Does a doctor owe federal income tax when a Texas student loan is forgiven for practicing medicine in a rural area?

Texas AG Opinion JM-554: Rural Doctor Loan Tax

Plain-English summary

The chairman of the State Rural Medical Education Board asked a tax question about the board's student loan program. The board lends money to medical students, and under article 4498c a doctor can pay off part of the loan by practicing in a rural area of Texas: the board credits one-fifth of the loan for each year of rural practice. The chairman wanted to know whether the amount forgiven that way counts as taxable income to the doctor under federal law, specifically section 108(f) of the Internal Revenue Code as amended by the Tax Reform Act of 1984. Source: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1986/jm0554.pdf

The AG said it does not. Section 108(f) keeps out of gross income any student loan that is discharged under a loan provision saying the debt will be forgiven if the borrower works for a certain period, in certain professions, for any of a broad class of employers. The condition does not have to appear in the statute; it just has to be part of the loan. Here the AG read article 4498c itself as supplying those terms, which are read into every loan the board makes: the loan is for a medical education leading to a license to practice in Texas (the profession), the credit is given for each year of rural practice (the period of time), and the doctor serves the Texas residents in the rural area who need care (the broad class of employers). Because all three pieces are met, a doctor may exempt from gross income any loan amount discharged under an authorized article 4498c provision. The chairman's other questions (about interest, retroactivity, and the board's paperwork duties) assumed the opposite answer, so the AG did not reach them. Source: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1986/jm0554.pdf

Currency note

This opinion was issued in 1986. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Section 108(f) of the Internal Revenue Code has been amended several times since 1986, and the Texas rural-medicine loan program has been recodified. Treat this page as historical context, not current tax advice. Verify current federal and state law before relying on any specific rule mentioned here.

Common questions

Is a forgiven rural-service medical loan taxable to the doctor?

No, according to this opinion. The AG concluded that loan amounts credited by the State Rural Medical Education Board for rural practice are excluded from gross income under section 108(f) of the Internal Revenue Code as amended in 1984, so they are not taxable income. Source: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1986/jm0554.pdf

Why does the Texas program qualify for the federal exclusion?

Because section 108(f) covers a student loan discharged for working a period of time in a certain profession for a broad class of employers, and article 4498c fits all three. The loan is for becoming a licensed Texas physician (profession), the credit is earned for each year of rural practice (period of time), and the doctor serves the residents of the rural area who need medical care (broad class of employers). The AG treated article 4498c's terms as read into every loan the board makes. Source: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1986/jm0554.pdf

Does the exclusion depend on how the board writes its loan documents?

The AG noted the board could always write its loans to meet the section 108(f) criteria, but concluded that article 4498c's own language already does so, since the statute is read into every loan instrument. So the exclusion follows from an authorized loan provision, whether it comes from the statute or the board's own terms. Source: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1986/jm0554.pdf

Background and statutory framework

Article 4498c, V.T.C.S., establishes the State Rural Medical Education Board and its loan program. Section 6 gives the board authority to make loans, grants, or scholarships to Texas students who want to become physicians, on terms the board sets, and directs the board to favor loans. Section 7 says the loans must be repaid to the state in cash with interest, but authorizes the board to credit one-fifth of the loan, with interest, for each year the graduate practices in a rural area as defined by the act; after the second full year of rural practice the borrower may pay off the balance and be relieved of further obligation. Source: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1986/jm0554.pdf

Section 108(f) of the Internal Revenue Code (26 U.S.C. § 108(f)), as amended by the Tax Reform Act of 1984, excludes from gross income the discharge of a student loan made by a governmental unit if the discharge was under a loan provision forgiving the debt when the borrower works for a certain period in certain professions for any of a broad class of employers. The AG matched each element to article 4498c: section 6 authorizes loans to obtain a medical education qualifying the borrower to be a licensed physician in Texas, and section 7 credits repayment for each year of rural practice (see also V.T.C.S. art. 4498c, § 20), with physicians in rural areas commonly employed by the Texas residents they serve. Reading the statutory terms into every loan instrument, as directed by ordinary rules of construction (53 Tex. Jur. 2d Statutes, at 45 (1964)), the AG concluded the discharged amounts are excluded from gross income. Source: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1986/jm0554.pdf

