Respondents, who held engineering positions at a laboratory
which the Westinghouse Electric Corp. operates under contract with
the Atomic Energy Commission, participated in a two-phase
Fellowship Program. In the first, or "work-study," phase, a
participating employee holds a regular job at Westinghouse and
attends university classes part time, for which the tuition and
other expenses are paid by the company. A qualified employee may
then be granted an educational leave of absence (the second phase)
to work on his doctoral dissertation, approval of which by
Westinghouse and the AEC is based partly on general relevancy to
work at the laboratory. He then devotes full time to the
dissertation for a period of several months, during which he
receives a "stipend" from Westinghouse ranging from 70% to 90% of
his prior salary plus a family allowance; retains seniority status,
and receives insurance, stock option privileges, and other employee
benefits. He is obligated to submit progress reports while on
leave, and, on its completion, to return to Westinghouse for at
least two years. Respondents filed refund claims for federal income
taxes withheld by Westinghouse from the amounts paid them while on
leave, contending that these payments were "scholarships," and
hence excludable under § 117 of the Internal Revenue Code of 1954.
On rejection of their claims, respondents brought this refund suit
in District Court. At the trial, the court instructed the jury in
accordance with Treas.Reg. § 1.117-4(c), which was promulgated
under § 117 and provides that amounts representing "compensation
for . . . employment services" and amounts paid "to enable [an
individual] to pursue studies . . . primarily for the benefit of
the grantor," are not excludable as scholarships. The jury found
that the amounts that respondents received were taxable income. The
Court of Appeals, holding the regulation invalid, reversed.
Held: Treas.Reg. § 1.117-4(c) is valid, and the jury
properly found that the amounts respondents received were not
excludable "scholarships," but taxable "compensation." Pp.
394 U. S.
747-758.
396 F.2d 258, reversed.
Page 394 U. S. 742
MR. JUSTICE STEWART delivered the opinion of the Court.
We are called upon in this case to examine for the first time
117 of the Internal Revenue Code of 1954, which excludes from a
taxpayer's gross income amounts received as "scholarships" and
"fellowships." The question before us concerns the tax treatment of
payments received by the respondents [
Footnote 1] from their employer, the Westinghouse Electric
Corporation, while they were on "educational leave" from their jobs
with Westinghouse.
During the period here in question, the respondents held
engineering positions at the Bettis Atomic Power Laboratory in
Pittsburgh, Pennsylvania, which Westinghouse operates under a
"cost-plus" contract with the Atomic Energy Commission. Their
employment status enabled them to participate in what is known as
the Westinghouse Bettis Fellowship and Doctoral Program. That
program, designed both to attract new employees seeking further
education and to give advanced training to persons already employed
at Bettis, offers a two-phase schedule of subsidized postgraduate
study in engineering, physics, or mathematics.
Page 394 U. S. 743
Under the first, or "work-study," phase, a participating
employee holds a regular job with Westinghouse and in addition
pursues a course of study at either the University of Pittsburgh or
Carnegie-Mellon University. [
Footnote 2] The employee is paid for a 40-hour work week,
but may receive up to eight hours of "release time" per week for
the purpose of attending classes. [
Footnote 3] "Tuition remuneration," as well as
reimbursement for various incidental academic expenses, is provided
by the company. [
Footnote
4]
When an employee has completed all preliminary requirements for
his doctorate, he may apply for an educational leave of absence,
which constitutes the second phase of the Fellowship Program. He
must submit a proposed dissertation topic for approval by
Westinghouse and the AEC. Approval is based,
inter alia,
on a determination that the topic has at least some general
relevance to the work done at Bettis. If the leave of absence is
secured, the employee devotes his full attention, for a period of
at least several months, [
Footnote
5] to fulfilling his dissertation requirement. During this
period, he receives a "stipend" from Westinghouse, in an amount
based on a specified percentage (ranging from 70 to 90) of his
prior salary plus "adders," depending upon the size of his family.
[
Footnote 6] He also retains
his seniority status and receives all employee benefits, such as
insurance and stock option privileges. In return, he not only must
submit periodic progress reports, but, under the written agreement
that all participants in the program must sign,
Page 394 U. S. 744
also is obligated to return to the employ of Westinghouse for a
period of at least two years following completion of his leave.
