Rev. Rul. 72-340

Advice has been requested whether stipends paid to unemployed or underemployed probationers under the circumstances described below are includible in their gross incomes.

A city was awarded a grant by a state that received the funds for the grant from the Law Enforcement Assistance Administration, Department of Justice. The purpose of the grant is to establish a project to reduce recidivism to crime among probationers by providing them with job training and placement in private industry. Training provided to probationers in the project includes vocational aptitude evaluation, remedial education, and guidance counseling.

Participants in the project are selected by the county probation department from probationers who are currently unemployed or underemployed. After completing approximately four weeks of vocational evaluation and job training, the participant is assisted in locating a job for which he is suited. During the period of evaluation, the participant receives remedial education and counseling. Upon securing employment, in which he receives on-the-job training, the participant returns to the project weekly for counseling and, if necessary, for remedial education. Each participant placed in a job is an employee of the hiring corporation. The duration of his employment is indefinite and he is paid by his employer on the same basis and at the same rate as others in the same job and receives all employee benefits.

As an incentive to the participant, a weekly "stipend" is paid to him by the city for twenty-six weeks. The stipend does not reduce any welfare payments the participant may be receiving, nor is it reduced by any public assistance payments received by the participant. However, the amount of the stipend is reduced if the participant fails to report to the project during his four week period of vocational evaluation and job training, or, if during his period of employment he fails to report to his job. The stipends also continue for participants who do not have a job, but they must report to the project when requested for counseling, academic instruction, or placement assistance. The stipends cease immediately if the participant quits the project.

Section 61(a)(1) of the Internal Revenue Code of 1954 provides that, except as otherwise provided, gross income means all income from whatever source derived, including compensation for services. However, disbursements from a general welfare fund in the interest of the general welfare, that are not made for services rendered, are not includible in gross income. See Revenue Ruling 63-136, C.B. 1963-2, 19, which holds that benefit payments made to individuals under the Area Redevelopment Act of the Manpower Development and Training Act of 1962 are not includible in the gross income of the recipients because they are intended to aid the recipients in their efforts to acquire new skills that will enable them to obtain better employment opportunities, and, as such, fall in the same category as other unemployment relief payments made for the promotion of the general welfare.

In the instant case the stipends made to a participant are intended to aid him in an effort to acquire training in skills that will afford him opportunities for gainful employment. Accordingly, these payments fall in the same category as other relief payments made for the promotion of the general welfare, and are not includible in his gross income.

Furthermore, none of the stipends received from the city by participants in the project are considered "wages" for purposes of the withholding of income tax at sources on wages or the taxes under the Federal Insurance Contributions Act.