court, Case No. 19-840, June 17, 2021

[6] California v. Texas, US Supreme Court, Case No. 19-840, June 17, 2021

[7] California v. Texas, US Supreme Court, Case No. 19-840, June 17, 2021

[8] California v. Texas, US Supreme Court, Case No. 19-840, June 17, 2021

[9] Justice Thomas, Concurring Opinion, California v. Texas, US Supreme Court, Case No. 19-840, June 17, 2021