Bingler v. Johnson
This landmark decision deals with the taxability
of certain educational support. Changes enacted as part of the Tax Reform
Act of 1986 restrict the application of this holding. Read this decision
carefully at least twice before attempting to brief it.
BINGLER, DISTRICT DIRECTOR OF INTERNAL
REVENUE v. JOHNSON ET AL.
SUPREME COURT OF THE UNITED STATES
394 U.S. 741; 89 S. Ct. 1439; 22 L.
Ed. 2d 695; 1969 U.S. LEXIS 3275; 69-1 U.S. Tax Cas. (CCH) P9348; 23 A.F.T.R.2d
March 3-4, 1969, Argued
April 23, 1969, Decided
CERTIORARI TO THE UNITED STATES COURT
OF APPEALS FOR THE THIRD CIRCUIT
SYLLABUS: 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
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. 747-758.
COUNSEL: Harris Weinstein argued the cause for petitioner. With him on
the briefs were Solicitor General Griswold, Assistant Attorney General
Walters, former Assistant Attorney General Rogovin, Jonathan S. Cohen,
and Michael B. Arkin.
James C. Larrimer argued the cause and filed a brief for respondents.
JUDGES: Warren, Black, Douglas, Harlan, Brennan, Stewart, White, Fortas,
OPINION: 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 taxpayers
gross income amounts received as scholarships and fellowships.
The question before us concerns the tax treatment of payments received
by the respondents n1 from their employer, the Westinghouse Electric Corporation,
while they were on educational leave from their jobs with
|n1 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.
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.
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.
n2 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. n3 Tuition remuneration, as well as reimbursement
for various incidental academic expenses, is provided by the company.
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 companys payroll office.
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, n5
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. n6 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, also is obligated to return to the employ of Westinghouse
for a period of at least two years following completion of his leave.
n7 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.
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.
The respondents all took leaves under the Fellowship Program at varying
times during the period 1960-1962, n8 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. n9 The respondents
filed claims for refund, contending that the payments they had received
were scholarships, and hence were excludable from income under
@ 117 of the Code, which provides in pertinent part:
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.
(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
. n10 When those claims were
rejected, the respondents instituted this suit in the District Court for
the Western 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
an individual to enable him to pursue studies or research primarily for
the benefit of the grantor, are not excludable as scholarships. n11
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.
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
(C) clerical help, or
which are incident to such a scholarship or to a fellowship
grant, but only to the extent that the amount is so expended by
(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
(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
(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
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.
The holding of the Court of Appeals with respect to Treas. Reg. @ 1.117-4
(c) was contrary to the decisions of several other circuitsmost
notably, that of the Fifth 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. n12 Accordingly, upon the District Directors
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.
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.
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)
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.
In addition, subsection (b)(2) limits the exclusion from income with regard
to non-degree candidates in two respects: 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 non-degree 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.
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.
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,
affd, 373 F.2d 742.
The regulation here in question represents an effort by the Commissioner
to supply the definitions that Congress omitted. n14 And it is fundamental,
of course, that as 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, 501. In this respect our statement
last Term in United States v. Correll, 389 U.S. 299, bears emphasis:
We do not sit as a committee of revision to perfect the administration
of the tax laws. Congress 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 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.
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
(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.
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 employmentor 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. n15
Particularly in light of the principle that exemptions from taxation are
to be construed narrowly, n16 we decline to assume that Congress intended
to sanctionindeed, as the respondents would have it, to compelsuch
an inequitable situation. n17
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 courts expressio unius reasoning,
the source of a limitation based on the reasonableness
of amounts granted to bona fide students is difficult to identify.
The legislative history underlying @ 117 is, as the Court of Appeals
recognized, far from clear. n18 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.
n19 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
assistantsgraduate students who perform research or teaching services
in return for their stipendsand 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 income, n20 but reached divergent results in situations involving
grants to post-doctoral researchers. n21
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).
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 determinationssuch as those that may be made under
Treas. Reg. @ 1.117-4 (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
[tax] treatment separate from that accorded gifts, n22 and attempting
to provide that grants falling within those categories should be treated
consistentlyas 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.
n22 Gordon, Scholarship and Fellowship Grants
as Income: A Search for Treasury Policy, 1960 Wash. U. L. Q. 144,
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), n23 the House Ways and Means Committee stated
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. n24 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 attentionviz.,
those involving research and teaching assistantships and post-doctoral
research grantswithout 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, n25 would also deem proper a definition of scholarship
under which comparable sorts of compensationwhich often, as in the
present case, are significantly greater in amountare likewise taxable.
n26 In providing such a definition, the Commissioner has permissibly implemented
an underlying congressional concern. n27 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
n23 That version provided for the exclusion
only of grants that, together with compensation received from the
recipients 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 intentmanifested
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 Commissioners attempt to achieve
that reconciliation as improper.
n28 The Court of Appeals seems to have recognized that in some circumstances
the Commissioners 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.
Under that provision, as set out in the trial courts instructions,
n29 the jury here properly found that the amounts received by the respondents
were taxable compensation rather than excludable scholarships.
n30 The employer-employee relationship involved is immediately 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 Westinghouses employ for a
substantial period of time after completion of their leave. n31 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 renderedwhether
past, present, or futureshould not be excludable from income as
scholarship funds. n32 That provision clearly covers this
n29 The instructions included, inter alia, the
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
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 masters
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 contracts 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
Westinghouses 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 leaveas increments to the respondents
salary, set aside in a company-administered educational fundthere
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 Governments 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 grantoris
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.
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.
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