A new Chapter 13 controversy is brewing over whether a debtor can take an additional $200 “Old Car” operating allowance on the means test for paid-off vehicles that are more than six (6) model years old or that have more than 75,000 miles. While the United States Trustee has generally conceded the issue, a number of Chapter 13 trustees have not. In the Southern District of California where I practice, one of our Chapter 13 trustees has joined the new trend in trying to challenge the extra “Old Car” operating allowance.
Recently this issue has increased in significance since the Supreme Court had decided Ransom v. FIA Card Services. In Ransom the Supreme Court of the United States (“SCOTUS”) held that a debtor may not take an ownership allowance on a paid-off vehicle. Ransom v. FIA Card Services, 562 U. S. ____ (2011). So if you are not able to take the “Old Car” allowance it’s a double whammy. You cannot set aside an expense for replacement (“ownership allowance”) and you probably have a vehicle that is out of warranty and more costly in repairs and maintenance.
Prior to the Ransom decision there was a split of authority between the federal circuit courts as to whether a debtor could take an ownership allowance (currently $496) on a vehicle that had already been paid-off prior to their filing for bankruptcy. The Fifth, Seventh, and Eighth Circuits said that you could take the allowance and the majority of the other circuits did not so permit.
In an effort to be fair to debtors with older model paid cars the Executive Office of the United States Trustee (“EOUST”) has had a policy in place to allow an additional “old car” operating allowance of $200. This policy was not derived from the direct language of the bankruptcy law but in reference to Internal Revenue Collection Standards from which the “Means Test” expense standards were drawn. In furtherance of the Internal Revenue Collection Standards, and to help guide field collection agents, the Internal Revenue Agency distributes an Internal Revenue Manual (“IRM”) to its field offices. The IRM is not a legally binding document but is generally followed by the IRS and carries some persuasive authority with the courts. Similarly, the EOUST has a “Statement of the U.S. Trustee’s Position on Legal Issues Arising Under the Chapter 13 Disposable Income Test,” that is their guiding policy guidance to the Regional United States Trustees but is not legally binding
The IRM states as follows:
I.R.M. 22.214.171.124.3 (10-22-2010)
- Transportation expenses are considered necessary when they are used by taxpayers and their families to provide for their health and welfare and/or the production of income. Employees investigating OICs are expected to exercise appropriate judgment in determining whether claimed transportation expenses meet these standards. Expenses that appear excessive should be questioned and, in appropriate situations, disallowed.
- The transportation standards consist of nationwide figures for loan or lease payments referred to as ownership costs and additional amounts for operating costs broken down by Census Region and Metropolitan Statistical Area. Operating costs include maintenance, repairs, insurance, fuel, registrations, licenses, inspections, parking and tolls.
- Ownership Expenses – Expenses are allowed for purchase or lease of a vehicle. Taxpayers will be allowed the local standard or the amount actually paid, whichever is less, unless the taxpayer provides documentation to verify and substantiate that the higher expenses are necessary. Generally, auto loan or lease payments will not continue as allowed expenses after the terms of the loan/lease have been satisfied. However, depending on the age or condition of the vehicle, the complete disallowance of the ownership expense may result in a transportation expense allowance that does not adequately meet the necessary expenses of the taxpayer. See paragraph (5) below for the definition and allowances of an older vehicle.
- Operating Expenses – Allow the full operating costs portion of the local transportation standard, or the amount actually claimed by the taxpayer, whichever is less, unless the taxpayer provides documentation to verify and substantiate that the higher expenses are necessary. Substantiation for this allowance is not required.
- In situations where the taxpayer has a vehicle that is currently over six years old or has reported mileage of 75,000 miles or more, an additional monthly operating expense of $200 will generally be allowed per vehicle.
(1) The taxpayer who has a 1998 Chevrolet Cavalier with 50,000 miles, will be allowed the standard of $231 per month plus $200 per month operating expense (because of the age of the vehicle), for a total operating expense allowance of $431 per month.
(2) The taxpayer has a 1995 Ford Taurus, with 90,000 reported miles. The vehicle was bought used, and the auto loan will be fully paid in 30 months, at $300 per month. In this situation, the taxpayer will be allowed the ownership expense until the loan is fully paid; i.e., $300 plus the allowable operating expense of $231 per month, for a total transportation allowance of $531 per month. After the auto loan is “retired” in 30 months, the ownership expense is not applicable; however, at that point, the taxpayer will be allowed a $200 operating expense allowance, in addition to the standard $231, for a total operating expense allowance of $431 per month.
- If a taxpayer claims higher amounts of operating costs because he commutes long distances to reach his place of employment, he may be allowed greater than the standard. The additional operating expense would generally meet the production of income test and therefore be allowed if the taxpayer provides substantiation.
