Paul L. Caron
Dean



Wednesday, April 19, 2006

Aprill on Effect of Moloney on Public Interest Loan Forgiveness Programs

Aprill_3Tax Prof and Associate Dean Ellen P. Aprill (Loyola-L.A.) offers some thoughts on the Tax Court case we blogged yesterday, Moloney v. Commissioner, T.C. Summ. Op. 2006-53 (4/17/06), which held that a law school graduate working in a public interest job must report income on the receipt of funds to help repay her student loans:

Section 108(f) of the Internal Revenue Code specifies that, contrary to the general rule, forgiveness of a student loan is not income if the forgiveness is made as part of a plan to encourage students to serve areas with unmet needs for a period of time. The code further states that "student loan" includes a loan made by an educational institution to refinance a loan, if the refinancing is part of a plan of the institution to encourage students to undertake such service.

Yesterday, the Tax Court decided a case, Moloney v. Commissioner, in which it concluded that a grant from a governmental program made by means of a dual-payee check to a law school graduate and to her lender to be used to repay her student loans could not constitute refinancing under section 108(f) and thus did constitute taxable income to the individual. My understanding from speaking to the Director of our Public Interest Department is that some law schools, not wishing or having the infrastructure to become lenders, have set up their public interest loan forgiveness program using such dual-payee checks. Although the Tax Court case is in a special category of cases for small claims that may not be treated as precedent for any other case (and which cannot be appealed), any school that has structured its public interest loan program in this way may wish to consider restructuring it or seeking a legislative solution.

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Comments

Two questions:

1. Often schools structure their benefits to LRAP participants as forgivable loans to take advantage of the 108(f) provision that allows exclusion of "any loan... made by an educational institution...to refinance a loan to an individual to assist the individual in attending..." It seems the court had a major issue with the cash payment as it did not conform with the language of 108(f). Do you think a forgivable loan from a school would find sanctuary under 108(f)?

2. One part of Maloney that jumped out at me was footnote 5, which states that 'certain professions' in 108(f) only means medicine, nursing and teaching (citing Porten v. Commissioner, 1993-73 n.1). Does that mean Law School LRAPs are not eligible under 108(f)?

Posted by: Michael Machen | Apr 19, 2006 6:46:37 AM

A law school financial aid officer emailed me to ask about footnote 5 in Moloney, which states that 'certain professions' in 108(f) only means medicine, nursing and teaching (citing Porten v. Commissioner, 1993-73 n.1). I believe the opinion to be wrong in footnote 5 -- the footnote ignores later amendment of the provision. When section 108(f) was first introduced in the 1980's, it applied only to governmental loan forgiveness programs and those programs covered only certain professions. When the section was amended in the 1990's (largely through the efforts of Stanford Law School, as I recall), it was extended to loans by the educational institutions themselves and the specific purpose was to cover law schools. The legislative history of the provision makes this purpose clear and explicit. See 93 TNT 107-69 (1993)(statement of Sen. Bumpers, sponsor of the legislation).

Posted by: Ellen Aprill | Apr 19, 2006 12:41:52 PM