The IRS Challenge:
The Affordable Care Act (ObamaCare) describes two different types of state-based exchanges in the law. One type is state-established. This type finds its statutory authority in Section 1311 of the law. In this section, states that establish their own exchanges are promised federal dollars for subsidies and advanceable tax credits to people who have incomes below 400 percent of the poverty line. Another option for states is to refuse to establish their own exchange. In this instance, states default to a federally operated exchange. The law provides for this type of exchange in another section of the law, Section 1321. Exchanges that find their statutory authority in this section of the law are not granted federal subsidies.
To fix this “glitch,” the IRS made a rule in May 2012 to deliver subsidies and tax credits to federally-operated exchanges. This significantly affects the law, because the exchanges subsidies trigger employer and individual mandates, which effectively function like taxes. Plaintiffs say the IRS lacks authority to make this rule, and the result will be illegal taxation.
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