[
Footnote 7] Upon return, he
is, according to the agreement, to "assume . . . duties
commensurate with his education and experience," at a salary
"commensurate with the duties assigned."
The respondents all took leaves under the Fellowship Program at
varying times during the period 1960-1962, [
Footnote 8] and eventually received their doctoral
degrees in engineering. Respondents.Johnson and Pomerantz took
leaves of nine months and were paid $5,670 each, representing 80%
of their prior salaries at Westinghouse. Respondent Wolfe, whose
leave lasted for a year, received $9,698.90, or 90% of his previous
salary. Each returned to Westinghouse for the required period of
time following his educational leave.
Westinghouse, which, under its own accounting system, listed the
amounts paid to the respondents as "indirect labor" expenses,
withheld federal income tax from those amounts. [
Footnote 9] The respondents filed claims for
refund, contending that the payments they had received were
Page 394 U. S. 745
"scholarships," and hence were excludable from income under §
117 of the Code, which provides in pertinent part:
"(a) General rule."
"In the case of an individual, gross income does not include --
"
"(1) any amount received -- "
"(A) as a scholarship at an educational institution (as defined
in section 151(e)(4)), or"
"(B) as a fellowship grant. . . . [
Footnote 10]"
When those claims were rejected, the respondents instituted this
suit in the District Court for the Western
Page 394 U. S. 746
District of Pennsylvania, against the District Director of
Internal Revenue. After the basically undisputed evidence regarding
the Bettis Program had been presented, the trial judge instructed
the jury in accordance with Treas.Reg. on Income Tax (1954 Code) §
1.117 4(c), 26 CFR § 1.117 4(c), which provides that amounts
representing "compensation for past, present, or future employment
services," and amounts "paid . . . to . . . an individual to enable
him to pursue studies or research primarily for the benefit of the
grantor," are not excludable
Page 394 U. S. 747
as scholarships. [
Footnote
11] The jury found that the amounts received by the respondents
were taxable income. Respondents then sought review in the Court of
Appeals for the Third Circuit, and that court reversed, holding
that the Regulation referred to was invalid, that the jury
instructions were therefore improper, and that, on the essentially
undisputed facts, it was clear as a matter of law that the amounts
received by the respondents were "scholarships" excludable under §
117. 396 F.2d 258.
The holding of the Court of Appeals with respect to Treas.Reg. §
1.117(c) was contrary to the decisions of several other circuits --
most notably, that of the Fifth
Page 394 U. S. 748
Circuit in
Ussery v. United States, 296 F.2d 582, which
explicitly sustained the Regulation against attack and held amounts
received under an arrangement quite similar to the Bettis Program
to be taxable income. [
Footnote
12] Accordingly, upon the District Director's petition, we
granted certiorari to resolve the conflict and to determine the
proper scope of § 117 and Treas.Reg. § 1.117-4(c) with respect to
payments such as those involved here. 393 U.S. 949.
In holding invalid the Regulation that limits the definitions of
"scholarship" and "fellowship" so as to exclude amounts received as
"compensation," the Court of Appeals emphasized that the statute
itself expressly adverts to certain situations in which funds
received by students may be thought of as remuneration. After the
basic rule excluding scholarship funds from gross income is set out
in § 117(a), for instance, subsection (b)(1) stipulates:
"In the case of an individual who is a candidate for a degree at
an educational institution . . subsection (a) shall not apply to
that portion of any amount received which 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. [
Footnote
13]"
In addition, subsection (b)(2) limits the exclusion from income
with regard to nondegree candidates in two respects:
Page 394 U. S. 749
first, the grantor must be a governmental agency, an
international organization, or an organization exempt from tax
under § 501(a), (c)(3) of the Code, and second, the maximum
exclusion from income available to a nondegree candidate is $300
per month for not more than 36 months. Since these exceptions are
expressly set out in the statute, the Court of Appeals, relying on
the canon of construction that
expressio unius est exclusio
alterius, concluded that no additional restrictions may be put
on the basic exclusion from income granted by subsection (a) -- a
conclusion forcefully pressed upon us by the respondents.
