§ 95.10     Other [Necessary] Expenses—Education
Cite as:    Keith M. Lundin, Lundin On Chapter 13, § 95.10, at ¶ ____, LundinOnChapter13.com (last visited __________).
[1]

The sixth of 161 categories of Other [Necessary]2 Expenses specified by the IRS3 is “Education.”4 Chapter 13 debtors with current monthly income (CMI)5 greater than applicable median family income6 are allowed a deduction for actual monthly expenses in the category Education specified by the IRS as part of the calculation of disposable income under § 1325(b)(2) and (3).7

[2]

Education is a potentially broad category of expenses limited by statute only that education expenses must be “actual” and must be “for the debtor, the dependents of the debtor, and the spouse of the debtor in a joint case if the spouse is not otherwise a dependent.”8 Digging no further into the Internal Revenue Manual or other secondary sources, it is easy to read the category Education to include school tuition, the cost of courses or training programs, expenses for room, board and transportation in connection with school as well as the costs of books and supplies. The Education category is limited to the debtor and dependents but is not limited to any particular kind of school. Elementary school and secondary school—even the expenses for attending college—fall within the category of Education specified by the IRS.

[3]

Any expansive reading of the Education category specified by the IRS runs into two potentially formidable problems. One is limitations found in the Internal Revenue Manual that the Treasury Department imposes on its agents in the negotiation of payment of delinquent taxes. The other results from numerous overlapping and contradictory educational expenses allowed by other categories of Other [Necessary] Expenses specified by the IRS and by separate expense allowances elsewhere in the Bankruptcy Code.

[4]

Some bankruptcy courts will be tempted to consult the Internal Revenue Manual for interpretation of the Education category of Other [Necessary] Expenses specified by the IRS.9 The Internal Revenue Manual contains the following strange explanation of when expenses in the Education category are allowed delinquent taxpayers:

If it is required for a physically or mentally challenged child and no public education providing similar services is available. Education expenses are also allowed for the taxpayer if required as a condition of employment.10

The IRS then gives these more or less consistent examples:

An attorney must take so many education credits each year or they will not be accredited and could eventually lose their license to practice before the State Bar. A teacher could lose their position or in some states their pay is commensurate with their education credits.11
[5]

Of course, the Bankruptcy Code imposes no prerequisite of physical or mental challenge on actual expenses in the Education category specified by the IRS. There is no bankruptcy analogue to the IRS requirement that public education be unavailable. The “condition of employment” requirement in the Internal Revenue Manual would exclude education expenses for all debtors and their dependents who are not employed—without regard to how “actual” those expenses may be. The policy choices that apparently drive the Treasury Department to severely limit allowance of educational expenses in negotiations for the payment of delinquent taxes collide with many obvious policies that would favor a broad interpretation of the Education category of expenses applicable to Chapter 13 debtors with CMI greater than median family income.

[6]

The Education category specified by the IRS potentially overlaps at least two other categories of Other [Necessary] Expenses specified by the IRS. There is a separate category specified by the IRS for “Student Loans.”12 Also, the Child Care category of Other [Necessary] Expenses could easily capture expenses that would also fall within the Education category specified by the IRS.13 Stretching only a little, Court-Ordered Payments are a third category of Other [Necessary] Expenses specified by the IRS that will often include education expenses in the domestic relations context.14

[7]

Perhaps more significantly, § 707(b)(2)(A)(ii)(IV) contains the following specific additional expense allowance:

[T]he debtor’s monthly expenses may include the actual expenses for each dependent child less than 18 years of age, not to exceed $1,65015 per year per child, to attend a private or public elementary or secondary school if the debtor provides documentation of such expenses and a detailed explanation of why such expenses are reasonable and necessary, and why such expenses are not already accounted for in the National Standards, Local Standards, or Other Necessary Expenses referred to in subclause (I).16
[8]

