Wednesday, April 19, 2006
Tax 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.