MEMOTo: The employeeFrom: Trang TranDate: 09/27/2013The purpose of this memorandum is to determine whether the stipend and adders payments from the corporation are excludable from employee`s gross incomeFactsThe employee got approval for a leave of absence to write his dissertation after completing all preliminary requirements for his doctorate under the corporation`s "Fellowship and Doctoral Program . During leaving time, he would receive a stipend from the corporation ranging from 70 percent to 90 percent of his prior salary plus adders, depending on the size of his family, and would also retain his seniority and receive all company benefits. However, he had to submit periodic progress reports and signed in a written agreement obligating him to work for the corporation for at least 2 years following the completion of his leave Issue and Conclusion 1Are the amounts paid to or on behalf of the employee in the Program excludable from his income as "scholarships? No, the amounts paid to or on behalf of the employee in the Program are not "scholarships and are thus not excludable under Code 117 Analysis 1The Code Sec.117 indicates that whether a payment made to or on behalf of an individual is excludable from his income as a scholarship or fellowship depends on the facts surrounding the payment.Reg. 1.117-3 provides that a "scholarship or "fellowship grant generally comprises amounts paid or allowed to or for the benefit of a person to help him in pursuing studies or research. However, any amount paid to or on behalf of an individual that represents either compensation for past, present or future employment services subject to the direction of the grantor are specifically not considered as scholarships or fellowship grants. In the instant case, the commitment required of the employee under the corporation`s Program to remain employed by the Corporation for at least two years following the completion of his dissertation, a "substantial quid pro quo was required from the employee in the Program, and therefore, the payments made by the corporation not "scholarships or "fellowships under Reg. 1.117-4(c).Under Bingler v. Johnson (SCt., 1969), the Supreme Court affirmed the district courts determination that stipend payments to Westinghouse employees by the company, made to further their studies for advanced scientific degrees on the condition that they return to the employ of the company, were not excludable from their income under Code 117. This case can be treated as precedence for our tax case as it was valid case ruled by Supreme Court and shares many similarities pertaining to the stipend payment to assist employee`s studying and future employment obligation. Hence, the stipend paid to employee in our case is includible in his income Under John E. MacDonald v. US. (TC, 1969) Tax Court ruled that the payments made to MacDonald (an employee of IBM, under the companys advanced education program, he continued to get his regular salary while studying graduate courses and working on his thesis) were primarily for the benefit of the company and were therefore not excludable as "scholarships to the taxpayer, even though there is no contractual obligation to perform future services. Because of the similarity of the corporation`s Program in our case with the program described in MacDonald case, the proposed payments by the corporation would be similarly held as "primarily for the benefit of the grantor even if the express obligation to perform future services were eliminated. In addition, Rev. Rul. 72-263 provides that a stipend paid by National Institutes of Health to a physician for post-doctoral research training at a medical school is not excludable from gross income as a Scholarship or fellowship grant. The fact that 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 created "substantial quid pro quo which held as benefit of the grantor under Reg. 1.117-4(c).

