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 s&vice 

in a rural county is liable for 

federal income taxes on the 

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 acceptable 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 conditions 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 scholarships 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 subsection, the tern 'student loan' means any loan to 

an individual to assist the individual in attending 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 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)(l)(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? 

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. 

Very J 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 

p. 2462