Citations and references

The opinion cited the following authorities. Source: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1986/jm0554.pdf

Statutes:

• 26 U.S.C. § 108(f) (Internal Revenue Code, as amended by the Tax Reform Act of 1984; student loan discharge exclusion)
• 26 U.S.C. § 170(b)(1)(A)(ii) (definition of educational organization)
• V.T.C.S. art. 4498c, §§ 6, 7, 20 (State Rural Medical Education Board loan program)

Other authority:

• 53 Tex. Jur. 2d Statutes, at 45 (1964)

Source

• Landing page: https://www.texasattorneygeneral.gov/opinions/jim-mattox/jm-0554
• Original PDF: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1986/jm0554.pdf

Original opinion text

Best-effort transcription from a scanned PDF. Minor errors may remain; the linked PDF is authoritative.

October 7, 1986

Sam A. Nixon, M.D.
Chairman
State Rural Medical Education Board
Southwest Tower Building
211 East Seventh Street
Austin, Texas 78701

Opinion No. JM-554

Re: Whether a physician whose student loan is repaid by service in a rural county is liable for federal income taxes on the amount of the loan discharged

Dear Dr. Nixon:

You have requested our opinion regarding the application of section 108(f) of the federal 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, article 4498c, establishes the State Rural Medical Education Board. Sections 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 acceptable for enrollment in a qualified medical school. The purpose of such loans, grants or scholarships shall be to enable such applicants to obtain a standard medical education which will qualify them to become licensed, practicing physicians and surgeons within the State of Texas. . . .

The said Board shall have authority to grant to each applicant deemed by the Board to be qualified to receive the same, a loan, grant or scholarship for the purpose of acquiring a medical education as herein provided for, upon such terms and conditions to be imposed by the Board as provided for in this Act. The Board shall, except in those cases which it deems proper, make every effort to grant loans to applicants rather than grants or scholarships. Before awarding funds, the Board may review candidates for loans, grants or scholarships to determine their intent concerning the location of future practice.

Sec. 7. Applicants who are granted loans, grants or scholarships by the Board shall receive an amount which may defray his or her tuition and other expenses in any reputable, accepted and accredited medical school or medical college or school . . . or a scholarship to any such medical college or school for a term not exceeding four (4) years, same to be paid at such time and in such manner as may 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 of which shall be under such terms and conditions as may be provided under rules and regulations of the Board. The said loans, grants, or scholarships shall 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 profession in a rural area as defined by this Act the Board is authorized and shall credit one-fifth of the loan, grant or scholarship together with interest thereon to the applicant for each year of such practice as certified by the Board. At the end of the second full year of practice in a rural area as provided for herein, the applicant shall be privileged to pay off the balance of the loan, grant or scholarship as the case may be with accrued interest thereon, and upon such payment shall be relieved from further obligation under his contract. Should 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).

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 does not include any amount which (but for this subsection) 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 part of the indebtedness of the individual would be discharged if the individual worked for a certain period of time in certain professions for any of a broad class of employers.

(2) Student loan.--For purposes of this subsection, the term 'student loan' means any loan to an individual to assist the individual in attending an educational organization described in section 170(b)(1)(A)(ii) made by--

. . . .

(B) a State, territory, or possession of the United States, or the District of Columbia, or any political subdivision thereof, or. . . . (Emphasis added).

26 U.S.C. § 108(f).

The "educational organizations" to which subsection (f)(2) of the federal statute refers means

an educational organization which normally maintains 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)(1)(A)(ii).

You ask:

1. Are our doctors excluded from paying taxes on their loans because of the provision [concerning] a broad class of employers?

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 doctors 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 the 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 certain period 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, regulations, and terms upon which loans will be made. Thus, the board could so condition loans as to meet section 108(f) criteria if the language 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, at 45 (1964), is sufficient in itself 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 [satisfying the "broad class of employers" requirement]. See V.T.C.S. art. 4498c, § 20. Physicians and surgeons practicing in rural areas are commonly employed by residents of Texas [the broad class of employers] to serve their medical needs.

In answer to your first question we advise that, in our opinion, physician and surgeon beneficiaries of the article 4498c 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 were predicated upon a different answer to the first question. We do not reach them.

SUMMARY

Physician and surgeon beneficiaries of article 4498c, 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.

Very truly yours,

Jim 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