Rev. Rul. 75-146

Advice has been requested as to the Federal income tax treatment of amounts received and expended by a Congressman in connection with an intern program under the circumstances described below.

A United States Congressman receives amounts from his constituency to be expended in connection with an intern program established and conducted by the Congressman's office. The interns are selected, without regard to political affiliation, from the Congressman's Congressional District. The program is designed to provide education and training to the individual intern as to governmental functions, particularly the legislative process. However, during the course of the program the selected interns work in the sponsoring Congressman's Washington office for a period of one or two months performing at times exactly the same type of constituent services as the Congressman's compensated staff.

Many of the students selected are able to finance their internships without financial assistance, while others are provided with enough money on which to live while in Washington. The money to support the program is obtained by the Congressman from various constituents throughout his Congressional District through his specific requests for their support of the intern program. Checks received are made out to the intern program. The money is not handled by the Congressman but is deposited in a special account and disbursed by one of his staff members. The Congressman uses the cash receipts and disbursements method of accounting in computing his Federal income tax.

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 102(a) of the Code provides, in pertinent part, that gross income does not include the value of property acquired by gift. A gift is generally defined as a voluntary transfer of property by its owner to another with donative intent and without consideration. In order to meet the qualifications of section 102, the intent of the donor must be one of "detached and disinterested generosity." See Commissioner v. Duberstein, 363 U.S. 278 (1960), 1960-2 C.B. 428.

In the instant case, the donors contribute to the intern fund with the intention of obtaining a more efficient public servant by supporting the intern program. Therefore, the contributions are not made with an incentive of detached and disinterested generosity and do not qualify as gifts within the meaning of section 102(a) of the Code.

Furthermore, the Congressman is not merely a conduit of restricted funds because the funds are used by him to conduct his public duties more efficiently. Many of the services performed by the interns are the same as those performed by the Congressman's compensated employees. "To claim that one is merely a conduit while at the same time enjoying all of the fruits of the involved transaction is anomalous." Riverfront Groves, Inc., 60 T.C. 435, 445 (1973).

Accordingly, amounts received by the intern fund are includible in the Congressman's gross income in the year in which received by the fund under section 61 of the Code.

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.

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 a scholarship or 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 him in the pursuit of studies.

Section 1.117-4(c) of the regulations provides, in 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 Bingler v. Johnson, 394 U.S. 741 (1969), 1969-2 C.B. 17, consistent with the regulations under section 117 of the Code, held that the ordinary meaning of the term scholarship or fellowship is a relatively disinterested, "no-strings" educational grant, with no requirements of any substantial "quid pro quo" from the recipient.

In the instant case although the activities of the interns may be of educational value to them, the amounts were paid for services performed by them in connection with the operation of the Congressman's office. See Rev. Rul. 71-559, 1971-2 C.B. 102.

Accordingly, the amounts received by the interns are compensation for services performed and are not excludable from gross income under section 117 of the Code, but are includible in their gross income under section 61.

Section 162(a) of the Code provides, in part, that there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on a trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered.

Accordingly, the Congressman may deduct the amounts paid to the interns as an ordinary and necessary business expense within the meaning of section 162 of the Code. See Rev. Rul. 73-464, 1973-2 C.B. 35.