In re Luedtke 4.9.14

Case: In re Luedtke

Summary:  The $200 "older vehicle operating expense" mentioned in the IRS Internal Revenue Manual is not part of the IRS National and Local Standards, and therefore cannot be claimed by Chapter 13 debtors.

Material and Procedural Facts:
Chapter 13 Debtors owned a 1993 Ford Taurus with 118,000 miles.  In calculating their monthly expenses for the purposes of determining disposable income, Debtors claimed not only the $472 for standard vehicle operating expense allowed for above-median income Montana debtors with two or more cars, but also an additional $200 “older vehicle operating expense.”

In support of the $200 older vehicle operating expense claim, Debtors argued that the "National Standards and Local Standards . . . issued by the Internal Revenue Service” used to determine allowable expenses under 707(b)(2)(A)(ii)(I) should include the IRS's Internal Revenue Manual (IRM) Chapter 8, part 5.  The relevant portion, 5.8.5.22.3, provides: "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."

Trustee objected to confirmation of the plan, arguing that the additional $200.00 could not be claimed as an expense, and that the Debtors had therefore failed to commit all disposable income to funding their plan.
 
The court overruled Trustee's objection and confirmed the plan.  The Trustee appealed.

The BAP Held:
1) The "older vehicle operating expense" is not part of the "National Standards and Local Standards"  issued by the IRS, and is therefore not allowed in calculating disposable income:  The IRM Part 5, Chapter 15, "The Financial Analysis Handbook", sets forth the National and Local Standards referenced in the Bankruptcy Code, and no "older vehicle operating expense" is mentioned there.  That expense is mentioned only in the chapter of the IRM relied on by the Debtors (chapter 8), and that chapter only deals with compromise proposals received from delinquent taxpayers.  Further, "While Chapter 8 explicitly references, incorporates and applies the procedures set forth in Chapter 15... Nowhere in the Financial Analysis Handbook... is there a general incorporation of the procedures and policies set forth in Chapter 8."

Interesting:
There is a split in the courts about this very issue, and a Supreme Court case --Ransom v FIA Card Services,-- is cited, discussed and argued in this decision and others in support of both positions.  That decision dealt with whether or not a Debtor could claim the $471 "ownership" cost of a car which the Debtor owned free and clear.  The Supreme Court found that Debtor could not, as "the vehicle-ownership category covers only the costs of a car loan or lease."

Ransom was originally a Bankruptcy case in the 9th Circuit: .  The 9th Circuit BAP's decision --In re Ransom-- was appealed to the 9th Circuit Court of Appeals, and that decision in turn was appealed to the Supreme Court, which issued the decision discussed above.

That 9th Circuit BAP decision actually mentions the $200 older vehicle operating expense, saying that debtors are allowed to take it, and used that as part of the reason to deny Debtor's claim of the above $471 expense (emphasis added):

The debtor also argues for allowance of the vehicle ownership expense deduction on equitable grounds. He claims that, due to the age of the car, the likelihood of major repairs and the costs of such repairs will increase. He further contends that the allowable operating costs under the Local Standards do not take into account the costs of major repairs.

However, as the court in Carlin noted:

Numerous safeguards are in place to protect both debtors and creditors. Debtors who own old or high mileage cars "free and clear," are entitled to an extra $200 per month operating expense...."

348 B.R. at 798 (citations omitted). We agree with the court in Carlin and conclude that the debtor's appeal to equity is unavailing.

A bit ironic: the 9th Circuit BAP decision gives a statement seeming to allow the very expense they disallow here, which decision is appealed and ends up in the Supreme Court, and the Supreme Court's decision -- which didn't touch that statement -- is in turn cited by the 9th Circuit BAP to disallow the same expense.  In this decision the 9th Circuit BAP uses a paragraph to explain why their own previous statement seeming to approve of the very expense they disallow here is merely dicta.  The attempt is less than convincing: the court's holding on a specific argument by the debtor explicitly depended on construing the $200 expense as an allowed expense.

In any event, this decision's take on Ransom as applicable here is probably best summed up as follows:

Ransom instructs that the Financial Analysis Handbook, IRM Part 5, Chapter 15, Section 1, may be relevant and even persuasive authority to the extent it helps interpret the National Standards and Local Standards and to the extent it does not conflict with the Bankruptcy Code. But nothing in Ransom supports the proposition that bankruptcy courts may look to other aspects of IRS policy and procedure in order to interpret and supplement the National Standards and Local Standards.