Internal Revenue Service
Revenue Ruling
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smRev. Rul. 58-76
1958-1 C.B. 56
Sec. 117
Caution: Distinguished by Rev. Rul. 75-490
IRS Headnote
Grants designated `Research Fellowship,' awarded by the American Heart Association, Inc., to aid specified individuals in the pursuit of a course of study preparatory to a career in cardiovascular research, and excludable from the gross income of the recipient in the manner and to the extent provided under section 117 of the Internal Revenue Code of 1954. Further, such amounts do not constitute wages subject to income tax withholding under section 3402 of the Code.
Full Text
Rev. Rul. 58-76
Advice has been requested as to the applicability of sections 117 and 3402 of the Internal Revenue Code of 1954 to amounts received under the circumstances described below.
The American Heart Association, Inc., an exempt organization for Federal income tax purposes, maintains a program under which it awards grants to individuals interested in furthering their training in the field of cardiovascular research. The recipients of such grants select the institutions at which their program of study leading to proficiency in the technique of research will be conducted, subject to the approval of the grantor. The subject to be investigated must also be approved by the grantor prior to the award of the fellowship. The recipient must devote his full time to his work and is not allowed to perform any duties for the institution where he is in training. Each recipient of a grant is required to file an annual report of his work with the grantor and is encouraged to publish results of his work through normal scientific channels. However, any publication will bear the statement, `This work was done during the tenure of a Research Fellowship of the American Heart Association.' The grant, designated `Research Fellowship' in the instant case, is to be distinguished from other fellowships or grants awarded by the association under other titles.
Section 117(a) of the Code provides that amounts received by an individual under a scholarship or fellowship grant are excludable from gross income, with certain limitations. The limitations applicable to individuals who are not candidates for degrees are contained in subsection (b), which provides, in part, as follows:
(b) LIMITATIONS.-
(2) INDIVIDUALS WHO ARE NOT CANDIDATES FOR DEGREES.-In the case of an individual who is not a candidate for a degree * * *, 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 an organization described in section 501(c)(3) which is exempt from tax under section 501(a) * * *.
(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 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 * * *.
Section 1.117-1 of the Income Tax Regulations provides that to the extent that a fellowship grant exceeds the limitations of section 117(b) of the Code, it is includible in the gross income of the recipient. The application of this section of the regulations may be illustrated by the following example:
A , an individual who files his income tax return on the calendar year basis, is awarded a fellowship grant to commence January 1 of the taxable year to cover a period of three years with an annual stipend of $4800 payable at a rate of $400 each month. Under the limitations of section 117 of the Code, A , may exclude from his gross income for each of the three taxable years $3600 ($300 x 12) and must include in his gross income for each taxable year $1200 ($4800 minus $3600). At the end of the third year the exclusion benefit of the recipient will be exhausted as provided under section 117(b)(2) of the Code.
Section 1.117-4 of the regulations provides, in part, that amounts paid under a research grant, which represent compensation for grantor supervised services or where such research is primarily for the benefit of the grantor, are not items considered as fellowship grants. However, the fact that the recipient must furnish progress reports to the grantor or that the research may be of some benefit to the grantor shall not, of itself, be considered to destroy the essential character of such amount as a fellowship grant. See Rev. Rul. 56-419, C.B. 1956-2, 112.
The facts in the instant case indicate that the grant recipient may choose the institution in which he will study and the project to be investigated, subject to the approval of the grantor. The grantor, though it requires annual progress reports from grant recipients, awards such research fellowships for the primary purpose of enabling recipients to pursue a program of study and research in their individual capacities. Accordingly, it is held that amounts received under the grant, designated `Research Fellowship' from the American Heart Association, Inc., to aid individuals in the pursuit of a course of study preparatory to a career in cardiovascular research, are excludable from the gross income of the recipient in the manner and to the extent provided under section 117 of the Code. Further, since such amounts do not constitute wages, they are not subject to the withholding of income tax under section 3402 of the Code.