Congress' express reference to the limitations just referred to
concededly lends some support to the respondents' position. The
difficulty with that position, however, lies in its implicit
assumption that those limitations are limitations on an exclusion
of all funds received by students to support them during the course
of their education. Section 117 provides, however, only that
amounts received as "scholarships" or "fellowships" shall be
excludable. And Congress never defined what it meant by the quoted
terms. As the Tax Court has observed:
"[A] proper reading of the statute requires that, before the
exclusion comes into play, there must be a determination that the
payment sought to be excluded has the normal characteristics
associated with the term 'scholarship.'"
Reese v. Commissioner, 45 T.C. 407, 413,
aff'd, 373 F.2d 742. The regulation here in question
represents an effort by the Commissioner to supply the definitions
that Congress omitted. [
Footnote
14] And it is fundamental, of course, that, as
Page 394 U. S. 750
"contemporaneous constructions by those charged with
administration of" the Code, the Regulations "must be sustained
unless unreasonable and plainly inconsistent with the revenue
statutes," and "should not be overruled except for weighty
reasons."
Commissioner v. South Texas Lumber Co.,
333 U. S. 496,
333 U. S. 501.
In this respect, our statement last Term in
United States v.
Correll, 389 U. S. 299,
bears emphasis:
"[W]e do not sit as a committee of revision to perfect the
administration of the tax laws. Congress
Page 394 U. S. 751
has delegated to the Commissioner, not to the courts, the task
of prescribing 'all needful rules and regulations for the
enforcement' of the Internal Revenue Code. 26 U.S.C. § 7805(a). In
this area of limitless factual variations, 'it is the province of
Congress and the Commissioner, not the courts, to make the
appropriate adjustments.'"
Id. at
389 U. S.
306-307. Here, the definitions supplied by the
Regulation 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 requirement of any substantial
quid pro
quo from the recipients.
The implication of the respondents'
expressio unius
reasoning is that any amount paid for the purpose of supporting one
pursuing a program of study or scholarly research should be
excludable from gross income as a "scholarship" so long as it does
not fall within the specific limitations of 117(b). Pay received by
a $30,000 per year engineer or executive on a leave of absence
would, according to that reasoning, be excludable as long as the
leave was granted so that the individual could perform work
required for a doctoral degree. This result presumably would not be
altered by the fact that the employee might be performing, in
satisfaction of his degree requirements, precisely the same work
which he was doing for his employer prior to his leave and which he
would be doing after his return to "employment" -- or by the fact
that the fruits of that work were made directly available to and
exploited by the employer. Such a result would be anomalous indeed,
especially in view of the fact that under § 117 the comparatively
modest sums received by part-time teaching assistants are clearly
subject to taxation. [
Footnote
15] Particularly in light of the principle
Page 394 U. S. 752
that exemptions from taxation are to be construed narrowly,
[
Footnote 16] we decline to
assume that Congress intended to sanction -- indeed, as the
respondents would have it, to compel -- such an inequitable
situation. [
Footnote 17]
The legislative history underlying § 117 is, as the Court of
Appeals recognized, "far from clear." [
Footnote 18] We do not believe, however, that it
precludes, as "plainly inconsistent" with the statute, a definition
of "scholarship" that excludes from the reach of that term amounts
received as compensation for services performed. The 1939 Internal
Revenue Code, like predecessor Codes, contained no specific
provision dealing with scholarship grants. Whether such grants were
includable in gross income depended simply upon whether they fell
within the broad provision excluding from income amounts received
as "gifts." [
Footnote 19]
Thus, case-by-case determinations regarding grantors' motives were
necessary. The cases decided under this approach prior to 1954
generally involved two types of financial assistance: grants to
research or teaching assistants -- graduate students who perform
research or teaching services in return for their stipends -- and
foundation grants to post-doctoral researchers. In cases decided
shortly before the 1954 Code was enacted, the Tax Court, relying on
the "gift" approach to scholarships and fellowships, held that
amounts received by a research assistant were taxable
Page 394 U. S. 753
income, [
Footnote 20] but
reached divergent results in situations involving grants to
post-doctoral researchers. [
Footnote 21]
In enacting 117 of the 1954 Code, Congress indicated that it
wished to eliminate the necessity for reliance on "case-by-case"
determinations with respect to whether "scholarships" and
"fellowships" were excludable as "gifts." Upon this premise, the
respondents hinge their argument that Congress laid down a standard
under which all case-by-case determinations- -- such as those that
may be made under Treas.Reg. § 1.117(c) -- are unnecessary and
improper. We have already indicated, however, our reluctance to
believe that § 117 was designed to exclude from taxation all
amounts, no matter how large or from what source, that are given
for the support of one who happens to be a student. The sounder
inference is that Congress was merely "recogni[zing] that
scholarships and fellowships are sufficiently unique . . . to merit
[tax] treatment separate from that accorded gifts," [
Footnote 22] and attempting to provide that
grants falling within those categories should be treated
consistently -- as in some instances, under the generic provisions
of the 1939 Code, they arguably had not been. Delineation of the
precise contours of those categories was left to the
Commissioner.