In conclusion: Provided above analysis, the amounts received by the employee are taxable compensation rather than excludable scholarships.Issue 2 and Conclusion 2Are the amounts paid to or on behalf of the employee in the Program excludable from his income as fringe benefit qualified for exclusion from gross income?Only educational assistant program under an accountable plan can permit employee to exclude certain amount (up to $5,250) from his income under Code Sec.127Analysis 2Under the Code Sec.132(a), certain qualified fringe benefits which are excluded from employee`s income include no-additional-cost service, qualified employee discount, working condition fringe, de minimis fringe, qualified transportation fringe, qualified moving expense reimbursement, qualified retirement planning services, or qualified military base realignment and closure. Also, according to Reg. 1.132-1, employee is defined as any individual who currently employed by the employer or who is absent by reason of retirement or disability or who is widow or widower of employee died in line of employer`s business. Hence, none of these certain excludible fringe benefit can be employed in our caseIn the instant case, however, educational assistant program can be counted as noncash fringe benefit that is not taxable to the employee. The Code Sec.127 provides that employees can exclude up to $5,250 per year of employer-provided educational assistance. Any excess of benefits over $5,250 that cannot be excluded as job-related education are treated as employee`s wages, and hence subject to withholding and employment tax.Still, whether or not these amounts can be deducted under educational assistant program still depends upon whether this program provided by corporation is from an accountable plan or unaccountable plan. If this program is from an accountable plan, the educational reimbursement would be excluded from the employee`s income. If the reimbursement is from a nonaccountable plan, the amount of reimbursement would be included in the employee`s incomeAccordingly, the employee can exclude up to $5,250 from his gross income if these amounts are considered as educational assistant program from the accountable plan of the corporation BIBLIOGRAPHYCode Sec. 117. Qualified Scholarship117(a)General Rule.Gross income does not include any amount received as a qualified scholarship by an individual who is a candidate for a degree at an educational organization described in Section 170(b)(1)(A)(ii)117(b)Qualified Scholarship.For purposes of this section117(b)(1)In general.The term qualified scholarship means any amount received by an individual as a scholarship or fellowship grant to the extent the individual establishes that, in accordance with the conditions of the grant, such amount was used for qualified tuition and related expenses.117(b)(2)Qualified tuition and related expenses.For purposes of paragraph (1), the term qualified tuition and related expenses means117(b)(2)(A)tuition and fees required for the enrollment or attendance of a student at an educational organization described in Section 170(b)(1)(A)(ii), and117(b)(2)(B)fees, books, supplies, and equipment required for courses of instruction at such an educational organization.117(c)Limitation.117(c)(1)In general.Except as provided in paragraph (2), subsections (a) and (d) shall not apply to that portion of any amount received which represents payment for teaching, research, or other services by the student required as a condition for receiving the qualified scholarship or qualified tuition reduction.117(c)(2)Exceptions.Paragraph (1) shall not apply to any amount received by an individual under117(c)(2)(A)the National Health Service Corps Scholarship Program under section 338A(g)(1)(A) of the Public Health Service Act, or117(c)(2)(B)the Armed Forces Health Professions Scholarship and Financial Assistance program under subchapter I of chapter 105 of title 10, United States Code.117(d)Qualified Tuition Reduction.117(d)(1)In general.Gross income shall not include any qualified tuition reduction.117(d)(2)Qualified tuition reduction.For purposes of this subsection, the term qualified tuition reduction means the amount of any reduction in tuition provided to an employee of an organization described in section 170(b)(1)(A)(ii) for the education (below the graduate level) at such organization (or another organization described in section 170(b)(1)(A)(ii)) of117(d)(2)(A)such employee, or117(d)(2)(B)any person treated as an employee (or whose use is treated as an employee use) under the rules of section 132(h).117(d)(3)Reduction must not discriminate in favor of highly compensated, etc.Paragraph (1) shall apply with respect to any qualified tuition reduction provided with respect to any highly compensated employee only if such reduction is available on substantially the same terms to each member of a group of employees which is defined under a reasonable classification set up by the employer which does not discriminate in favor of highly compensated employees (within the meaning of section 414(q)). For purposes of this paragraph, the term highly compensated employee has the meaning given such term by Section 414(q)117(d)(5)[(4)] Special rules for teaching and research assistants.In the case of the education of an individual who is a graduate student at an educational organization described in Section 170(b)(1)(A)(ii) and who is engaged in teaching or research activities for such