§ 95.7     Other [Necessary] Expenses—Child Care
Cite as:    Keith M. Lundin, Lundin On Chapter 13, § 95.7, at ¶ ____, LundinOnChapter13.com (last visited __________).
[1]

The third of 161 categories of Other [Necessary]2 Expenses specified by the IRS3 is “Child Care (Babysitting, day care, nursery and preschool).”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 of Child Care specified by the IRS as part of the calculation of disposable income under § 1325(b)(2) and (3).7

[2]

Child Care is a broad category of potential expenses somewhat limited by the parenthetical list. The specific mention of “babysitting” and “day care” suggests that child care expenses in or out of the home would be included. “Nursery” and “preschool” would be inclusive of most child care expenses up to school age. The parenthetical references to “preschool” and “nursery” and the absence of any mention of after-school care could be interpreted to exclude child care programs for school-age kids with parents who aren’t home from work when the school day ends. The general category “Child Care” is certainly broad enough to include expenses for after-school programs so long as the parenthetical is not read to limit the reach of the category itself.

[3]

It is possible that bankruptcy courts will default to the Internal Revenue Manual for interpretation of the Child Care category of Other [Necessary] Expenses specified by the IRS.8 The IRS has the following to say about when child care expenses are allowable to a taxpayer negotiating repayment of delinquent taxes: “If it meets the necessary expense test. Only reasonable amounts are allowed.”9 The Internal Revenue Manual then offers the following “Note[]/Tip[]” to revenue agents with respect to the Child Care category: “Cost of child care can vary greatly. Do not allow an unusually large child care expense if more reasonable alternatives are available. Consider the age of the child and if both parents work.”10

[4]

The “necessary expense” test mentioned above is further defined by the IRS: “Other expenses may be considered if they meet the necessary expense test—they must provide for the health and welfare of the taxpayer and/or his or her family or they must be for the production of income. This is determined based on the facts and circumstances of each case.”11

[5]

The Bankruptcy Code imposes no “health and welfare” or “production of income” limitation on the allowance of actual expenses in the category Child Care specified by the IRS. However, even in courts inclined to apply the IRS necessary expense test, it should be relatively easy for Chapter 13 debtors to show that child care expense are for the health and welfare of the debtor or the debtor’s family. When all the adults in a debtor’s household work, the argument may have purchase that child care is necessary for the production of income. That the IRS only allows “reasonable” child care expenses raises again the issue that there is no reasonableness (or necessity) limitation on actual Child Care expenses in a Chapter 13 case under § 707(b)(2)(A)(ii)(I).12

[6]

The Child Care category specified by the IRS potentially overlaps several other expenses allowed Chapter 13 debtors with CMI greater than applicable median family income. For example, Child Care expenses are often addressed in the course of divorce and separation and become domestic support obligations (DSOs) in a Chapter 13 case.13 DSOs that include Child Care expenses are priority claims under § 507(a)(1) and must be paid in full to accomplish confirmation of a Chapter 13 plan under § 1322(a)(2).14 To determine disposable income for a Chapter 13 debtor with CMI greater than applicable median family income, § 707(b)(2)(A)(iv) separately permits an expense deduction for all debts entitled to priority divided by 60.15

[7]

Actual Child Care expenses in the category specified by the IRS will overlap and often be different from those included in DSOs that are priority claims for purposes of § 707(b)(2)(A)(iv). The “actual” Child Care expenses allowed by § 707(b)(2)(A)(ii)(I) within the category specified by the IRS will not reflect the amount or mathematical division by 60 that would be allowed when a DSO includes Child Care expenses under § 707(b)(2)(A)(iv). Discussed elsewhere,16 a DSO that includes Child Care expenses may be a “debt” that would be excluded from monthly expenses by the “notwithstanding” sentence in § 707(b)(2)(A)(ii)(I). This limitation on the deductibility of debts with respect to the category Child Care specified by the IRS under § 707(b)(2)(A)(ii)(I) would not apply to the allowance of Child Care expenses as part of a priority DSO under § 707(b)(2)(A)(iv).17 To the extent a child care expense is a DSO but is not a debt, it is arguably deductible within the category Child Care expenses under § 707(b)(2)(A)(ii)(I) and as a priority debt under § 707(b)(2)(A)(iv). There is no clue in § 707(b)(2) how that overlapping expense should be resolved within the calculation of disposable income.18

