The U.S. Court of Federal Claims rejected a taxpayer’s argument that the IRS improperly allowed the offset of a tax refund on his 2019 return filed in January 2020 against his outstanding student loan debt in violation of the CARES Act. As the opinion pointed out in the case of Seto v. United States, US Court of Federal Claims, Docket No. 1:21-CV-01497[1], since the offset took place over a month before the CARES Act was signed into law, there was no relief available that would enable him to recover his refund.

Facts of the Case

Mr. Seto had outstanding student loans that were in default. He had been receiving notices of delinquency and default beginning in 2015. In December of 2018 he received the following notice from the U.S. Department of Education indicating the agency planned to take the step of asking the Treasury to apply certain federal payments due to Mr. Seto, including income tax refunds, against the outstanding student loan balance:

The Department intends to refer your [student loan] debt to the U.S. Department of the Treasury for collection through Treasury offset against all payment streams that are currently authorized by law or that become authorized in the future. These payment streams may include, but are not limited to, Federal and State tax refunds, Social Security benefits, and Federal travel reimbursements.[2]

In February 2019 the Department of Education certified Mr. Seto’s outstanding debt to the Department of the Treasury in order that any income tax refunds he was eligible to receive would be offset against the outstanding loan.

Despite this notice, Mr. Seto decided to take advantage of a federal tax credit program that ended up generating a significant income tax refund for 2019. As the court describes the situation:

…[O]n July 19, 2019, Mr. Seto purchased a rooftop solar energy system for his home at a total cost of $26,939, financed over ten years with Loanpal. ECF 20 at Exs. 1-2. Mr. Seto’s decision to invest in renewable energy was inspired, in part, by the Federal Investment Tax Credit (commonly known as the Solar Tax Credit) which, in 2019, granted taxpayers a residential energy efficient property credit equal to thirty percent (30%) of the cost of rooftop solar energy systems. See https://www.irs.gov/newsroom/energy-incentives-for-individuals-residential-property-updated-questions-and-answers.[3]

Mr. Seto was facing a requirement to come up with a significant lump sum payment to keep his monthly payments at their initial level not later than March 4, 2021—so the refund generated by the credit presumably would be very helpful in meeting that requirement and ensuring his payments did not increase.

Indeed, in accordance with the terms of the Loanpal Loan Closing Certificate, Mr. Seto’s initial monthly payment of $187.22 would increase to $277.05 on March 4, 2021, if he failed to pay down the loan principal by $10,094.71 and meet the “target balance” of $16,844.29 by that date. ECF 20 at Ex. 1.[4]

Thus, early in 2020 Mr. Seto filed his 2019 income tax return and awaited the receipt of his refund.

In January 2020, Mr. Seto filed his 2019 federal income tax return with the IRS, claiming a $7,994 Federal Investment Tax Credit for the purchase and installation of the solar energy system and a net refund of $9,288.[5]

But, alas, he was not to see that $9,288 (or at least the vast majority of it). The Department of Treasury did not send Mr. Seto the refund he expected. Rather the opinion notes:

By letter dated February 20, 2020, the Department of the Treasury, Bureau of the Fiscal Service, notified Mr. Seto that his 2019 federal income tax refund in the amount of $9,288 had been applied to offset (in part) his outstanding student loan debt. ECF 16-1 at A179. Thereafter, on July 16, 2020, following the Setos’ submission of a verified innocent spouse claim with the IRS, the Department of Education refunded them $2,075. See id. at A116-17, 178.[6]

On March 27, 2020, the CARES Act was signed into law by the President. In Section 3513(e) the Act provided for suspension of various collection activities related to student loans, including “reduction of tax refund by amount of debt authorized under section 3720A of title 31, United States Code, or section 6402(d) of the Internal Revenue Code of 1986.”[7] No provision in the law provided for an effective date for this provision prior to the enactment date of the law (March 27, 2020), though the law did provide that the suspension period would run through September 30, 2020.[8]

Court’s Decision

The taxpayer claims that the offset of his refund was improper:

Mr. Seto avers that the IRS unlawfully offset his refund in light of fact that, had he filed his 2019 federal income tax return later in the tax season, his refund would not have been withheld due to certain financial relief provisions included in the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), Pub. L. No. 116-136, 134 Stat. 281 (2020).[9]

In essence, had Mr. Seto not filed very early in tax season to get his refund (which he didn’t end up getting) and had rather filed his return later in tax season, he would have received his entire refund. Mr. Seto was right about that—had he filed his return on or near the July 15, 2020, eventual due date for 2019 returns, the refund would not have been offset.

But the opinion notes that the law only took effect on March 27, 2020:

Although the CARES Act temporarily suspended collection actions for borrowers with defaulted federal student loans, including federal income tax refund offsets, the statute did not go into effect until the President signed the bill into law on March 27, 2020. Pub. L. No. 116-136, 134 Stat. 281 (2020).[10]

All of the activities related to Mr. Seto’s tax return and refund took place more than one month before the bill was signed into law:

Mr. Seto filed his 2019 federal income tax return in January 2020. ECF 1 at 3. The IRS processed his return and applied his refund to offset a portion of his outstanding student loan debt on or before February 20, 2020, when Mr. Seto was formally notified of the government’s action. ECF 16-1 at A179.[11]

Those dates proved to be a problem for Mr. Seto. While it might be deemed “unfair” it was nevertheless the result of the law that was passed, as the court could not add a retroactive effective date to a law that lacked such a clause:

Nothing in the CARES Act states or clearly suggests that the student loan temporary relief provisions applied retroactively. Absent such statutory language, courts cannot construe laws and implementing regulations to have retroactive effect. Hicks v. Merit Sys. Prot. Bd., 819 F.3d 1318, 1321 (Fed. Cir. 2016) (“Retroactivity is not favored in the law and congressional enactments and administrative rules will not be construed to have retroactive effect unless their language requires this result. Accordingly, we will construe a statute to avoid retroactivity unless there is clear evidence that Congress intended otherwise.”) (cleaned up). Consequently, the enactment of the CARES Act has no bearing on Mr. Seto’s illegal exaction claim.[12]

[1] Seto v. United States, US Court of Federal Claims, Docket No. 1:21-CV-01497, May 9, 2022, Seto v. United States, US Court of Federal Claims, Docket No. 1:21-CV-01497 (retrieved May 10, 2022)

[2] Seto v. United States, US Court of Federal Claims, Docket No. 1:21-CV-01497, May 9, 2022

[3] Seto v. United States, US Court of Federal Claims, Docket No. 1:21-CV-01497, May 9, 2022

[4] Seto v. United States, US Court of Federal Claims, Docket No. 1:21-CV-01497, May 9, 2022

[5] Seto v. United States, US Court of Federal Claims, Docket No. 1:21-CV-01497, May 9, 2022

[6] Seto v. United States, US Court of Federal Claims, Docket No. 1:21-CV-01497, May 9, 2022

[7] CARES Act Section 3513(e)(2)

[8] CARES Act Section 3513(a)

[9] Seto v. United States, US Court of Federal Claims, Docket No. 1:21-CV-01497, May 9, 2022

[10] Seto v. United States, US Court of Federal Claims, Docket No. 1:21-CV-01497, May 9, 2022

[11] Seto v. United States, US Court of Federal Claims, Docket No. 1:21-CV-01497, May 9, 2022

[12] Seto v. United States, US Court of Federal Claims, Docket No. 1:21-CV-01497, May 9, 2022