organization, paragraph (2) shall be applied as if it did not contain the phrase (below the graduate level).Code Sec.127. Educational assistance programs(a) Exclusion from gross income (1) In general Gross income of an employee does not include amounts paid or expenses incurred by the employer for educational assistance to the employee if the assistance is furnished pursuant to a program which is described in subsection (b). (2) $5,250 maximum exclusion If, but for this paragraph, this section would exclude from gross income more than $5,250 of educational assistance furnished to an individual during a calendar year, this section shall apply only to the first $5,250 of such assistance so furnished. Book: Employees can exclude up to $5,250 per year of employer-provided educational assistance. Any excess of benefits over $5,250 that cannot be excluded as job-related education are included in employee`s wages, and therefore subject to withholding and employment tax 127(c)(1)Educational assistance.The term educational assistance means127(c)(1)(A)the payment, by an employer, of expenses incurred by or on behalf of an employee for education of the employee (including, but not limited to, tuition, fees, and similar payments, books, supplies, and equipment), and127(c)(1)(B)the provision, by an employer, of courses of instruction for such employee (including books, supplies, and equipment),but does not include payment for, or the provision of, tools or supplies which may be retained by the employee after completion of a course of instruction, or meals, lodging, or transportation. The term educational assistance also does not include any payment for, or the provision of any benefits with respect to, any course or other education involving sports, games, or hobbies.127(c)(5)Certain tests not applicable.An educational assistance program shall not be held or considered to fail to meet any requirements of subsection (b) merely because127(c)(5)(A)of utilization rates for the different types of educational assistance made available under the program; or127(c)(5)(B)successful completion, or attaining a particular course grade, is required for or considered in determining reimbursement under the program.Code Sec.132(a). Exclusion from gross incomeGross income shall not include any fringe benefit which qualifies as a132(a)(1)no-additional-cost service,132(a)(2)qualified employee discount,132(a)(3)working condition fringe,132(a)(4)de minimis fringe[,]132(a)(5)qualified transportation fringe,132(a)(6)qualified moving expense reimbursement,132(a)(7)qualified retirement planning services, or132(a)(8)qualified military base realignment and closure fringe.Reg. 1.117-3. Definitions(a)Scholarship.A scholarship generally means an amount paid or allowed to, or for the benefit of, a student, whether an undergraduate or a graduate, to aid such individual in pursuing his studies. The term includes the value of contributed services and accommodations (see paragraph (d) of this section) and the amount of tuition, matriculation, and other fees which are furnished or remitted to a student to aid him in pursuing his studies. The term also includes any amount received in the nature of a family allowance as a part of a scholarship. However, the term does not include any amount provided by an individual to aid a relative, friend, or other individual in pursuing his studies where the grantor is motivated by family or philanthropic considerations. If an educational institution maintains or participates in a plan whereby the tuition of a child of a faculty member of such institution is remitted by any other participating educational institution attended by such child, the amount of the tuition so remitted shall be considered to be an amount received as a scholarship.(b)Educational organization.For definition of "educational organization" paragraphs (a) and (b) of 117 adopt the definition of that term which is prescribed in section 151(e)(4). Accordingly, for purposes of section 117 the term "educational organization" means only an educational organization which normally maintains a regular faculty and curriculum and normally has a regularly organized body of students in attendance at the place where its educational activities are carried on. See section 151(e)(4) and regulations thereunder.(c)Fellowship grant.A fellowship grant generally means an amount paid or allowed to, or for the benefit of, an individual to aid him in the pursuit of study or research. The term includes the value of contributed services and accommodations (see paragraph (d) of this section) and the amount of tuition, matriculation, and other fees which are furnished or remitted to an individual to aid him in the pursuit of study or research. The term also includes any amount received in the nature of a family allowance as a part of a fellowship grant. However, the term does not include any amount provided by an individual to aid a relative, friend, or other individual in the pursuit of study or research where the grantor is motivated by family or philanthropic considerations.(d)Contributed services and accommodations.The term "contributed services and accommodations" means such services and accommodations as room, board, laundry service, and similar services or accommodations which are received by an individual as part of a scholarship or fellowship grant.