In a NYTimes op-ed, Professor Will Baude argues that the Obama Administration can easily avoid any adverse decision in King v. Burwell by limiting the case to the particular persons in front of it. That is, the administration won’t collect penalties from the challengers but can continue to provide tax credits for policies purchased on federal exchanges. The regulation extending the Section 36B credit to federal polices would, in substance, remain effective.
I’m having an exceptionally difficult time understanding how this could possibly work. Taxpayers do not automatically enjoy Section 36B tax credits but must instead file a return establishing their entitlement to them, as part of their annual obligation to self-assess their tax liabilities. And if the Supreme Court invalidates the regulation, taxpayers will have no basis for claiming the credit. According to the Supreme Court, an invalid Treasury regulation is a “mere nullity,” Manhattan Gen. Equip. v. Comm’r, 297 U.S. 129 (1936), and taxpayers cannot rely on regulations that improperly interpret a statute. A taxpayer cannot possibly file a true and accurate return based on a “nullity.”
Maybe the IRS would simply announce that it will limit King v. Burwell to the actual litigants and that taxpayers can go ahead and claim the credit. But that proposition would be monumentally corrosive to the tax system and it is unimaginable that the IRS would adopt that approach. Taxpayers must file true and accurate returns with regard to case law — it’s no defense to civil and criminal penalties to argue that contrary case law is irrelevant because the taxpayer was not a party to the actual litigation. The IRS may as well issue a regulation saying “No one has to pay any taxes” and tell taxpayers that they can rely on it.
Also, there is no statute of limitations on false or fraudulent returns. A taxpayer who simply ignores King v. Burwell and claims a tax credit will forever face potential civil and criminal penalties from the IRS. Maybe the taxpayer could avoid prison by saying that he was following the IRS’s press release rather than the tax code. But every year taxpayers are assessed civil penalties when they follow informal agency guidance, like IRS instructions, rather than the actual code.
And what about the IRS’s ignoring of King v. Burwell for employers and some individuals who wish to avoid penalties? If the government ignores King v. Burwell, the IRS’s collection of penalties will require the government to pay taxpayers’ legal fees. Section 7430 generally requires that the IRS pay a taxpayer’s legal fees for fighting tax bills unless the IRS’s position is substantially justified. If King v. Burwell goes against the government, the IRS will not have any justification for collecting penalties, much less a substantial one.
Again, I cannot imagine that any court would hold that the IRS can dodge its obligation to pay legal fees because King v. Burwell applies only to the particular litigants. Section 7430 would be a dead letter otherwise.
I’m also highly skeptical that deliberately subjecting the Treasury to reverse penalties under Section 7430 somehow comports with the obligation to faithfully execute the law, although I’ll leave it to the constitutional law theorists to sort that one out. Will’s op-ed has motivated me to take a look at his broader scholarship on the law of judgments and think about the relevant constitutional framework. But for now, it suffices to say that simply ignoring King v. Burwell would lead to noxious practical results for pretty much everyone involved.