Untitled Texas Attorney General Opinion

Sam A. Nixon, M.D. Opinion No. JM-554
Chairman
State Rural Medical Education Re: Whether a physician whose
Board student loan is repaid by s&vice
Southwest Tower Building in a rural county is liable for
211 East Seventh Street federal income taxes on the
Austin, Texas 78701 amount of the loan discharged
Dear Dr. Nixon:
You have requested wr opinion regarding the application of
section 108(f) of the fedetal Internal Revenue Code, as amended by the
Tax Reform Act of 1984, to the forgiveness of indebtednesses under
section 7 of article 4498c, V.T.C.S. This opinion is limited to the
questions asked.
The Texas statute, a::ticle 4498c. establishes the State Rural
Medical Education Board. ;ections 6 and 7 of the statute provide in
pertinent part:
Sec. 6. It shall be the duty of the Board to
receive and pass upon, allow or disallow all
applications for loans, grants or scholarships
made by students who are bona fide citizens and
residents of the State of Texas and who have a
desire to become physicians, and who are accept-
able for enrollment in a qualified medical school.
The purpose of mch loans, grants or scholarships
shall be to en&>:le such applicants to obtain a
standard medical education which will qualify them
to become licer.sed, practicing physicians and
surgeons within t&e State of Texas. . . .
The said Boari. shall have authority to grant to
each applicant ds:emed by the Board to be qualified
to receive the s,nne, a loan, grant or scholarship
for the purpose of acquiring a medical education
as herein providf:d for, upon such terms and condi-
tions to be imposed by the Board as provided for
in this Act. The Board shall, except in those
cases which it dtzems proper, make every effort to
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Dr. Sam A. Nixon - Page 2 (JM-554)
grant loans to applicants rather than grants or
scholarships. Before
-- awarding funds, the Board may
review candidates for loans, grants or scholar-
ships to determf;le their intent concerning the
location of fututg practice.
Sec. 7. Applkants who are granted loans,
grants or schola:rrrhips by the Board shall receive
an amount which may defray his or her tuition and
other expenses in any reputable, accepted and
accredited medica:L school or medical college or
school . . . or II scholarship to any such medical
college or schocl for a term not exceeding four
(4) years, same to be paid at such time and in
such manner as ‘nay be determined by the Board.
The loans, grants and scholarships herein provided
may be proportioned in any such manner as to pay
to the medical school to which any applicant is
admitted such funds as are required by that
school. and the balance to be paid directly to the
applicant; all
-- o:i which shall be under such terms
and conditions as may be provided under rules and
regulations of tkz: Board. The said loans, grants,
or scholarships &all be based upon the condition
that the full amount thereof shall be repaid to
the State of Texas in cash in full with ten (10)
percent interest from the date of each payment by
the State on such loan, grant or scholarship or by
satisfaction of other conditions of the Board or
this Act. If the applicant
-- practices his profes-
sion in a rural area as defined by this Act the
Board is author:&ed and shall credit one-fifth
of the loan, gr& or scholarship together with
interest thereon70 the applicant for each year of
such practice as-certified by the Board. At the
end of the seconcrfull year of practice in a rural
area as provided-for herein, the applicant shall
be privileged topay off the balance of the loan,
grant or scholar.ship as the case may be with
accrued interest thereon, and upon such payment
shall be relieved from further obligation under
his contract. S’wuld the applicant default under
his contract at any time the full principal and
accrued interest plus a penalty of 100 percent of
the outstanding balance plus attorney’s fees as
defined by said contract shall be due and owing to
the State. (Emphasis added).
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Dr. Sam A. Nixon - Page 3 (JM-554)
.
P
Section 108(f) of the Internal Revenue Code of the United States,
as amended in 1984, reads in pertinent part:
(f) Student loans.--
(1) In general.--In the case of an individual,
gross income doc:s not include any amount which
(but for this sub:section) would be includible in
gross income by :reason of the discharge (in whole
or in part) of any student loan if such discharge
was pursuant to a provision of such loan under
which all or ptrrt of the indebtedness of the
individual would be discharged if the individual
worked for a ce:rtain period of time in certain
professions for a:y of a broad class of employers.
