Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 76-99

1976-1 C.B. 40

Section 61
Section 117

IRS Headnote

Armed Forces Health Professions Scholarship Program. Payments received during calendar years 1973, 1974, and 1975, by participants in the Armed Forces Health Professions Scholarship Program for educational expenses and monthly stipends are excludible from their gross income as scholarships; however, the regular pay and allowances they received while on active duty are includible in their gross income.

Full Text

Rev. Rul. 76-99

Advice has been requested whether, under the circumstances described below, payments to participants in the Armed Forces Health Professions Scholarship Program (AFHPSP) are excludable from gross income under section 117 of the Internal Revenue Code of 1954.

The AFHPSP, authorized by the Uniformed Services Health Professions Revitalization Act of 1972, chapter 105, 10 U.S.C. sections 2120-2127 (Supp. III 1973), provides that for the purpose of obtaining adequate numbers of commissioned officers on active duty who are qualified in the various health professions, the Secretary of each military department, under regulations prescribed by the Secretary of Defense, may establish and maintain a health professions scholarship program for the department. Participants are degree candidates who are commissioned officers in reserve components of the armed forces and serve on active duty with full pay and allowances for a period of forty-five days during each year of participation in the program. Except for the forty-five day period, participants under the program are detailed as students at accredited civilian educational institutions and are not considered to be on active duty. In addition, during the forty-five day period of active duty participants may, in some instances, be required to serve at the educational institution. During the period they are not on active duty, they receive a stipend of $400 per month. The Act also provides for the payment of educational expenses incurred under the program, including tuition, fees, books, and laboratory expenses. Participants are required to serve on active duty for a period of not less than one year for each year they participate in the program. A participant who is dropped from the program for any reason, may be required to serve on active duty in an appropriate military capacity.

Section 61 of the Code provides that unless otherwise excluded by law, gross income means all income from whatever source derived, including, but not limited to, compensation for services.

Subject to certain limitations and qualifications, section 117(a) of the Code provides that gross income of an individual does not include any amount received as a scholarship at an educational institution or as a fellowship grant.

Whether an amount received by an individual is excludable from gross income under section 117(a) of the Code depends upon the facts and circumstances under which the payment is made. Section 1.117-3(a), (c) and (d) of the Income Tax Regulations provides that a scholarship or fellowship grant generally means an amount paid or allowed to or for the benefit of an individual to aid the individual in pursuing studies or research and includes the value of contributed services and accommodations. The term "contributed services and accommodations" means such service and accommodations as room, board, laundry service and similar services or accommodations which are received by an individual as a part of a scholarship or fellowship grant. Thus, the amount of tuition, matriculation and other fees that are furnished or remitted to a student to aid the student in pursuing a course of study as well as an amount received in the nature of a family allowance, may be considered as part of a scholarship or fellowship grant.

Section 1.117-4(c) of the regulations provides, however, that any amount or 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 amounts represent compensation for past, present or future services, payment for services that are subject to the direction or supervision of the grantor, or if the studies or research are primarily for the benefit of the grantor.

The Supreme Court of the United States in the case of Bingler v. Johnson, 394 U.S. 741 (1969), 1969-2 C.B. 17, upheld the validity of the regulations under section 117 of the Code as comporting 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.

In Rev. Rul. 73-256, 1973-1 C.B. 56, a State, in order to increase the number of doctors in its rural areas, advanced to its qualified residents, amounts not in excess of $10,000 to aid such residents in attending medical schools. The recipient and the board appointed to administer the program entered into an agreement that included a promise by the recipient to repay the amounts in five annual installments commencing one year after the completion of the recipient's medical education. The agreement further provided that for each year the recipient practiced medicine in a rural area of the State, the installment due that year was to be cancelled. Rev. Rul. 73-256 states that this condition required a substantial quid pro quo from the recipient, since in return for receiving a medical education, the recipient must perform services in an area selected by the grantor. Thus, although no employment relationship existed between the grantor and the grantees, the services required did not further an educational purpose and were designed to accomplish a basic objective of the grantor. Therefore, cancellation of the loan was primarily for the benefit of the grantor within the meaning of section 1.117-4(c) of the regulations. Accordingly, Rev. Rul. 73-256 holds that the amounts received under the program were not excludable from the gross income of the recipients under section 117 of the Code, but were includible in income under section 61.

In the instant case, participants under the AFHPSP are required to serve on active duty with the armed forces for a period of not less than one year for each year they participate in the program. This condition requires a substantial quid pro quo from the participants, in that in return for receiving training in a health profession, they must render future services by serving on active duty with the armed forces.

Based on the foregoing the $400 monthly stipend, all pay and allowances, and the reimbursements for tuition, fees, books, and laboratory expenses received by participants under the AFHPSP would not be excludable from their gross incomes under section 117 of the Code but would be includible in gross income under section 61.

However, section 4 of Public Law 93-483, 1974-2 C.B. 447, provides that any amount received from appropriated funds as a scholarship, including the value of contributed services and accommodations, by a member of a uniformed service who is receiving training under the AFHPSP (or any other program determined by the Secretary of the Treasury or the Secretary's delegate to have substantially similar objectives) from an educational institution (as defined in section 151(e)(4) of the Code) shall be treated as a scholarship under section 117 of the Code, whether that member is receiving training while on active duty or in an off-duty or inactive status, and without regard to whether a period of active duty is required of the member as a condition of receiving those payments.

Public Law 93-483, further provides that the term "uniformed service" has the meaning given it by section 101(3) of Title 37, U.S.C. (1970) which includes the Army, Navy, Air Force, Marine Corps, Coast Guard, Environmental Science Services Administration and Public Health Service. However, Public Law 93-483 is applicable only with respect to amounts received during calendar years 1973, 1974, and 1975.

Accordingly, based on Public Law 93-483, payments for educational expenses incurred under the AFHPSP including tuition, fees, books and laboratory expenses, and the $400 monthly stipends received by a member receiving training from an educational institution, during calendar years 1973, 1974, and 1975, are treated as if they are part of a scholarship within the meaning of section 117 of the Code, and are therefore excludable from the gross income of the recipient.

Further, since Public Law 93-483 applies only to amounts received from appropriated funds "as a scholarship," any regular pay and allowances of an officer for the performance of the 45 days of active duty training each year, whether at an educational institution or otherwise, are not excludable from gross income under section 117 of the Code as part of the authorized scholarship exclusion, but are includible in gross income under section 61 as compensation for services.

In the absence of further legislation, after the expiration of the 1975 calendar year, all amounts received under the AFHPSP will be treated as compensation and includible in gross income under section 61 of the Code.