Appellate Courts Reach Conflicting Decisions on Premium Tax Credit Regs.

By James A. Beavers, J.D., LL.M., CPA, CGMA


On the same day, the D.C. Circuit and Fourth Circuit Courts of Appeals issued decisions on whether Regs. Sec. 1.36B-2(a)(1), which authorizes a premium tax credit for insurance purchased on health insurance exchanges established by the federal government, is a valid regulation. The D.C. Circuit held that the regulation was invalid because it found that in Sec. 36B Congress unambiguously restricted the credit to insurance purchased on an exchange established by a state or the District of Columbia. The Fourth Circuit held that the regulation was valid because it found that Congress's intent in Sec. 36B was ambiguous and the IRS's interpretation of the statute was reasonable and therefore entitled to deference.


In March 2010, Congress passed the Patient Protection and Affordable Care Act, P.L. 111-148 (PPACA), to "increase the number of Americans covered by health insurance and to decrease the cost of health care" ( National Federation of Independent Business v. Sebelius , 132 S. Ct. 2566, 2580 (2012)). To increase the availability of affordable insurance plans, the PPACA provided for the establishment of health care exchanges (exchanges) designed to allow individuals to purchase competitively priced health care coverage. The PPACA authorizes the states and the District of Columbia to each create their own exchange (state exchanges). However, because the PPACA allowed the states to elect to not create exchanges, the statute also provided for the creation of federal exchanges by the Department of Health and Human Services (the federal exchanges) on which individuals in states that did not set up a state exchange could purchase health care coverage.

Sec. 36B, enacted as part of the PPACA, provides a federal tax credit (the premium tax credit) to low- and middle-income Americans to offset the cost of insurance policies purchased on state exchanges. However, Sec. 36B does not explicitly provide the same credit for policies purchased on the federal exchanges. Because the majority of states elected not to create their own exchanges, this apparently left individuals in those states without access to the credit. To solve this problem, the IRS issued Regs. Sec. 1.36B-2(a)(1), in which it interpreted Sec. 36B broadly to authorize the credit for insurance purchased on the federal exchanges in addition to insurance purchased on state exchanges.

In the D.C. District Court and a district court in the Fourth Circuit, taxpayers residing in states that did not establish exchanges challenged the validity of Regs. Sec. 1.36B-2(a)(1) under the Administrative Procedure Act (APA), claiming that the IRS's interpretation of Sec. 36B in Regs. Sec. 1.36B-2(a)(1) is inconsistent with the text of Sec. 36B. In response, the government argued that in the context of the PPACA as a whole, it was clear that Congress intended that the premium tax credit should apply to both state exchanges and federal exchanges, so the regulation was the correct interpretation of Sec. 36B. Agreeing with the government's argument, both district courts held that the regulation was valid. The taxpayers appealed the decisions respectively to the D.C. Circuit and the Fourth Circuit.

Standing and Cause of Action

The courts were first required to determine whether the taxpayers had standing to bring suit, i.e., that they would suffer an injury that would be traceable to Regs. Sec. 1.36B-2(a)(1). The taxpayers argued that but for the premium tax credits, they would qualify for the unaffordability exemption to the individual mandate penalty and would therefore not be subject to the tax penalty for failing to maintain minimum essential coverage. Thus, due to the credits, they face a direct financial burden because they are forced either to purchase insurance or pay the penalty. Both courts agreed that this was an injury sufficient to give the taxpayers standing to bring suit.

The courts then considered whether the taxpayers had a cause of action to challenge the regulations. The APA provides a cause of action to challenge an agency's final regulation if there is no other adequate remedy in a court. The government argued that the taxpayers could not challenge the regulation under the APA because they had an adequate alternative remedy in the form of a tax refund suit. Both courts concluded that because the taxpayers were not seeking relief in the form of a tax refund, a tax refund suit would not provide an adequate alternative form of relief for that which the taxpayers sought under the APA. Therefore, they found that the taxpayers had a cause of action under the APA.

