§ 95.6     Other [Necessary] Expenses—Charitable Contributions
Cite as:    Keith M. Lundin, Lundin On Chapter 13, § 95.6, at ¶ ____, LundinOnChapter13.com (last visited __________).
[1]

The second of 161 categories of Other [Necessary]2 Expenses specified by the IRS3 is “Charitable contributions (Donations to tax exempt organizations).”4 A Chapter 13 debtor with current monthly income (CMI)5 greater than applicable median family income6 includes Charitable Contributions in “amounts reasonably necessary to be expended”7—an intermediate step in the calculation of disposable income at confirmation.8

[2]

This category is broadly worded and could be interpreted to allow an expense deduction for charitable contributions by an above-median Chapter 13 debtor to any tax exempt organization in any amount. Presumably, “tax exempt organizations” would be determined by other provisions of the Internal Revenue Code.9

[3]

Detailed elsewhere,10 prior to December 20, 2006, there was an imbalance in § 1325(b)(2) and (3) with respect to whether charitable contributions were amounts reasonably necessary to be expended for a Chapter 13 debtor with CMI greater than applicable median family income. For Chapter 13 debtors with CMI less than applicable median family income, there clearly was an expense allowance for charitable contributions to defined religious or charitable entities not to exceed 15 percent of gross income.11 But for Chapter 13 debtors with CMI greater than applicable median family income, § 1325(b)(3) prior to December 20, 2006, defined amounts reasonably necessary to be expended without incorporation of the charitable contribution deduction in § 1325(b)(2)(A)(ii).

[4]

As a result of this glitch in the statute, prior to December 20, 2006, the only charitable deduction available to Chapter 13 debtors with CMI greater than applicable median family income was the category of Other [Necessary] Expenses for Charitable Contributions specified by the IRS. This was especially odd because the allowable charitable deductions were then quite different depending on income. For Chapter 13 debtors with CMI less than applicable median family income, § 1325(b)(2)(A)(ii) restricted permissible recipients and limited the total amount of charitable contributions includible in amounts reasonably necessary to be expended. The more general category of Other [Necessary] Expenses specified by the IRS applicable to debtors with CMI greater than applicable median family income was differently restricted as to recipients and not limited at all as to amount.

[5]

Effective December 20, 2006, the Religious Liberty and Charitable Donation Clarification Act of 200612 amended § 1325(b)(3) to awkwardly include in the definition of amounts reasonably necessary to be expended by a Chapter 13 debtor with CMI greater than applicable median family income the charitable contributions allowance in § 1325(b)(2)(A)(ii). In Chapter 13 cases filed after December 20, 2006, the charitable contribution allowance of up to 15 percent of gross income described in § 1325(b)(2)(A)(ii) is an amount reasonably necessary to be expended by a Chapter 13 debtor with CMI greater than applicable median family income.13

[6]

Congress may have created an expense duplication with respect to charitable contributions for Chapter 13 debtors with CMI greater than applicable median family income in cases filed after December 20, 2006—or else (curiously) rendered the Other [Necessary] Expense category for Charitable Contributions completely useless. The 2006 amendment rewrote § 1325(b)(3) to state that amounts reasonably necessary to be expended for a debtor with CMI greater than applicable median family income, “other than” the Charitable Contributions allowance described in § 1325(b)(2)(A)(ii), are determined in accordance with § 707(b)(2)(A) and (B).14 The category of Other [Necessary] Expenses specified by the IRS comes into the disposable income calculation for a debtor with CMI greater than applicable median family income through § 707(b)(2)(A)(ii)(I).15 Does the “other than” now in § 1325(b)(3) signal that the Charitable Contributions category of Other [Necessary] Expenses is never applicable to any Chapter 13 debtor? This reading nullifies part of the incorporation of IRS Standards into the determination of disposable income for Chapter 13 debtors—an outcome not to be embraced casually.16

[7]

It might be said that the December 20, 2006, enactment is the more specific treatment of Charitable Contributions, but it could also be argued that both charitable contribution deductions are available because they identify different kinds and amounts that may be allowable expenses for Chapter 13 debtors with CMI greater than applicable median family income. The “actual” charitable contributions allowed by § 707(b)(2)(A)(ii)(I) could be more than the 15 percent of gross income capped by § 1325(b)(2)(A)(ii). The charitable entities or organizations cross-referenced in § 1325(b)(2)(A)(ii) do not necessarily include all “tax exempt organizations” stated in the category of Other [Necessary] Expenses specified by the IRS.

