n2 Formerly Carnegie Institute of Technology.

n3 A maximum of 156 hours of release time per year is allowed.

n4 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.

n5 The ordinary leave period is nine months.

n6 Maximum monthly limits are placed on the amounts paid.

n7 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.

n8 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 Pomerantz from November 1, 1961, to July 31, 1962.

n9 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.

n10 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 binational 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)).”

n11 “@ 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.”

n12 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.

n13 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.

n14 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.”

n15 Cf. 1 J. Mertens, Law of Federal Income Taxation @ 7.42, p. 110 (P. Zimet & W. Oliver rev. ed. 1962).

n16 See Commissioner v. Jacobson, 336 U.S. 28, 48-49; Helvering v. Northwest Steel Rolling Mills, Inc., 311 U.S. 46, 49.

n17 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.

n18 396 F.2d, at 263.

n19 Int. Rev. Code of 1939, c. 1, @ 22 (b)(3), 53 Stat. 10; see
Int. Rev. Code of 1954, @ 102.

n20 See, e. g., Banks v. Commissioner, 17 T. C. 1386.

n21 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).

n22 Gordon, Scholarship and Fellowship Grants as Income: A Search for Treasury Policy, 1960 Wash. U. L. Q. 144, 151.

n23 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.

n24 H. R. Rep. No. 1337, supra, n. 23, at 17.

n25 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.

n26 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.

n27 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.

n28 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.”

n29 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.”

n30 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. para. 68,221 (Sept. 30, 1968) (requirement of summer employment with grantor; held excludable).

n31 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.

n32 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.