§ 95.5     Other [Necessary] Expenses—Accounting and Legal Fees
Cite as:    Keith M. Lundin, Lundin On Chapter 13, § 95.5, at ¶ ____, LundinOnChapter13.com (last visited __________).
[1]

The first of 161 categories2 of Other [Necessary]3 Expenses specified by the IRS is “Accounting and legal fees.”4 Chapter 13 debtors with current monthly income (CMI)5 greater than applicable median family income6 are entitled by § 707(b)(2)(A)(ii)(I) to include in monthly expenses the debtor’s “actual monthly expenses” in the category “Accounting and legal fees” issued by the IRS.7

[2]

The category Accounting and legal fees at first blush could be a useful item of expense for Chapter 13 debtors. There are almost always some legal fees involved in a Chapter 13 case—if nothing else, the fees charged by debtor’s counsel for the Chapter 13 case itself. After the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA),8 to succeed in a Chapter 13 case, every debtor must have filed all state and federal tax returns required for the four years prior to the petition.9 For some debtors, there are many delinquent tax returns that must be constructed and filed—often with the help of an accountant or similar professional. Sometimes there are also accounting fees when debtors have more complicated bankruptcy estates. When there is litigation with respect to claims or the dischargeability of debts, legal fees in a Chapter 13 case can be substantial.10

[3]

Without searching beyond the category specified by the IRS, the phrase “Accounting and legal fees” is broad enough to encompass the debtor’s accounting and legal fees to maintain the Chapter 13 case. But there are problems with this conclusion.

[4]

The first problem is in § 707(b)(2)(A)(ii)(I): “Notwithstanding any other provision of this clause, the monthly expenses of the debtor shall not include any payments for debts.”11 Arguably, all prepetition obligations to attorneys or accountants would be “debts” for purposes of the “notwithstanding” sentence. Even the prepetition contract with debtor’s counsel12 creates a “debt” for legal fees that “shall not” be included in monthly expenses otherwise allowed by § 707(b)(2)(A)(ii)(I).13

[5]

This raises the obvious question whether there is any content to the allowance of Other [Necessary] Expenses for Accounting and legal fees when payments for debts are excluded. Perhaps accounting or legal fees that arise after the petition would escape characterization as “debt,” but it is hard to imagine how debtors would predict future accounting and legal fees that would not be debts but would be allowable Other [Necessary] Expenses in the category Accounting and legal fees.

[6]

There are many good reasons not to look deeper into the Internal Revenue Manual for interpretation of the Other [Necessary] Expense category for Accounting and legal fees.14 But if you do look, the IRS states that Accounting and legal fees are allowable Other [Necessary] Expenses if “representation before the Service is needed or meets the necessary expense test. Amount must be reasonable.”15 The Internal Revenue Manual then offers this “Note[]/Tip[]” to revenue agents with respect to the Accounting and legal fees category: “Disallow accounting or legal fees that are not related to remaining current, solving the current liability or do not meet the necessary expense test.”16

[7]

This commentary from the Internal Revenue Manual demonstrates once again why it is inappropriate to consult the Internal Revenue Manual for interpretation of the categories of Other [Necessary] Expenses allowable in Chapter 13 cases pursuant to § 707(b)(2)(A)(ii)(I) of the Bankruptcy Code. The IRS would only allow expenses for Accounting and legal fees with respect to representation before the IRS. The IRS’s interpretation of its own category would exclude accounting or legal fees for a bankruptcy case. Consulting the Internal Revenue Manual leads to the absurd conclusion that Congress incorporated into the disposable income test an expense deduction that it (presumably) knew could only be used to account for litigation with the Treasury Department.

[8]

The category of Other [Necessary] Expenses for Accounting and legal fees overlaps other categories specified by the IRS and may overlap other specific expenses allowed a Chapter 13 debtor with CMI greater than applicable median family income. For example, the fourth category of Other [Necessary] Expenses specified by the IRS—“Court-Ordered Payments”17—will sometimes include obligations imposed on a debtor to pay the legal fees of a former spouse in domestic relations litigation.18 A prepetition debt for legal fees incurred in a domestic relations court would be both an “Accounting and legal fee” and a “Court-Ordered Payment.” Ironically, that same prepetition attorney fee obligation probably is a “debt” that would be excluded from monthly expenses by the “notwithstanding” sentence in § 707(b)(2)(A)(ii)(I).19 But this prepetition debt would probably be a domestic support obligation20 entitled to priority and full payment, and this “debt” would be fully deductible for a Chapter 13 debtor with CMI greater than applicable median family income under § 707(b)(2)(A)(iv)—the third overlapping expense provision that seems to apply.21 Nothing in the Bankruptcy Code as amended by BAPCPA instructs bankruptcy courts and practitioners how to manage these layers of overlapping and inconsistent expense deductions.22

