SamA.Nixon, M.D. Chairman State Rural Medical Education Board Southwest Tower Building 211East Seventh Street Austin, Texas 78701 Opinion No. JM-554 Re: Whether a physician whose student loan is repaid bys&vice in a rural county is liable for federal income taxes on the amount of the loan discharged DearDr. Nixon: You have requested wr opinion regarding the application of section 108(f) of the fedetal Internal Revenue Code, as amendedbythe Tax Reform Act of 1984, to the forgiveness of indebtednesses under section 7of 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 6and 7of 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 madeby students whoare bona fide citizens and residents of the State of Texas and whohave a desire to become physicians, andwhoare acceptable for enrollment in aqualified medical school. Thepurpose 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&eState ofTexas.

. . . Thesaid Boari. shall have authority to grant to each applicant ds:emedbythe Board tobequalified to receive the s,nne, aloan, grant or scholarship for the purpose of acquiring amedical education asherein providf:d for, uponsuch terms andconditions to be imposed by the Board as provided for in this Act. The Board shall, except in those cases which it dtzemsproper, makeevery effort to

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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 anamountwhich maydefray his or her tuition and other expenses in any reputable, accepted and accredited medica:L school or medical college or school

. . .or IIscholarship to any such medical college or schocl for aterm not exceeding four (4) years, same to be paid at such time and in such manner as ‘nay be determined by the Board. Theloans, grants andscholarships herein provided maybe 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. andthe balance tobepaid directly tothe applicant; all o:iwhich shall be under such terms

-- andconditions asmaybe provided under rules and regulations of tkz:Board. Thesaid 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 onsuch loan, grant or scholarship orby 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 endof the seconcrfull year ofpractice in arural 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 apenalty of 100percent of the outstanding balance plus attorney’s fees as defined bysaid contract shall bedueandowing to the State. (Emphasis added).

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Section 108(f) of the Internal Revenue Codeof the United States,

as amendedin 1984, reads in pertinent part:

(f) Student loans.-- (1) In general.--In the case of anindividual, 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 anystudent 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 abroad class of employers. (2) Student :.oan.--For purposes of this subsection, the tern 'student loan' meansanyloan to an individual to assist the individual in attending an educational organization described in section 170(b)(l)(A)(ii) madeby--

. . . . (B) aS1:ate. territory, or possession of theUnited St&es, or the District of Columbia, or anypolitical subdivision thereof, or. . . . (Emphasis added).
26U.S.C. 5108(f). The"educational orgar.izations" towhich 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. 26U.S.C. ~170(b)(l)(A)(ii). Youask:1. Are our doctors excluded from paying taxes on their loans because of the provision [concerning] abroad class of employers?

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2. If our doctors must pay taxes on their loans, is interest to be considered apart of the financial obligation? 3. If the TaxReform Act is applicable, is it required that dactors pay taxes on their loans when the loans were given before the Tax Reform Act of 1984waspassed? 4. If the TaxReform Act is applicable, is it incumbent upon tie Board to explain this to the loan recipient and, if necessary, provide himwith 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 aprovision of aloan allowing adischarge if the student debtor "worked (1) for a certarperiod of time (2) in certain professions (3) for any of a broad class of employers." Thecondition need not be set out in the statute; it is sufficient that it be "pursuant to aprovision of such loan."Sections 6and7of article 4498c. V.T.C.S., empowerthe 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. Butwethink the language of article 4498c, which is to be read into every such loan instrument, see 53Tex. Jur. 2dStatutes 625, at 45 (1964). is sufficient in self to satisfy section 108(f) requirements. Thefederal 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]. SeeV.T.C.S. art. 4498c. 020. Physicians andsurgeons practicing in Gl areas .ze commonly employed byresidents of Texas [the broad class of employc:rs] to serve their medical needs.

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Inanswer toyour firr,t question weadvise that, in our opinion, physician andsurgeon beneficiaries of the article 4498~ student loan program may exempt from their gross income -- pursuant to section 108(f) of the federal Internal Revenue Codeas revised in 1984-- any loan amountdischarged pursuant to authorized provisions of anarticle 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 moreyears in arural area serving the medical needs of residents ofTexas employing himfor that purpose. Your other questions '#ere predicated upon adifferent answer to the first question. Wedonot reach them. SUMMARY Physician and surgeon beneficiaries of article 4498~. V.T.C.S., student loans mayexempt from their gross income under the federal Internal Revenue Code as amended in 1984 any loan amount discharged pursuant toanauthorized loan provision. Very 

# Jtruly yours

A;, J IM MATTOX Attorney General of Texas JACKHIGHTOWER First Assistant Attorney General MARYKELLER Executive Assistant Attorney General RICKGILPIN Chairman, Opinion Committee Prepared byBruce Youngblood Assistant Attorney General

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