Rev. Rul. 73-255

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 the hospital as an administrative resident, are excludible 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 to receiving the degree, he is required to serve a one-year period in an approved hospital, as an administrative resident, that will fulfill certain hours of graduate credit towards the degree. The taxpayer receives a monthly stipend from the hospital during his term of residency.

The residency program used by the university and coordinated with the hospital divides the year of administrative residency into four three-month periods designed to provide a residency experience that is a logical and planned extension of the academic year preceding it. The first period consists of an analysis or overview of the management process and organizational structure of the hospital. During this period the student-resident is required to establish criteria to determine how the functions of management (planning, organizing, staffing, directing, and controlling) are practiced in the hospital.

During the second period of the program the student-resident devotes his time to an analysis of the community that the hospital serves. This analysis is directed toward the relationship between the hospital and outside agencies, the hospital and patient population, and other relationships pertinent to the hospital.

During the third period, the student-resident undertakes an analysis of the flow of information both within and between the various departments of the hospital. All information is analyzed from the standpoint of capability, usefulness, duplication, adequacy, method of collection, distribution, direction of flow, currency, and whether or not additional information is needed.

In the fourth period, the student-resident is expected to evaluate the data gathered in the first three periods and to make specific recommendations for change. After these recommendations are discussed with the preceptor, they may be implemented as the resident's responsibility if the preceptor decides that they are of sufficient value. At the completion of each of the four periods, the student-resident is required to submit a report of his findings to the university.

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 including fees, commissions, and similar items.

Section 117(a) of the Code provides, subject to certain limitations and qualifications, that gross income of an individual does not include amounts 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 scholarship or fellowship grants. A scholarship or fellowship grant, as defined in section 1.117-3 of the Income Tax Regulations, is an amount paid to or for the benefit of an individual to aid him in the pursuit of studies.

Section 1.117-4(c) of the 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 which 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.

The Supreme Court of the United States in the case of Bingler v. Johnson, 394 U.S. 741 (1969), 1969-2 C.B. 17, upheld the validity of the regulations under section 117 of the Code. The Court held that the ordinary meaning of the term scholarship or fellowship is a relatively disinterested, "no-strings" educational grant, with no requirement of any substantial "quid pro quo" from the recipient.

Rev. Rul. 57-385, 1957-2 C.B. 109, which is somewhat similar to the instant case, holds that an administrative resident at a hospital performed substantial services while he was rotated through various hospital departments and in return received "salary" payments from the hospital. The amounts paid by the hospital were payment for services rendered and were includible in the resident's gross income.

Under the facts in the instant case the taxpayer, during his residency, was expected to gather information relating to the functions of the hospital, evaluate the data received, and make specific recommendation for change. Although there was no guarantee that the work product of the taxpayer would be of value to the hospital, the hospital had the right to that work product in case it was. Thus, the hospital extracted a quid pro quo from the taxpayer and the primary purpose of the grant was for the benefit of the hospital-grantor.

Accordingly, the amounts received from the hospital by the taxpayer are not excludible from gross income as a scholarship or fellowship grant under section 117 of the Code but are includible in income under section 61 of the Code.

Rev. Rul. 57-385, 1957-2 C.B. 109, is hereby amplified.