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A Practical Guide to Assist Hospitals and Physicians Obtain Fellowship Tax Exclusion
Published online by Cambridge University Press: 01 January 2021
Extract
This article concerns the exclusion from taxable income of scholarship and fellowship grants received by residents and research assistants under Section 117 of the Internal Revenue Code. As is often the case, frequent litigation has resulted in confusion, and it has become difficult for the individual physician or institution to determine the extent and scope of exclusions that are possibly available.
The enactment of Section 117 in 1954 was intended by Congress to provide an exclusion from taxable income to students for all scholarship and fellowship income received. However, the courts, which had to interpret the intended meaning of “scholarship” and “fellowship” income, developed three often inconclusive and contradictory tests — the primary purpose, compensation, and control tests. 1969, the United States Supreme Court, in the case of Bingler v. Johnson, synthesized these three tests into a single standard, the quid pro quo test. The Court held that the meaning of “scholarship” and “fellowship” intended by Congress comported with the ordinary understanding of the terms, that is, as relatively disinterested, “no-strings” educational grants, with no requirement of any substantial quid pro quo from the recipient.
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- Copyright © American Society of Law, Medicine and Ethics 1978
References
26 U.S.C. §117, Scholarships and fellowship grants.Google Scholar
394 U.S. 741 (1969).Google Scholar
Treas. Reg. §1.117 (c)(1) (1956).Google Scholar
See Bingler v. Johnson, 394 U.S. 741, 756–57 (1969); Bonn v. Commissioner, 34 T.C. 64, 70–73 (1960) (where resident at VA Hospital performed valuable and essential professional services, stipend from private foundation was taxable, since training was secondary to patient care); Bachmura v. Commissioner, 32 T.C. 1117, 1126 (1959) (payments to non-degree candidate stem from employment relationship and are taxable).Google Scholar
See Wells v. Commissioner, 40 T.C. 40, 48–49 (1963) (where purpose of VA training program was to both provide service and train recipient, court rejects contention that employment relationship alone makes payments taxable).Google Scholar
See Steiman v. Commissioner, 56 T.C. 1350, 1355–56 (1971) (where financial need of academically qualified students, rather than their teaching abilities, was primary consideration in awarding graduate assistantships, such awards were non-taxable).Google Scholar
See Stougaard v. Commissioner, 30 T.C.M. 1331, 1336 (1971) (where state could command services of recipient, financial need of recipients was not determinative); see generally, Bingler v. Johnson, 394 U.S. 741 (1969).Google Scholar
See Chestmore v. Commissioner, 33 T.C.M. 1226, 1230–31 (1974) (Ph.D. candidate entitled to exclusion under Section 117 since no substantial services were rendered to teaching hospital and the one-year internship was requirement for degree); Wells v. Commissioner, 40 T.C. 40 (1963).Google Scholar
Hembree v. United States, 464 F.2d 1262, 1264 (4th Cir. 1972) (even though state law provided that primary purpose of university hospital was training of physicians rather than treatment of patients, it is the purpose of the payment, not of the facility, that is determinative of whether the income exclusion is afforded taxpayer).Google Scholar
See Bingler v. Johnson, 394 U.S. 741, 757 (1969) (periodic word reports, as well as other factors, signify that payments were made in compensation for services).Google Scholar
See generally, Stieman v. Commissioner, 56 T.C. 1350 (1971); Jamieson v. Commissioner, 51 T.C. 635 (1969) (payments to teaching assistant not based upon financial need, but for services rendered in capacity subject to the same regulations as regular employees).Google Scholar
See Spruch v. Commissioner, 20 T.C.M. 324, 326 (1961).Google Scholar