I am reading
a case that reminds me of a return from last year’s filing season. I had an
accountant who became upset, arguing that the result was unfair.
I agree, but
this is tax.
I started
practice in the eighties, and a significant portion of my tax education was at
a law school. Tax accounting classes
tended to be staccato-like:
issue-driven, procedural and reliably arithmetic. Tax law classes were case and doctrine-focused: what is income, for example, and we would study the
concept of income as it evolved over the decades.
It seemed to
me that tax law early in my career followed – as a generalization - more of
that law school feel: corporate liquidations and the General Utilities doctrine; the claim of right doctrine and North American Oil; business purpose and
Helvering v Gregory. There were strong
Ways and Means and Finance Committee chairs with some understanding of the
issues (and precedent) their committees were addressing.
But those
were different politicians. Both they and taxes have gotten progressively weirder.
Congress went
on to introduce something called uniform capitalization, arguing that accountants
did not know how to absorb costs into inventory; tax items – personal
exemptions or itemized deductions, for example – that would evaporate like a
Thanos movie moment; an alternative minimum tax that would tax something that
ultimately went down in value; the increasing refundability of tax credits,
meaning that those at the low end of the income scale had as much if not more
opportunity to game the system than any big-baddy McMoneybags did.
Let’s look
at the Fisher case.
Christina
Fisher began the year as a single mom. She married Timothy in November.
Christina was struggling, and she received Obamacare subsidies.
You may
recall that there are two relevant aspects to Obamacare that will come into
play in this case:
(1) If you are below a certain income level, you
might be entitled to some – or even full – subsidy of your health insurance
premiums.
(2) You can use that subsidy to pay your premiums
immediately rather than wait to the end of the year and receive the subsidy via
a tax refund.
There was no
question that Christina was entitled to a subsidy for more than 10 months. Her
circumstances changed when she married; she no longer qualified.
Time to
prepare her taxes.
One is
supposed to attach a reconciliation of projected income when receiving the
subsidy to actual income ultimately reported on the tax return. The Fishers did
not.
The IRS did
it for them. They also wanted approximately $4,500, saying she was not entitled
to the subsidy.
A rational
mind would expect that the tax law would go to a month-by-month calculation.
There was no doubt that she qualified for 10 months. Let’s allow for some doubt
in the month of marriage. Let’s also disqualify the last month of the year
because of Timothy’s income.
At worst she
would have to pay back 2 months, right?
Nah.
She has to
use her household income for the year – including Timothy’s income.
Then she
takes half of that amount for her monthly testing.
Not her OWN
income, mind you, but one-half of combined income for the year.
Who came up
with this?
Not the best
and brightest exercising due deliberation, clearly.
Well, using
even one-half of the combined household income, Christina failed all 10 months
one would have expected her to pass. She owed almost $4,500 to the IRS.
And that is
why my accountant lost his mind last year. He could not believe that what he
was reading is really what was meant. It made no sense! Surely there is an
alternative calculation? Does the tax Code allow a facts and circumstances …?
Ahh, he is
still young. He will learn.