[9]

The overlap of the expense category for Accounting and legal fees and § 707(b)(2)(A)(iv) and the exclusion of “debt” in clause (ii) of § 707(b)(2)(A) has complicated the management of attorney fees in Chapter 13 cases. Detailed elsewhere,23 a Chapter 13 debtor with CMI greater than applicable median family income is entitled to an expense deduction for payment of “all priority claims” under § 707(b)(2)(A)(iv). Priority claims in a Chapter 13 case include expenses of administration under §§ 507(a)(2) and 503(b).24 Compensation allowed a debtor’s attorney in a Chapter 13 case will be an administrative expense under § 503(b)(2) that would be entitled to priority and full payment through the Chapter 13 plan.25 Those attorney fees would be allowable expenses for a Chapter 13 debtor with CMI greater than applicable median family income under § 707(b)(2)(A)(iv)—without regard to whether they fall within the category Accounting and legal fees specified as Other [Necessary] Expenses by the IRS and without regard to whether those fees would be “debts” for purposes of the “notwithstanding” sentence in § 707(b)(2)(A)(ii)(I). In other words, the overlap between the category of Other [Necessary] Expenses for Accounting and legal fees and priority attorney fees under § 707(b)(2)(A)(iv) does not disable Chapter 13 debtors with CMI greater than applicable median family income from accounting for legal fees as an expense deduction in the disposable income calculation.

[10]

You wouldn’t know this from Official Form B22C. The category of Other [Necessary] Expenses for Accounting and legal fees—though undeniably “specified” by the IRS—is absent altogether from the current version of Official Form B22C. There is simply no place on Official Form B22C for debtor’s attorney’s fees in connection with the Chapter 13 case notwithstanding that those fees would both be “legal fees” for purposes of the category of Other [Necessary] Expenses specified by the IRS and be priority claims for purposes of § 707(b)(2)(A)(iv).26

[11]

A Chapter 13 debtor with ongoing legal and accounting expenses might claim a monthly expense deduction for this missing category—perhaps at Line 60.27 The debtor who does so, however, should keep in mind that Form B22C does not mathematically account for additional expenses listed at Line 60 in the calculation of disposable income.

[12]

Attorneys but not accountants are specifically mentioned in 11 U.S.C. § 330 in connection with Chapter 13 cases,28 giving rise to the question whether professional fees other than attorney fees would be expenses of administration entitled to priority that would also be accounted for in the disposable income test as expense deductions under § 707(b)(2)(A)(iv).29 But it has been recognized that an accountant can contribute to confirmation of a Chapter 13 plan in a manner that generates an allowable administrative expense.30 An accountant hired by the debtor in a Chapter 13 case after the petition arguably would not have a “debt” for purposes of the “notwithstanding” sentence in § 707(b)(2)(A)(ii)(I), and the accounting expenses would fall within both the Accounting and legal fees category of Other [Necessary] Expenses specified by the IRS and the allowance for priority administrative expenses in § 707(b)(2)(A)(iv).


 

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

 

3  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.

 

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

 

8  Pub. L. No. 109-8, 119 Stat. 23 (2005).

 

9  See 11 U.S.C. § 1308, discussed beginning at § 42.4  Tax Return Duties—In General.

 

10  See § 294.1 [ Debtors’ Attorneys’ Fees ] § 136.6  Debtors’ Attorneys’ Fees before BAPCPA.

 

11  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, 474.1 [ In General ] § 95.1  In General and 477.1 [ Other [Necessary] Expenses—In General; All Categories ] § 95.4  Other [Necessary] Expenses—In General; All Categories.

 

12  Prepetition written contracts between debtors and bankruptcy counsel are mandated by 11 U.S.C. § 528(a). See § 366.1 [ WARNING! You Are a Debt Relief Agency ] § 4.1  WARNING! You Are a Debt Relief Agency.

 

13  But attorney fees would be priority debts deductible as expenses under 11 U.S.C. § 707(b)(2)(A)(iv). See below in this section, and see § 486.1 [ Total Priority Debts and Divide by 60 ] § 97.1  Total Priority Debts and Divide by 60.

 

14  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.

 

15  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.

 

16  I.R.M. 5.15.1.10 (May 9, 2008). In the May 1, 2004, version of the Internal Revenue Manual, this Notes/Tips comment read: “Disallow any other accounting or legal fees. Disallow costs not related to solving current liability.” I.R.M. 5.15.1.10 (May 1, 2004), available at 2007 WL 2646965.

