Rev. Rul. 69-424

Advice has been requested whether, under the circumstances described below, the amounts paid to a college on behalf of a taxpayer are excludable from his gross income under the provisions of section 117(a) of the Internal Revenue Code of 1954. If the amounts are not excludable under section 117(a), advice is requested whether they are wages for purposes of the Federal Insurance Contributions Act, the Federal Unemployment Tax Act, and the Collection of Income Tax at Source on Wages (chapters 21, 23, and 24, respectively, subtitle C of the Code).

The taxpayer, a professional baseball player, is under contract with a major league baseball club to play baseball for one of its minor league clubs during June, July, and August, for which he will be paid a specified amount each month. As a part of the contract, the taxpayer entered into a "College Scholarship Plan" agreement with the major league club, in which the club agreed to pay, on his behalf, certain specified expenses in connection with his attendance at an accredited college of his choice, up to a fixed maximum amount per semester. The expenses for which the club shall be liable are limited to the cost of tuition, room and board, text books, and fees. The taxpayer must be enrolled in a regular undergraduate course at an accredited college and must have commenced his studies in the course within a certain period of time.

The unconditional release of the taxpayer or his placement on the league's military list does not relieve the baseball club of the obligation to make the payments under the plan. However, the club is relieved of the obligation to continue the payments should the taxpayer fail to attend an accredited college for two consecutive years without proper reason; fail to report for spring training as directed by his club; or be placed on the voluntarily retired, disqualified, or ineligible list.

The plan is supervised by the Commissioner of Baseball, or by an administrator appointed by him. All payments under the plan are made by the Commissioner of Baseball or by the administrator, subject to reimbursement by the club. All payments under the plan are made to the college attended by the taxpayer.

Subject to certain qualifications and limitations, section 117(a) of the Code provides that gross income of an individual does not include an amount received as a scholarship at an educational institution or as a fellowship grant.

Section 1.117-4 of the Income Tax Regulations provides, in pertinent part, that amounts paid or allowed to, or on behalf of, an individual to enable him to pursue studies or research are considered to be amounts received as a scholarship or fellowship grant for the purpose of section 117 of the Code if the primary purpose of the studies or research is to further the education and training of the recipient in his individual capacity and the amount provided by the grantor for such purpose does not represent compensation or payment for services. However, any amount or amounts paid or allowed to, or on behalf of, an individual to enable him to pursue studies or research shall not be considered to be an amount received as a scholarship or fellowship grant for the purpose of section 117(a) of the Code if such amount represents either compensation for past, present, or future employment services or payment for services that are subject to the direction or supervision of the grantor, or if such studies or research are primarily for the benefit of the grantor.

In the instant case the taxpayer had signed a contract with the major league club to play baseball for its minor league club. The major league club is obligated to pay for his tuition, room and board, text books and fees, under the conditions stated in the agreement, and to pay him a stated amount per month to play baseball during certain months. All of these payments are made under the employment contract entered into by the taxpayer in consideration for his playing baseball for the club. Thus, these amounts represent "compensation for past, present, or future employment services" within the meaning of section 1.117-4 of the regulations.

Accordingly, under the circumstances described above, no part of the amounts paid to the college on behalf of the player by the baseball club are excludable from his gross income under the provisions of section 117(a) of the Code but are compensation for employment services and are wages subject to income tax withholding under section 3402(a) of the Code. Also, the amounts are wages for purposes of the Federal Insurance Contributions Act and the Federal Unemployment Tax Act.