Furthermore, a congressional intention that not all grants
received by students were necessarily to be "scholarships" may
reasonably be inferred from the legislative history. In explaining
the basis for its version of § 117(b)(2), [
Footnote 23] the House Ways and Means Committee
stated
Page 394 U. S. 754
that its purpose was to "tax those grants which are in effect
merely payments of a salary during a period while the recipient is
on leave from his regular job." [
Footnote 24] This comment related, it is true, to a
specific exception to the exclusion from income set out in
subsection (a). But, in view of the fact that the statute left open
the definitions of "scholarship" and "fellowship," it is not
unreasonable to conclude that, in adding subsection (b) to the
statute Congress was merely dealing explicitly with those problems
that had come explicitly to its attention --
viz., those
involving research and teaching assistantships and post-doctoral
research grants -- without intending to forbid application to
similar situations of the general principle underlying its
treatment of those problems. One may justifiably suppose that the
Congress that taxed funds received by "part-time" teaching
assistants, presumably on the ground that the amounts received by
such persons really represented compensation for services
performed, [
Footnote 25]
would also deem proper a definition of "scholarship" under which
comparable sorts of compensation -- which often, as in the present
case, are significantly greater in amount -- are likewise taxable.
[
Footnote 26]
Page 394 U. S. 755
In providing such a definition, the Commissioner has permissibly
implemented an underlying congressional concern. [
Footnote 27] We cannot say that the
provision of Treas.Reg. § 1.117-4(c) that taxes amounts received as
"compensation" is "unreasonable or plainly inconsistent with the .
. . statut[e]." [
Footnote
28]
Under that provision, as set out in the trial court's
instructions, [
Footnote 29]
the jury here properly found that the
Page 394 U. S. 756
amounts received by the respondents were taxable "compensation",
rather than excludable "scholarships." [
Footnote 30] The employer-employee relationship
involved is immediately
Page 394 U. S. 757
suggestive, of course, as is the close relation between the
respondents' prior salaries and the amount of their "stipends." In
addition, employee benefits were continued. Topics were required to
relate at least generally to the work of the Bettis Laboratory.
Periodic work reports were to be submitted. And, most importantly,
Westinghouse unquestionably extracted a
quid pro quo. The
respondents not only were required to hold positions with
Westinghouse throughout the "work study" phase of the program, but
also were obligated to return to Westinghouse's employ for a
substantial period of time after completion of their leave.
[
Footnote 31] The thrust of
the provision dealing with compensation is that bargained-for
payments, given only as a "
quo" in return for the
quid of services rendered -- whether past, present, or
future -- should not be excludable from income as
Page 394 U. S. 758
"scholarship" funds. [
Footnote 32] That provision clearly covers this case.
Accordingly, the judgment of the Court of Appeals is reversed,
and that of the District Court reinstated.
It is so ordered.
MR. JUSTICE DOUGLAS would affirm the judgment for the reasons
stated by the Court of Appeals in 396 F.2d 258.
