Opinion
Docket No. 14511-19S.
04-30-2021
Marion Jean Antilla-Brown & Vernon James Brown, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
ORDER
Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it is
ORDERED that the Clerk of the Court shall transmit herewith to petitioner and to respondent a copy of the pages of the of the trial of the above case before Judge Mark V. Holmes at Saint Paul, Minnesota on March 18, 2021, containing his oral findings of fact and opinion rendered after the conclusion of trial.
In accordance with the oral findings of fact and opinion, an appropriate decision will be entered.
(Signed) Mark V. Holmes
Judge Bench Opinion by Judge Mark V. Holmes March 18, 2021
THE COURT: In the case of Marion Jean Antilla-Brown and Vernon James Brown, docket number 14511-19S the Court has decided to enter oral findings of fact and opinion and the following represents the Court's oral findings of fact and opinion. This bench opinion is made pursuant to the authority granted by section 7459(b) of the Internal Revenue Code of 1986, as amended and Rule 152 of the Tax Court's own rules of practice and procedure.
Most Americans understand that as their income increases, the tax on it increases. Even as their income increases the rate of tax can increase, at least on that greater portion of income that they earned, but these higher rates usually only apply only to that extra income. Few Americans know about tax cliffs. These are traps in the Tax Code where a small increase in income, or sometimes even in a particular type of income can cause them to fall off into tax rates that are confiscatory, and one hopes not really intended by congress.
This is the story of Marion Jean Antilla-Brown and her husband, Vernon James Brown, and the tax cliff they fell off as part of the Affordable Care Act. Mrs. Brown retired in 2016. She was short of 65 years of age and so in need of health insurance. She and her husband had pension income of about $16,000 and Social Security income that they expected of about $30,000. Only a part of the Social Security income would be taxable income. They expected their taxable income to be about $28,000. And now they're faced with a tax increase of nearly $7,000. The story here is that a central feature of the Affordable Care Act is the provision of subsidies by the Federal government based on income to enable people to purchase insurance on the exchanges.
In 2016 that's what Mrs. Brown did. She was still a few years short of Medicare eligibility. And so she went on behalf of herself and her husband onto the exchange. Now, part of the exchange's function is to figure out which Americans need subsidies to afford the insurance that they buy over the exchange. Mr. and Mrs. Brown were on a fixed income. They thought they knew what they could expect. So they reported that income accurately on the exchange, and they enrolled in a plan that gave them about $600 a month in subsidies. Then their problems began.
Mrs. Brown had health trouble. It escalated into biopsies and surgery and a diagnosis of cancer. The insurance that she got on the exchange did not, in fact, cover as many of the expenses as most people might think they would.get. She had bills. Thousands of dollars in bills that were not covered by the exchange's insurance.
In early 2017 these came due. She started getting them, and she thought that she would have to get a payment plan over time, but she went to the hospital and negotiated a deal. She would pay up front a lower price, instead of a higher price spread over months or perhaps years. To do this she needed to withdraw money from her IRA. This showed good midwestern thrift. She was doing the right thing.
Then there was another problem that they encountered, more trouble. In the middle of August the house they were renting was put up for sale by its owner. They needed to find another place to live. They needed a security deposit, probably a first months rent, definitely a utility deposit and moving expenses to go from one town to another. They again dipped into their IRA, a perfectly normal and good thing to do to have savings that you're able to access when you have an emergency like this. But the result is that when it came time to do their 2017 tax returns -- and they did them early, I noticed in February of 2018 -- they had to add these withdrawals from the IRA to their income. They honestly and accurately did so, but this had an astonishing effect on their monthly subsidies under the Affordable Care Act.
These IRA withdrawals increased their taxable income from about $28,000 to about $45,000, but then even worse these subsidies needed to be paid back under the Affordable Care Act, not according to what their new, adjusted gross income, or taxable income was, but under something called modified adjustable gross income. Under the terms of the Affordable Care Act, if a couple has more than 400 percent of the poverty level not in their adjusted gross income, but in their modified adjusted gross income they would now be taxable on the full amount of the subsidy they received. And when one looks at the rules for calculating modified adjusted gross income, it includes the portion of their Social Security that is not taxed for income tax purposes, because during their working lives they already paid tax on it. "Never mind", the Code says, in calculating modified adjusted gross income one has to add back this nontaxable portion of Social Security. When the math is done, Mrs. Antilla-Brown discovered but for the purpose of qualifying for subsidies they had income not of $45,000, but of $65,036. As it turns out, another part of the government, the Department of Health and Human Services was miscalculated that 400 percent of the poverty level for a family of two in Minnesota is $64,080. That's a $956 difference. This $956 difference triggered an obligation to repay the entire subsidy of $7,515. That means that if they had earned -- if they had taken out $956 less from their IRA or had earned $956 less in pensions that year, they would have had to repay a maximum of $1,900 for their subsidies.
The tax on that extra $956 amounts to more than 580 percent. This is a tax rate found nowhere expressly in the Tax Code. It's just the tax rate that the government says they now owe on that extra income they took out to deal with health emergencies that was not covered by their health insurance subsidized by the government. This is a very steep tax cliff for the Browns to fall off of.
I noticed that the government had no defense on the grounds of tax justice here. There areis none. This is stupid tax policy to have such a high rate of tax on working people when they enter retirement. The only justice involved here is the justice of following the language of the law as it is written. And as a judge I have to follow the law as it is written, and not what justice or even good tax policy might be. I have to rule in the IRS's favor here.
But I do have three final thoughts. The first is that Mr. and Mrs. Antilla-Brown are not the only ones in this situation, especially when the unsuspecting calculate the entire amount of the income they received from Social Security, not only the portion that's taxed is part of the income tax, but the entire portion to determine the eligibility for subsidies. And this is especially true for people who have over the course of their working lives put savings into traditional rather than ROTH IRAs. As we said in another case where people fell off this exact tax cliff, "While we are sympathetic to petitioner's situation, his modified adjusted gross income exceeded eligible levels and we are bound by the statute as written." That's Johnson v. Commissioner, 152 T.C. 121, 129 (2019).
Mrs. Antilla-Brown, you are not the only person in this situation. It's a serious problem across the country. My second thought is that when I was a new judge, I learned that somebody at the IRS Headquarters reads all the bench opinions, even those in small cases like this one. I hope that is still the case and that somebody at the IRS in the Treasury Department recommends some change in the law to eliminate this tax cliff. It is deeply unfair to working people in this country. Or at the very least I urge the IRS to find some means, in some fashion that people can understand, and in time for them to alter their behavior so that they do not face this absurd situation of extraordinarily high tax rates, that they may find themselves facing when they have to draw on their life's savings for unforeseen emergencies.
My third point, and this is directed to you, Mr. George, is that this is a giant tax bill for a couple with Mr. and Mrs. Brown's income. Please include in any subsequent correspondence alternative payment possibilities, but I do have to rule in favor of the respondent in this case.
This concludes the Court's oral findings of fact and opinion in the case.
(Whereupon, at 11:12 a.m., the above-entitled matter was concluded.)