[8]

Courts that choose to dig into the Internal Revenue Manual for guidance with respect to the content of the category for Charitable Contributions specified by the IRS17 will find the following explanation of when a charitable contribution is an allowable expense for a delinquent taxpayer:

If it is a condition of employment or meets the necessary expense tests. Example: A minister is required to tithe according to his employment contract. Disallow any other charitable contributions that are not considered necessary. Example: Review the employment contract.18
[9]

For tax collection purposes the IRS permits a very narrow expense for charitable contributions. The description of this category in the Internal Revenue Manual is substantially narrower than the statutory charitable donation expense added to § 1325(b)(3) of the Bankruptcy Code in 2006. The IRS notion of a taxpayer’s “necessary” charitable contribution is less generous than the charitable contribution allowed by the Bankruptcy Code as a reasonable and necessary expense for a Chapter 13 debtor with CMI less than applicable median family income.19 At least in cases filed after December 20, 2006, there seems to be congressional policy that debtors in bankruptcy will be treated differently with respect to expense deductions for charitable contributions than are delinquent taxpayers under the categories of Other [Necessary] Expenses specified by the IRS. The obvious problem is that these different logics collide in a Chapter 13 case for a debtor with CMI greater than applicable median family income who is arguably entitled to both charitable contribution deductions in the disposable income calculation.

[10]

It is possible that the allowance of expense deductions for charitable contributions under the category specified by the IRS will also collide with the “notwithstanding” sentence in § 707(b)(2)(A)(ii)(I) that monthly expenses “shall not include any payments for debts.”20 It is possible that debtors will come into Chapter 13 cases with pledges to charitable entities and organizations. A prepetition pledge might qualify as a “debt” for purposes of the “notwithstanding” sentence in § 707(b)(2)(A)(ii)(I). If a prepetition pledge to a charitable organization is a debt, then that debt would not be included in the expenses allowed by the category Charitable Contributions specified by the IRS. That same “debt” would not be disqualified as an amount reasonably necessary to be expended for purposes of § 1325(b)(3) in cases filed after December 20, 2006.

[11]

The drafters of Official Form B22C omitted altogether the category of Other [Necessary] Expenses for Charitable Contributions. Instead, at Line 45, charitable contributions not to exceed “15 percent of your gross monthly income” are allowed, but strangely so. The instructions at Line 45 allow a Chapter 13 debtor with CMI greater than applicable median family income to enter “the amount reasonably necessary for you to expend each month on charitable contributions in the form of cash or financial instruments.”

[12]

Line 45 of Official Form B22C looks like an effort to mimic the statutory allowance for charitable contributions in § 1325(b)(2)(A)(ii), but the effort is inaccurate. The phrase “reasonably necessary” nowhere appears in § 1325(b)(2)(A)(ii). The “cash or financial instruments” limitation similarly is not in the statute. “15 percent of your gross monthly income” in Line 45 may or may not be the same as “15 percent of gross income of the debtor for the year in which the contributions are made”—the actual language of § 1325(b)(2)(A)(ii). It is not obvious why the instructions at Line 45 don’t precisely track the statute.

[13]

The lack of parallelism extends further if a Chapter 13 debtor with CMI greater than applicable median family income can also claim charitable contributions in the category of Other [Necessary] Expenses specified by the IRS. Of course, none of the limitations in Line 45 just discussed are found in the category Charitable Contributions specified by the IRS. There is no mention at Line 45 of the narrow restrictions on expenses for charitable contributions described in the Internal Revenue Manual. On the other hand, a “reasonably necessary” condition might be imposed on the category of Other [Necessary] Expenses for Charitable Contributions specified by the IRS if the IRS’s interpretation of the category in the Internal Revenue Manual applies in bankruptcy cases. All in all, it has to be said that Line 45 of Official Form B22C does not accurately reflect either § 1325(b)(2)(A)(ii) or the category of Other [Necessary] Expenses for Charitable Contributions specified by the IRS.

[14]

A Chapter 13 debtor with CMI greater than applicable median family income who claims a charitable contribution different from or in excess of that described in § 1325(b)(3) might claim an actual expense in the category of Charitable Contributions specified by the IRS. This would require some doctoring of Official Form B22C. Line 60 of the Official Form might be the place to claim an additional charitable contribution—again, keeping in mind that expense deductions claimed at Line 60 fall outside the mathematical calculation of disposable income in the Official Form.

