Rev. Rul. 59-118

Advice has been requested whether amounts received from the Veterans Administration by an individual, who is enrolled at a university as a candidate for a doctoral degree in psychology and who is required to serve a training period at Veterans Administration hospitals as a staff assistant, are excludable from gross income under section 117 of the Internal Revenue Code of 1954.

The Veterans Administration conducts a unified psychology training program in cooperation with universities approved for doctoral training in psychology by the American Psychological Association. The dual purpose of the program is to furnish a continuing source of qualified staff psychologists for the Administration's Department of Medicine and Surgery and to provide needed services for which psychological technicians would otherwise have to be employed. Throughout the training period, trainees pursue their academic studies at the university and give part-time service toward meeting hospital and clinic needs, under the joint jurisdiction and supervision of university and Veterans Administration staffs. While preparing for full-time staff positions, the trainees serve as a part of the work force of the hospitals and render service to patients. The trainees, functioning as junior staff members, constitute an essential part of psychology services at the stations to which they are assigned.

All candidates for such traineeship are initially selected by the department of psychology of an approved university, and such individual must have at least a bachelor's degree from a college or university of recognized standing. The candidate must submit to the university and to the Veterans Administration Standard Form 57, Application for Federal Employment. Individuals who already have an advanced degree in psychology, but lack necessary experience, may apply for training if they are sponsored by one of the participating universities. During the training period the trainees are paid for the number of hours actually worked at Veterans Administration stations to which assigned at such compensation rates as are established with reference to the base full-time applicable pay levels of the Federal civil service. They are employees of the United States Government.

Section 1.117-4(c) of the Income Tax Regulations provides, in part, that if any amount paid or allowed to, or on behalf of, an individual to enable him to pursue studies or research, represents compensation for past, present, or future employment services, or represents either payment for services which are subject to the direction or supervision of the grantor, or research primarily for the benefit of the grantor, such payments or allowances shall not be considered as amounts received as a scholarship or a fellowship grant for the purpose of section 117 of the Code.

The fact that such individuals are also attending graduate school at a university does not change their status as employees of the Veterans Administration. Revenue Ruling 57-386, C.B. 1957-2, 107, holds that stipends received by interns and residents at a training hospital who assisted in the care of patients as a part of their training represented compensation for services and not nontaxable fellowship grants. They were primarily performing services for the hospital even though in the process they were acquiring training and experience in their particular specialties. See also Revenue Ruling 56-101, C.B. 1956-1, 89, and Revenue Ruling 57-385, C.B. 1957-2, 109.

Revenue Ruling 57-560, C.B. 1957-2, 108, holds that amounts received from the Mayo Foundation and Mayo Properties Association as fellowship grants and cost-of-living allowances by doctors of medicine, who are studying for graduate degrees at a clinic or hospital, are excludable from gross income under section 117 of the Code, where the doctors rendered no services to the hospital or clinic, replaced no personnel who would be employed on a salary basis, and performed no functions for the benefit of the grantor or training institution. None of these conditions exist in the instant case.

Accordingly, it is held that the amounts paid by the Veterans Administration to graduate students while serving a training period at Veterans Administration hospitals as staff assistants, as a condition to receiving a doctorate degree in psychology from a university, represent compensation for services rendered and not nontaxable scholarship or fellowship grants. Such amounts are includible in the student-employees gross income under section 61 of the Code.

Revenue Ruling 57-560, C.B. 1957-2, 108, distinguished.