Rev. Rul. 57-560

Advice has been requested regarding the treatment for Federal income tax purposes of amounts received by taxpayers from the Mayo Foundation and Mayo Properties Association as fellowship grants and cost-of-living allowances under the facts set forth below.

A number of doctors of medicine receive grants and cost-of-living allowances from the Foundation and the Association while they are studying at a clinic or hospital for graduate medical and surgical degrees. The Foundation refers to these doctors, all of whom possess an `M.D.' degree or its equivalent, as `fellows.' When a `fellow' is accepted by the Foundation, he is formally enrolled in the University of Minnesota Graduate School as a student and is a candidate for a Master of Science or Doctor of Philosophy degree.

These students attend lectures and staff meetings, and participate in seminar programs. They perform given medical tasks under direct and personal guidance of staff doctors, conduct examinations of patients and draw conclusions as to diagnosis and indicated therapy. However, these conclusions are not made known to the patients, neither do they constitute a basis for treatment of the patient. The examination of the patient is reviewed and repeated by the instructing physician on the diagnostic floor who works in close supervision of the students and advises them of the conditions and proper conclusions which the students may have overlooked.

Surgery students function as observes in the operating room and later participate in a limited number of simpler surgical procedures, although they do not assume any responsibility or render any material service either at the operating table or in the postoperative care.

All students conduct certain studies in the laboratory, calculated to broaden and advance the knowledge of medical science in general. These studies do not contribute to the current medical care of patients.

The `fellows' merely participate in a program of graduate education and training. They are not charged with the responsibility for the care and treatment of patients, neither are they under any commitment to the clinic, hospital, or foundation.

Section 117(a)(1) of the Internal Revenue Code of 1954 provides that in the case of an individual, an amount received as a fellowship grant, including the value of contributed services and accommodations, is excludable from gross income.

Section 1.117-4(c)(2) of the Income Tax Regulations provides, in 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.

Accordingly, it is held that the amounts received from the Mayo Foundation and the Mayo Properties Association by doctors of medicine who are studying at the University of Minnesota Graduate School for graduate degrees, where they render no service, replace no personnel who would be employed on a salary basis, and perform no functions for the benefit of the grantor or training institution, are fellowship grants and are excludable from gross income under section 117(a)(1) of the Internal Revenue Code of 1954.