(2) Student :.oan. --For purposes of this sub-
section, the tern 'student loan' means any loan to
an individual to assist the individual in atten-
ding an educational organization described in
section 170(b)(l)(A)(ii) made by--
. . . .
(B) a S1:ate. territory, or possession of
the United St&es, or the District of Columbia,
or any political subdivision thereof, or. . . .
(Emphasis added).
26 U.S.C. 5108(f).
The "educational orgar.izations" to which subsection (f)(2) of the
federal statute refers mears
an educational organization which normally main-
tains a regular faculty and curriculum and
normally has a regularly enrolled body of pupils
or students in attendance at the place where its
educational activities are regularly carried on.
26 U.S.C. ~170(b)(l)(A)(ii).
You ask:
1. Are our doctors excluded from paying taxes
on their loans because of the provision [con-
cerning] a broad class of employers?
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Dr. Sam A. Nixon - Page 4 (JM-554)
2. If our doctors must pay taxes on their
loans, is interest to be considered a part of the
financial obligation?
3. If the Tax Reform Act is applicable, is it
required that dactors pay taxes on their loans
when the loans were given before the Tax Reform
Act of 1984 was passed?
4. If the Tax Reform Act is applicable, is it
incumbent upon tie Board to explain this to the
loan recipient and, if necessary, provide him with
the appropriate tax forms to declare such income?
In our opinion, the credits allowed by the State Rural Medical
Education Board pursuant to section 7 of article 4498c, do not
constitute taxable income under the federal Internal Revenue Code as
amended in 1984. The language of section 108(f) thereof plainly
excludes from gross income amounts discharged pursuant to a provision
of a loan allowing a discharge if the student debtor "worked (1) for a
certarperiod of time (2) in certain professions (3) for any of a
broad class of employers." The condition need not be set out in the
statute; it is sufficient that it be "pursuant to a provision of such
loan."
Sections 6 and 7 of article 4498c. V.T.C.S., empower the board to
establish the rules, regul&tions, and terms upon which loans will be
made. Thus, the board could so condition loans as to meet section
108(f) criteria if the larguage of article 4498c did not already do
so. But we think the language of article 4498c, which is to be read
into every such loan instrument, see 53 Tex. Jur. 2d Statutes 625, at
45 (1964). is sufficient in self to satisfy section 108(f)
requirements. The federal law does not define the "certain period of
time," the "certain professions," or the "broad class of employers" of
which it speaks.
Article 4498c. section 6, authorizes loans to residents of the
state for the purpose of obtaining a medical education that will
qualify them to become licensed, practicing physicians and surgeons
"within the State of Texas," and section 7 authorizes credit upon
repayment of the loan only for "each year" [satisfying the "certain
period of time" requirement] the graduate practices his medical
"profession" [satisfying the "certain profession" requirement] in a
rural area of Texas [sat,isfying the "broad class of employers"
requirement]. See V.T.C.S. art. 4498c. 020. Physicians and surgeons
practicing in Gl areas .ze commonly employed by residents of Texas
[the broad class of employc:rs] to serve their medical needs.
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Dr. Sam A. Nixon - Page 5 (JM-554)
In answer to your firr,t question we advise that, in our opinion,
physician and surgeon beneficiaries of the article 4498~ student loan
program may exempt from their gross income -- pursuant to section
108(f) of the federal Internal Revenue Code as revised in 1984 -- any
loan amount discharged pursuant to authorized provisions of an article
4498c loan. Such an authorized provision will require the graduate,
in order to receive the credit, to engage in the practice of his
profession for one or more years in a rural area serving the medical
needs of residents of Texas employing him for that purpose.
Your other questions '#ere predicated upon a different answer to
the first question. We do not reach them.
SUMMARY
Physician and surgeon beneficiaries of article
4498~. V.T.C.S., student loans may exempt from their
gross income under the federal Internal Revenue Code
as amended in 1984 any loan amount discharged
pursuant to an authorized loan provision.
J
Very truly yours
A;,
J I M MATTOX
Attorney General of Texas
JACK HIGHTOWER
First Assistant Attorney General
MARY KELLER
Executive Assistant Attorney General
RICK GILPIN
Chairman, Opinion Committee
Prepared by Bruce Youngblood
Assistant Attorney General
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