June 2013 – Significant Developments
More health care developments. In recent weeks there have been several significant tax and agricultural law developments. Most recently, the President announced that he was suspending enforcement of the employer mandate (and associated penalties for non-compliance) contained in the 2010 health care law until the beginning of 2015 – after the fall 2014 mid-term elections are over. Under the employer mandate, all “large” employers must provide health insurance for their employees. A “large employer” is defined as an employer with at least 50 full-time employees, and “full-time” means employees working 30 or more hours per week. Whether the President has the authority to unilaterally suspend a duly enacted law passed by the Congress (albeit entirely by the President’s political party) is a question that could end up in court. The employer mandate is contained in Section 1513 of the Patient Protection and Affordable Care Act of 2010. The individual mandate, on the other hand, is not suspended and takes effect beginning in 2014. So practically all citizens will have to have health insurance starting next year, but those working at a “large” company will be on their own to buy their insurance. That will undoubtedly force many persons to buy their insurance from the taxpayer subsidized, government-run healthcare “exchanges” because, as you have probably noted, the price of individual policies on the private market has increased substantially due, in large part, to the health care act. While IRS has ruled that tax credits can be applied to exchanges run by the Department of Health and Human Services in those states (34 of them) that are not setting up exchanges, that ruling is being challenged in court.
The health care law also created a new tax on self-insured medical reimbursement plans. It is an excise tax that is payable on Form 720 and is established via I.R.C. §4376. The tax applies to any plan year ending after September 30, 2012, and the tax is due seven months after the plan’s year-end. So, for calendar year 2012 plans, the first payment is due July 31, 2013. The new tax has a sunset provision. It won’t apply to plan years ending after September 30, 2019. The tax is $1 per the average number of lives covered under the plan for plans that end during fiscal year 2013. It’s $2 thereafter. A “self-insured plan” is any plan for providing accident or health coverage if any portion of the coverage is provided other than through an insurance policy and is established or maintained by 1 or more employers for the benefit of their employees. There is a special rule for health reimbursement arrangements (HRAs). If an HRA is the only self-insured plan that the employer offers, then the tax is based on the number of employees. Covered family members are not counted. The penalty for failure to file is the penalty imposed by I.R.C. §6651. That can be up to 25 percent of the tax due, but “small employers” pay a penalty of the lesser of $135 or 100 percent of the tax due. So, for a married couple with two kids the tax would be $4 dollars right now and the failure to pay the tax would result in a $4 penalty in addition to the requirement to pay the tax. IRS has said, however, that the tax is a fee that the employer can deduct as an expense of doing business. You can view the revised IRS Form 720 here.
Major takings case decided by the U.S. Supreme Court. In June, the U.S. Supreme Court decided a takings case from Florida. In early June the U.S. Supreme Court ruled that the takings analysis that it set forth in a case in the early 1990s applies to situations where the government tries to exact monetary payment purportedly to offset the impact of development. That’s significant because the present case did not involve any dedication of real property. By so holding the Court essentially overruled a Ninth Circuit decision in a different case in 2011. The Court also held that the government bears the burden of proof to show that the mitigation that they are demanding is “roughly proportional” to the benefit derived and that the burden of proof cannot be removed by the government’s denial of a permit application. This is a big case for property owners and developers, particularly in those states lacking a statutory provision that provides the protection given by the Court in this case.
Estate and tax planning. In late June, a bare majority of the U.S. Supreme Court determined that the portion of the Defense of Marriage Act (DOMA) that defined marriage in a manner consistent with Natural Law as a union between one man and one woman was unconstitutional in the absence of a specific federal policy. But, the Court’s ruling does not impact the portion of DOMA that specifies that no state is required to give effect to another state’s recognition of homosexual unions. The case involved a claimed marital deduction in the estate of a decedent who was in a homosexual union at the time of death – the parties were registered as domestic partners under NY law and then participated in a ceremony in Canada. The Court’s decision creates many tax issues including the impact of conflicting state laws, and the effective date of the Court’s decision for tax purposes. Many tax provisions are implicated by the Court’s decision and practitioners may need to consider filing amended returns or protective refund claims. Numerous estate planning provisions are also impacted including the marital deduction, portability of the unused exclusion at the first death, and “gift splitting.” However, the issue is most likely not over. Depending on the outcome of the 2014 mid-term elections, and the 2016 Presidential election, legislation could pass the Congress that would re-enact the stricken portion of DOMA and include a provision that removes judicial review in such matters as this that are largely political in nature. Indeed, Justice Scalia in his dissent noted as much.
Taxation. In June, the U.S. Tax Court issued a significant opinion on the self-employment tax treatment of CRP payments. The Court agreed with the IRS that merely signing a CRP contract subjects the CRP rental payments to self-employment tax in the recipient’s hands. The Court’s opinion is severely flawed and means that completely passive persons such as retirees and other non-farmers must pay self-employment tax on the CRP rents. You can read our discussion of the case here.
Water Law. In June, the U.S. Supreme Court also decided a big water dispute between Oklahoma and Texas involving a Compact governing water in the Red. River. Oklahoma won. Texas cannot take water from the Red River that is located in Oklahoma with Oklahoma’s permission. Oklahoma state law regulating out-of-state water users, was not preempted by the Compact.