University of Virginia Seeks Clarity on Tax Treatment of Law School Debt

Enclosed is a copy of a letter and short memo from the Dean and me requesting Treasury Department guidance on section 108(f)(1). We mailed the hard copy to you yesterday. Please let me know if you have any questions.

We write to request Treasury Department clarification regarding the scope of section 108(f)(1) of the Internal Revenue Code, which allows a student in certain circumstances to exclude from gross income the discharged amount of his educational loans. The University of Virginia School of Law maintains a Loan Forgiveness Program under which the educational debt of a student is forgiven, in whole or in part, if the student works in qualifying public service following graduation. This program is an important part of the Law School's commitment to make public service a viable career option for its graduates. Under the program, our students are able to provide significant legal services to federal, state, and local governments, legal aid offices, public defenders, the military, public interest organizations, and legal reform groups that qualify as nonprofit organizations.

Among other things, section 108(f)(1) requires that the student whose loan is discharged must work for a certain period of time "in certain professions." In Moloney v. Commissioner, T.C. Summ. Op. 2006-53, n.5, the Tax Court stated in dicta that "[t]he term 'certain professions' to which sec. 108(f)(1) applies are medicine, nursing, and teaching." For reasons explained in the attached memorandum, we believe section 108(f)(1) also applies to students who perform work in professions other than the ones mentioned by the court, including the legal profession. Because of the potential confusion caused by the court's statement, however, we urge the Treasury Department to issue appropriate guidance clarifying the scope of this provision. The guidance will provide critical assurance to students regarding the tax consequences of participating in a loan forgiveness program such as Virginia's.

We appreciate your attention to this matter. Please let us know if we can provide you with any further information.

From: John C. Jeffries, Jr. and George K. Yin

Date: April 11, 2007

Subj: Meaning of "Certain Professions" in Section 108(f)(1)

Section 108(f)(1) of the Internal Revenue Code excludes from gross income the discharged amount of a student loan if, among other things, the student whose loan is discharged works for a certain period of time "in certain professions." This memorandum describes the background of section 108(f)(1) and explains why the work -- requirement should be construed as including work performed in the legal profession.

Section 108(f)(1) was enacted as part of the Deficit Reduction Act of 1984, P.L. 98-369. Prior to that Act, Congress had passed a similar, temporary provision, section 2117 of the Tax Reform Act of 1976, P.L. 94-455, which excluded from gross income the discharged amount of student loans forgiven prior to 1979 if the student performed certain qualifying work.¹ The 1976 Act provision reversed the effect in certain circumstances of Rev. Rul. 73- 256, 1973-1 C.B. 56, which held that the discharge of an individual's medical educational loan pursuant to his providing medical services in a rural area constituted income to the individual.

Although section 2117 of the Tax Reform Act of 1976 does not specify that the student whose loan is discharged must work "in certain professions,"² the Senate Finance Committee Report accompanying that Act contains that qualifying language.³ The Senate Report also describes the background behind the provision and explains the difficulty in attracting doctors, nurses, and teachers to work in certain parts of the country.⁴ There is no indication, however, in either the statute or the committee reports that the provision was applicable only if work were performed in certain specified professions.⁵ Indeed, in PLR 7921066, 1979 PLR Lexis 2391 (Feb. 26, 1979), the IRS concluded that section 2117 of the Tax Reform Act of 1976 applied in the case of a student who later worked as a pollution abatement practitioner for a government agency, and not as a doctor, nurse, or teacher.

As noted, section 108(f)(1) includes the qualifying language that a student must work "in certain professions." Again, however, there is nothing in the statute or the committee reports explaining the meaning of this phrase, or whether the provision was intended to apply only if work were performed in certain specified professions.⁶ In the Joint Tax Committee explanation of the 1984 Act, however, the staff states that "[t]he professions to which the provision refers are medicine, nursing, and teaching."⁷ We believe that this statement is merely descriptive of the examples brought to Congress's attention in 1984 and earlier that would be affected by the statutory provision, and not prescriptive of any limitation imposed by Congress. Like the Senate Committee Report accompanying the Tax Reform Act of 1976, the Senate Report accompanying the 1984 Act describes the background behind the provision, including the difficulty attracting doctors, nurses, and teachers to certain parts of the country.⁸

