Opinion ID: 223512
Heading Depth: 2
Heading Rank: 2

Heading: Net Income Calculations

Text: ECMC complains that Walker produced no evidence related to Troy Walker's part-time income, leaving an unspecified amount of income unaccounted for. It also maintains that the bankruptcy court committed clear error when it applied 2007 income tax and payroll deductions to adjusted gross income figures from 2004 to 2007. Finally, ECMC contends that the bankruptcy court exacerbated this error by subtracting certain tax liabilities from the stipulated adjusted gross income figure, which amounted to a double-counting of deductions and artificially reduced the net income calculation. ECMC asserts that this method of calculating net income taints the overall analysis because it is based on mere speculation and relieves Walker of her burden of proving undue hardship by a preponderance of the evidence. We ground our review on income figures to which both parties stipulated. Because ECMC stipulated to these figures, we reject its claim that it was clear error not to calculate and include income from Troy Walker's part-time work. The parties stipulated that the Walkers' adjusted gross income in 2007 was $67,639. [1] This leaves a monthly adjusted gross income of $5,636.58. The BAP found no error in the bankruptcy court's method of using the Walkers' actual federal and state tax liability for 2007, rather than taking the sum of income tax withholdings from Troy's paychecks and then accounting for the Walkers' income tax refund. When averaged over twelve months, the monthly income tax obligation was $372. We agree that this was not error and thus adopt this figure for our analysis. We question, however, the manner in which both the bankruptcy court and the BAP treated additional voluntary withholdings from Troy's 2007 paystubs. The paystubs indicate automatic payroll deductions in the amount of $934.10 for items such as retirement, deferred compensation, medical insurance, life insurance, and pension. These paystubs were admitted into the record without explanation from Walker and were not challenged by ECMC at trial. Both the bankruptcy court and the BAP added the sum of the payroll deductions to the tax liability to reach a total withholding of $1,306.10 and subtracted this sum from their respective gross monthly income calculations to arrive at a net monthly income. At no point did either court acknowledge that it had subtracted the income tax liability and payroll deductions from the 2007 adjusted gross income figure to which both parties stipulated. In other words, both courts treated as monthly gross income a figure the parties stipulated to be monthly adjusted gross income. This conflation is problematic because the adjusted gross income figure may account for at least some of the payroll deductions on the paystub, e.g., retirement, deferred compensation, and employee contribution to a medical insurance premium. See 26 U.S.C. § 62(a) (defining adjusted gross income as gross income minus the sum of the above-the-line deductions, including retirement savings and health-saving accounts). Because we have a stipulated gross adjusted income figure, not the tax return itself, we cannot compare the 2007 tax return with the payroll stub to discern which, if any, deductions on the payroll stub were also claimed as above-the-line deductions. On this record, it is impossible to discern whether double-counting did in fact take place. ECMC is of little help, because it failed to challenge the paystub evidence at trial, failed to address the issue of double-counting when it appeared before the BAP, and failed to specify on appeal which specific payroll deductions it believed may have been double-counted. We recognize that a court may not engage in speculation when determining net income and reasonable and necessary living expenses. Educ. Credit Mgmt. Corp. v. Jesperson (In re Jesperson), 571 F.3d 775, 780 (8th Cir.2009). In Jesperson, the bankruptcy court credited testimony from the debtor regarding his federal income tax obligation that was patently false, which had the effect of understating the debtor's income. The bankruptcy court also concluded that the debtor's housing expenses were $1000 per month, when the evidence showed that the debtor lived rent-free with his brother and had worked out an agreement under which he could continue to do so for $500 per month. We concluded that the bankruptcy court had clearly erred in both determinations and thus reversed the undue hardship determination. Similarly, in In re Rose, 324 B.R. 709 (8th Cir.BAP2005), the BAP concluded that the bankruptcy court committed clear error by ignoring more than $260 in monthly disposable income and by giving undue weight to the mere possibility that debtor might need a new car or the possibility that her roommate might move out, thereby doubling her housing costs. Id. at 713. These possibilities did not rise to the level of reasonably reliable facts and circumstances and could not serve as the basis of the bankruptcy court's legal conclusion. Id. The degree of speculation evident in Jesperson and Rose is absent here. The BAP did not substitute assumptions or speculation for reasonably reliable facts, nor did it accept an income figure that was patently false or give undue weight to changes in the debtor's life circumstances that had not yet occurred. Rather, it employed a method that posed a risk of double-counting in determining the debtor's net monthly income. We reject ECMC's suggestion that employing this method is akin to impermissible speculation and we likewise reject the claim that it so taints the undue hardship analysis that it precludes discharge as a matter of law. Net income is but one factor in the analysis and is to be assessed relative to reasonable household expenses. Accordingly, the magnitude of the potential error can be evaluated only in the larger context of the totality-of-circumstances analysis. If we exclude altogether the disputed payroll deductions of which ECMC complains, we subtract the monthly federal and state income tax liability of $372 from the stipulated monthly gross adjusted income of $5,636.58 to arrive at a net monthly income of $5,264.58. [2] That figure is still less than the Walkers' monthly expenses of $5,913, leaving a monthly deficit of nearly $650. Thus, even when the payroll deductions are excluded, the expenses of the debtor and her dependents outstrip her available resources. ECMC responds that this deficit is illusory because the claimed expenses of Walker and her dependents are unreasonable as a matter of law.