Rev. Rul. 77-319

Advice has been requested whether national research service awards received by individuals pursuant to the provisions of the National Research Service Awards Act of 1974, 42 U.S.C. sections 2891-1 and 2891-2 (Supp. V 1975), are excludable from the recipients' gross incomes as scholarships or fellowship grants under section 117 of the Internal Revenue Code of 1954.

The stated purpose of the Act is to increase the capability of the National Institutes of Health (NIH) and the Alcohol, Drug Abuse, and Mental Health Administration (ADAMHA) to carry out their responsibility of maintaining a superior national program of research into the physical and mental diseases and impairments of human beings by establishing a program of national research service awards to assure the continued excellence of biomedical and behavioral research.

The awards are made to individuals for (1) biomedical and behavioral research at the NIH and the ADAMHA in matters relating to the cause, diagnosis, prevention, and treatment of diseases or other health problems to which the activities of the NIH and the ADAMHA are directed, (2) training at the NIH and the ADAMHA of individuals to undertake such research, (3) biomedical and behavioral research at non-Federal public and nonprofit private institutions, and (4) pre- and postdoctoral training at such public and private institutions to undertake such research. Grants are also made to non-Federal public and nonprofit private institutions to enable them to make such awards to individuals selected by them.

The recipient is not required to publish the results of the research. However, any 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.

The period of an award generally may not exceed three years. Within two years after completion of the award period, each recipient must, on a continuous basis, engage in health research or teaching for a period equal to the award period. However, if the Secretary of the Department of Health, Education and Welfare determines that there are no suitable positions available to a recipient, the Secretary may authorize the recipient (1) to serve as a member of the National Health Service Corps for a period equal to the award period, or (2) for a period of 20 months for each 12-month award period, either to serve in the recipient's specialty in private practice in a geographic area designated by the Secretary, to provide services in the specialty for certain health maintenance organizations that serve underserved populations, or to engage in a health-related activity appropriate to the recipient's education or training. If the recipient fails to comply with the service requirement, the recipient must pay to the United States an amount computed according to a formula that takes into account the number of months the recipient is obligated to serve and the number of months actually served in satisfaction of the obligation.

Section 61 of the Code and the Income Tax Regulations thereunder provide that, except as otherwise provided by law, gross income means all income from whatever source derived.

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.

Section 1.117-3 of the regulations provides, in part, 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 the pursuit of study or research.

Section 1.117-4(c) of the regulations provides, in part, that any amount paid or allowed to, or on behalf of, an individual to enable the individual to pursue studies or research is not considered an amount received as a scholarship or fellowship grant if the studies or research are primarily for the benefit of the grantor.

In Bingler v. Johnson, 394 U.S. 741 (1969), 1969-2 C.B. 17, the Supreme Court of the United States held that the definitions supplied in section 1.117-4(c) of the regulations are proper, comporting as they do 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 the instant case, a substantial quid pro quo from the recipients is required because, in return for receiving the awards, (1) the recipients must, within two years after completion of the award period, engage in health research or teaching or some equivalent service for a period equal to the award period, and (2) the Government reserves the right to make royalty-free use of any copywrited materials produced as a result of the research performed during the award period. See Rev. Rul. 73-256, 1973-1 C.B. 56, and Rev. Rul. 72-263, 1972-1 C.B. 40. Therefore, the awards are made primarily for the benefit of the grantor.

Accordingly, the awards are not excludable from the recipients' gross incomes as scholarships or fellowship grants under section 117 of the Code, but are includible in their gross incomes under section 61.