Rev. Rul. 72-263

Advice has been requested whether, under the circumstances described below, stipends paid under a grant by the National Institutes of Health are excludable from the recipient's gross income under the provisions of section 117(a) of the Internal Revenue Code of 1954.

The taxpayer, a physician engaged in postdoctoral research training at a medical school, received a grant from the National Institutes of Health (NIH) of the Department of Health, Education, and Welfare. Under the grant NIH paid a stipend directly to the taxpayer for research training purposes. In addition, the taxpayer signed a contract with a local hospital as a nonremunerative resident and spends approximately two to three hours per week at a clinic examining patients with lung diseases. The rest of his time, in an approximately 80-hour week, is spent in various research activities studying the same lung diseases produced in rats.

The purpose of the NIH grant is to support postdoctoral research training in health and health-related areas. An applicant, prior to formal application, must arrange for admission to an appropriate institution and must be accepted by a sponsor who will supervise his training. An application is then submitted emphasizing the training experience and the broadening of scientific competence to be gained. Applications are reviewed initially by committees composed of consultants from appropriate scientific fields, primarily from the academic community. Evaluation of the application is based upon the qualifications of the applicant and his potential for research as evidenced by academic records, reference reports, publications, and other relevant information. The recommendations of the committees are the primary criterion in awarding the grant.

The amount of the stipend paid under the grant depends upon the relevant postdoctoral experience of the recipient at the time of the grant. Research experience, teaching, internship, and residence are considered relevant experience and increase the amount of the stipend paid the recipient. An additional specified amount is provided for each dependent. NIH make no deductions from the stipends for any purpose such as income tax or social security.

Grant recipients are required to pursue research training on a "full-time basis" and the sponsoring institution interprets "full-time basis" in accordance with its own policies. Recipients are not entitled to a vacation but are entitled to normal institutional holidays in addition to sick leave and military leave. Moreover, recipients are not allowed to retain any fees from clinical practice, professional consultation or other comparable activities performed pursuant to the purpose of the grant. These fees must be assigned to the sponsoring institution.

Any invention arising from work to which the recipient contributes during the tenure of his grant must be reported to NIH for disposition of patent rights. The recipient is free to publish or otherwise make public the results of work performed during the grant. He must, however, indicate that the work was supported by NIH. Also, except as otherwise provided in the conditions of the grant, when publications, films, or similar materials are developed from work supported by NIH, the author is free to arrange for copyright without approval. Any such copyrighted materials are subject to a royalty-free, nonexclusive and irrevocable license to the Government to reproduce, translate, publish, use, and dispose of them and to authorize others to do so.

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 his gross income under section 117 of the Code depends upon the facts and circumstances under which the payment is made. The exclusion provision applies only to scholarships or fellowship grants. A scholarship or fellowship grant is an amount paid or allowed to an individual for the primary purpose of furthering the education and training of the recipient in his individual capacity.

Section 1.117-4(c) of the Income Tax Regulations provides, in pertinent part, that any amount or amounts paid or allowed to, or on behalf of, an individual to enable him 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, if such amount represents payment for services which are subject to the direction or supervision of the grantor, or if such studies or research are primarily for the benefit of the grantor. Any of these conditions will negate the existence of a scholarship or fellowship grant as defined in these regulations.

The Supreme Court of the United States in the case of John H. Bingler v. Richard F. Johnson, et al., 394 U.S. 741 (1969), Ct. D. 1926, C.B. 1969-2, 17, upheld the validity of section 1.117-4(c) of the regulations, referred to above. In support of its view that, under the provisions of those regulations, a stipend is not a scholarship or a fellowship within the meaning of section 117 of the Code if the grantor requires a quid pro quo from the recipient in the form of rendition of services for the grantor, the Court stated, "The thrust of the provision dealing with compensation is that bargained-for payments, given only as a quo in return for the quid of services rendered--whether past, present, or future--should not be excludable from income as 'scholarship' funds."

The Tax Court of the United States in referring to the Johnson case stated "The regulations are thus designed, at least in part, to distinguish relatively disinterested payments made primarily for the purpose of furthering the education of the recipient from payments made primarily to reward or induce the recipient's performance of services for the benefit of the payor." Jerry S. Turem v. Commissioner, 54 T.C. 1494, at 1505 (1970); cf., Elmer L. Reese, Jr. v. Commissioner, 45 T.C. 407, at 411 (1966), affirmed per curiam 373 F. 2d 742 (1967).

The facts in the instant case indicate that NIH is bargaining for research services and a research product rather than seeking to primarily benefit the education and training of the recipient in his individual capacity. For example, his selection was based on his potential for research and the amount of the stipend under the program is determined in relation to his relevant experience. Presumably, a person with such experience is more likely to engage in productive research and NIH sought to reward him for that experience. In addition, NIH reserved the rights to make royalty-free use of any copyrighted material produced as a result of the research and also reserved the patent rights to any invention arising from the research. These facts indicate that NIH made the payments as a "quo" in return for the "quid" of research services and a research product.

Accordingly, in the instant case, the amounts paid by NIH under the grant are not excludable from the recipient's gross income under the provisions of section 117(a) of the Code, but are includible in his gross income under section 61 of the Code as compensation for services.