- If the amount claimed is more than the total allowed by any of the transportation standards, the taxpayer must provide documentation to verify and substantiate that those expenses are necessary. All deviations from the transportation standards must be verified, reasonable and documented in the case history.
In opposition to the IRM and the Statement of the U.S. Trustee’s Position on Legal Issues Arising Under the Chapter 13 Disposable Income Test guidance some Chapter 13 trustees’ are still arguing against the “Old Car” allowance. The Chapter 13 trustees in large part are relying on three post Ransom cases.
In the first of these cases, In re Hargis, the court denied the claim on the basis that this additional allowance is not in the standards table incorporated by 11 U.S.C. § 707(b)(2). The court noted that an additional $200 vehicle operating expense deduction is neither in the Local Standards nor in the Collection Financial Standards. The court therefore concluded that “as a matter of statutory interpretation… the $200 additional operating expense is not an expense specified under the …Local Standards with the meaning of § 707(b)(2)(A)(ii)(I). In re Hargis, ___ B.R._____, 2011 WL 165123 (Bankr. D. Utah 2011).
In a similar case, Van Dyke, the court disallowed the additional operating expense deduction in part for the reason that the amount referred to in the guideline is not an applicable monthly expense amount specified under the Local Standards as required by the statute. For that reason the court held that the allowance of this additional amount set forth in the guidelines would be inconsistent with the statute. Making reference to the Supreme Court’s observation in Ransom about the role of the guidelines, the court concluded that “allowance of an additional amount as set forth in the IRS guidelines is not a matter of interpretation of the Local Standards for transportation, but one of its revision.” Van Dyke, 2011 WL1833186.
In the final case, In re Schultz, the court reasons that even if it were to utilize the guidance contained in the IRM, it would not necessarily produce the result that the Debtors would urge. The court noted that the additional expense is generally, but not universally allowed. Accordingly, it is discretionary. Additionally the IRS applies Local Standards as caps on expenditures asserted by taxpayers, not as allowances. Accordingly, the Debtors would only be entitled to the amount specified in the standard or their actual expenses, whichever is less. The court went on to conclude since the amount was less on Schedule J for operating expenses than on Form B22C that the Debtors were only eligible for the lesser amount on Schedule J. In re Schultz Case No. 11-40490-JWV-13, (W.D. of Missouri, June 2011).
In support of the IRM and the Statement of the U.S. Trustee’s Position on Legal Issues Arising Under the Chapter 13 Disposable Income Test guidance some debtors counsel have successfully argued in favor of the “Old Car” allowance in the following cases.
In the case of 10-61317_In_Re_Baker, the court supports its decision to allow the “old car” allowance based on the Justice Kagan’s response to Justice Scalia’s dissent in Ransom. Justice Kagan for writing for the majority states, “Because the dissent appears to misunderstand our use of the Collection Financial Standards, and because it may be important for future cases to be clear on this point [emphasis and underlining added], we emphasize again that the statute does not “incorporate” or otherwise “import” the IRS guidance. Post, at 730, 732 (opinion of Scalia, J.). The dissent questions what possible basis except incorporation could justify our consulting the IRS’s view, post, at 732, n., but we think that basis obvious: The IRS creates the National and Local Standards referenced in the statute, revises them as it deems necessary, and uses them every day. The agency might, therefore, have something insightful and persuasive (albeit not controlling) to say about them.” In re Baker, Case No. 10-61317-13 (D. Montana, February 9, 2011).
Other cases that have found the IRM as persuasive in finding for special circumstances and allowance of the expense are as follows: In re Slusher, 359 B.R. 290, 310 (Bankr. D. Nev. 2007), In re O’Conner, No. 08-60641-13, 2008 WL 4516374, at *13 (Bankr. D. Mont. September 30, 2008), In re Carlin, 348 B.R. 795, 798 (Bankr. D. Or., 2006), In re Wilson, 383 B.R. 729, 734 (8th Cir. Bap 2008).
In conclusion, the extra $200 “Old Car” allowance should not be considered a given in a Chapter 13 case. In reviewing the appropriateness of the expense courts are looking to see whether or not the extra expense is a special circumstance. While the IRM may be have some persuasive value, debtor’s counsel should also be prepared to substantiate their estimation of why the allowance accurately reflects the anticipated additional operating expenses for an older high mileage car that in all likelihood is out of warranty. Counsel should also know that where there is a discrepancy between the B22 allowance and the actual Schedule J expense many courts are disinclined to allow the extra expense. If the expense is claimed on B22C, the additional operating expense as expected should also be properly reflected on Schedule J.