Wednesday, July 01, 2009

Fifth Circuit Allows Ownership Expense on Paid For Vehicle

The Fifth Circuit has held that a debtor may claim an ownership expense on the chapter 7 means test even if the debtor does not have a loan or lease payment. In re Tate, No. 08-60953 (5th Cir. 6/10/09). In the Tate case, the debtors owned two paid for vehicles. If they were allowed to claim a vehicle ownership expense under the means test, their monthly disposable income was $137.66, just under the threshold of $166.67 where their case would be deemed to be abusive. A Bankruptcy Court in Mississippi dismissed the case on the Trustee's motion, a decision which was upheld by the District Court.

However, when the matter reached the Fifth Circuit, the Court concluded that "the debtors should have been able to deduct the transportation ownership deduction under the plain language" of the statute. The Fifth Circuit noted a split between courts following the "plain language" approach and the Internal Revenue Manual test. The Court described the two approaches as follows:

Both approaches start from the text of the statute, which states in part, "The debtor's monthly expenses shall be the debtor's applicable monthly expense amounts specified under the National Standards and Local Standards." (citation omitted). The approaches differ, however, in how they read the word "applicable" in the above sentence.

Courts following the "plain language" approach read the word "applicable" to refer to the selection of an expense amount from the Local Standards that relates to the geographic area in which the debtor resides and the number of vehicles the debtor owns. (citation omitted). Under the plain language approach, the vehicle ownership deduction that "applies" to a debtor is the one that corresponds to his geographic region and number of cars regardless of whether that deduction is an actual expense. (citation omitted). . . .

Courts following the IRM approach conclude that the vehicle ownership deduction is not allowed if the debtor has no debt payment. These courts reach this result by reading the word "applicable" to modify "monthly expense" amounts so the debtor can deduct this expense if he has a "relevant" ownership expense. (citation omitted). In other words, under this approach, if the debtor has no debt or lease payment related to a vehicle, he cannot take the ownership deduction because it is not applicable or relevant to him. This interpretation is called the IRM approach because the courts following it use the methology of the IRM as an interpretive guide for applying the means test. (citation omitted). Under this approach, courts look not only to the Local Standards but also to how the IRS uses the Local Standards in its revenue collection process. Under the IRM, if a taxpayer has no car payment, the taxpayer is only entitled to the vehicle operation expense, not the ownership deduction.

Opinion, pp. 4-5.

In adopting the plain language approach, the Fifth Circuit sided with the Seventh Circuit, which is the only other circuit court to address the issue. In re Ross-Tousey, 549 F.3d 1148 (7th Cir. 2008).

As I see it, the plain language approach is preferable for at least three reasons. First, it is always best to follow the plain language of the statute. Any time that courts bend a statute to arrive at the result that Congress may have intended, they stray into legislating rather than judging. Second, following the Internal Revenue Manual poses a separation of powers issue. While it is bad enough that BAPCPA relies on a standard promulgated by the executive branch to determine eligibility for bankruptcy, at least the National and Local Standards purport to be based on objective factors. However, allowing the IRS to shade those standards through the IRM effectively allows an executive branch agency to amend the statute, which is an obvious problem. Finally, allowing an ownership expense recognizes reality. A car is a depreciating asset. Even if a debtor does not have a debt payment, the trade-in value of the vehicle is going down. Thus, a prudent debtor who does not have a car payment would still be saving for the downpayment on a replacement vehicle. Allowing an ownership expense only for debtors with a car payment penalizes the debtor who keeps a car for the long term as opposed to the person who trades for a shiny, new car every year.

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