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New ruling gives physicians hope in claiming the Rural Physician Tax Credit

February 10, 2020 Tax State and Local Tax

Bruce P. Ely[1], William T. Thistle II
Bradley Arant Boult Cummings LLP
Birmingham, Alabama

Governor Ivey in her State of the State address on February 4 argued forcefully that Alabama must do more to attract physicians (and nurse-practitioners) to practice in the rural, under-served areas of the state. Unfortunately, one of the only current tax incentives to do so—a $5,000 income tax credit that can be claimed over a 5 consecutive year period--has been the source of many audits and administrative and Alabama Tax Tribunal appeals.  And more often than not, physicians claiming the credit lost, despite their (and their CPA’s) belief that they met all the requirements of the somewhat vague statute-- and in some cases even though their tax prep software confirmed their qualification. 

Good news. The Tax Tribunal recently held in favor of a rural physician while providing needed clarity on the criteria for the tax credit. Phillip & Jennifer L. Dean v. State of Alabama Department of Revenue, Docket No. INC.18-569-JP (1/20/20).  There, Chief Judge Jeff Patterson found that a doctor living in Muscle Shoals but practicing in nearby Sheffield and Russellville qualified as a “rural physician” practicing in a “small or rural community.”   

By way of background,  in Thomasina Sharpe v. State of Alabama Department of Revenue, Docket No. INC. 17-452-JP (2/5/18), the Tax Tribunal parsed the definition of “rural physician”: he or she must: (1) be licensed to practice medicine in Alabama; (2) practice and reside in a “small or rural community;” and (3) have admitting privileges to a “small or rural hospital.”  A small or rural community is defined as a community that has less than 25,000 residents according to the latest U.S. decennial census and has a hospital with an emergency room.  Ala. Code section 40-18-131. In Sharpe, the Tribunal denied the taxpayer’s appeal because, although she lived in a rural community and commuted to a different rural community to practice, the community where she lived didn’t have a hospital with an emergency room.   

In the present case, the ADOR originally insisted that the physician both reside and practice in the same rural community.  Thus, Dr. Dean didn’t seem to qualify for the tax credit because he resided in Muscle Shoals but practiced elsewhere.  The taxpayer (and, we assume, his attorney-wife) argued articulately that the Sharpe decision was not intended to require this, but only that the community where the doctor resides and the community where he or she practices both constitute a “rural community” under the statute.  All three cities have hospitals with emergency rooms, and each had a population below the 25,000 resident cap.  

At the Tax Tribunal, however, the ADOR dropped that argument and instead asserted that the four adjacent cities (known as the Quad Cities) of Muscle Shoals, Florence, Tuscumbia, and Sheffield constitute but one “community” which has a combined population above the 25,000 cap.  Since the statute uses the term “community” rather than “municipality,” the ADOR believed the Alabama legislature intended this application.    

The Tribunal instead relied on the language in the statute’s definition that references the latest decennial census as a clue to interpreting legislative intent.  After analyzing U.S. census law, the Tribunal held that Alabama law does not allow aggregating municipal populations and therefore the definition of a rural community can only be applied to a singular geographical unit, not including surrounding areas. Accordingly, the ADOR was directed to issue the taxpayers their full refund claim, plus interest. 

The Tribunal’s new decision provides helpful guidance to physicians who are or who are contemplating practicing in a rural area of the state (and their CPAs) in applying for this credit.  Since the ADOR didn’t pursue its original argument that a physician must both practice and reside in the same rural community, though, that issue may remain open.  However, the Tribunal included in its Final Order the portion of the ADOR’s letter to Dr. Dean asserting that argument, and then proceeded to rule for him.  That may be a hint the Tribunal likely would have held for the doctor even if the state had pursued that argument on appeal.  Although it’s unknown whether the ADOR plans to appeal, refund claims for other qualifying rural physicians are now in order, subject to the applicable statute of limitations. If the reader has any questions about the new ruling, please contact Bruce at bely@bradley.com or Will at wthistle@bradley.com.        

© Bruce P. Ely/William T. Thistle II/Bradley Arant Boult Cummings LLP. All rights reserved.

[1] A special thanks to our law clerk, Jack Pouchert, for his assistance in preparing this column. Jack is a 3L at Cumberland School of Law here in Birmingham and the Student Materials Editor of the Cumberland Law Review.

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