The Chevron Analysis

In making their decisions on the merits of the cases, the courts both employed what is called the Chevron analysis, from the Supreme Court case Chevron U.S.A., Inc. v. Natural Res. Def. Council, Inc. , 467 U.S. 837 (1984), which is used to determine whether an agency's (in this case, the IRS's) interpretation of a statute in a final regulation is valid. In the Chevron analysis, a court applies a two step-test. In the first step, the court analyzes the statute to see if Congress has directly addressed the precise question at issue in the regulation. If the court finds that Congress has addressed the issue in the statute and the statute has an unambiguous "plain meaning," the court must follow the intent of Congress as expressed by the plain meaning of the statute. If the regulation is in accord with the plain meaning of the statute, it is valid, and if not, it is invalid. Thus, there is no need to complete the second step of the Chevron analysis.

However, if the court finds that a statute is ambiguous regarding Congress's intent and is susceptible to multiple plausible interpretations, the court moves to the second step of the Chevron analysis. In the second step, the court reviews the regulation and considers whether it is a permissible construction of the statute (i.e., it is a reasonable interpretation of the statute). If it is, the court is required to defer to the agency's interpretation.

The Parties' Arguments

Although both the taxpayers and the government argued that the PPACA, read in its totality, clearly expressed Congress's intent, they disputed what that intent actually was. The taxpayers pointed to the explicit language of Sec. 36B, arguing that if individuals can receive credits only for plans enrolled in "through an Exchange established by the State under section 1311 of the [PPACA]," then the IRS clearly cannot give credits to taxpayers who purchased insurance on the federal exchanges, because the federal exchanges are established by the federal government, which, under the applicable definition, is not a state.

The government countered that the language of Sec. 36B should not be read in isolation but, rather, should be read in the context of the entire PPACA. The government argued that when read as a whole, the PPACA established complete equivalence between state and federal exchanges, such that when the federal government establishes an exchange in a state, it does so standing in the states' shoes. Further, the government contended that the taxpayers' interpretation of Sec. 36B rendered other provisions of the PPACA absurd and that the legislative history showed the taxpayers' interpretation was at odds with the overall purpose of the PPACA, which was to achieve near universal health insurance coverage and lower health insurance premiums and the cost of health care in general.

D.C. Circuit's Decision on the Merits

The D.C. Circuit held, after applying only the first step of the Chevron analysis, that Regs. Sec. 1.36B-2(a)(1) was invalid because Sec. 36B unambiguously expressed Congress's intent to restrict the premium tax credit to insurance purchased on a state exchange. It rejected the government's arguments based on principles of statutory construction against this literal interpretation and found the government's other arguments regarding absurd results or the statutory history and purpose of the PPACA were not sufficient to prove that Congress meant something other than what the plain language of Sec. 36B said.

Statutory construction: Because Sec. 36B makes the availability of a premium tax credit dependent on a taxpayer's being enrolled in "an Exchange established by the State under section 1311" of the PPACA, the government made several technical arguments, based on the principles of statutory construction and the language of Section 1311 and Section 1321 (which is referred to in Section 1311), that state exchanges and the federal exchanges were equivalent for purposes of Sec. 36B. The court rejected each of these arguments in turn and ultimately stated:

Those provisions, to be sure, establish some degree of equivalence between state and federal Exchanges—enough, indeed, that if section 36B had authorized credits for insurance purchased on an "Exchange established under section 1311," the IRS Rule would stand. But section 36B actually authorizes credits only for coverage purchased on an "Exchange established by the State under section 1311," 26 U.S.C. § 36B(c)(2)(A)(i), and the government offers no textual basis—in sections 1311 and 1321 or elsewhere—for concluding that a federally-established Exchange is, in fact or legal fiction, established by a state. Moreover, as we have noted, that absence is especially glaring given that the [PPACA] elsewhere provides that a federal territory that establishes an Exchange "shall be treated as a State," 42 U.S.C. § 18043(a), clearly demonstrating that Congress knew how to deem a non-state entity to be a "State." Thus, at least in light of sections 1311 and 1321, the meaning of section 36B appears plain: a federal Exchange is not an "Exchange established by the State."