[
Footnote 1]
We refer only to respondents Richard E. Johnson, Richard A.
Wolfe, and Martin L. Pomerantz; their wives are parties to this
action solely because joint tax returns were filed for the years in
question.
[
Footnote 2]
Formerly Carnegie Institute of Technology.
[
Footnote 3]
A maximum of 156 hours of release time per year is allowed.
[
Footnote 4]
The Fellowship Program is funded jointly by Westinghouse and the
AEC, but the amounts paid to participating employees are channeled
through the company's payroll office.
[
Footnote 5]
The ordinary leave period is nine months.
[
Footnote 6]
Maximum monthly limits are placed on the amounts paid.
[
Footnote 7]
Respondent Wolfe began his leave at a time when Westinghouse did
not require agreement in writing to the two-year "return"
commitment. He was formally advised before he went on leave,
however, that he was "expected" to return to Westinghouse for a
period of time equal to the duration of his leave, and he, in fact,
honored that obligation.
[
Footnote 8]
Respondent Wolfe was on leave from March 1, 1960, to February
28, 1961; respondent Johnson from October 1, 1960, to June 30,
1961, and respondent Pomerant from November 1, 1961, to July 31,
1962.
[
Footnote 9]
Tuition and incidental fees were also paid by Westinghouse, but
no withholding was made from those payments, and their tax status
is not at issue in this case. Although conceptually includable in
income, such sums presumably would be offset by educational expense
deductions.
See Treas.Reg. on Income Tax (1954 Code) §
1.162-5, 26 CFR § 1.162-5.
[
Footnote 10]
The entire section reads as follows:
"§ 117. Scholarships and fellowship grants."
"(a) General rule."
"In the case of an individual, gross income does not include
--"
"(1) any amount received -- "
"(A) as a scholarship at an educational institution (as defined
in section 151(e)(4)), or"
"(B) as a fellowship grant, including the value of contributed
services and accommodations; and"
"(2) any amount received to cover expenses for --"
"(A) travel,"
"(B) research,"
"(C) clerical help, or"
"(D) equipment,"
"which are incident to such a scholarship or to a fellowship
grant, but only to the extent that the amount is so expended by the
recipient."
"(b) Limitations."
"(1) Individuals who are candidates for degrees."
"In the case of an individual who is a candidate for a degree at
an educational institution (as defined in section 151(e)(4)),
subsection (a) shall not apply to that portion of any amount
received which 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. 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 such
degree, such teaching, research, or other services shall not be
regarded as part-time employment within the meaning of this
paragraph."
"(2) Individuals who are not candidates for degrees."
"In the case of an individual who is not a candidate for a
degree at an educational institution (as defined in section
151(e)(4)), subsection (a) shall apply only if the condition in
subparagraph (A) is satisfied and then only within the limitations
provided in subparagraph (B)."
"(A) Conditions for exclusion."
"The grantor of the scholarship or fellowship grant is --"
"(i) an organization described in section 501(c)(3) which is
exempt from tax under section 501(a),"
"(ii) a foreign government,"
"(iii) an international organization, or a bi-national or
multinational education and cultural foundation or commission
created or continued pursuant to the Mutual Educational and
Cultural Exchange Act of 1961, or"
"(iv) the United States, or an instrumentality or agency
thereof, or a State, a territory, or a possession of the United
States, or any political subdivision thereof, or the District of
Columbia."
"(B) Extent of exclusion."
"The amount of the scholarship or fellowship grant excluded
under subsection (a)(1) in any taxable year shall be limited to an
amount equal to $300 times the number of months for which the
recipient received amounts under the scholarship or fellowship
grant during such taxable year, except that no exclusion shall be
allowed under subsection (a) after the recipient has been entitled
to exclude under this section for a period of 36 months (whether or
not consecutive) amounts received as a scholarship or fellowship
grant while not a candidate for a degree at an educational
institution (as defined in section 151(e)(4))."
[
Footnote 11]
§ 1.117-4. Items not considered as scholarships or fellowship
grants.
