Opinion
17923-19
01-20-2023
MASOUMEH GHAFFARI & MOHAMMED FARAHMAND, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
DAVID GUSTAFSON JUDGE
Now pending before the Court is the Commissioner's motion for summary judgment. Some of the operative facts are not in dispute, and to that extent we will grant the motion in part pursuant to Tax Court Rule 121(c). To resolve the facts that are in dispute, we will set the case for trial.
Unless otherwise indicated, Rule references are to the Tax Court Rules of Practice and Procedure, and section references are to the Internal Revenue Code (26 U.S.C.) in effect at the relevant times. A citation in this order to a "Doc." refers to a document so numbered in the Tax Court docket record of this case, and a pinpoint citation therein refers to the pagination as generated in the portable document format ("PDF") file. Dollar amounts are rounded.
Background
Initial coverage through the Marketplace for 2018
Effective as of January 1, 2018, petitioners Masoumeh Ghaffari and Mohammed Farahmand applied for and obtained health insurance coverage provided by Cigna Health and Life Insurance Company ("Cigna"). They obtained this coverage through the Health Insurance Marketplace ("the Marketplace") of the Department of Health and Human Services ("HHS"). The Marketplace determined that petitioners were eligible for advance payments of the premium tax credit ("APTC") for their Marketplace coverage. As a result, the Marketplace made monthly premium payments of $1,875 to Cigna as APTC in January through April, totaling $7,500.
Attempted cancellation of coverage for February 2018
Mr. Farahmand became eligible for Medicare on February 1, 2018. Petitioners allege (and, for purposes of Rule 121, we assume): that sometime in January 2018, petitioners' adult son attempted on their behalf to cancel their Cigna coverage; that his attempt was in substantial compliance with the prescribed means for making such a cancellation; and that by error of the Marketplace, that cancellation did not become effective. Petitioners did not know that the Marketplace continued to pay $1,875 monthly premiums for the Cigna coverage for February, March, and April 2018; and they did not intend to have Cigna coverage for that period. (These disputed facts, which we assume here, will be a subject of trial in this case.)
Replacement coverage for May through December 2018
Sometime in April 2018 petitioners' Cigna coverage was canceled, and through the Marketplace Ms. Ghaffari obtained health insurance coverage from Kaiser Permanente ("Kaiser"), effective May 1, 2018. Thereafter, the Marketplace paid monthly premiums of $977 to Kaiser as APTC for May through December, totaling $7,816.
There is no dispute that the premium payments made by the Marketplace to Cigna and Kaiser totaled $15,316. The Marketplace reported these premium payments on Forms 1095-A, "Health Insurance Marketplace Statement".
Petitioners' 2018 income tax return
On March 11, 2019, petitioners timely filed their federal income tax return, Form 1040, "U.S. Individual Income Tax Return", for the year 2018. They filed that return with the status of "married filing jointly", and they claimed no dependents. They reported that their adjusted gross income ("AGI") was $86,950 and that their nontaxable social security benefits were $2,739. They reported a total tax liability of $7,020.
Petitioners did not attach to their return any Form 8962, "Premium Tax Credit (PTC)", and they did not report on that return any tax liability for excess APTC payments.
Examination, NOD, and petition
The IRS examined petitioners' 2018 return and determined that, because they had not reported excess APTC, they had understated their income tax liability. An IRS examiner made an initial determination that petitioners were liable for a § 6662(a) penalty due to a substantial understatement of income tax. On June 19, 2019, the IRS examiner's immediate supervisor approved in writing the initial determination of the penalty.
On August 28, 2019, the IRS issued to petitioners a notice of deficiency ("NOD), which determined a deficiency for petitioners' 2018 taxable year in the amount of $15,316 and a § 6662(a) penalty in the amount of $3,063.
On September 23, 2019, petitioners timely mailed a petition to the Tax Court challenging the NOD. The petition reflects a Virginia residence address.
The Commissioner's motion
The Commissioner filed a motion for summary judgment (Doc. 27), with supporting declarations and documents (Docs. 28-29). Petitioners filed an opposition (Doc. 31), with supporting declarations and documents (Docs. 32-33). And the Commissioner filed a reply (Doc. 34).