[8]

The overlaps for Child Care continue within § 707(b)(2)(A)(ii)(I): detailed below,19 there is a separate category of Other [Necessary] Expenses for “Court-Ordered Payments” that is likely to contain Child Care expenses ordered by a state court in resolution of domestic relations issues. The category Court-Ordered Payments will overlap the category Child Care to the extent child care expenses are also court-ordered. The Bankruptcy Code contains no clear instruction how to resolve overlaps and conflicts among categories of Other [Necessary] Expenses specified by the IRS.20 It is possible that Child Care expenses falling within the category Court-Ordered Payments would be “debts” that are excluded from allowance under § 707(b)(2)(A)(ii)(I) by the “notwithstanding” sentence.21 This exclusion would not resolve the overlap or conflict between the two categories but would disallow Child Care expenses under either category if that expense is a “debt.” As noted above, most “debts” that are Court-Ordered Payments for “Child Care” will also be DSOs entitled to priority that will be separately deductible (after division by 60) under § 707(b)(2)(A)(iv).22

[9]

There is also potential overlap between the Child Care category of Other [Necessary] Expenses and the separate category for “Education” specified by the IRS. Detailed below,23 it is likely that expenses contemplated by the Education category would overlap Child Care expenses with respect to children in day care or after care—if for no other reason because there is no bright line between educating and caring for children in many circumstances. There are no signals in the Bankruptcy Code with respect to the management of expenses that overlap the categories for Child Care and Education specified by the IRS.

[10]

Actual expenses in the category for Child Care specified by the IRS will sometimes overlap school expenses separately allowed by § 707(b)(2)(A)(ii)(IV). Detailed elsewhere,24 § 707(b)(2)(A)(ii)(IV) allows a Chapter 13 debtor with CMI greater than applicable median family income actual expenses for each dependent child younger than 18 years of age up to $1,650 per year to “attend a private or public elementary or secondary school.” To realize this deduction from CMI on the way to disposable income, the debtor must document the expenses and explain why the expenses are “not already accounted for in the National Standards, Local Standards, or Other Necessary Expenses referred to in subclause (i).”25

[11]

In contrast to other overlapping expenses allowed above-median Chapter 13 debtors,26 the Bankruptcy Code specifically addresses this conflict and requires the debtor to document and explain why school expenses allowed by § 707(b)(2)(A)(ii)(IV) are not already accounted for by a category of Other [Necessary] Expenses specified by the IRS such as the Child Care category. This careful statutory attention to the potential for duplicative expenses is enigmatic given that there are so many other conflicts and overlaps that are not directly accounted for by the statute. That Congress specifically dealt with the potential duplication of expenses between the category Child Care specified by the IRS and the education expenses allowed by § 707(b)(2)(A)(ii)(IV) will suggest to some that duplicative and overlapping expenses not addressed by the statute are allowable.27

[12]

The Child Care category specified by the IRS could be read to overlap several separate expense allowances for health care. It is hardly a stretch that “Child Care” would include health care expenses for a child. Health care expenses for a Chapter 13 debtor’s child are addressed by at least four expense allowances in the disposable income calculation: the “Health Care” category of Other [Necessary] Expenses specified by the IRS;28 “Out-of-Pocket Health Care” expenses—a new allowance within the National Standards as modified by the IRS on October 1, 2007;29 care and support of a chronically ill or disabled child described in § 707(b)(2)(A)(ii)(II)30; and the allowance for health insurance and health savings account expenses separately provided by § 707(b)(2)(A)(ii)(I).31 Unlike the allowance for education expenses in § 707(b)(2)(A)(ii)(IV) just discussed, the various allowances for health care do not specify how to manage overlaps and inconsistencies with the category for Child Care specified by the IRS. Prepetition health care expenses for a child—for example, a hospital bill or dental bill—would likely be “debts” that are excluded from actual monthly expenses in the category specified by the IRS because of the “notwithstanding” sentence in § 707(b)(2)(A)(ii)(I).32

[13]

