Internal Revenue Service
Revenue Ruling

TaxLinks.com   sm

 Rev. Rul. 67-85

1967-1 C.B. 25

Sec. 117

IRS Headnote

An additional amount made available to an educational institution by the grantor of a fellowship award for expenses incurred in the training of the recipient of the award is considered to be in the nature of tuition, and, as such, is part of the recipient's fellowship grant. The total amount of the award granted, including the additional amount, is excludable from the recipient's gross income to the extent of the limitation provided in section 117(b)(2)(B) of the Internal Revenue Code of 1954.

Full Text

Rev. Rul. 67-85

Advice has been requested whether any portion of an additional amount made available by the grantor of a fellowship award to defray expenses involved in the training of the fellowship recipient is excludable from the recipient's gross income.

The taxpayer, who was not a candidate for a degree, was awarded a 1-year research fellowship grant by an organization described in section 501(c)(3) of the Internal Revenue Code of 1954, which is exempt from tax under section 501(a) of the Code. The grant was made for study in advanced orthopedics at an institute of orthopedics associated with a university hospital in a foreign country. In addition, the grantor made available to the institute a fixed sum to be used as compensation for the expenses involved in training the recipient. No specific designation was made as to the character of the expenses to be covered by this amount. It was, however, provided that at the discretion of the director of studies, who was the counselor of the grantee, a portion of the amount could be used to pay the cost of the grantee's travel to scientific meetings. Tuition and fees, if required to be paid to the institute, were deductible from the amount made available to the institute by the grantor as before stated, and were to be paid directly to the institute by the grantor.

The grantee was not required to perform services for the institute or the hospital. However, as a part of his training, he was to examine patients selected by the director of studies and might, under supervision, occasionally operate on such a patient. He was not to be responsible for preoperative or postoperative care. The areas of study and research were selected jointly by the grantee and his counselor. These areas were chosen solely for their value in advancing the grantee's knowledge and training. The grantor did not derive any direct benefit from such program of study and research nor did it award the grant to the grantee for past, present, or future employment services.

Section 117(a)(1)(B) of the Code provides that in the case of an individual gross income does not include any amount received as a fellowship grant, including the value of contributed services and accommodations. In the case of a taxpayer not a candidate for a degree, section 177(b)(2)(B) of the Code limits the amount of the fellowship grant excluded under section 117(a)(1) of the Code in any taxable year to an amount equal to $300 times the number of months for which the taxpayer received amounts under the fellowship during the taxable year, up to a period of 36 months, whether or not consecutive.

Section 117(a)(2) of the Code provides that gross income does not include any amount received to cover expenses for travel, research, clerical help, or equipment which are incident to a fellowship grant, to the extent that the amount is so expended by the recipient. A further requirement for the exclusion is that at the time of the grant the amount must be specifically designated to cover such expenses. Section 1.117-1(b)(2)(i) of the Income Tax Regulations.

Under section 1.117-3(c) of the regulations, the term `fellowship grant' is defined generally as an amount paid or allowed to, or for the benefit of an individual to aid him in the pursuit of study or research. That term includes the amount of the tuition, matriculation, and other fees which are furnished or remitted to an individual to aid him in the pursuit of study or research. In the instant case, the additional amount awarded was intended primarily to cover the expenses incurred by the institute in training the grantee. While discretion was given to the grantee's counselor to allow the use of a part of the amount for traveling to scientific meetings, there was no obligation so to use any part of the amount; nor was any particular sum specified for that purpose. It is clear, therefore, that no amount was `specifically designated' to cover travel expenses within the meaning of section 1.117-1(b)(2)(i) of the regulations. Consequently no part of the additional amount qualifies as a sum received to cover expenses for travel pursuant to section 117(a)(2) of the Code.

Because the discretionary authority to spend some of the additional amount on travel was vested in an official of the educational institution whose primary responsibility was to see that the institution recovered its educational costs and because the authority was limited to a portion of the additional amount, it is considered that the existence of such discretionary authority does not change the primary character or purpose of the additional amount. Since the additional amount was granted primarily to cover the expense incurred by an educational institution in training a student, such amount would appear to be in the nature of tuition (payment for instruction) and thus a part of the fellowship grant as defined by section 1.117-3(c) of the regulations.

Accordingly, the entire award (including the additional amount) is a fellowship grant within the meaning of section 117(a)(1)(B) of the Code, and is excludable from the grantee's gross income subject to the limitations prescribed in section 117(b)(2)(B) of the Code.