Discussion
I. Legal principles
A. Summary Judgment
The purpose of summary judgment is to expedite litigation and avoid unnecessary trials. Fla. Peach Corp. v. Commissioner, 90 T.C. 678, 681 (1988). We may grant a motion for summary judgment when there is no genuine dispute of material fact and a decision may be rendered as a matter of law. Rule 121(b); Elec. Arts, Inc. v. Commissioner, 118 T.C. 226, 238 (2002). The moving party (here, the Commissioner) bears the burden of presenting evidence to "show that there is no genuine dispute as to any material fact and that a decision may be rendered as a matter of law", Rule 121(b). In determining the presence or absence of a genuine dispute, the Court will view factual materials and draw inferences in the light most favorable to the nonmoving party. Dahlstrom v. Commissioner, 85 T.C. 812, 821 (1985). We therefore resolve doubts and draw inferences in favor of petitioners.
B. Advance Premium Tax Credit
We recently explained the APTC as follows in Manzolillo v. Commissioner, T.C. Memo. 2022-107, at *3:
As part of the Patient Protection and Affordable Care Act, Pub. L. No. 111-148, §§ 1401(a), 10105, 124 Stat. 119, 213, 906 (2010), section 36B allows a PTC to subsidize the cost of health insurance purchased through a health insurance exchange by taxpayers meeting certain statutory requirements. See Treas. Reg. § 1.36B-2(a). The PTC is generally available to individuals with household incomes between 100% and 400% of the federal poverty line (FPL) amount for the year at issue. § 36B(c)(1)(A), (d)(3)(B); see McGuire v. Commissioner, 149 T.C. 254, 259 (2017). A taxpayer's household income is the sum of the MAGI of both spouses. Treas. Reg. § 1.36B-1(e)(1).
Recipients can choose to receive the benefits in advance, in which case the payments are made directly to the insurer. See § 36B; McGuire, 149 T.C. at 260. At year end a taxpayer who received an APTC must reconcile the amount of the APTC already received with the entitlement amount. § 36B(f)(2). The taxpayer may do so by completing Form 8962 and filing it with the tax return. If the APTC is greater than the entitlement amount, the taxpayer owes the Government the excess APTC, which will be reflected as an increase in tax. § 36B(f)(2)(A); Keel v. Commissioner, T.C. Memo. 2018-5, at *6.
Citing published HHS guidelines, the Commissioner demonstrates that, for 2018, 400% of the FPL for a family of two was $64,960.Petitioners do not dispute this figure.
See Doc. 27, paras. 35-36 ("According to the guidelines published in the Federal Register on January 2017 by the Secretary of Health and Human Services [under the authority of 42 U.S.C. § 9902(2)], the FPL for a family of two in the 48 contiguous States and the District of Columbia was $16,240 for tax year 2018…. Pursuant to 44 U.S.C. § 1507, a court shall take judicial notice of information properly published in the Federal Register…. 400% of the FPL for a family of two is $64,960").
C. Substantial understatement penalty
Section 6662(a) imposes an "accuracy-related penalty" equal to 20% of the portion of the underpayment that is attributable to various factors, including a "substantial understatement of income tax". § 6662(b)(2). For the purposes of section 6662(b)(2) and (d)(1)(A), an understatement of income tax is "substantial" if it exceeds the greater of "10 percent of the tax required to be shown on the return" or $5,000. § 6662(d)(1)(A).
An "understatement" is defined as the excess of the amount of tax required to be shown on the return over the amount of tax which is shown on the return. § 6662(d)(2)(A).
The Commissioner bears the burden of production with respect to the liability of an individual for any penalty. § 7491(c). To satisfy his burden, the Commissioner must present sufficient evidence to show that it is appropriate to impose the penalty. See Higbee v. Commissioner, 116 T.C. 438, 446 (2001). Once the Commissioner meets his burden of production on penalties, the taxpayer must come forward with persuasive evidence that the Commissioner's showing is incorrect, or with evidence of an available defense, such as "reasonable cause". Rule 142(a); Higbee, 116 T.C. at 447.
Compliance with the written supervisory approval requirement of section 6751(b)(1) is an element of the Commissioner's burden of production on penalties. Graev v. Commissioner, 149 T.C. 485, 493 (2017), supplementing and overruling in part 147 T.C. 460 (2016). The Commissioner's motion shows that such approval was properly obtained in this instance, and petitioners do not dispute that showing.
