Delegation of Authority

Did Congress intend for an administrative agency in the executive branch to have the power to determine whether a debtor can receive a discharge in a chapter 7 case?  Or whether a debtor can save a home in a chapter 13 case or should be committed to making payments in a chapter 13 plan for a five year rather than three year period?  Or whether an unsecured creditor should get paid in a chapter 13 case?  Did Congress intend that this power should be exercised from time to time by that agency without notice to the bankruptcy community or an opportunity for comment?  And did Congress intend that this unbridled power should be held by an agency that has never been delegated any rulemaking authority under the Bankruptcy Code or any other statute in regard to bankruptcy? 

Members of the Bankruptcy Rules Committee were informed at a meeting on September 6, 2007 that the Internal Revenue Service had made substantial changes to its Collection Financial Standards and that these changes were to take effect on October 1, 2007. Although the IRS had apparently been working on these changes for some time, they failed to notify anyone in the bankruptcy community about the changes until just one week earlier, even though the IRS standards are now very much part of consumer bankruptcy law and practice.  For above-median income debtors, the IRS standards are incorporated into the means test which determines whether a debtor’s chapter 7 filing is presumed abusive.  Significantly, the IRS standards are also used to determine an above-median chapter 13 debtor’s disposable income, and as Katie Porter noted in an earlier post about the findings in a recent RAND report, the IRS standards were applicable in a range of 13-66 percent of the cases RAND reviewed in eight districts.

The IRS changes presented an immediate challenge to the Rules Committee.  It had at an earlier meeting approved revisions to the Official Forms which implement the means test and disposable income test, Official Forms 22A, 22B, and 22C.  These revised forms were to be submitted to the Standing Committee for further approval and were expected to be made effective in bankruptcy cases filed on or after December 1, 2007.  But the IRS changes meant that some of the form revisions would be incorrect or inapplicable, or would require even further revisions.  More troubling, a new standard had been created by the IRS for Out-of-Pocket Health Care Expenses, and it was not clear at the time whether it would even get picked up by the statutory language in section 707(b)(2)(A) of the Code.  For a debtor to claim an IRS expense based on the statute, it must be a monthly expense amount specified under the IRS National Standards and Local Standards, or the debtor’s actual expenses for categories specified as Other Necessary Expenses.  When first announced, the IRS had not considered the new health care expense to fall within either category; it was to be designated under a new separate category.  (The IRS has now included the health care expense standard as part of the National Standards).

Faced with Official Forms that could not possibly be revised under the rules enabling process to conform with the new IRS standards in time for the October 1 effective date, the Rules Committee decided to hold back on submission of its amended Forms 22A, 22B, and 22C to the Standing Committee.  At the same time, and perhaps in recognition of the turmoil the IRS changes were causing in the bankruptcy system, the IRS announced that it would delay implementation of its changes for bankruptcy purposes until January 1, 2008.  A disclaimer to this effect can be found on the IRS website.  This would leave time for form changes necessitated by the new IRS standards to be made.  The current plan is that new conforming forms will be ready for use in bankruptcy cases by January 1, 2008.

Of course, the problems with the forms were avoidable.  Hopefully, the IRS will coordinate better in the future.  But there are much larger legal issues swirling around this delegation of authority, if you can call it that, to the IRS.

Even before these recent changes, application of the IRS collection guidelines in bankruptcy cases has generated controversy.  For example, courts are divided on whether the plain words of the statute permit the debtor to take the full IRS transportation ownership standard if the debtor’s car loan payment is less than that amount or if the loan is paid-off, or whether based on the IRS collection guidelines the debtor should get to deduct the actual monthly loan payment if less than the standard (or if no payment, $200 per month for a vehicle over six years old with more than 75,000 miles).  Judge Randy Haines in In re Chamberlain, 369 B.R. 519 (Bankr.D.Ariz. 2007) found that the debtor should get the full “amounts specified” in the IRS standards.  Rejecting application of the separate IRS guidelines, Judge Haines said: “Nothing in the statute, Bankruptcy Rules or official forms refers a debtor to any IRS publications for additional rules or interpretation. The IRS is not an administrative agency that administers the Bankruptcy Code, so there is no basis for a Court to defer to its administrative expertise.”