This separate $1,650-per-year expense allowance creates several interpretive difficulties for the Education category of Other [Necessary] Expenses specified by the IRS. Section 707(b)(2)(A)(ii)(IV) is arguably more specific than the Education category of Other [Necessary] Expenses and could be read as a limitation on the content of the Education category. But this approach runs squarely into the wording of § 707(b)(2)(A)(ii)(IV) which specifically references the Other [Necessary] Expenses in § 707(b)(2)(A)(ii)(I), carving out the overlap and acknowledging that the overlap should not lead to double accounting for actual education expenses for dependent children younger than 18 years old. Seen through another lens, “actual expenses . . . to attend a private or public elementary or secondary school” are allowed by subclause (IV) “in addition” to the Education expenses allowed in the category of Other [Necessary] Expenses specified by the IRS. In other words, subclause (IV) is intended by its own words as an addition to the education expenses already captured by the Education category of Other [Necessary] Expenses.

[9]

One of the first reported decisions to address the Education category of Other [Necessary] Expenses specified by the IRS uncritically adopted the limitations found in the Internal Revenue Manual. In In re Saffrin,17 the debtors claimed a $1,000-per-month actual expense deduction for a child’s college education expenses. Weaving together the Bankruptcy Code and the Internal Revenue Manual, the bankruptcy court generated the following narrow view of the Education expense category:

Section 707(b)(2)(A)(ii)(I) . . . permits a deduction for “Other Necessary Expenses” only if those expenses are listed in the “categories specified” in the Internal Revenue Manual. . . . The categories of “other expenses” in the Internal Revenue Manual do not include expenses associated with a child’s college education. Certainly, one of the “categories specified” is “education.” See Internal Revenue Manual § 5.15.1.10 at ¶ 3. But educational expenses are deemed “necessary” only if the education producing the expenses “is required for a physically or mentally challenged child and no public education providing similar services is available,” or if it is “for the taxpayer and . . . [is] required as [a] condition of employment.” . . . [T]he expenses the [debtors] are incurring to send their daughter to the University of Illinois are not expenses related to the education of a physically or mentally challenged child, nor are they expenses for education required as a condition of employment.18
[10]

The wholesale incorporation of the Internal Revenue Manual into the Bankruptcy Code by the bankruptcy court in Saffrin mimics the mistreatment of the Education category by the drafters of Official Form B22C. Line 34 of Official Form B22C gives the following account of the Education category specified by the IRS:

Other Necessary Expenses: Education for employment or for physically or mentally challenged child. Enter the total average monthly amount that you actually expend for education that is a condition of employment and for education that is required for a physically or mentally challenged dependent child for whom no public education providing similar services is available.
[11]

Of course, the instructions at Line 34 of Official Form B22C are familiar—they almost reproduce the commentary quoted above from the Internal Revenue Manual. This narrow view of the content of the Education category has no source in the Bankruptcy Code.

[12]

If Saffrin and the forms drafters are on the right track, the category of Education expenses specified by the IRS has relatively little utility in Chapter 13 cases. Compelling policy arguments can be framed that Chapter 13 debtors should be encouraged to improve their financial circumstances through education. Education is increasingly expensive, and a narrow reading of the Education expense category is not compelled by the statute.

[13]

It is possible that some Education expenses will be “debts” excluded from monthly expenses by the “notwithstanding” sentence in § 707(b)(2)(A)(ii)(I).19 For example, a debtor obligated to pay tuition expenses arguably has a “debt” that falls within the category of Other [Necessary] Expenses for Education specified by the IRS, but payments on this debt would be excluded from monthly expenses. If excluded from the category of Education expenses, tuition comes back into the disposable income calculation only if it is for a dependent under the age of 18 for purposes of subclause (IV) of § 707(b)(2)(A)(ii) mentioned above.20 Detailed elsewhere,21 the specific allowance for school expenses of dependent children under the age of 18 in § 707(b)(2)(A)(ii)(IV) has been interpreted by several courts to preclude deduction of expenses for college for children over the age of 18—typically without mention of the Education category of Other [Necessary] Expenses specified by the IRS.


