§ 99.6     § 1325(b)(2)(A)(ii): Charitable Contributions (Again?)
Cite as:    Keith M. Lundin, Lundin On Chapter 13, § 99.6, at ¶ ____, LundinOnChapter13.com (last visited __________).
[1]

The management of charitable contributions as expense deductions within the disposable income test has been chaotic because of a long history of statutory malfunctions. The good news is that repeated statutory corrections may have finally stabilized the allowance of most commonly encountered charitable deductions. The whole subject is a hot potato. For the most part, at least since December 20, 2006, Chapter 13 debtors seem not to be subject to unusual scrutiny with respect to charitable deductions.

[2]

There have been four distinct periods within which the treatment of charitable contributions in the disposable income calculation changed.1 Prior to 1998, there was anarchy. There were nonbankruptcy statutes dealing indirectly with the issue,2 but the courts were in broad disagreement whether and to what extent charitable deductions were “reasonable and necessary” expenses for Chapter 13 debtors.3

[3]

In 1998, the Religious Liberty and Charitable Donation Protection Act of 19984 amended § 1325(b)(2)(A) to provide that disposable income for all Chapter 13 debtors did not include

charitable contributions (that meet the definition of “charitable contribution” under section 548(d)(3)) to a qualified religious or charitable entity or organization (as that term is defined in section 548(d)(4)) in an amount not to exceed 15 percent of the gross income of the debtor for the year in which the contributions are made.5
[4]

After a brief debate whether the “reasonable and necessary” test still applied, the courts seemed to conclude that the 1998 legislation evidenced congressional intent that all Chapter 13 debtors were allowed charitable deductions up to the 15 percent described above as a deduction from income in the disposable income calculation.6

[5]

Of course, it would have been simple enough to carry the familiar deduction for charitable contributions quoted above into the reconstruction of the disposable income test in 2005. But there is very little that is simple about the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA).7 Whether by intent or mistake,8 BAPCPA repositioned the 15 percent maximum charitable contribution into § 1325(b)(2)(A)(ii)—in a place that made this deduction available for Chapter 13 debtors with current monthly income (CMI)9 less than applicable median family income10 but placed the charitable deduction out of the flow of § 1325(b)(2) and (3) with respect to debtors with CMI greater than applicable median family income. The effect was startling: in Chapter 13 cases filed after October 17, 2005, debtors with CMI less than applicable median family income were entitled to the charitable contribution deduction up to 15 percent of gross income, but Chapter 13 debtors with CMI greater than applicable median family income were not.

[6]

In the months after the effective date of BAPCPA, several courts issued decisions recognizing that the 15 percent charitable contribution deduction allowed all Chapter 13 debtors by prior law was no longer available to Chapter 13 debtors with CMI greater than applicable median family income.11

[7]

Perhaps more accurately, the enactment of BAPCPA eliminated the 15 percent maximum statutory deduction for charitable contributions but granted Chapter 13 debtors with CMI greater than applicable median family income a new charitable deduction through the incorporation of IRS standards in § 707(b)(2)(A)(ii)(I). Detailed elsewhere,12 one of the categories of Other [Necessary]13 Expenses specified by the IRS14 is “Charitable contributions (Donations to tax exempt organizations).”15 Chapter 13 debtors with CMI greater than applicable median family income are allowed to include charitable contributions in “amounts reasonably necessary to be expended”16—an intermediate step in the calculation of disposable income at confirmation.17 In other words, with the enactment of BAPCPA, Chapter 13 debtors with CMI greater than applicable median family income lost the familiar 15 percent maximum statutory expense deduction for charitable contributions but gained an expense allowance for Charitable contributions in the category of Other [Necessary] Expenses specified by the IRS consistent with § 707(b)(2)(A)(ii)(I).

[8]

But there were problems with this switch of available charitable deductions. The category of Other [Necessary] Expenses for Charitable contributions is not capped by § 707(b)(2)(A)(ii)(I). The category itself, Charitable contributions (Donations to tax exempt organizations), is at least different and perhaps broader than the 15 percent maximum deduction for charitable contributions described in the Bankruptcy Code and quoted above. Also, there is a sentence in § 707(b)(2)(A)(ii)(I) that states “notwithstanding” the allowance of monthly expenses in the categories of Other [Necessary] Expenses specified by the IRS, monthly expenses “shall not include any payments for debts.”18 To the extent a Chapter 13 debtor’s charitable contributions can be characterized as “debts,” the “notwithstanding” sentence excludes those charitable contributions from allowable expenses. This combination of statutory provisions left much uncertainty whether and to what extent a Chapter 13 debtor with CMI greater than applicable median family income could deduct charitable contributions in the disposable income calculation after BAPCPA.