Absurd results: The government gave three examples of absurd results that would follow from a literal interpretation of Sec. 36B that it claimed showed that it was Congress's intent to allow credits for insurance purchased on all exchanges. One of the examples of the results the government asserted would occur is that the reporting requirements in Sec. 36B(f) as applied to the federal exchanges would be superfluous and nonsensical. The D.C. Circuit acknowledged that it had an obligation to avoid endorsing a statutory interpretation that caused absurd results, but that it was also required to apply the principle narrowly.

The court found that a literal interpretation would not lead to any of the results claimed by the IRS. In the case of the Sec. 36B(f) reporting requirements, the court determined that the taxpayers' interpretation would not make these reporting requirements superfluous, but would merely make them overinclusive. However, the court concluded that even if the premium tax credit were allowed for insurance purchased on a federal exchange, the reporting would in many cases be overinclusive because it would apply to many policies purchased for which a taxpayer was not entitled to a credit because of his or her income level.

Legislative history and the purpose of the PPACA: Finally, the court addressed the government's legislative history arguments, which included the government's claim that restricting the availability of the premium tax credit would be contrary to Congress's broad purpose in passing the PPACA. While the court allowed that legislative history could be evidence of congressional intent, it was not the sole or even the primary source of such evidence. The court stated that its inquiry into the PPACA's legislative history was therefore narrow, and in the face of the statute's plain meaning, it asked only if the legislative history provided evidence that the literal meaning of the statute was demonstrably at odds with the intent of the drafters of the PPACA.

The court found that there was scant legislative history that dealt with the precise question of the availability of the premium tax credit for insurance purchased on the federal exchange, so the government was left urging the court to infer Congress's intent on the availability of tax credits from its silence. The court gave this argument little credit, concluding that as a general principle it should not ignore the text of a statute without a clear indication of what Congress's intent was.

The government fared no better with its argument based on the purpose of the PPACA and how the premium credit was an essential element in the economic structure of the system set up by the act. The government posited that if the premium credit were not allowed for insurance purchased on all exchanges, the entire system would collapse due to adverse selection; therefore, it was inconceivable to think that Congress would have made the subsidies conditional on states' establishing the exchanges. The court found, however, that in other areas of the act (e.g., the part of the act known as the Community Living Assistance Services and Supports, or CLASS, Act), Congress had done exactly what the government had said it was inconceivable Congress would do: introduce significant adverse selection risk to insurance markets.

More generally, the court asserted that the PPACA's ultimate aims shed little light on the precise question at issue, namely, whether subsidies are available on federal exchanges because such exchanges are "established by the State." The court pointed out that the Supreme Court had repeatedly warned that courts cannot assume that whatever furthers a statute's primary objective must be the law, because no legislation pursues its purposes at all costs. Thus, the court found that it could not assume without further evidence that Congress drafted Sec. 36B with the purpose of pursuing the PPACA's overall goals.

Having given its reasons for rejecting the governments various arguments, the court provided a concise summary of its position:

The fact is that the legislative record provides little indication one way or the other of congressional intent, but the statutory text does. Section 36B plainly makes subsidies available only on Exchanges established by states. And in the absence of any contrary indications, that text is conclusive evidence of Congress's intent. . . . To hold otherwise would be to say that enacted legislation, on its own, does not command our respect—an utterly untenable proposition. Accordingly, applying the statute's plain meaning, we find that section 36B unambiguously forecloses the interpretation embodied in the [regulation] and instead limits the availability of premium tax credits to state-established Exchanges.

The Fourth Circuit's Decision on the Merits

The Fourth Circuit, after applying both steps of the Chevron analysis, held that Regs. Sec. 1.36B-2(a)(1) was valid. In the first step of the analysis, focusing on the language of Sec. 36B in the context of the entire PPACA, the court found that the statute was not so clear and unambiguous that it foreclosed an interpretation other than a literal interpretation of the language of Sec. 36B alone. In the second step of the analysis, the court concluded that, based primarily on the broad policy goals of the PPACA, the IRS's interpretation of Sec. 36B in the regulation was reasonable and thus the regulation was entitled to judicial deference.