 

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

 

18  See also §§ 99.1 [ What Claims Are Priority Claims? ] § 73.2  What Claims Are Priority Claims?, 440.1 [ New and Changed Priority Claims ] § 73.3  Priority Claims Added or Changed by BAPCPA and 519.1 [ Domestic Support Obligations ] § 136.21  Domestic Support Obligations after BAPCPA.

 

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

 

20  See 11 U.S.C. § 101(14A), discussed in §§ 440.1 [ New and Changed Priority Claims ] § 73.3  Priority Claims Added or Changed by BAPCPA, 498.1 [ Domestic Support Obligations Must Be Current ] § 113.3  Domestic Support Obligations Must Be Current, 519.1 [ Domestic Support Obligations ] § 136.21  Domestic Support Obligations after BAPCPA and 552.1 [ Domestic Support Obligations: § 523(a)(5) ] § 159.5  Domestic Support Obligations: § 523(a)(5).

 

21  11 U.S.C. § 707(b)(2)(A)(iv) is discussed in § 486.1 [ Total Priority Debts and Divide by 60 ] § 97.1  Total Priority Debts and Divide by 60.

 

22  See §§ 472.1 [ Netting Issues, Including Exclusion of Payments for Debts ] § 94.2  Netting Issues, Including Exclusion of Payments for Debts and 477.1 [ Other [Necessary] Expenses—In General; All Categories ] § 95.4  Other [Necessary] Expenses—In General; All Categories for further discussion of this problem.

 

23  See § 486.1 [ Total Priority Debts and Divide by 60 ] § 97.1  Total Priority Debts and Divide by 60.

 

24  See §§ 99.1 [ What Claims Are Priority Claims? ] § 73.2  What Claims Are Priority Claims?, 294.1 [ Debtors’ Attorneys’ Fees ] § 136.6  Debtors’ Attorneys’ Fees before BAPCPA, 442.1 [ Attorney Fees after BAPCPA ] § 73.9  Attorney Fees after BAPCPA, 486.1 [ Total Priority Debts and Divide by 60 ] § 97.1  Total Priority Debts and Divide by 60 and 515.1 [ Debtors’ Attorneys’ Fees ] § 136.7  Debtors’ Attorneys’ Fees after BAPCPA.

 

25  See §§ 442.1 [ Attorney Fees after BAPCPA ] § 73.9  Attorney Fees after BAPCPA, 486.1 [ Total Priority Debts and Divide by 60 ] § 97.1  Total Priority Debts and Divide by 60 and 515.1 [ Debtors’ Attorneys’ Fees ] § 136.7  Debtors’ Attorneys’ Fees after BAPCPA.

 

26  See §§ 380.1 [ Form B22C: Disposable Income Calculation ] § 36.21  Form 122C-2: Disposable Income Calculation, 442.1 [ Attorney Fees after BAPCPA ] § 73.9  Attorney Fees after BAPCPA and 486.1 [ Total Priority Debts and Divide by 60 ] § 97.1  Total Priority Debts and Divide by 60 for further discussion of this issue.

 

27  See also § 380.1 [ Form B22C: Disposable Income Calculation ] § 36.21  Form 122C-2: Disposable Income Calculation.

 

28  See § 294.1 [ Debtors’ Attorneys’ Fees ] § 136.6  Debtors’ Attorneys’ Fees before BAPCPA.

 

29  See, e.g., In re Allen, No. 02-18758, 2006 WL 2912534, at *1–*2 (Bankr. D. Mass. Oct. 10, 2006) (unpublished) (Chapter 13 debtor cannot hire a professional to assist in analyzing and objecting to a mortgage holder’s claim. “[T]he power to hire professionals, at least those not to be engaged in the use or sale of property under § 1303, is vested in the Chapter 13 trustee and not the debtor. . . . There is nothing in the Bankruptcy Code giving a Chapter 13 debtor authority to deal with claims. . . . While I agree . . . that it would be logical to give the Chapter 13 debtor the power to deal with claims, I am unable to write that authority into the statute. . . . I hold that a Chapter 13 debtor does not have the authority to hire a professional to challenge creditors.”).

 

30  See, e.g., In re Fifer, No. 05-40222-H3-13, 2007 WL 1231677 (Bankr. S.D. Tex. Apr. 25, 2007) (Accountant for debtor allowed $1,050 fee as administrative expense when estate received benefit from six tax return preparations that contributed to confirmed plan that paid administrative and unsecured claims in full.).