[9]

Congress got the message and quickly passed the Religious Liberty and Charitable Donation Clarification Act of 2006.19 Effective December 20, 2006, this statute amended § 1325(b)(3) to read as follows:

Amounts reasonably necessary to be expended under paragraph (2), other than subparagraph (A)(ii) of paragraph (2), shall be determined in accordance with subparagraphs (A) and (B) of section 707(b)(2), if the debtor has current monthly income [greater than applicable median family income].20
[10]

It seems pretty clear that the 2006 amendment to § 1325(b)(3) was intended to allow Chapter 13 debtors with CMI greater than applicable median family income the same maximum 15 percent charitable contribution that was already available after BAPCPA to Chapter 13 debtors with CMI less than applicable median family income in § 1325(b)(2)(A)(ii). But the 2006 statute is awkwardly drafted and raises questions that could become important to some Chapter 13 debtors.

[11]

For example, does the “other than” reference added to § 1325(b)(3) mean that charitable contributions under § 1325(b)(2)(A)(ii) are the only charitable contributions allowed a Chapter 13 debtor with CMI greater than applicable median family income? Section 1325(b)(3) directs Chapter 13 debtors with CMI greater than applicable median family income to determine amounts reasonably necessary to be expended “in accordance with subparagraphs (A) and (B) of section 707(b)(2)” “other than” the charitable contributions described in § 1325(b)(2)(A)(ii). This could be interpreted to say that the Charitable contributions category of Other [Necessary] Expenses incorporated into the disposable income test by § 1325(b)(3)—and found in subparagraph (A) of § 707(b)(2)—is not available to debtors with CMI greater than applicable median family income. If “other than” does not nullify the incorporation of the Charitable contributions category of Other [Necessary] Expenses specified by the IRS, then, after the 2006 amendments, Chapter 13 debtors with CMI greater than applicable median family income have two available charitable contribution deductions from CMI in the disposable income calculation—creating a whole other set of problems.21

[12]

It seems likely that the courts will conclude that Chapter 13 debtors with CMI greater than applicable median family income filing after December 20, 2006, at least are entitled to the maximum 15 percent Charitable contribution deduction in § 1325(b)(2)(A)(ii). This would take us back to the statutory rules that were in effect between 1998 and 2005.22

[13]

Official Form B22C addresses Charitable contributions at Line 45:

Charitable contributions. Enter the amount reasonably necessary for you to expend each month on charitable contributions in the form of cash or financial instruments to a charitable organization as defined in 26 U.S.C. § 170(c)(1)-(2). Do not include any amount in excess of 15% of your gross monthly income.
[14]

The instructions at Line 45 are a less than perfect statement of the statutory allowance for charitable contributions in § 1325(b)(2)(A)(ii). The phrase “reasonably necessary” appears nowhere in § 1325(b)(2)(A)(ii). That phrase does appear earlier in § 1325(b)(2), but ordinary canons of statutory construction do not compel the interpretation that the reasonably necessary test applies to the charitable contributions that are specifically allowed—not to exceed 15 percent of gross income—in § 1325(b)(2)(A)(ii). This issue—whether the 15 percent charitable contribution allowance was allowed outright or was limited by the “reasonably necessary” standard that preceded it—existed from the enactment of the 1998 amendments to § 1325(b)(2) and was resolved by most courts in favor of the interpretation that the 15 percent maximum charitable contribution deduction was allowed without regard to the reasonably necessary test.23 The drafters of Official Form B22C have aggressively interpreted the 2006 statute to reimpose the reasonably necessary test on charitable contributions. The statute is not written that way, and the Form is now at odds with judicial interpretations of the predecessor statute.

[15]

Notice also that the “15% of your gross monthly income” limitation at Line 45 of Official Form B22C may or may not be the same as the “15 percent of gross income of the debtor for the year in which the contributions are made” in § 1325(b)(2)(A)(ii). It is not obvious why the instructions at Line 45 don’t precisely track the statute.


 

1  See also §§ 165.1 [ Reasonably Necessary for Maintenance or Support ] § 91.3  Reasonably Necessary for Maintenance or Support, 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 477.3 [ Other [Necessary] Expenses—Charitable Contributions (Donations to Tax Exempt Organizations) ] § 95.6  Other [Necessary] Expenses—Charitable Contributions.