"The following payments or allowances shall not be considered to
be amounts received as a scholarship or a fellowship grant for the
purpose of section 117:"
"
* * * *"
"(c) Amounts paid as compensation for services or primarily for
the benefit of the grantor. (1) Except as provided in paragraph (a)
of § 1.117-2, any amount paid or allowed to, or on behalf of, an
individual to enable him to pursue studies or research, if such
amount represents either compensation for past, present, or future
employment services or represents payment for services which are
subject to the direction or supervision of the grantor."
"(2) Any amount paid or allowed to, or on behalf of, an
individual to enable him to pursue studies or research primarily
for the benefit of the grantor."
"However, amounts paid or allowed to, or on behalf of, an
individual to enable him to pursue studies or research are
considered to be amounts received as a scholarship or fellowship
grant for the purpose of section 117 if the primary purpose of the
studies or research is to further the education and training of the
recipient in his individual capacity and the amount provided by the
grantor for such purpose does not represent compensation or payment
for the services described in subparagraph (1) of this paragraph.
Neither the fact that the recipient is required to furnish reports
of his progress to the grantor, nor the fact that the results of
his studies or research may be of some incidental benefit to the
grantor shall, of itself, be considered to destroy the essential
character of such amount as a scholarship or fellowship grant."
[
Footnote 12]
Generally in accord with
Ussery are
Reese v.
Commissioner, 373 F.2d 742 (C.A.4th Cir.);
Stewart v.
United States, 363 F.2d 355 (C.A. 6th Cir.), and
Woddail
v. Commissioner, 321 F.2d 721 (C.A. 10th Cir.).
See also
Reiffen v. United States, 180 Ct.Cl. 296, 376 F.2d 883.
[
Footnote 13]
Subsection (b) goes on to except from that limitation situations
in which
"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 such
degree. . . ."
In those situations, scholarship or fellowship funds received
for such services are nontaxable.
See n 10,
supra.
[
Footnote 14]
See also Treas.Reg. on Income Tax (1954 Code) §§
1.117-3(a), (c), 26 CFR §§ 1.117-3(a), (c), which set out the
"normal characteristics" associated with scholarships and
fellowships:
"§ 1.117 -- Definitions."
"(a) Scholarship. A scholarship generally means an amount paid
or allowed to, or for the benefit of, a student, whether an
undergraduate or a graduate, to aid such individual in pursuing his
studies. The term includes the value of contributed services and
accommodations (
see paragraph (d) of this section) and the
amount of tuition, matriculation, and other fees which are
furnished or remitted to a student to aid him in pursuing his
studies. The term also includes any amount received in the nature
of a family allowance as a part of a scholarship. However, the term
does not include any amount provided by an individual to aid a
relative, friend, or other individual in pursuing his studies where
the grantor is motivated by family or philanthropic considerations.
If an educational institution maintains or participates in a plan
whereby the tuition of a child of a faculty member of such
institution is remitted by any other participating educational
institution attended by such child, the amount of the tuition so
remitted shall be considered to be an amount received as a
scholarship."
"
* * * *"
"(c) Fellowship grant. A fellowship grant generally means an
amount paid or allowed to, or for the benefit of, an individual to
aid him in the pursuit of study or research. The term includes the
value of contributed services and accommodations (
see
paragraph (d) of this section) and the amount of tuition,
matriculation, and other fees which are furnished or remitted to an
individual to aid him in the pursuit of study or research. The term
also includes any amount received in the nature of a family
allowance as a part of a fellowship grant. However, the term does
not include any amount provided by an individual to aid a relative,
friend, or other individual in the pursuit of study or research
where the grantor is motivated by family or philanthropic
considerations."
We are not concerned in this case with distinctions between the
terms "scholarship" and "fellowship."
[
Footnote 15]
Cf. 1 J. Mertens, Law of Federal Income Taxation §
7.42, p. 110 (P. Zimet & W. Oliver rev. ed.1962).
[
Footnote 16]
See Commissioner v. Jacobson, 336 U. S.
28,
336 U. S. 48-49;
Helvering v. Northwest Steel Rolling Mills, Inc.,
311 U. S. 46,
311 U. S.
49.