[15]

Prior to the 2006 amendments to § 1325(b)(3), several courts commented—somewhat inaccurately—that the expenses allowed Chapter 13 debtors with CMI greater than applicable median family income by § 707(b)(2)(A) and (B) did not include any charitable contributions.21 More accurately, the bankruptcy court in In re Diagostino22 referenced the category for Charitable Contributions specified by the IRS but held the contribution unavailable based on the Internal Revenue Manual:

[C]haritable contributions . . . may be considered as an Other Necessary Expense pursuant to § 5.15.1.10 of the Internal Revenue Manual. . . . There is nothing in the record indicating that the Debtors’ charitable contributions provide for the health and welfare of the Debtors or are for the production of income. . . . [T]here is no evidence establishing the Debtors are required to make charitable contributions in the context of their employment or that either Debtor is a minister. Accordingly, applying the guidelines of the IRS . . . the Debtors’ charitable contributions are not provided for under § 707(b)(2)(A) and (B) and do not meet the necessary expense test under “Other Expenses.”23

 

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 §§ 466.1 [ In General ] § 92.1  In General and 471.1 [ Big Picture: Too Many Issues ] § 94.1  Big Picture: Too Many Issues.

 

8  See §§ 466.1 [ In General ] § 92.1  In General, 467.1 [ Projected Disposable Income: All Debtors ] § 92.2  Projected Disposable Income: All Debtors and 471.1 [ Big Picture: Too Many Issues ] § 94.1  Big Picture: Too Many Issues.

 

9  See, e.g., § 170(c)(1) and (c)(2) of the Internal Revenue Code of 1986.

 

10  See § 487.2 [ Charitable Contributions ] § 99.6  § 1325(b)(2)(A)(ii): Charitable Contributions (Again?).

 

11  See 11 U.S.C. § 1325(b)(2)(A)(ii), discussed in §§ 470.1 [ Section 1325(b)(2)(A) and (B): “Amounts Reasonably Necessary to Be Expended—” When CMI Is Less Than Applicable Median Family Income ] § 93.1  Section 1325(b)(2)(A) and (B): “Amounts Reasonably Necessary to Be Expended—” When CMI Is Less Than Median Family Income and 487.2 [ Charitable Contributions ] § 99.6  § 1325(b)(2)(A)(ii): Charitable Contributions (Again?).

 

12  Pub. L. No. 109-439, 120 Stat. 3285 (Dec. 20, 2006), discussed in § 487.2 [ Charitable Contributions ] § 99.6  § 1325(b)(2)(A)(ii): Charitable Contributions (Again?).

 

13  See § 487.2 [ Charitable Contributions ] § 99.6  § 1325(b)(2)(A)(ii): Charitable Contributions (Again?).

 

14  11 U.S.C. § 1325(b)(3), as amended by Religious Liberty and Charitable Donation Clarification Act of 2006, Pub. L. No. 109-439, 120 Stat. 3285 (Dec. 20, 2006), discussed in § 487.2 [ Charitable Contributions ] § 99.6  § 1325(b)(2)(A)(ii): Charitable Contributions (Again?).

 

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

 

16  See § 487.2 [ Charitable Contributions ] § 99.6  § 1325(b)(2)(A)(ii): Charitable Contributions (Again?) for further discussion.

 

17  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.

 

18  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.

 

19  See § 470.1 [ Section 1325(b)(2)(A) and (B): “Amounts Reasonably Necessary to Be Expended—” When CMI Is Less Than Applicable Median Family Income ] § 93.1  Section 1325(b)(2)(A) and (B): “Amounts Reasonably Necessary to Be Expended—” When CMI Is Less Than Median Family Income.

 

20  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.

 

21  See, e.g., In re Meyer, 355 B.R. 837, 843 (Bankr. D.N.M. 2006) (“[D]ebtors with incomes over the applicable state median income must instead look to § 707(b)(2)(A) and (B) to determine what they are allowed as reasonably necessary expenditures. Section 707(b)(2)(A)(ii) provides a specific itemization of what those reasonably necessary expenses may be. The itemization does not include charitable contributions. In consequence, Debtors, because of their over-median income, are not entitled to claim charitable contributions as necessary expenses in calculating their disposable income for their plan.”); In re Tranmer, 355 B.R. 234, 252 (Bankr. D. Mont. 2006) (“Section 1325(b)(3) requires, for above-median income debtors, application of the means test of § 707(b)(2)(A) and (B), which do not mention charitable contributions among their detailed list of expenses.”).

 

22  347 B.R. 116 (Bankr. N.D.N.Y. 2006).

 

23  347 B.R. at 118–19.