 

2  See, e.g., Religious Freedom Restoration Act, 42 U.S.C. § 2000bb.

 

3  See § 165.1 [ Reasonably Necessary for Maintenance or Support ] § 91.3  Reasonably Necessary for Maintenance or Support.

 

4  Pub. L. No. 105-183, 112 Stat. 517 (1998).

 

5  11 U.S.C. § 1325(b)(2)(A), as amended by Religious Liberty and Charitable Donation Protection Act of 1998, Pub. L. No. 105-183, 112 Stat. 517 (1998).

 

6  See § 165.1 [ Reasonably Necessary for Maintenance or Support ] § 91.3  Reasonably Necessary for Maintenance or Support.

 

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

 

8  Subsequent events suggest mistake.

 

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

 

10  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).

 

11  See In re Meyer, 355 B.R. 837, 843 n.6 (Bankr. D.N.M. 2006) (Line 45 of Form B22C incorrectly permits debtor with CMI greater than applicable median family income to take a charitable deduction. “That line 45 of Form B22C is labeled ‘Continued Charitable Deductions’ and is to be filled out by an above-median debtor cannot be used to change the language or the meaning of the statute. ‘The forms shall be construed to be consistent with these rules and the Code.’ F.R.B.P. 9009. . . . [O]ne looks to the statute to determine what the law is, and then interprets the form in light of the statute’s dictate.”); In re Tranmer, 355 B.R. 234, 252 (Bankr. D. Mont. 2006) (Citing In re Diagostino, 347 B.R. 116 (Bankr. N.D.N.Y. 2006), debtors with CMI greater than applicable median family income are not allowed an expense deduction for charitable contributions. “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, and does not incorporate § 1325(b)(2)(A) and (B). . . . Congress did not incorporate Senator Russ Feingold’s (D-Wisconsin) proposed amendment to include the charitable contribution provision of § 1325(b)(2)(A)(i) in determining amounts reasonably necessary to be expended under § 1325(b)(3).”); In re Diagostino, 347 B.R. 116, 118–20 (Bankr. N.D.N.Y. 2006) (“[W]here debtors are above the median income, the court must look to 11 U.S.C. § 707(b)(2)(A) and (B) to determine the debtors’ reasonably necessary expenses. . . . There is no mention of charitable contributions in either subsection. While charitable contributions are not deemed a reasonably necessary expense under § 707(b)(2)(A) and (B), they 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.’ . . . Whether tithing is or is not reasonable for a debtor in bankruptcy is for Washington to decide. . . . [C]onsistency and logic would demand the same treatment of all debtors under Title 11. Until Congress amends § 1325(b)(3), the court’s hands are tied and the tithing principles that this court once applied pre BAPCPA have been effectively mooted.”).

 

12  See § 477.3 [ Other [Necessary] Expenses—Charitable Contributions (Donations to Tax Exempt Organizations) ] § 95.6  Other [Necessary] Expenses—Charitable Contributions.

 

13  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.

 

14  See § 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). 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. See § 477.3 [ Other [Necessary] Expenses—Charitable Contributions (Donations to Tax Exempt Organizations) ] § 95.6  Other [Necessary] Expenses—Charitable Contributions.

 

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

 

17  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.

 

18  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, 477.1 [ Other [Necessary] Expenses—In General; All Categories ] § 95.4  Other [Necessary] Expenses—In General; All Categories and 477.3 [ Other [Necessary] Expenses—Charitable Contributions (Donations to Tax Exempt Organizations) ] § 95.6  Other [Necessary] Expenses—Charitable Contributions.

 

19  Pub. L. No. 109-439, 120 Stat. 3285 (2006).

 

20  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 (2006) (emphasis added).

 

21  See § 477.3 [ Other [Necessary] Expenses—Charitable Contributions (Donations to Tax Exempt Organizations) ] § 95.6  Other [Necessary] Expenses—Charitable Contributions.

 

22  See § 165.1 [ Reasonably Necessary for Maintenance or Support ] § 91.3  Reasonably Necessary for Maintenance or Support.

 

23  See § 165.1 [ Reasonably Necessary for Maintenance or Support ] § 91.3  Reasonably Necessary for Maintenance or Support. See, e.g., Drummond v. Cavanagh (In re Cavanagh), 250 B.R. 107, 112 (B.A.P. 9th Cir. 2000) (“[A] court is not supposed to engage in a separate analysis to determine whether charitable contributions up to fifteen percent are reasonably necessary for the debtor’s maintenance and support.”).