Rev. Rul. 82-57

The Internal Revenue Service has reconsidered its decision, announced in Rev. Rul. 65-59, 1965-1 C.B. 67, to suspend Rev. Rul. 59-118, 1959-1 C.B. 41, and not to litigate cases in which amounts have been received under circumstances substantially identical to those in Wells v. Commissioner, 40 T.C. 40 (1963), and Richard A. Anderson v. United States, Civil No. 3-59-238 (D. Minn., Nov. 15, 1960).

FACTS

Rev. Rul. 59-118 holds that amounts paid by the Veterans Administration to graduate students while serving a training period at VA hospitals as staff assistants, as a condition to receiving a doctoral degree from a university, do not represent scholarships or fellowship grants excludable under section 117 of the Internal Revenue Code. Rather, these are compensation for services rendered and are includible in gross income under section 61.

Rev. Rul. 65-59 states that, pending amendment of the Income Tax Regulations under section 117 of the Code, the Service will not litigate cases in which amounts have been received under circumstances substantially identical to those in Wells and Anderson. Rev. Rul. 65-59 also states that Rev. Rul. 59-118 will not be applied in disposing of cases involving stipends paid by the VA to graduate students while serving a training period as staff assistants at VA hospitals.

LAW AND ANALYSIS

Under section 117(a) of the Code, gross income does not include any amount received as a scholarship at an educational organization or a fellowship grant.

Section 117(b) of the Code provides that, for a candidate for a degree at an educational organization described in section 170(b)(1)(A)(ii), section 117(a) will not apply to that portion of any amount received that represents payment for teaching, research, or other services in the nature of part-time employment required as a condition to receiving the scholarship or the fellowship grant. However, if teaching, research, or other services are required of all candidates (whether or not recipients of scholarships or fellowship grants) for a particular degree as a condition to receiving the degree, the teaching, research, or other services will not be regarded as part-time employment.

Section 1.117-4(c) of the regulations provides that any amount paid or allowed to, or on behalf of, an individual to pursue studies or research is not considered an amount received as a scholarship or fellowship grant if the studies or research are primarily for the benefit of the grantor.

In Bingler v. Johnson, 394 U.S. 741 (1969), Ct. D. 1926, 1969-2 C.B. 17, the Supreme Court of the United States held that the definitions in section 1.117-4(c) of the regulations are proper, because they comport with the ordinary understanding of "scholarships" and "fellowships" as relatively disinterested, "no-strings" educational grants with no requirement of any substantial quid pro quo from the recipients. The Court also stated that the thrust of the provision dealing with compensation is that bargained--for payments, given only in return for services rendered--whether past, present, or future--should not be excludable from income as "scholarship" funds.

In Turem v. Commissioner, 54 T.C. 1494, 1505 (1970), the court, in referring to Bingler v. Johnson, stated that the regulations are designed in part to distinguish relatively disinterested payments made primarily to further the recipient's education from payments made primarily to reward or induce the recipient's performance of services for the benefit of the grantor.

If payments are made to compensate recipients for participating in a course of training that prepares them to perform services in a program of the grantor, they are not the type of disinterested, "no strings" grants described in Bingler v. Johnson because they are made primarily for the benefit of the grantor. As a result, they are not excludable under section 117 of the Code. Rev. Rul. 68-312, 1968-1 C.B. 59. The express purpose of the payments in Wells was to furnish a continuing source of qualified staff psychologists for the VA hospitals and to provide needed services for which psychological technicians would otherwise have to be employed. These payments were, therefore, designed to compensate the recipients for participating in a course of training that prepared them to perform services in a program of the grantor. Consequently, despite the court's findings that the taxpayer did not perform substantial services and that the primary purpose of the payments was to aid in training the recipients, the payments in Wells were made primarily for the benefit of the grantor and, hence, are not excludable from gross income under section 117. The fact that the recipients were not legally bound to perform future services does not change this conclusion. Ehrhart v. Commissioner, 57 T.C. 872(1972), aff'd 470 F.2d 940 (1st Cir. 1973). Also see, Smith v. Commissioner, 60 T.C. 279 (1973) and Ide v. United States, File CA 6452 (W.D. Mich., June 12, 1973).

In addition, although Wells holds that the VA payments in that case are excludable from gross income under section 117 of the Code, that case is not controlling in the situation described in Rev. Rul. 59-118. In Wells, the court found that the recipients of the payments did not perform substantial services, while the taxpayer in Rev. Rul. 59-118 was an essential part of the psychology services at the hospital. Accordingly, Wells and Rev. Rul. 59-118 are distinguishable on their facts.

The taxpayer in Anderson was a candidate for an advanced medical degree at a university and, as part of that program, was an assistant resident at a VA hospital. The jury in Anderson concluded that the services performed by the taxpayer were required of all candidates for the degree in question, and, therefore, the court held that payments received from the VA were excludable from gross income under section 117 of the Code.

However, the "all candidates" provision of section 117(b) of the Code is a factor only if it is first determined that the payments in question have the normal characteristics of a scholarship. If the payments do not have these characteristics (for example, if they are compensation for services), they cannot be excluded from gross income under section 117 even if the services in question are required for all degree candidates. Brubakken v. Commissioner, 67 T.C. 249, 254 (1976); Rev. Rul. 73-218, 1973-1 C.B. 53.

Therefore, the jury in Anderson should first have considered whether the payments in question had the normal characteristics of a scholarship and then considered the applicability of the "all candidates" exception of section 117(b)(1) only if it found that the payments had these characteristics.

HOLDING

The Service will not follow Wells and Anderson and will litigate cases in which amounts have been received under circumstances substantially similar to those in Wells and Anderson.

EFFECT ON OTHER REVENUE RULINGS

Rev. Rul. 59-118 is reinstated.

Rev. Rul. 65-59 is revoked.

PROSPECTIVE APPLICATION

Under the authority in section 7805(b) of the Code, the provisions of this revenue ruling will not be applied to amounts received prior to April 5, 1982, the date this revenue ruling is published in the Internal Revenue Bulletin.