[
Footnote 17]
The opinion of the Court of Appeals reiterates that the stipends
received by the respondents were "reasonable." Those payments
approximated, of course, the respondents' previous engineering
salaries. In any event, given the court's
expressio unius
reasoning, the source of a limitation based on the "reasonableness"
of amounts granted to
bona fide students is difficult to
identify.
[
Footnote 18]
396 F.2d at 263.
[
Footnote 19]
Int.Rev.Code of 1939, c. 1, § 22(b)(3), 53 Stat. 10;
see Int.Rev.Code of 1954, § 102.
[
Footnote 20]
See, e.g., Banks v. Commissioner, 17 T.C. 1386.
[
Footnote 21]
Compare Ti Li Loo v. Commissioner, 22 T.C. 220
(university grant for National Health Service research held
taxable),
with Stone v. Commissioner, 23 T.C. 254
(foundation grant held nontaxable).
[
Footnote 22]
Gordon, Scholarship and Fellowship Grants as Income: A Search
for Treasury Policy, 1960 Wash.U.L.Q. 144, 151.
[
Footnote 23]
That version provided for the exclusion only of grants that,
together with compensation received from the recipient's former
employer, were less than 75% of his salary for the preceding year.
Noting that the House bill would have taxed many modest grants
simply because the recipient had no substantial earned income in
the previous year, the Senate rejected that formulation and
substituted the present $300 per month, 36-month provision of §
117(b)(2).
See H.R.Rep. No. 1337, 83d Cong., 2d Sess., 17;
S.Rep. No. 1622, 83d Cong., 2d Sess., 18.
[
Footnote 24]
H.R.Rep.No. 1337,
supra, n 23, at 17.
[
Footnote 25]
The House version of § 117(b)(1) taxed only amounts received as
payment for teaching and research services. The Senate amended the
provision, however, to include payments for "other services" as
well.
See S.Rep. No. 1622,
supra, n 23, at 18.
[
Footnote 26]
In connection with the question of what Congress may have
intended to denote by the terms "scholarship" and "fellowship," it
is noteworthy that the House Report stated, "Such grants generally
are of small amount and are usually received by individuals who
would have little or no tax liability in any case." H.R.Rep. No.
1337,
supra, n 23,
at 17.
[
Footnote 27]
The Court of Appeals viewed the "primary purpose" of § 117 as
the "encourage[ment of] financial aid to education through tax
relief." 396 F.2d at 262. But while some desire to aid scholarship
students no doubt underlay enactment of the statute, that desire
must be reconciled with an apparent congressional intent --
manifested in the limitations set out in subsection (b) -- to tax
amounts that represent compensation for services performed. As the
text makes clear, we cannot view the Commissioner's attempt to
achieve that reconciliation as improper.
[
Footnote 28]
The Court of Appeals seems to have recognized that, in some
circumstances the Commissioner's approach is justified. Its opinion
stated:
"A significant commitment by the student in return for a grant
would, of course, place that grant outside the category
'scholarship,' at least to the extent of the value of that
commitment. For if the grantee had to barter for his stipend,
giving full value for it, this arrangement would hardly serve the
primary purpose of the § 117 exclusion: to encourage financial aid
to education through tax relief."
396 F.2d at 262. It is not clear how this position can be
squared with the Court of Appeals' holding that Treas.Reg. §
1.117-4(c) is invalid. In any event, as we suggest
infra,
we cannot agree with the conclusion of the Court of Appeals that
the grants received by the respondents were not "bartered for."
[
Footnote 29]
The instructions included,
inter alia, the following
passage:
"You are . . . instructed that, one, any amount of money paid to
an individual to enable him to pursue studies or research, if such
amount represents either compensation for past, present or future
employment services, or represents payment for services which are
subject to the direction or supervision of the grantor, . . . is
not a scholarship or fellowship under the tax laws."
"Two, any amount of money paid to an individual to enable him to
pursue studies or research which studies or research are primarily
for the benefit of the grantor is not a scholarship under the tax
laws."
[
Footnote 30]
We thus endorse the decisions of the Fifth and Sixth Circuits in
Ussery v. United States, 296 F.2d 582, and
Stewart v.
