Internal Revenue Service
Revenue Ruling
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smRev. Rul. 59-80
1959-1 C.B. 39
Sec. 117
IRS Headnote
A prize awarded by a business firm as part of an advertising campaign is excludable from the gross income of the recipient when the prize consists of a scholarship to be used by the winner only when enrolled as a candidate for a degree at a college.
Full Text
Rev. Rul. 59-80
Advice has been requested as to the taxability of amounts received as a scholarship prize in a contest sponsored by a business firm as part of an advertising campaign.
The taxpayer was the winner of a contest conducted by a business firm. The prize was in the form of a two-year scholarship to a person pursuing a course of study leading to a degree at one of two colleges specified in the contest. According to the contest rules, the winner was required to meet all the entrance and scholastic requirements of the college selected. The prize money could only be used to pay tuition for two consecutive years and at no time could any of the money be paid directly to the winner for any other use. Thus, if only one year was needed to complete his college training, the winner would not receive the equivalent cash for the unexpended portion of the prize. No employee of the grantor or its advertising agency was eligible to compete in this contest.
The winner was employed full time during the day, but not by the grantor, and he pursued a course of study leading to a Bachelor of Arts degree by attending evening classes at one of the specified colleges. The grantor agreed to modify the rules to allow the money to be used over a four or five-year period of night study.
Section 74(a) of the Internal Revenue Code of 1954 provides as follows:
* * * Except as provided in subsection (b) and in section 117 (relating to scholarships and fellowship grants), gross income includes amounts received as prizes and awards.
Section 1.74-1 of the Income Tax Regulations provides, in part, that prizes and awards includible in the gross income of the recipient include amounts received from participation in contests of all types, unless such prizes or awards qualify as an exclusion from gross income under section 74(b), or unless such prize or award is a scholarship or fellowship grant excluded from gross income by section 117 of the Code.
Section 117 of the Code provides as follows:
(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)) * * *.
The term `scholarship' is defined in section 1.117-3(a) of the regulations as an amount `paid to or allowed to, or for the benefit of, a student, * * * to aid such individual in pursuing his studies.' An exception is made by section 1.117-4(c) of the regulations which provides, in part, that amounts paid as compensation for past, present, or future employment services are not considered as scholarship grants.
The foregoing sections of the Code and regulations make it clear that if an award can properly be classified as a scholarship the provisions of section 117 apply and those of section 74 do not, even if the award could also be properly classified as a prize or award for the purposes of section 74. Since under the facts of this case the award meets the definition of a scholarship and the recipient was not an employee of the grantor at the time of the award and is not obligated to perform employment services for the grantor while attending college or after graduation, the exception of section 1.117-4(c) of the regulations is not applicable to this case.
Accordingly, it is held that this award is excludable from gross income as a scholarship within the meaning of section 117(a) of the Code.