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




                                          p.   2458
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).




                                               p.   2459
        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?




                                                       p.   2460
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.




                                               p.   2461
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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