United States, 363 F.2d 355. In
Ussery, the Court of
Appeals for the Fifth Circuit specifically upheld Treas.Reg. §
1.117-4(c) and held taxable monthly payments received by an
employee of the Mississippi Department of Public Welfare who had
been given leave to secure a master's degree in social work. The
taxpayer there received employee benefits while on leave, and was
obligated to return to the department following completion of his
studies. Stewart involved a similar arrangement under which an
employee of the Tennessee Department of Public Welfare received
monthly stipends and other benefits during an educational leave of
absence but was required to return thereafter to her previous
position.
See Reese v. Commissioner, 373 F.2d 742 (C.A.4th
Cir.),
affirming 45 T.C. 407 (student-teacher);
Woddail v. Commissioner, 321 F.2d 721 (C.A. 10th Cir.)
(resident physician; obligated to remain following part-time
participation in training program);
cf. Reiffen v. United
States, 180 Ct.Cl. 296, 376 F.2d 883 (relying solely on
characterization of payments as "primarily for benefit of
grantor"). Several Tax Court decisions point in the same direction,
although treatment of various factual situations under § 117 has
not been marked by a great deal of consistency.
See
generally Tabac, Scholarships and Fellowship Grants: An
Administrative Merry-Go-Round, 46 Taxes 485 (1968).
The Commissioner has acquiesced in
Evans v.
Commissioner, 34 T.C. 720 (
see 1965-1 Cum.Bull. 4),
which allowed exclusion where, although the taxpayer was obligated
to work for the grantor following completion of her studies, there
had been no previous employment relationship.
See Rev.Rul.
65-146, 1965-1 Cum.Bull. 66. We are informed by the Solicitor
General, however, that the Evans acquiescence will be modified.
See also Broniwitz v. Commissioner, P-H 1968 TC Mem. Dec.
� 68,221 (Sept. 30, 1968) (requirement of summer employment with
grantor; held excludable).
[
Footnote 31]
The contract's provision that employees who avail themselves of
educational leave will be assigned duties "commensurate with
[their] education and experience," and compensated at rates
"commensurate with" those duties, is hardly sufficient to avoid the
clear inference that their grants are fully bargained for and in
the nature of compensation. The program is featured in
Westinghouse's recruiting efforts as a benefit attractive to many
potential employees. Moreover, as suggested in the text,
participation in the program undeniably means giving up the right
to take more remunerative employment elsewhere for a considerable
period of time. Had the company modified its program so that the
amounts of the "fellowship" grants were spread over the years
preceding and following the educational leave -- as increments to
the respondents' salary, set aside in a company-administered
"educational fund" -- there could be little doubt that those
amounts would have represented compensation. We see no persuasive
reason why a different tax result should be reached under
Treas.Reg. § 1.117-4(c) on the actual facts involved here. There is
no merit in the respondents' oblique suggestion that payment for
present services is somehow different, with respect to the question
before us, from deferred or anticipatory payments.
[
Footnote 32]
We accept the suggestion in the Government's brief that the
second paragraph of Treas.Reg. § 1.117-4(c) -- which excepts from
the definition of "scholarship" any payments that are paid to an
individual "to enable him to pursue studies or research primarily
for the benefit of the grantor" -- is merely an adjunct to the
initial "compensation" provision:
"By this paragraph, the Treasury has supplemented the first in
order to impose tax on bargained-for arrangements that do not
create an employer-employee relation, as, for example, in the case
of an independent contractor. But the general idea is the same:
'scholarship' or 'fellowship' does not include arrangements where
the recipient receives money and in return provides a
quid pro
quo."
Brief for Petitioner 22.
The respondents point out that the Internal Revenue Service is
considering possible revisions of the Regulations under § 117. The
Solicitor General informs us, however, that, although revisions
might "conform the Regulations to the results reached" in such
cases as
Wells v. Commissioner, 40 T.C. 40, no changes are
contemplated with respect to situations such as that involved here.
Reply Brief for Petitioner in support of certiorari 3, n. 2;
see Rev.Rul. 65-59, 1965-1 Cum.Bull. 67.