 

1  Prior to May 9, 2008, the IRS specified 16 categories of Other [Necessary] Expenses in the Internal Revenue Manual. See I.R.M. 5.15.1.10 (May 1, 2004), available at 2007 WL 2646965. The May 9, 2008, version of the Internal Revenue Manual eliminated the “Health Care” category of Other [Necessary] Expenses, leaving only 15 categories. See I.R.M. 5.15.1.10 (May 9, 2008), discussed in §§ 477.1 [ Other [Necessary] Expenses—In General; All Categories ] § 95.4  Other [Necessary] Expenses—In General; All Categories and 477.8 [ Other [Necessary] Expenses—Health Care ] § 95.11  Other [Necessary] Expenses—Health Care.

 

2  The word “Necessary” is in brackets because there is no such thing as a category of Other Necessary Expenses specified by the IRS as contemplated by 11 U.S.C. § 707(b)(2)(A)(ii)(I). There are categories of Other Expenses specified by the IRS, but the “Necessary” part of that phrase appears only in the Bankruptcy Code and is not specified by the IRS. See § 477.1 [ Other [Necessary] Expenses—In General; All Categories ] § 95.4  Other [Necessary] Expenses—In General; All Categories.

 

3  See § 477.1 [ Other [Necessary] Expenses—In General; All Categories ] § 95.4  Other [Necessary] Expenses—In General; All Categories.

 

4  I.R.M. 5.15.1.10 (May 9, 2008). The specification of this category of Other [Necessary] Expenses by the IRS was the same prior to May 9, 2008. See I.R.M. 5.15.1.10 (May 1, 2004), available at 2007 WL 2646965.

 

5  See § 468.1 [ Current Monthly Income: The Baseline ] § 92.3  Current Monthly Income: The Baseline.

 

6  See § 469.1 [ Comparison of CMI to Applicable Median Family Income: § 1325(b)(3) ] § 92.4  Household Size and Comparison of CMI to Median Family Income: § 1325(b)(3).

 

7  See 11 U.S.C. § 707(b)(2)(A)(ii)(I), discussed in § 471.1 [ Big Picture: Too Many Issues ] § 94.1  Big Picture: Too Many Issues.

 

8  11 U.S.C. § 707(b)(2)(A)(ii)(I).

 

9  See §§ 471.1 [ Big Picture: Too Many Issues ] § 94.1  Big Picture: Too Many Issues, 475.1 [ National Standards ] § 95.2  National Standards, 476.1 [ Local Standards: Housing and Transportation ] § 95.3  Local Standards: Housing and Transportation and 477.1 [ Other [Necessary] Expenses—In General; All Categories ] § 95.4  Other [Necessary] Expenses—In General; All Categories for many good reasons why consulting the Internal Revenue Manual to interpret expense deductions in Chapter 13 cases is a bad idea.

 

10  I.R.M. 5.15.1.10 (May 9, 2008). See also I.R.M. 5.15.1.10 (May 1, 2004), available at 2007 WL 2646965.

 

11  I.R.M. 5.15.1.10 (May 9, 2008). See also I.R.M. 5.15.1.10 (May 1, 2004), available at 2007 WL 2646965.

 

12  See § 477.15 [ Other [Necessary] Expenses—Student Loans ] § 95.18  Other [Necessary] Expenses—Student Loans.

 

13  See § 477.4 [ Other [Necessary] Expenses—Child Care ] § 95.7  Other [Necessary] Expenses—Child Care.

 

14  See § 477.5 [ Other [Necessary] Expenses—Court-Ordered Payments ] § 95.8  Other [Necessary] Expenses—Court-Ordered Payments.

 

15  This amount was $1,500 prior to April 1, 2007.

 

16  11 U.S.C. § 707(b)(2)(A)(ii)(IV), discussed in § 483.1 [ Education Expenses ] § 95.26  Education Expenses.

 

17  380 B.R. 191 (Bankr. N.D. Ill. 2007) (Goldgar).

 

18  380 B.R. at 193.

 

19  See § 472.1 [ Netting Issues, Including Exclusion of Payments for Debts ] § 94.2  Netting Issues, Including Exclusion of Payments for Debts.

 

20  See 11 U.S.C. § 707(b)(2)(A)(ii)(IV), discussed in § 483.1 [ Education Expenses ] § 95.26  Education Expenses.

 

21  See § 483.1 [ Education Expenses ] § 95.26  Education Expenses.