By Jennifer Davis
Temple-going Utahns filing for bankruptcy may have gotten a little nervous over the recent court decision in New York that certain individuals in bankruptcy may not make charitable contributions, including tithing, but local bankruptcy experts say the decision will not broadly affect Utahns.
“This will not affect Utah because there are very few people who are filing bankruptcy in Utah who are above the median income, and this only affects them,” said Duane Gillman, a bankruptcy attorney and bankruptcy trustee for the U.S. Bankruptcy Court in Salt Lake City. “Only about five percent of those who file earn that much.”
Although the court ruling may only affect a narrow range of Utahns, the problem may grow since more than 2 million Americans filed for bankruptcy protection in 2005.
“I personally think the judge in New York is correct in the law, and I think the judges in Utah, who are very good judges who sit in the bankruptcy court, will study this issue very carefully, and I think they will come out with the same conclusion, but that”s my opinion,” said Richard Aaron, professor of law at the S.J. Quinney College of Law at the University of Utah.
The question arose because in October Congress passed a U.S. bankruptcy reform law, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, which states that if a debtor is filing for a Chapter 13 bankruptcy and earned more than the median income, according to the IRS, then they would be subject to the means test that the IRS utilizes to determine the disposable income for repayment to unsecured creditors.
Under the IRS means test, it is required that debtors list monthly expenses to determine the disposable income. Tithing and charitable contributions, however, are not among “reasonably necessary” expenses allowed in the Internal Revenue Code, unless it is for employment. Examples of the reasonably necessary expenses include health insurance, disability insurance, health savings and expenses to protect family from violence.
“The Internal Revenue Service propagates to say how you deal with people who owe money to the IRS and say how much they need to pay, so Congress said, ”All right, look to how the IRS is doing it to determine how to pay back creditors,”” Gillman said.
However, when Congress passed the law last year, they may not have foreseen the contradiction they were causing of the Religious Liberty and Charitable Donation Protection Act passed in 1998 under President Clinton, which allows tithing under the bankruptcy code.
“I don”t think anyone realized the IRS test excluded tithing – in essence, amending the ”98 law,” Gillman said. “I”ve seen nothing in the legislature that shows that Congress knew this would have the effect that it did. I think what they were trying to do [for people who had the income above the median test] was to make a more rigid test, and they looked to the IRS test and adopted those.”
Aaron agrees that the law is unclear without any easy answers.
“My bet is no one in Congress ever gave this question a thought,” he said. “They passed a law in, I think, a hurry, and they didn”t pay attention to the problems they were creating.”
Some senators, on the other hand, see the ruling as a misinterpretation of the law.
Sen. Orrin Hatch, along with Sens. Chuck Grassley and Jeff Sessions, wrote a letter to Attorney General Alberto Gonzales, in which they said the ruling in New York “inaccurately interprets how tithes are to be treated under the bankruptcy laws” and “runs counter to Congressional intent.”
Hatch also said in the letter that nothing in the bankruptcy reform laws passed last year was intended to change the right to allow tithes in a bankruptcy repayment plan.
However, misinterpretations of the new law may come into effect because of all the complicated and competing factors, Aaron said.
For example, using the IRS to determine how much taxes one should pay while in debt is reasonable, but applying the IRS for creditors is another thing, he said. Also, different states interpret the law in different ways and the fact that some may give contributions and some may not, depending on their income, causes tension.
“The New York judge might emphasize something different than a judge in Utah because you have all these complicated factors, like what did Congress mean? It”s all right to make a contribution but not pay taxes, is it the same for creditors? And what is the difference?” Aaron said. “You can see where a judge has to take into account all these different competing rules.”
The conflict arose in March when a couple in New York, Frank and Patricia Diagostino, listed $100 for charitable contributions under their expenses, but Judge Robert E. Littlefield Jr., of the U.S. Bankruptcy Court for the Northern District of New York ruled that because their income was above the applicable state median income, the debtors must apply the standards of the IRS, in which they do not qualify for charitable contribution deduction.
“The 2005 reform legislation didn”t just reword the federal bankruptcy code, it also effectively rewrote Exodus and Deuteronomy,” said Henry Sommer, president of the National Association of Consumer Bankruptcy Attorneys in a news release. “Many who practice their faith and believe that they are bound by creed to tithe a portion of their income will find that Congress effectively decided that what credit cards want is more important than the deeply personal religious practices of Americans.”
The solution to the problem must be dealt with on a national level, since the Constitution in Article I says that Congress has the power to pass reforms in bankruptcy.
“It can be addressed in two ways,” Gillman said. “Littlefield feels that Congress needs to amend Title 11. I think the Internal Revenue Service could amend its regulations and accomplish the same thing.”
Littlefield said until Congress amends the law, the court”s hands are tied and the tithing principle that the court once applied have been mooted in his opinion of the case.
Aaron said the Supreme Court may have to deal with the issue since it involves the separation of church and state.
“The new problem is a national law, which you expect to see the same everywhere,” he said. “I would say if we start to see conflicting decisions that is something the Supreme Court should get involved in.”
Issues in the past dealing with bankruptcy and tithing also include whether tithing is a constitutionally protected religious practice.
“Congress says we”re in favor of people making contributions even if private creditors don”t get paid,” Aaron said. “The creditors say, ”Why should we subsidize someone”s church that I”m not even a member of?””
The Church of Jesus Christ of Latter-day Saints has not made a statement on the issue nor have they filed a friend of the court brief for the case, said Scott Trotter, church spokesman.
Rankings of households filing for bankruptcies:
51. South Carolina
Per capita personal income in 2004
United States: $33,041
1. Washington, D.C.: $52,101
46. Utah: $26, 946
51. Mississippi: $24,379
(Source: U.S. Bureau of Economic Analysis)
Most generous states
* Utah ranks 1st in generosity and 48th in per-capita spending.
* Oklahoma ranks 2nd in generosity and 22nd in per-capita spending.
* Nebraska ranks 3rd in generosity and 32nd in per-capita spending.
(source: New Tithing Group)