Official Form B22C addresses at Line 35 the Child Care category of Other [Necessary] Expenses specified by the IRS. The instructions at Line 35 state: “Enter the average amount that you actually expend on childcare—such as baby-sitting, day care, nursery and preschool. Do not include other educational payments.” The “baby-sitting, day care, nursery and preschool” portion of the instruction is taken straight from the parenthetical description of the Child Care category specified by the IRS.33 The instruction not to include “other educational payments” is not part of the description of the category for Child Care specified by the IRS. It may signal that the forms drafters realize there is an overlap between the Child Care category of Other [Necessary] Expenses specified by the IRS and other allowances for educational expenses—the separate category for Education specified by the IRS34 and the separate statutory allowance for up to $1,650 per child for elementary and secondary school expenses in § 707(b)(2)(A)(ii)(IV).35

[14]

The statutory source for the exclusion written into Line 35 of the Form is not revealed. It is not obvious how debtors will draw a line between child care expenses and education expenses for children when neither the bankruptcy statute nor the Internal Revenue Manual gives any clue to the boundaries between the two. Notice also that there is no instruction to exclude health care expenses at Line 35, though it is almost certain that one or more of the many categories of Health Care expenses will include expenses that might otherwise be included within the Child Care category specified by the IRS. Do the forms drafters intend to signal that education expenses overlapping child care expenses are excluded at Line 35 but that health care expenses for a child are not excluded? More likely, there are just too many overlapping categories to adequately address all in the Official Form. Debtors are left to make their best guesses about where to put health and education expenses that overlap the Child Care category and to guess whether such expenses can be deducted more than once for § 707(b)(2)(A) purposes.


 

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

 

8  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.

 

9  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.

 

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

 

12  See §§ 471.1 [ Big Picture: Too Many Issues ] § 94.1  Big Picture: Too Many Issues and 477.1 [ Other [Necessary] Expenses—In General; All Categories ] § 95.4  Other [Necessary] Expenses—In General; All Categories for further discussion of this issue.

 

13  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, 441.1 [ New and Changed Treatment of Priority Claims ] § 73.6  Treatment of Priority Claims Changed by BAPCPA and 519.1 [ Domestic Support Obligations ] § 136.21  Domestic Support Obligations after BAPCPA.

 

14  See §§ 440.1 [ New and Changed Priority Claims ] § 73.3  Priority Claims Added or Changed by BAPCPA and 441.1 [ New and Changed Treatment of Priority Claims ] § 73.6  Treatment of Priority Claims Changed by BAPCPA.

 

15  11 U.S.C. § 707(b)(2)(A)(iv), discussed in § 486.1 [ Total Priority Debts and Divide by 60 ] § 97.1  Total Priority Debts and Divide by 60.

 

16  See below in this section, and see §§ 471.1 [ Big Picture: Too Many Issues ] § 94.1  Big Picture: Too Many Issues, 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.

 

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

 

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

 

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

 

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

 

21  See §§ 471.1 [ Big Picture: Too Many Issues ] § 94.1  Big Picture: Too Many Issues, 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.

 

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

 

23  See § 477.7 [ Other [Necessary] Expenses—Education ] § 95.10  Other [Necessary] Expenses—Education.

 

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

 

25  11 U.S.C. § 707(b)(2)(A)(ii)(IV), discussed in § 483.1 [ Education Expenses ] § 95.26  Education Expenses.

 

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

 

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

 

28  See § 477.8 [ Other [Necessary] Expenses—Health Care ] § 95.11  Other [Necessary] Expenses—Health Care. The Health Care category of Other [Necessary] Expenses was eliminated by the IRS in the May 9, 2008, version of the Internal Revenue Manual. See §§ 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.

 

29  See § 475.1 [ National Standards ] § 95.2  National Standards.

 

30  See § 481.1 [ Elderly, Ill or Disabled ] § 95.24  Elderly, Ill or Disabled.

 

31  See § 478.1 [ Health and Disability Insurance ] § 95.21  Health and Disability Insurance.

 

32  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.

 

33  See I.R.M. 5.15.1.10 (May 9, 2008). See also I.R.M. 5.1.15.10 (May 1, 2004), available at 2007 WL 2646965.

 

34  See § 477.7 [ Other [Necessary] Expenses—Education ] § 95.10  Other [Necessary] Expenses—Education.

 

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