Reversing Lower Courts, Supreme Court Holds Puerto Rico Residents Ineligible for SSI

(Parker Tax Publishing May 2022)

In an 8-1 decision, the Supreme Court reversed the First Circuit and held that the Constitution does not require Congress to extend Supplemental Security Income (SSI) benefits to residents of Puerto Rico. According to the Court, Congress's decision to exempt Puerto Rico's residents from most federal income, gift, estate, and excise taxes supplied a rational basis for likewise distinguishing residents of Puerto Rico from residents of the United States for purposes of the SSI benefits program and, to find otherwise, would usher in potentially far-reaching consequences, with serious implications for the Puerto Rican people and the Puerto Rican economy. U.S. v. Madero, 2022 PTC 113 (S. Ct. 2022).

Background

The United States includes five Territories: American Samoa, Guam, the Northern Mariana Islands, the U.S. Virgin Islands, and Puerto Rico. For various historical and policy reasons, including local autonomy, Congress has not required residents of Puerto Rico to pay most federal income, gift, estate, and excise taxes. Likewise, Congress has not extended certain federal benefits programs to residents of Puerto Rico. At the same time, residents of Puerto Rico generally pay social security, Medicare, and unemployment taxes. On the benefits side, under Code Sec. 3121(e), residents of Puerto Rico are eligible for social security and Medicare. Residents of Puerto Rico are also eligible for federal unemployment benefits under Code Sec. 3306(j).

Jose Luis Vaello Madero was born in Puerto Rico in 1954. Puerto Ricans are citizens of the United States pursuant to the Jones Act of 1917 and subsequent legislation granting birthright citizenship to Puerto Rico's native-born inhabitants. In 1985, Madero moved to New York where he lived until 2013. In the later part of his residence in New York, Madero was afflicted with severe health problems, conditions which forced him to seek aid under the Supplemental Security Income (SSI) program. SSI is a federal income supplement program funded by general tax revenues and not by social security taxes. It is designed to help aged, blind, and disabled people, who have little or no income. It also provides cash to meet basic needs for food, clothing, and shelter. In June 2012, Madero was found eligible to receive SSI disability benefits and thus began receiving SSI payments on a monthly basis. The monthly amounts were deposited directly by the Social Security Administration into his checking account in a New York bank.

In July 2013, Madero relocated to Loiza, Puerto Rico to help care for his wife, who had previously moved to Puerto Rico due to her own health issues. When he moved to Puerto Rico, he was no longer eligible to receive SSI benefits. Unaware of Madero's new residence, the U.S. government continued to pay him SSI benefits. The government eventually sued Madero in the U.S. District Court for the District of Puerto Rico to recover those errant payments, which totaled more than $28,000. In response, Madero invoked the Constitution, arguing that Congress's exclusion of residents of Puerto Rico from the SSI program violated the equal-protection component of the Fifth Amendment's Due Process Clause. In negating Madero's equal protection claims, the government relied on two Supreme Court decisions, namely Califano v. Gautier Torres, 435 U.S. 1 (1978) (per curiam) and its sequel Harris v. Rosario, 446 U.S. 651 (1980) (per curiam). The Supreme Court's decision in Gautier Torres is a brief per curiam opinion summarily reversing without oral argument the decision of a three-judge district court that held that the denial of SSI benefits to a recipient who acquired them while a resident of Connecticut, but was thereafter denied them by reason of his moving to Puerto Rico, violated his constitutional right to travel. The decision in Harris involved a class action lawsuit regarding the Aid to Families with Dependent Children program (AFDC), in which the plaintiffs alleged a violation of equal protection because the U.S. citizens residing in Puerto Rico received less financial assistance under that program than persons who resided in the states.

The government cited these cases as permitting the differential treatment of persons who lived in Puerto Rico, pursuant to the plenary powers granted to Congress under the Territory Clause of the Constitution, so long as there was a rational basis for Congress's actions. The government offered two explanations for the exclusion of Puerto Rico residents from SSI benefits: (1) the unique tax status of Puerto Rico, and (2) the costs of extending the program to residents of Puerto Rico.

The district court held that Congress's decision to "disparately classify United States citizens residing in Puerto Rico" ran counter to the very essence and fundamental guarantees of the Constitution itself. Thus, the district court concluded that the exclusion of Puerto Rico residents from receiving SSI violated the Fifth Amendment. The government appealed to the First Circuit.

The First Circuit affirmed the district court's decision. The First Circuit was of the view that Califano was not decided on equal protection grounds, and that Harris did not involve a challenge to SSI direct aid to persons, and thus, neither case foreclosed Madero's contention that his wholesale exclusion from SSI violated the equal protection guarantee. The First Circuit did not view Califano and Harris as a carte blanche for all federal direct assistance programs to discriminate against Puerto Rico residents. There still must be a rational justification for the classification, the court said, and it could see none. The government appealed to the Supreme Court.

Analysis

The Supreme Court reversed the First Circuit and held that the Constitution does not require Congress to extend SSI benefits to residents of Puerto Rico. According to the Court, in Califano and Harris, the Supreme Court applied the deferential rational-basis test to uphold Congress's decision not to extend certain federal benefits to Puerto Rico. The Court said that because Congress chose to treat residents of Puerto Rico differently from residents of the United States for purposes of tax laws, it could do the same for benefits programs. Those two case precedents, the Court said, dictated the result in the instant case. Congress's decision to exempt Puerto Rico's residents from most federal income, gift, estate, and excise taxes supplied a rational basis for likewise distinguishing residents of Puerto Rico from residents of the United States for purposes of the SSI benefits program. Madero's contrary position, the Court observed, would usher in potentially far-reaching consequences, with serious implications for the Puerto Rican people and the Puerto Rican economy. The Constitution, the Court said, does not require that extreme outcome.

Observation: In a dissenting opinion, Justice Sotomayor noted that the SSI program provides a guaranteed minimum income to certain vulnerable citizens who lack the means to support themselves. If they meet uniform federal eligibility criteria, she noted, recipients are entitled to SSI regardless of their contributions, or their state's contributions, to the U.S. Treasury. She found the Court's decision to uphold Congress's decision to exclude citizen residents of Puerto Rico from this important safety-net program to be inconsistent with the Fifth Amendment's equal protection guarantee. She argued that there is no rational basis for Congress to treat needy citizens living anywhere in the United States so differently from others. To hold otherwise, she concluded, is irrational and antithetical to the very nature of the SSI program and the equal protection of citizens guaranteed by the Constitution.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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