Rev. Rul. 72-469

Advice has been requested whether, under the circumstances described below, amounts received for participating in an optional research program at a hospital are excludable from gross income under the provisions of section 117(a) of the Internal Revenue Code of 1954.

A resident in internal medicine at a hospital received compensation from the hospital at a specified amount per year. The resident elected to participate in an optional medical research program at the hospital. Under the program he received from the hospital a monthly stipend in addition to his salary. The hospital encouraged optional research work by residents, but those declining to participate were not penalized. The hospital's experience showed that, on an overall basis, the majority of the residents decided to participate in the program and that paying the resident for participating in the research project reduced the amount of "moonlighting" engaged in by the residents to supplement their residency pay.

Under the program, a participating resident selects his research topic with the approval of the director of training for the program. The selected research topic is submitted each July and a manuscript concerning the resident's research is submitted the following June. The best manuscripts are published in the bulletin of the hospital's Medical Staff. The hospital requires submission of the manuscripts to the director of training to afford him an opportunity to see that (1) the hospital facilities are sufficient to support the research and provide the necessary research material, (2) the project is within the competence of the resident, and (3) the research activity will supplement the resident's training.

The resident's research project is not required for his certification and does not directly aid in supplying services, treatment, or management benefits to patients. However, on occasions, research concerning hospital procedures has caused the hospital to change its management and treatment program with regard to patients.

Section 61 of the Code provides that, unless otherwise excluded by law, gross income means all income from whatever source derived including, but not limited to, compensation for services. Subject to certain limitations and qualifications, section 117(a) of the Code provides that gross income of an individual does not include any amount received as a scholarship at an educational institution or as a fellowship grant.

Whether an amount received by an individual is excludable from his gross income under section 117 of the Code depends upon the facts and circumstances under which the payment is made. The exclusion provision applies only to scholarships or fellowship grants. A scholarship or fellowship grant is an amount paid or allowed to an individual for the primary purpose of furthering the education and training of the recipient in his individual capacity.

Section 1.117-4(c) of the Income Tax Regulations provides, in part, that 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 if such amount represents compensation for past, present, or future employment services, if such amount represents 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. Any of these conditions will negate the existence of a scholarship or fellowship grant as defined in these regulations.

In the case of John H. Bingler v. Richard E. Johnson, et al., 394 U.S. 741 (1969), Ct. D. 1926, C.B. 1969-2, 17, the Supreme Court of the United States stated that the definitions supplied by the regulations clearly are prima facie proper, comporting as they do with the ordinary understanding of "scholarships" and "fellowships" as relatively disinterested, "no-strings" educational grants, with no requirements of any substantial quid pro quo from the recipients.

Revenue Ruling 57-386, C.B. 1957-2, 107, based upon section 1.117-4(c) of the regulations, holds that stipends received by interns and resident physicians performing services at a medical training hospital, in order to complete or receive specialized training, constitute compensation for services rendered and are includible in the gross income of the recipients. The basis for this holding is that although interns and residents acquired training and experience in their particular specialties, they were primarily performing services for the hospital as physicians.

Under the facts in the instant case the research findings of residents at the hospital are sometimes used in formulating management or treatment programs with regards to patients. In addition, the best resident manuscripts are published in the bulletin of the hospital's Medical Staff and the publication of these manuscripts serves to advance the research aims and objective of the hospital. Thus, the residents are performing research services for the hospital within the meaning of Revenue Ruling 57-386. Also, the monthly stipends are intended as supplemental compensation for services rendered for the benefit of the hospital.

Accordingly, the amounts received by the resident for participating in the optional research program at the hospital are not excludable from gross income as a scholarship or fellowship grant under section 117(a) of the Code but are includible in income under section 61 of the Code.

Revenue Ruling 57-386 is hereby amplified.