Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 76-65

1976-1 C.B. 46

Section 61
Section 117
Section 162

IRS Headnote

Education; employees on educational leave. Monthly payments a state public welfare department makes to its employees while on educational leave to pursue job-related training, with the employees obligated to return to the public welfare program for a minimum period of service, are not excludable from gross income as scholarships; however, tuition fees the department pays directly to a university for the employees are not includible in gross income and the employees may deduct, under section 162 of the Code, amounts paid for books, travel, and incidental expenses related to the education.

Full Text

Rev. Rul. 76-65

Advice has been requested under the circumstances described below as to the Federal income tax treatment of (1) amounts paid by an employer to employees while the employees are on educational leave, (2) the amounts paid by employees for educational expenses also while on educational leave, and (3) tuition fees paid directly to the university by an employer on behalf of employees.

The department of public welfare of a State grants educational leave to its employees so that they may obtain additional training that will better equip them for the performance of their duties in the public welfare program and that will provide for the more efficient administration of the public assistance and service programs. Employees given such leave must have completed the required work for a college degree and must be members of the staff of the department. The courses taken may lead to a master's degree in a field related to the employees' occupation, are not required of the employees to meet the minimum educational requirements of their employment and do not qualify them for a new trade or business. The employees must attend school while on educational leave and must return to the public welfare program for a minimum of one year's service (or a minimum of two year's service if educational leave has been granted for a period exceeding 12 months). The department pays the employees a stated sum per month while they are on educational leave and pays tuition expenses directly to the university. Other educational expenses such as travel (including meals and lodging incurred while away from home), books, and other incidental expenses are paid by the employees.

The first question concerns the treatment of the monthly payments by the department to employees when they are on educational leave.

Section 61 of the Internal Revenue Code of 1954 provides that, unless otherwise excluded by law, gross income means all income from whatever source derived including, but not limited to, compensation for services including fees, commissions, and similar items.

Section 117(a) of the Code provides, subject to certain limitations and qualifications, that gross income of an individual does not include amounts received as a scholarship at an educational institution or as a fellowship grant. A scholarship or fellowship grant as defined in section 1.117-3 of the Income Tax Regulations is an amount paid to, or for the benefit of, an individual to aid in the pursuit of studies.

Section 1.117-4(c) of the regulations provides, in pertinent part, that any amounts paid or allowed to or on behalf of an individual to enable the individual to pursue studies or research shall not be considered to be an amount received as a scholarship or fellowship grant, if such amount represents compensation for past, present, or future employment services or if the studies or research are primarily for the benefit of the grantor. In the instant case, since the courses taken by the employees make them more effective employees, they are primarily for the benefit of the employer-grantor.

In the cases of Ussery v. United States, 296 F.2d 582 (1961), and Stewart v. United States, 363 F.2d 355 (1966), in which the facts were similar to the instant case, it was held that monthly payments to an employee on educational leave were not excludable from the recipient's gross income under the provisions of section 117 of the Code.

Furthermore, in the case of Bingler v. Johnson, 394 U.S. 741 (1969), 1969-2 C.B. 17, the Supreme Court of the United States held that stipends paid to employees on educational leave under circumstances similar to the instant case were not excludable from gross income as scholarships under section 117(a) of the Code.

Accordingly, in the instant case, monthly payments to employees on educational leave are not excludable from gross income as scholarships under section 117(a) of the Code, but are includible in the gross incomes of the employees under section 61 of the Code as compensation for services.

The second question concerns the treatment of amounts paid by the employees for books, incidental expenses, and the reasonable travel expenses including amounts expended for meals and lodging incurred in connection with the employees' education.

Section 162 of the Code provides for the deduction of all ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. To the extent, therefore, that educational expenses qualify as "ordinary and necessary" trade or business expenses they are allowable deductions.

Section 1.162-5 of the regulations provides, in general, that expenditures made by an individual for the individual's education are deductible if they are for education that (1) maintains or improves skills required by the individual's employment or other trade or business, or (2) meets the express requirements of the individual's employer or the requirements of applicable law or regulations imposed as a condition to the retention by the individual of established employment relationship, status, or rate of compensation. Under these circumstances, educational expenditures are ordinary and necessary business expenses of the employee. No deduction is allowable for expenditures for education required of the individual in order to meet the minimum educational requirements for employment qualification in the individual's employment or other trade or business or for expenditures for education that is part of a program of study being pursued that will lead to qualifying the individual in a new trade or business even though the education may maintain or improve skills required by the individual in the individual's employment or other trade or business or may meet the express requirements of the individual's employer or of applicable law or regulations. Under these circumstances, educational expenditures are personal expenses of the employee.

Section 1.162-5(e) of the regulations provides, in part, that if an individual travels away from home primarily to obtain education, the expenses of which are deductible, the individual's expenditures for travel, meals, and lodging while away from home are deductible. However, if as an incident of such trip the individual engages in some personal activity such as sight-seeing, social visiting, or entertaining or other recreation, the portion of the expenses attributable to such personal activity constitutes nondeductible personal or living expenses and is not allowable as a deduction. If the individual's travel away from home is primarily personal, the individual's expenditures for travel, meals and lodging while away from home (other than meals and lodging during the time spent in participating in deductible education pursuits) are not deductible.

Based on the facts in the instant case, the education undertaken by employees is education that maintains and improves their skills as employees of the department and is not education that is part of a program of study being pursued that qualifies the employees for a new trade or business or education required of them to meet the minimum educational requirements of their employment.

Accordingly, the cost of the education undertaken by employees while attending the university, including the costs of books, other incidental expenses, and the reasonable travel expenses, including amounts expended for meals and lodging while away from home, are deductible as educational expenses under section 162 of the Code.

The third question concerns the treatment of tuition fees paid directly to the university by the department for employees who are on educational leave.

These tuition fees paid directly to the university are not regarded, for Federal income tax purposes, as being compensatory to the employees because, as indicated above, had they paid the fees themselves such fees would have been deductible under section 1.162-5 of the regulations, as ordinary and necessary trade or business expenses rather than personal expenses. Accordingly, in the instant case, the tuition fees are noncompensatory expenditures incurred in furthering the governmental function of the department and are not includible in the gross incomes of the employees.