The only judicial or administrative agency authority we have found that specifically interprets this language is consistent with our view. In PLR 8714035, 1987 PLR Lexis 4135 (Jan. 2, 1986), the IRS concluded that the discharge of a student loan by a college on condition that the student work as a full-time staff member of the college fell outside of the scope of section 108(f)(1). In reaching its conclusion, the IRS stated --

Both Porten v. Commissioner, T.C. Memo 1993-73, and Moloney v. Commissioner, T.C. Summ. Op. 2006-53, involved the application of section 108(f)(1) and each specifically recited in a footnote the language contained in the Joint Committee staff explanation of the 1984 Act.¹⁰ Neither case, however, turned on an interpretation of the meaning of the phrase, "in certain professions," and neither court therefore addressed that issue.

In conclusion, we believe that the condition contained in section 108(f)(1) that work be performed "in certain professions" should be construed to be consistent with its plain and natural meaning, which would include work performed in the legal profession. There is nothing in the statute or committee reports of the 1984 Act or predecessor acts that would support a more restrictive meaning. Furthermore, the only judicial or administrative agency authority specifically interpreting this language is consistent with this conclusion. Because the statement contained in the recent Moloney case has introduced possible confusion as to the applicability of section 108(f)(1) to students who participate in loan forgiveness programs such as Virginia's, we respectfully request that the Treasury Department issue guidance clarifying the scope of that provision.

Please let us know if we can provide you with any further information.

² The pertinent language in section 2117(a) of the Tax Reform Act of 1976 provides that the loan discharge must be pursuant to a condition that the student work "for a certain period of time in certain geographical areas or for certain classes of employers."

³ See S. Rep. No. 94-938, 94^th Cong., 2d Sess. 430 (1976) (requiring mat the student work "for a certain period of time in certain professions in certain geographical areas or for certain classes of employers") (emphasis added). See also Staff of Jt. Comm. on Tax'n., General Explanation of the Tax Reform Act of 1976, 94^th Cong. 2d Sess. 631 (1976) (containing "in certain professions" language); GCM 37160, 1977 GCM Lexis 123 n.3 (noting difference between statutory language, committee report, and staff explanation). The phrase, "in certain professions, " was not included in the bill reported by the Senate Finance Committee. See H.R. 10612, § 1319, as reported by Senate Finance Committee, June 10, 1976.

⁴ See S. Rep. No. 94-938, 94^th Cong., 2d Sess. 430 (1976).

⁵ Neither the Senate Finance Committee report nor the Conference Report to the 1976 Act, the only committee reports mentioning the provision, provides any such limitation. See S. Rep. No. 94-938, 94^th Cong., 2d Sess. 429-31 (1976); S. Conf. Rep. No. 94-1236, 94^th Cong., 2d Sess. 501 (1976). In addition, no such limitation is set forth in any of the committee reports describing the extension of the provision in the Revenue Act of 1978. See S. Rep. No. 95-1263, 95^th Cong. 2d Sess. 97-98 (1978) (describing section 2117 of the Tax Reform Act of 1976 as applying only if work were performed "in certain professions" but not providing any further guidance); H. Conf. Rep. No. 95-1800, 95^th Cong. 2d Sess. 216 (1978).

⁶ See S. Prt. No. 98-169 (Vol. 1), 98^th Cong. 2d Sess. 886-87 (1984); H. Conf. Rep. No. 98-861, 98^th Cong. 2d Sess. 1279(1984).

⁷ See Staff of Jt. Comm. on Tax'n., General Explanation of the Revenue Provisions of the Deficit Reduction Act of 1984, 98^th Cong. 2d Sess. 1200 (1984).

⁸ See S. Prt. No. 98-169 (Vol. 1), 98^th Cong. 2d Sess. 887 (1984).

⁹ PLR 8714035 (emphasis in original). The ruling also noted that the loan at issue did not qualify as a "student loan."

¹⁰Porten v. Commissioner, T.C. Memo 1993-73, n.1; Moloney v. Commissioner, T.C. Summ. Op. 2006-53, n.5.