Rev. Rul. 57-385

Advice has been requested whether amounts received from a hospital by a student, who is enrolled at a university as a candidate for the degree of Master of Hospital Administration and who is required to serve one year at a hospital as an administrative resident, are excludable from gross income under section 117 of the Internal Revenue Code of 1954.

The taxpayer, who is a regular tuition-paying student not on a scholarship is a candidate for the degree of Master of Hospital Administration. As a condition precedent to receiving the degree, he is required to serve a one-year period in an approved hospital as an administrative resident. This year of residency, which fulfills twelve hours of graduate credit toward a master's degree, is supervised by members of the hospital administration faculty of the university. During the year, the resident follows a definite program of work; he is rotated through the various departments of the hospital where, by observation, inquiry and participation in departmental activities, he is acquainted with the operation of the hospital and related administrative problems and techniques; he also has selected administrative projects and problems to solve; and, finally, he must submit a formal project report as a requirement of the degree. As an administrative resident, he receives a monthly salary which is paid out of hospital funds with no reimbursement from the university. Such salary is determined entirely by the hospital and increases somewhat as he continues in his work.

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 payment either for services which are subject to the direction or supervision of the grantor, or for 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.

Therefore, since the salary, the amount of which is at the discretion of the hospital, was paid by the hospital for services rendered, it does not qualify as a scholarship or fellowship grant within the meaning of section 117 of the Internal Revenue Code of 1954. It constitutes a payment for services rendered to the hospital and is includible in gross income under section 61(a) of the Code. It is also subject to withholding of income tax under section 3402 of the Code.