III. Analysis
A. APTC
The Commissioner moves for summary judgment on the $15,316 of income tax liability attributable to the excess APTC, and a portion of that amount is not in dispute. That is
There is no dispute that for 2018 the Marketplace made premium payments in the amount of $15,316.
There is likewise no dispute that petitioners were ultimately not entitled to the PTC for 2018, because their household income exceeded the relevant limit ($64,960). That is, the Commissioner demonstrates that the total MAGI of the two spouses in this instance was their reported AGI of $86,950 plus social security benefits of $2,739, totaling $89,689, and petitioners do not dispute the math.
There is likewise no dispute that both petitioners had Cigna coverage (and intended to have that coverage) in January 2018 (for which the Marketplace paid a premium of $1,875) and that Ms. Ghaffari had Kaiser coverage (and intended to have that coverage) in May through December (for which the Marketplace paid premium of $7,816), totaling $9,691. That is, there is no dispute that the petitioners received and intended to receive benefit of $9,691 to the extent of those payments.
Petitioners do dispute whether the Cigna premiums paid for February, March, and April 2018 (i.e., $5,625) should be treated as having been paid for them, since (they allege) they had taken appropriate steps to cancel the coverage and had thereby instructed the Marketplace to stop paying Cigna premiums. We hold that there is therefore a genuine dispute of material fact as to whether that $5,625 portion of the premiums, allegedly attributable to Marketplace error, should be deemed to have been paid on their behalf and for their benefit.
Consequently, we will deny summary judgment in part to that extent, but we will grant the Commissioner summary judgment in part to the extent of the undisputed premiums totaling $9,691.
B. Penalty
The IRS determined that for 2018 petitioners were liable for a penalty equal to 20% of their underpayment, based on a substantial understatement of tax. As we explained above, the penalty is due if the understatement exceeds the greater of "10 percent of the tax required to be shown on the return" or $5,000. In this instance, the understatement will be at least $9,691 (if petitioners prove that the remaining $5,625 of the deficiency that the IRS determined is attributable to premiums paid on account of Marketplace error). On that assumption, the total tax due would be the $7,020 of tax reported as due plus the deficiency of $9,691, for a total tax of $16,711. The understatement of $9,691 would exceed both "10 percent of the tax required to be shown on the return" (i.e., 10% x $16,711 = $1,671) and $5,000, so the penalty would be due.
So far as we can tell, petitioners' opposition does not raise any "reasonable cause" defense. It succinctly states (Doc. 31, para. 2) "that any penalty under I.R.C. § 6662(a), if applicable, should be waived under the facts of this case", but it does not specify what those facts are. Reasonable cause is sometimes shown by reliance on an advisor; and petitioners did employ a return preparer to prepare their return; but they make no allegations about what information they provided to the preparer, and they offer no explanation for why their return included no Form 8962 nor otherwise attempted to reconcile the amount of the APTC they had received (or even just the lesser amount they allegedly believed they had received) with the amount to which they were entitled.
It is therefore
ORDERED that the Commissioner's motion for summary judgment is granted in part, pursuant to Rule 121(c), in that we hold there is no genuine dispute of any material fact as to the following:
+ Petitioners were not entitled to PTC for 2018, because their household income exceeded the limit.
+ Petitioners owe the Government for excess APTC for (and their income tax liability is increased by) the premium payments made by the Marketplace in January and May through December, totaling $9,691.
+ Petitioners are liable for substantial underpayment penalty on the deficiency arising from excess APTC.
It is further
ORDERED that the Commissioner's motion for summary judgment is denied in part as to premium payments totaling $5,625 made by the Marketplace in February through April of 2018. We will resolve by means of trial whether petitioners owe the Government for excess APTC in that amount (or any portion thereof). It is further
ORDERED that this case is calendared for trial at the Court's Washington, D.C. trial session beginning at 10:00 a.m. (ET) on Monday, May 8, 2023, in the South Courtroom of the United States Tax Court, 400 Second Street, NW, Washington, D.C., 20217. It is further
ORDERED that, together with this Order, the Clerk of the Court shall serve on the parties: (1) a Notice Setting Case for Trial and (2) a copy of the Standing Pretrial Order for the Court's May 8, 2023, Washington, D.C., trial session.
This Order constitutes official notice to the parties.