First step of the Chevron analysis: The Fourth Circuit found that in the first step of the Chevron analysis, the court should not determine whether a particular interpretation of a statute is correct, but whether Congress's intent in enacting the statute is so clear that there can be only one interpretation. The taxpayers made a two-prong argument: (1) that the language of Sec. 36B clearly does not include federal exchanges; and (2) in Sections 1311 and 1321 of the PPACA, state exchanges and federal exchanges are referred to separately, so the omission of a reference to federal exchanges in Sec. 36B represented an intentional choice by Congress to limit premium tax credits to insurance purchased on a state exchange.

The court admitted that there was a "certain sense" to the taxpayers' position. However, the court also considered the government's arguments regarding the language of Sec. 36B in the context of the entire PPACA and in particular Sections 1311 and 1321. Section 1311 directs states to set up exchanges, and Section 1321 provides that the Department of Health and Human Services must set up an exchange in a state where the state does not do so. According to the government, this necessarily meant that the federal exchanges were the equivalent of the state exchanges. Accordingly, the reference to a state exchange in Sec. 36B also encompassed the federal exchanges, and therefore the premium tax credits applied to insurance purchased on those exchanges. The court credited this as being a stronger argument than the taxpayers', but only slightly so; consequently, it found that the statutory language alone did not unambiguously support either the taxpayers' or the government's interpretation of the statute.

The government made the same ­arguments about the literal interpretation leading to absurd results and the legislative history and purpose of the PPACA in the Fourth Circuit as it made in the D.C. Circuit, so the court reviewed them to determine if they were strong enough to render the government's interpretation of Sec. 36B as its sole unambiguous meaning. With regards to the absurd results arguments, the court once again concluded that the government's arguments were the stronger, but not strong enough to win the day for the government.

With respect to the legislative history, the Fourth Circuit, like the D.C. Circuit, did not find it particularly useful because it did not contain any strong evidence of what Congress's intent was for the issue at hand. The court acknowledged that several floor statements made by senators seemed to support the government's position, but it was possible to construe those statements in a way that they did not support it. The court also noted that while there was no compelling support in the legislative history for the taxpayers' argument that the premium tax credits were restricted to state exchanges with the intent of coercing states to set up exchanges, it was a plausible argument. Thus, the court found that the legislative history did not support either the government's or the taxpayers' argument.

Second step of the Chevron analysis: Having found that the statute was ambiguous, and thus Congress had not "directly spoken to the precise question at issue," the court moved to the second step of the Chevron analysis. In the second step, it determined that the IRS's interpretation of the statute in Regs. Sec. 1.36B-2(a)(1) was reasonable, so it was required to defer to the IRS's interpretation.

The court was persuaded that the regulation was reasonable primarily because it advanced the broad policy goals of the PPACA, which, as the Supreme Court had described in National Federation of Independent Business , were to increase the number of Americans covered by health insurance and decrease the costs of health care. The court explained that a premium tax credit that covered insurance purchased on all exchanges was an essential component of the system set up by the PPACA, a proposition that the court said even the taxpayers did not dispute. It had become even more important, as the IRS was aware at the time it wrote the regulation, when most states had declined the federal government's invitation to set up their own exchanges. As the court stated:

It is thus entirely sensible that the IRS would enact the regulations it did, making Chevron deference appropriate. Confronted with the Act's ambiguity, the IRS crafted a rule ensuring the credits' broad availability and furthering the goals of the law. In the face of this permissible construction, we must defer to the IRS Rule.


The D.C. Circuit has vacated the decision of the three-judge panel in Halbig and granted the government's request for an en banc hearing (i.e., a hearing by the full court) of the case. It is widely believed that the D.C. Circuit sitting en banc will, like the Fourth Circuit, hold that the regulation is valid and that subsidies are available for insurance purchased on federal exchanges. If this happens, there will be no split between the appellate circuits, making it less likely that the Supreme Court will agree to hear either case. However, given the importance of the issue, the Supreme Court might still agree to hear one of the cases, and, in addition, there are several other cases involving this same issue currently pending in other circuits. Thus, even if the D.C. Circuit agrees with the Fourth Circuit, a new circuit split may develop that encourages the Supreme Court to resolve the issue.

Halbig v. Burwell , No. 14-5018 (D.C. Cir. 7/22/14); King v. Burwell , No. 14-1158 (4th Cir. 7/22/14)












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