Paul L. Caron

Tuesday, April 18, 2006

Tax Court: Law School Graduate Working in Public Interest Has Income on Receipt of Funds to Help Repay Student Loans

Tax_court_24The Tax Court decided a case yesterday of interest to law students:  Moloney v. Commissioner, T.C. Summ. Op. 2006-53 (4/17/06).  Melissa Moloney received $55,000 in Federal Stafford Loans to attend law school in 1996-99.  After graduating, she worked for the Baltimore County State’s Attorney’s Office.  In 2002, she received $4,372 from the Janet L. Hoffman Loan Assistance Repayment Program ("LARP"), administered through the Maryland Higher Education Commission.  The LARP provides funds to repay student loans for "Maryland residents who provide public service in Maryland State or local government or nonprofit agencies in Maryland." The funds are distributed in a check made payable to both the graduate and the lender.

Ms. Maloney argued that the $4,372 was not income to her under § 108(f):

Looking to both the language of the Internal Revenue Code Section 108(f) and the award letter for the LARP, both specify that the person receiving the financial award must work in a specified employment, in the case of the LARP, it is full-time employment with the state or local government or non profit organization. Looking to the CCH Explanation of Internal Revenue Code Section 108(f) for further guidance of the intent of that section, it states:

In order to ensure the professional participation in public service activities, many educational organizations sponsor programs which offer students an opportunity to be discharged (partially or completely) from their student loans, by working for a period of time in a public serviced organization. (CCH--Standard Federal Tax Reports ¶ 7002, * * *)

Due to the fact that the language purposefully is not exact, allowing for other possible programs, programs which may not have been in existence when the Code Section was drafted coupled with the CCH Explanation and requirements of the Janet L. Hoffman LARP, it is Petitioner’s position that the award received through the LARP should be treated as a discharge of indebtedness and therefore non taxable income. The very spirit of 108(f) is to ensure that professionals participate in public service employment rather than working in the private sector.

The IRS disagreed with Ms. Moloney's reading of § 108(f):

Her [petitioner’s] argument glosses over the fact that the award is not a discharge of indebtedness. Even if the award were considered to be a discharge of indebtedness, it would not be excludible from income under I.R.C. § 108(f) under the plain language of the statute. Petitioner attempts to avoid the language of the statute by arguing that the intent of the award falls within the intent behind the law. * * * She fails to recognize that this reading of I.R.C. § 108(f) is without foundation.

The Tax Court agreed with the IRS:

Petitioner’s reliance on section 108(f) is misplaced.  Income from the discharge of indebtedness is includible in gross income. Sec. 61(a)(12). Section 108 provides certain exceptions to that treatment. Section 108(f) entitled “Student Loans” establishes certain circumstances under which income from the discharge of a student loan may be excluded from gross income. In no event may section 108(f) apply unless there is in fact a discharge of a student loan. In the instant case, petitioner received petitioner’s LARP award of $4,372. That award was to be, and was, used by petitioner to repay a portion of petitioner’s law school loan. Petitioner’s LARP award did not discharge petitioner’s law school loan or any other student loan that petitioner may have had.

In a footnote, the court observed:

Petitioner’s reliance on the “CCH Explanation of Section 108(f)” also is misplaced. That explanation is not binding on the Court. It merely represents the views of the publisher of the publication "CCH Standard Federal Tax Reporter."

The court concluded:

We turn finally to petitioner’s argument that the Court should be guided by not only the letter but also the spirit of section 108(f)(1). The Court must follow the law as written by Congress.

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What about footnote 5 which says 108(f) only applies to the professons of 'medicine, nursing and teaching' ? As far as I know, many law school LRAPs rely on this provision for their programs.

Posted by: Michael Machen | Apr 18, 2006 12:46:50 PM