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At issue is whether the IRS, by providing tax credits to those who enrolled through Federally established and operated exchanges, violated the law.

PPACA SEC. 1401 creates section 36B of the Internal Revenue Code:

SEC. 1401(a) In General.--Subpart C of part IV of subchapter A of chapter 1 of the Internal Revenue Code of 1986 (relating to refundable credits) is amended by inserting after section 36A the following new section:

SEC. 36B (a) In General.--In the case of an applicable taxpayer, there shall be allowed 
             as a credit against the tax imposed by this subtitle for any taxable year 
             an amount equal to the premium assistance credit amount of the taxpayer for
             the taxable year.

         (b) Premium Assistance Credit Amount.--For purposes of this section--
        
             (1) In general.-- <> The term `premium assistance 
                 credit amount' means, with respect to any taxable year, the sum 
                 of the premium assistance amounts determined under paragraph (2)
                 with respect to all coverage months of the taxpayer occurring 
                 during the taxable year.
 
             (2) Premium assistance amount.--The premium assistance amount determined
                 under this subsection with respect to any coverage month is the amount
                 equal to the lesser of--

                    ``(A) the monthly premiums for such month for 1 or more 
                          qualified health plans offered in the individual   
                          market within a State which cover the taxpayer, the 
                          taxpayer's spouse, or any dependent (as defined in 
                          section 152) of the taxpayer and which were enrolled in 
                          through an Exchange established by the State under 1311 
                          of the Patient Protection and Affordable Care Act, or

                    ``(B) the excess (if any) of--
                           ``(i) the adjusted monthly premium for such 
                                 month for the applicable second lowest cost silver 
                                 plan with respect to the taxpayer, over
                          ``(ii) an amount equal to 1/12 of the product 
                                 of the applicable percentage and the taxpayer's 
                                 household income for the taxable year.

36B(b)(2) specifies the premium assistance amount is equal to the lesser of SEC. 36B(b)(2)(A) or SEC. 36B(b)(2)(B).

SEC. 36B(b)(2)(A) is explicitly specified as applying to an Exchange established by the State under 1311.

For SEC. 36B(b)(2)(B) to be given effect SEC. 36B(b)(2)(B) must necessarily also refer to Exchanges established by the State under 1311, otherwise 36B(b)(2) would be meaningless because a taxpayer can not be enrolled in both a state and federal exchange and whichever is the lesser amount applies.

Courts would have to either ignore the explicit and unambiguous letter of the law and introduce the absurdity that SEC. 36B(b)(2)(A) “Exchange established by the State under 1311" includes “Exchange established by the Federal government under 1321", or simply read out of SEC. 36B(b)(2)(A) “Exchange established by the State under 1311".

The law is not ambiguous or unreasonable, Congress’ intent is clear. There are no "errors" for the judiciary to correct.

The court can not reconstruct a statute to satisfy an agency’s claim or to provide cover for their illegal acts.

The act explicitly provides tax credits for Exchanges established by the State and excludes tax credits for Exchanges established by the Federal government. This was intended as an inducement to states to establish exchanges. Many states did not establish exchanges, this was not anticipated by the authors of PPACA.

A recently made claim revolves around the meaning of "such an exchange", that this phrase makes “Exchange established by the State under 1311" equivalent to “Exchange established by the Federal government under 1321". This claim is based on SEC. 1311 (d)(1)

(d)(1) In general.--An Exchange shall be a governmental agency or nonprofit entity that is established by a State.

and SEC. 1321 (c)(1)(B)(ii)(II) of the PPACA, parts of which I've highlighted.

(c) FAILURE TO ESTABLISH EXCHANGE OR IMPLEMENT REQUIREMENTS.—
  (1) IN GENERAL.—If—
     (A) a State is not an electing State under subsection (b); or
     (B) the  Secretary  determines,  on  or  before  January 1, 2013, that an electing State—
        (i) will not have any required Exchange operational by January 1, 2014; or
        (ii) has not taken the actions the Secretary deter- mines necessary to implement—
               (I) the other requirements set forth in the standards under subsection (a); or
               (II) the requirements set forth in subtitles A and C and the amendments made by such sub- titles;
               the Secretary shall (directly or through agreement with a not- for-profit entity) establish and 
               operate such Exchange within the State and the Secretary shall take such actions as are
               necessary to implement such other requirements.

The Federal government can not compel States to establish an Exchange, it can and has offered inducements to establish such an Exchange. If a State rejects the inducements and has not established an Exchange then the Secretary shall [ ] establish and operate such Exchange within the State that did not establish such an Exchange.

SEC. 36B(b)(2)(A) of the IRS code clearly states "Exchange established by the State". It does not say "Exchange established within the State".

Administration lawyers are attempting to obfuscate by claiming there is ambiguity where none exists, and absent that they are attempting to generate ambiguity. The law is clear: the act explicitly provides tax credits for Exchanges established by the State and excludes tax credits for Exchanges established by the Federal government.