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Suing to Recover Offset of Tax Refund Against Student Loan Debt

Posted on July 28, 2020

In the case of Nelson v. United States, No. 1:19-cv-00841-EDK (Fed. Cir. June 3, 2020) the Federal Circuit gave a per curiam affirmance of the decision by the Court of Federal Claims dismissing her complaint for lack of subject matter jurisdiction. Ms. Nelson represented herself seeking to recover her federal tax refund for the years 1988 to 2018 offset to satisfy debt to the Missouri Department of Higher Education.

She initially filed suit in state court in Missouri. Because she named the Department of Education as a defendant, the case was removed to the United States District Court, which the government will do in essentially every case in which it is sued in state court. The case there was dismissed because it was barred by the statute of limitations and for other reasons. The court also granted a motion for summary judgement filed by the Department of Education finding that she “continued to owe money to [the Department of Education] and that [its] continuing efforts to collect that debt [were] justified.”

In the tradition of Elizabeth Warren, Ms. Nelson persisted. Unfortunately for her, persistence does not equal victory. In June of 2019 she filed a complaint against the same two parties in the Court of Federal Claims, after her 2018 income tax refund was once again taken to pay past due education loans. She sought to obtain the return of all of her refunds for a 30-year period, to stop further offset of her refunds, to clear her credit history and to obtain punitive damages for the violation of her 14th Amendment rights.

The Court of Federal Claims dismissed her case for lack of jurisdiction for several reasons. With respect to the challenge to the offset, it pointed out that IRC 6402(g) “explicitly bars judicial review of [such] action.” The correct way to attack the offset would have been to sue the Department of Education on the debt itself and not on the offset. I do not mean to suggest that such a suit would have produced a different result in the end, but she would not have bumped headlong into a bar against litigation.

The Court of Federal Claims dismissed her case for illegal exaction (see prior post here on the meaning of these terms), because of her prior suit against the Department of Education and the result in that suit, which causes issue preclusion in this case and bars her claim.

Finally, the Court of Federal Claims dismissed her case under the 14th Amendment for punitive damages or to clear her credit history because the 14th Amendment “do[es] not mandate payment by the government.”

The Federal Circuit reviews her claims on these various grounds.   First, it agreed that the Court of Federal Claims has no jurisdiction over the Missouri Department of Higher Education. It also found no jurisdiction against the IRS for offsetting her tax refund based on the Department of Education claim. This is a point we have discussed before and one that is difficult to explain to clients who come into the office seeking redress for an offset refund against the IRS, thinking that the IRS has failed to give them the refund. As the court points out, the IRS (or the Treasury Offset Program) is required to offset the funds under IRC 6402(d)(1) upon receiving notice of a past due legally enforceable debt from one of the approved parties in the statute and then IRC 6402(g) bars review of the action. Finally, it agreed on the issue preclusion aspect of the decision.

This sad result for Ms. Nelson can be traced into the bankruptcy discharge provisions, which make it nearly impossible to discharge student loan debt. BC 523 (a)(8) prevents an individual from discharging student loan debt:

unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor’s dependents, for—

(A) (i) an educational benefit overpayment or loan made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution; or

(ii) an obligation to repay funds received as an educational benefit, scholarship, or stipend; or

(B) any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual;

So, Ms. Nelson is stuck. Her federal tax refund will be taken year after year. Other collection actions will be taken against her to collect this money. When a debt is excepted from discharge, a debtor faces potentially a lifetime of staring at that debt. Here, I do not think the statute of limitations on collection will provide much assistance to her because the Department of Education has obtained a judgment. We don’t learn from this case how she incurred the debt and what happened to the education that caused her to incur it. The case simply presents the very real and sad situation facing many individuals holding student loan debt.  They cannot meet the near impossible standard to obtain an exception from bankruptcy discharge and cannot show that the educational institution failed to provide the agreed upon education, as some students have successfully argued in for-profit college context.

Ms. Nelson’s case was decided days after President Trump vetoed a bill that would overturn regulations issued by the Department of Education making it more difficult than Obama era regulations to raise the borrower defense. Congress is currently considering providing relief to student loan borrowers as part of the ongoing COVID-19 response. Because of the large amount of student loan debt, there are significant implications to loosening the ability to obtain relief from student debt. We have blogged about these issues before here, here and here. Student loan issues will not go away. We need to find a way to provide relief for those who deserve the relief in order to avoid cases like Ms. Nelson’s, where we see the 30 year shackles of the debt. I am not proposing an answer, but it’s a problem that badly needs one.

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