Rev. Rul. 55-554

Advice has been requested as to the exclusion from gross income by the recipient of a fellowship grant of an additional amount included in the fellowship grant due to the dependents of the recipient.

The taxpayer received from an organization, described in section 501(c)(3) which is exempt from tax under section 501(a) of the Internal Revenue Code of 1954, a fellowship grant for a 1-year period under which he studied preventive medicine. He was not a candidate for a degree. It is the practice of the grantor organization to take into consideration whether the recipient is married and has dependents and to fix the amount of the grant accordingly. The taxpayer's grant included an additional allowance for dependents and exceeded the amount of $300 times the number of months for which the grant was received, but he did not receive any separate allowance for expenses of the type which is excludable under section 117(a)(2) of the Code.

Section 117(a)(1) of the Code excludes from gross income amounts received as a scholarship or fellowship grant, subject to the limitations of section 117(b). In the case of a recipient who is not a candidate for a degree, section 117(b)(2) of the Code limits the amount excludable as a scholarship or fellowship grant under section 117(a)(1) to an amount equal to $300 times the number of months for which the recipient received amounts under the grant during the taxable year, limited to a maximum period of 36 months. In addition to the exclusion allowed by section 117(a)(1) of the Code, section 117(a)(2) provides for the exclusion of any amount received to cover expenses for (A) travel, (B) research, (C) clerical help, or (D) equipment, which are incident to a scholarship or fellowship grant, but only to the extent so expended by the recipient.

The allowable exclusions are clearly specified. There is no express additional exclusion for amounts received as an allowance for dependents and no such exclusion can be implied. Even though an allowance for dependents is taken into account in determining the amount of the grant, the total amount received from the grantor will be considered to be the amount of the fellowship grant and must therefore be included in gross income to the extent that it exceeds the limitation provided in section 117(b)(2) of the Code. In computing his taxable income, the taxpayer is of course entitled to such deductions for his spouse and dependents as are allowable under section 151 of the Code.

Accordingly, it is held that the entire amount of a fellowship grant received by a taxpayer who is not a candidate for a degree must be included in his gross income to the extent that it exceeds the exclusion provided by section 117(a), as limited by section 117(b)(2) of the Code, irrespective of the fact that the amount of such grant may be greater where the recipient has dependents