The Means Test: The Clunker Allowance

As if the means test wasn’t illogical and opaque enough, consider the unwritten provision for old cars.

Where do you find the unwritten allowance? It’s not in the Bankruptcy Code but in the Internal Revenue Manual at 5.8.20.3. The IRS allows a delinquent taxpayer with a paid for car more than 6 years old or with more than 75,000 miles to deduct an extra $200 for the expense of operating an older or high mileage vehicle. And so, it appears, do bankruptcy judges.

Now, there is a whole other discussion about how or why the IRS’s manual for its collection agents should be grafted onto the Bankruptcy Code. And if this aspect of the IRS’s application of its standards is incorporated into the means test, what other provisions might be next? Dollars to doughnuts, it won’t be one that sorta benefits those foolish enough to have a paid for car.

Anyway, my thanks to attorney Roxanne Daneri of Sacramento who shared the online location of this provision with me. Several times in the past years, I had gone looking for the URL for this provision without success. The UST has long offered the “clunker allowance” as a sop for their position that with no debt on a car, the debtor didn’t get an ownership allowance. That position has since, of course, been cemented by the Supreme Court in Ransom.

So, add to your client interview checklist the mileage on the client’s vehicles. Perhaps the client needs to drive the car around the block a couple of times to make that 75,000 mile point. Or wait to file to til the new model year. That mileage or sheer age may eat up another $200 of CMI. Then, join me in wondering if the means test doesn’t reward the wrong kind of debtor behavior?

Image courtesy of Bogdan Sunitu.

http://www.lindsey-law.com Kyle

I think that it is sad and quite clear who the Bankruptcy Code benefits all too often.
Jeff

Is that $200/month? Just checking because our Ch-13 trustee is a pain about everything, and I’m always advocating the expense of driving a car older that 5 years.
DReidy

Can someone help me with this? I practice in Atlanta, and our Ch. 13 trustees here have just recently taken the position that we can no longer take the extra $200 for the “Clunker allowance.” I have to argue this next week but write a mini brief on it, due Friday, April 15th. I believe their reasoning is found in the amended version of the IRS Manual that can be found online.

Here’s what the new version says, amended March 2011:

Operating Costs

In addition to Ownership Costs, a taxpayer is allowed Operating Costs, by regional and metropolitan area, as shown in the table below. For each automobile, taxpayers will be allowed the lesser of:

a. the amount actually spent monthly for operating costs, or
b. the operating costs shown in the table below.

http://www.irs.gov/businesses/small/article/0,,id=104623,00.html

It completely omits the reference, found in the online version dated 10-22-2010, to the extra $200.

Here’s the older version, still available online at the link:

http://www.irs.gov/irm/part5/irm_05-008-005.html#d0e1407

5.8.5.20.3 (10-22-2010)

Transportation Expenses

Transportation expenses are considered necessary when they are used by taxpayers and their families to provide for their health and welfare and/or the production of income. Employees investigating OICs are expected to exercise appropriate judgment in determining whether claimed transportation expenses meet these standards. Expenses that appear excessive should be questioned and, in appropriate situations, disallowed.

The transportation standards consist of nationwide figures for loan or lease payments referred to as ownership costs and additional amounts for operating costs broken down by Census Region and Metropolitan Statistical Area. Operating costs include maintenance, repairs, insurance, fuel, registrations, licenses, inspections, parking and tolls.

Ownership Expenses – Expenses are allowed for purchase or lease of a vehicle. Taxpayers will be allowed the local standard or the amount actually paid, whichever is less, unless the taxpayer provides documentation to verify and substantiate that the higher expenses are necessary. Generally, auto loan or lease payments will not continue as allowed expenses after the terms of the loan/lease have been satisfied. However, depending on the age or condition of the vehicle, the complete disallowance of the ownership expense may result in a transportation expense allowance that does not adequately meet the necessary expenses of the taxpayer. See paragraph (5) below for the definition and allowances of an older vehicle.

Operating Expenses – Allow the full operating costs portion of the local transportation standard, or the amount actually claimed by the taxpayer, whichever is less, unless the taxpayer provides documentation to verify and substantiate that the higher expenses are necessary. Substantiation for this allowance is not required.

In situations where the taxpayer has a vehicle that is currently over six years old or has reported mileage of 75,000 miles or more, an additional monthly operating expense of $200 will generally be allowed per vehicle.

Any help would be much appreciated. Dennis J. Reidy, Khoshnood Law Firm, Atlanta, GA

The Means Test: The Clunker Allowance

About Cathy