Rev. Rul. 89-67

1989-1 C.B. 233, 1989-20 I.R.B. 4.

                       Internal Revenue Service

                                 Revenue Ruling

                      INCOME SOURCE; SCHOLARSHIP OR GRANT

                            Published: May 15, 1989

Section 863. - Items Not Specified in Section 861 or 862

  Income source; scholarship or grant. The source of a payment made to a nonresident alien as a scholarship or grant is determined by the residence of the payor. Rev. Ruls. 66-291 and 66-292 revoked.

ISSUE

  What is the source of an amount paid as a fellowship or a scholarship?

LAW AND ANALYSIS

  Section 863(a) of the Internal Revenue Code of 1986 provides authority for the Commissioner to allocate or apportion items of gross income not specified in sections 861 and 862 to sources within and without the United States. No statutory rule is provided under section 861 or 862 for income received to support or subsidize a recipient's research or study activities.

  Rev. Rul. 66-292, 1966-2 C.B. 280, held that the source of an amount received as a scholarship or fellowship is determined by where the research or study activities take place. A companion ruling, Rev. Rul. 66-291, 1966-2 C.B. 279, held that the source of an award for a puzzle contest is determined by where the activities required to solve the puzzle are performed. The rules contained in these revenue rulings are analogous to the rule contained in sections 861(a)(3) and 862(a)(3) of the Code that sources compensation from personal services where the services are performed. There is no indication in either cited revenue ruling, however, that the recipients performed any services for the payor, and Rev. Rul. 66-292 explicitly states to the contrary. (See also Rev. Rul. 80-98, 1980-1 C.B. 368, and Rev. Rul. 61-65, 1961-1 C.B. 17, where receipt of fellowship awards similar to the awards under consideration in Rev. Rul. 66-292 are treated as not involving compensation for personal services). The amount received to support or subsidize research and study and the amount received in respect of puzzle solving activities described in the two revenue rulings is not compensation for personal services because no services are performed. Absent a significant economic nexus with the place where the study and research and puzzle solving activities are performed, it is more appropriate to source these payments where the principal economic nexus exists, namely, at the residence of the payor. Thus, for example, scholarship or fellowship payments for research or study, and amounts paid for puzzle-solving activities, made by the United States or a political subdivision thereof, a noncorporate U.S. resident, or a domestic corporation will be from U.S. sources. Similar payments by a foreign government or a foreign corporation will be foreign source payments. Payments made by an entity designated as a public international organization under the Internal Organizations Immunities Act (See section 7701(a)(18)) will be foreign source payments.

  The fact that payments are made by an intermediary agency acting on behalf of the payor does not alter this result, provided that a genuine agency relationship exists. (Compare Rev. Rul. 54-483, 1954-2 C.B. 168, where amounts paid by the United States Government, acting as an agent of a contractor rendering services abroad for the Government, to U.S. citizen employees of the contractor directly pursuant to contract are not amounts paid by the United States).

HOLDING

  The source of a payment made as a scholarship, fellowship, or an award for puzzle solving contest activities is the residence of the payor.

EFFECT ON OTHER REVENUE RULINGS

  Rev. Rul. 66-291 and Rev. Rul. 66-292 are revoked.

EFFECTIVE DATE

  The effective date of this revenue ruling is May 15, 1989. Taxpayers may apply the ruling retroactively to amounts received on or after January 1, 1986.

DRAFTING INFORMATION

  The principal author of this revenue ruling is Carol P. Tello, Office of the Associate Chief Counsel (International). For further information on the ruling, call Ms. Tello on (202) 377-9059.

Rev. Rul. 89-67, 1989-1 C.B. 233, 1989-20 I.R.B. 4.