Opinion analysis: Car ownership deduction limited to debtors making car payments

On Tuesday, in Ransom v. FIA Card Services, N.A., the Court by a vote of eight to one (in Justice Kagan’s first opinion) affirmed the Ninth Circuit’s ruling that a debtor may not deduct “vehicle ownership” costs when computing his chapter 13 plan payment if the debtor owns his vehicle “free and clear.”  The statutory language in question was added to the Bankruptcy Code in 2005 by the Bankruptcy Abuse Prevention and Consumer Protection Act (“BAPCPA”).

Chapter 13 debtors propose a plan to the chapter 13 trustee and their creditors.  The plan proposes to pay the debtor’s “disposable income” each month to the chapter 13 trustee for either three years or five years.  If the debtor makes all the payments after the plan is confirmed, the debtor receives a discharge of remaining debts at the end of the period.  The Bankruptcy Code now provides a specific methodology for computing the plan payment.  In general, the debtor begins with his income and deducts “reasonably necessary” living expenses.   For “above-median” debtors, as the debtor is here, “reasonably necessary expenses” are determined in part by various charts prepared by the Internal Revenue Service and used by the IRS when attempting to collect taxes.  The chart in question is called “Vehicle Ownership Cost,” and it allows $471.00 for a debtor’s “First Car” and $322.00 for the “Second Car.”

In this case, because the debtor owned one car, he deducted $471.00 from his income when computing his disposable income and therefore his plan payment.  The credit card company objected on the ground that the ownership chart deduction applies only to debtors who are making car loan or lease payments – which Mr. Ransom was not and therefore his plan payment should be $471.00 higher for five years.  The Ninth Circuit agreed.

The Court agreed also.  Congress, of course, decides what is deductible, but the relevant provision of the code – which Justice Kagan set forth twice in her opinion – provides that “[t]he debtor’s monthly expenses shall be the debtor’s applicable monthly expense amounts specified under the National Standards and Local Standards.”   The code does not define applicable.  The debtor argued that the ownership chart is “applicable” to him because he owns “one car,” and he is permitted to use the “Local Standard table that corresponds to his geographic location, income, family size, or number of cars.”  Obviously he owns a car and the chart therefore “is applicable” to him.  This makes sense, he continued, because debtors who own vehicles have ownership costs even if they make no payments.  By denying a person the right to deduct the chart amount, debtors will be motivated to incur debt before filing or to take out a small loan before filing, which would then permit them to deduct the Local Standards amount.

The creditor countered that the IRS operating manual allows a taxpayer to deduct the ownership cost only when the taxpayer is making loan or lease payments on the car.  The issue was whether it is appropriate to consider the IRS’s view of when the chart is applicable to a chapter 13 debtor.  The Court concluded that, “[a]lthough the statute does not incorporate the IRS’s guidelines, courts may consult this material in interpreting the National and Local Standards;  after all, the IRS uses those tables for a similar purpose—to determine how much money a delinquent taxpayer can afford to pay the Government.  The guide-lines of course cannot control if they are at odds with the statutory language.”

The Court’s opinion further notes that if Congress intended the debtor to be able to deduct every chart, it would not have used the word applicable.  That term serves as a “filter” – i.e., the debtor may take the deduction only if “that deduction is appropriate for him.”  Further, “consideration of BAPCPA’s purpose strengthens our reading of the term ‘applicable.’”  Congress intended debtors to repay “the maximum they can afford.”

In his dissent, Justice Scalia focuses on the text of the statute.  Moreover, he argues, the IRS use of the charts should not be determinative or even relevant, as the IRS “directive forms no part of the Local Standards to which the statute refers.”   He contends that the debtor’s interpretation of Congress’ intent in the language that it used is reasonable, and he notes that there are other deductions that are allowed for which the statute limits the deduction to that which is “reasonable and necessary,” such as care of elderly parents, health and disability insurance, certain energy costs.   Given Congress’s efforts to  make the computations specific, it is “strange for Congress to limit the car-ownership deduction to the somewhat peculiar category ‘cars subject to any amount whatever of outstanding indebtedness’ by the mere word ‘applicable,’ meant as incorporation of a limitation that appears in instructions to IRS agents.”