You may also ask, what authority does the IRS have to delay implementation of its standards for bankruptcy purposes?  The Bankruptcy Code says the debtor gets to take the expenses under the IRS standards “in effect on the date of the order for relief,” that is when the case is filed.  Although the new standards are a mixed bag for debtors (my rough review suggests that debtors in states with lower median incomes, joint filers who have two cars, and debtors 65 and older generally fair better), debtors have an argument that the new standards should apply in cases filed before January 1, 2008.  I’ve also run the numbers on a few cases and found that creditors would benefit in some cases (in one chapter 13 case I reviewed, the debtors would be required to pay an additional $136 per month into the plan).  Can unsecured creditors make this same argument in current cases?  And in cases filed after January 1 (and in the future anytime the IRS decides to change the standards), again I ask, should the IRS be able to unilaterally wield this power to adopt standards which have the force of law in bankruptcy cases and which control how much and what kind of bankruptcy relief a debtor may get? 

My brief review suggests that courts are reluctant to find an improper delegation of authority, but has there even been a delegation of authority to the IRS under the Code? And since Administrative Procedures Act challenges dealing with notice and comment typically arise in the context of an agency which has been given rulemaking authority under an enabling statute, does it matter that the Code gives no express power to the IRS to issue regulations for bankruptcy purposes?  I leave for others far more knowledgeable than me in administrative and constitutional law the answers to these questions.  As for the policy questions .....

Comments

[Rich Berger]

Welcome to the regulatory state!

You are only getting worked up now?

[B]

Mr. Rao unfairly blames the IRS for overstepping its authority and making a mess of the bankruptcy system. Is it the fault of the IRS that Congress chose in BAPCPA to make reference to certain IRS standards? It seems to me that in revising its standards the IRS is simply going about its merry, revenue-collecting way, oblivious to the effect on bankruptcy cases. And properly oblivious at that, since the IRS is indeed not a rule-making body under the Bankruptcy Code. The blame here lies with Congress, not with the agency on whom Mr. Rao would like to foist responsibility for this travesty.

[lmclark]

Funny but this issue just came up in court today. So far as I am concerned, if the standards are available for me to see, I could care less whether the IRS says they count or don't count "for bankruptcy purposes." It's not like they have any control over how the Third Branch interprets the First Branch's enactment. In fact, I laughed at the hubris of the IRS even suggesting that their numbers "don't count" for bankruptcy purposes until January 2008.

The previous post is correct in pointing out that this train wreck is the fault of Congress' decision to use IRS standards to set allowable expenses for purposes of the means test. It probably seemed like a good idea at the time, but it appears that Congress may not have anticipated what a mess this could make of things administratively.

Incidentally, I'm not seeing very much means testing issues. The place this comes up most for me is on the chapter 13 docket. There is so much confusion now over whether to use Schedules I and J, or B22C, or some combination of the two, or something else entirely, in order to get at what the plan payment should be for purposes of best efforts. Personally, I'd love to go back to the old system of just using I and J. Most judges got it right most of the time, and fewer errors were made. Much lower transaction costs too.

[John Rao]

As to the comment from Rich B., pardon me if I was not clear. My only complaint with the IRS is that they did not give advance notice to anyone in the bankruptcy world of these changes which were in the works for some time. I did not blame the IRS for overstepping its authority. You are quite right that the IRS is free to change the standards for its own internal collection purposes as it deems proper. Therein lies the problem.

[B]

The question remains, Mr. Rao: why should the IRS give special advance notice to "the bankruptcy world" of changes in agency standards? Has Congress required the IRS to do so in some statute or other? Has the IRS itself adopted some regulation or other taking on that obligation?

If not, are agencies somehow obligated -- out of the goodness of their administrative hearts, and putting aside the usual notice-and-comment requirements for rule-making -- to divine who on the planet might conceivably be affected by changes in agency standards and then give those folks special notice?

The answer, of course, is no.

In the best of all possible worlds, yes, it would be "nice" if the IRS gave bankruptcy lawyers, bankruptcy judges, and -- oh, yes -- pesky law professors, notice of these kinds of things. But it is not the best of all possible worlds, and that is not the IRS's fault, either.