§ 95.20     Other [Necessary] Expenses—Repayment of Loans to Pay Federal Taxes
Cite as:    Keith M. Lundin, Lundin On Chapter 13, § 95.20, at ¶ ____, LundinOnChapter13.com (last visited __________).
[1]

The sixteenth of 161 categories of Other [Necessary]2 Expenses specified by the IRS3 is “Repayment of loans made for payment of Federal Taxes.”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 Repayment of loans made for payment of Federal Taxes specified by the IRS as part of the calculation of disposable income under § 1325(b)(2) and (3).7

[2]

This category of potential expenses is both limited by its description and perhaps emptied of content altogether in Chapter 13 cases by the “notwithstanding” sentence in § 707(b)(2)(A)(ii)(I).8 To fall within this category, an actual expense must be for a loan incurred for payment of federal taxes (only). A loan to pay state taxes would not fall in this category. “Federal Taxes” is broad enough to include all forms of federal taxes, not just income taxes.

[3]

The immediate problem with this category is the precondition of a “loan.” Detailed elsewhere,9 “notwithstanding” any other provision of the sentence that allows a debtor to deduct expenses in the categories specified as Other [Necessary] Expenses issued by the IRS, the monthly expenses of the debtor “shall not include any payments for debts.”10 “Payments for debts” would include “Repayment of Loans” made for payment of federal taxes—effectively draining this category of all meaning for Chapter 13 debtors with CMI greater than applicable median family income. This illustrates again the misguided incorporation of IRS standards into bankruptcy practice by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA).11 Even strict statutory constructionists will have trouble finding content for this category of Other [Necessary] Expenses.

[4]

Looking into the Internal Revenue Manual for interpretation of this category of Other [Necessary] Expenses12 produces the following guideline for revenue agents with respect to when the Repayment of loans made for payment of Federal Taxes is an allowable expense of a delinquent taxpayer: “If the loan is guaranteed by the taxpayer’s assets when those assets are of reasonable value and are necessary to provide for the health and welfare of the family.”13 Prior to May 9, 2008, this commentary in the Internal Revenue Manual read “secured” rather than “guaranteed” in the quoted sentence.14 The substitution of “guaranteed” for “secured” is obscure. Either way, a delinquent taxpayer must have assets that guarantee or secure the Repayment of loans made for payment of Federal Taxes else the IRS does not consider repayment to be an allowable Other [Necessary] Expense.

[5]

There is, of course, no requirement in the Bankruptcy Code that a loan for payment of federal taxes be guaranteed or secured by assets to fall within the category of Other [Necessary] Expenses specified by the IRS. If there is any content to this category, the repayment of any loan to pay federal taxes—whether secured, guaranteed or neither—is an available expense deduction.

[6]

It might be recalled at this point that debts incurred to pay a tax to the United States that would be nondischargeable under § 523(a)(1) are nondischargeable in a Chapter 7 case but are dischargeable at the completion of payments in a Chapter 13 case.15 There is obvious logic from the standpoint of the Treasury Department to allowing a delinquent taxpayer an expense deduction for repayment of loans made to pay federal taxes. This logic is less clear in a Chapter 13 case when the bankruptcy policy choice is to allow the discharge of loans made to pay federal taxes.

[7]

If there is content to this category of Other [Necessary] Expenses, then this category potentially overlaps or duplicates several other categories of expenses allowed Chapter 13 debtors with CMI greater than applicable median family income. A loan to pay federal taxes would fit one or both categories specified by the IRS for “Secured or legally perfected debts”16 or “Unsecured Debts.”17 It is not a little bit curious that the IRS specifies separate categories for secured and unsecured debt expenses and then also a category for Repayment of loans made for payment of Federal Taxes—the overlap or duplication among these categories seems inevitable. Suffice it to say, the Bankruptcy Code allows a Chapter 13 debtor with CMI greater than applicable median family income actual expense deductions in all of these categories—subject to the exclusion of debts in the “notwithstanding” sentence.

[8]

Not surprisingly, there is no provision on Official Form B22C for the category of Other [Necessary] Expenses specified by the IRS for Repayment of loans made for payment of Federal Taxes. This is one of several categories of Other [Necessary] Expenses simply omitted from Form B22C.18 It is conceivable that a debtor with a prepetition loan for the repayment of federal taxes would have granted a security interest in a primary residence or other property necessary for the support of the debtor or a dependent of the debtor. Line 48 of Official Form B22C might then be available to expense repayment of this secured debt—not because it falls within a category of Other [Necessary] Expenses specified by the IRS but because it would then be separately allowed as an expense by § 707(b)(2)(A)(iii).19 If the loan for repayment of federal taxes is not secured, there is no obvious place to claim this expense deduction on Form B22C other than the unsatisfying additional expense at Line 60.


 

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

 

8  See below in this section, and see § 472.1 [ Netting Issues, Including Exclusion of Payments for Debts ] § 94.2  Netting Issues, Including Exclusion of Payments for Debts.

 

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

 

10  11 U.S.C. § 707(b)(2)(A)(ii)(I), discussed in § 472.1 [ Netting Issues, Including Exclusion of Payments for Debts ] § 94.2  Netting Issues, Including Exclusion of Payments for Debts.

 

11  Pub. L. No. 109-8, 119 Stat. 23 (2005). See § 471.1 [ Big Picture: Too Many Issues ] § 94.1  Big Picture: Too Many Issues.

 

12  There are many good reasons why consulting the Internal Revenue Manual to interpret expense deductions in Chapter 13 cases is a bad idea. 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.

 

13  I.R.M. 5.15.1.10 (May 9, 2008).

 

14  I.R.M. 5.15.1.10 (May 1, 2004), available at 2007 WL 2646965.

 

15  Compare 11 U.S.C. § 523(a)(14) and (14A) with 11 U.S.C. § 1328(a)(2). See also §§ 344.1 [ Broadest Discharge Available ] § 157.1  Broadest Discharge Available and 548.1 [ Taxes ] § 159.1  Taxes.

 

16  See § 477.11 [ Other [Necessary] Expenses—Secured or Legally Perfected Debts ] § 95.14  Other [Necessary] Expenses—Secured or Legally Perfected Debts.

 

17  See § 477.12 [ Other [Necessary] Expenses—Unsecured Debts ] § 95.15  Other [Necessary] Expenses—Unsecured Debts.

 

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

 

19  See § 485.1 [ Average Monthly Payments on Account of Secured Debts ] § 96.1  Average Monthly Payments on Account of Secured Debts.