(e)Candidate for a degree.The term "candidate for a degree" means an individual, whether an undergraduate or a graduate, who is pursuing studies or conducting research to meet the requirements for an academic or professional degree conferred by colleges or universities. It is not essential that such study or research be pursued or conducted at an educational institution which confers such degrees if the purpose thereof is to meet the requirements for a degree of a college or university which does confer such degrees. A student who receives a scholarship for study at a secondary school or other educational institution is considered to be a "candidate for a degree". [Reg. 1.117-3.]Reg. 1.117-4. Items not considered as scholarships or fellowship grants(c).Amounts paid as compensation for services or primarily for the benefit of the grantor.(1)Except as provided in paragraph (a) of 1.117-2 and 1.117-5, any amount paid or allowed to, or on behalf of, an individual to enable him to pursue studies or research, if such amount represents either compensation for past, present, or future employment services or represents payment for services which are subject to the direction or supervision of the grantor.(2)Any amount paid or allowed to, or on behalf of, an individual to enable him to pursue studies or research primarily for the benefit of the grantor.However, amounts paid or allowed to, or on behalf of, an individual to enable him to pursue studies or research are considered to be amounts received as a scholarship or fellowship grant for the purpose of section 117 if the primary purpose of the studies or research is to further the education and training of the recipient in his individual capacity and the amount provided by the grantor for such purpose does not represent compensation or payment for the services described in subparagraph (1) of this paragraph. Neither the fact that the recipient is required to furnish reports of his progress to the grantor, nor the fact that the results of his studies or research may be of some incidental benefit to the grantor shall, of itself, be considered to destroy the essential character of such amount as a scholarship or fellowship grant.[Reg. 1.117-4.]Reg. 1.132-1 (a)In general.Gross income does not include any fringe benefit which qualifies as a(1)No-additional-cost service,(2)Qualified employee discount,(3)Working condition fringe, or(4)De minimis fringe.Special rules apply with respect to certain on-premises gyms and other athletic facilities (1.132-1(e)), demonstration use of employer-provided automobiles by full-time automobile salesmen (1.132-5(o)), parking provided to an employee on or near the business premises of the employer (1.132-5(p)), and on-premises eating facilities (1.132-7).(b)Definition of employee(1)No-additional-cost services and qualified employee discounts.For purposes of section 132(a)(1) (relating to no-additional-cost services) and section 132(a)(2) (relating to qualified employee discounts), the term "employee" (with respect to a line of business of an employer) means(i)Any individual who is currently employed by the employer in the line of business,(ii)Any individual who was formerly employed by the employer in the line of business and who separated from service with the employer in the line of business by reason of retirement or disability, and(iii)Any widow or widower of an individual who died while employed by the employer in the line of business or who separated from service with the employer in the line of business by reason of retirement or disability.Bingler v. Johnson, SCt, 69-1 USTC 9348, 394 US 741, 89 SCt 1439, 4/23/69, Revg CA-3.Scholarships: Employees on educational leave: Compensation.--Stipends received by three Westinghouse Electric Corporation employees, while on educational leave from their employment to study for Ph. D. degrees, were taxable compensation rather than excludable scholarships. Reg. 1.117-4(c), which provides that amounts representing compensation for past, present, or future employment services or amounts enabling the recipient to pursue studies or research primarily for the benefit of the grantor are not excludable scholarships, is a valid attempt by the Commissioner to supply definitions of the terms scholarship and fellowship and is not unreasonable or plainly inconsistent with the statute. Sec. 117 does not preclude a definition of scholarship that excludes from the reach of that term amounts received as compensation for services performed. Third Circuit reversed and District Court decisions reinstated.John E. MacDonald, Jr., 52 T.C. 386, 52 TC 386 (1969).Exclusions from gross income: Scholarship or fellowship grant: Full salary paid while on leave: Ph.D. candidate: Primary beneficiary of grant. Held, payments received by T from his employer (IBM) in the full amount of his salary while pursuing studies at a university for a Ph.D. under an employer-sponsored advanced education program were not excludable from gross income as a scholarship or fellowship grant. Sec. 117(a), I. R. C. 1954; Treas. Regs.,secs. 1.117-3(a) and (c), and 1.117.4(c). John E. MacDonald, Jr., pro se, Myers Corners Rd., Wappingers Falls, N. Y. Richard J. Mandell, for the respondent.The Commissioner determined a deficiency in petitioners' income tax for the taxable year 1961 in the amount of $2,030.32. The sole issue is whether the sum of $15,300 received by petitioner John E. MacDonald, under an employer-sponsored education program is excludable from petitioners' gross income under section 117 of the 1954 Code as a scholarship or fellowship grant

Rev. Rul. 72-263, 1972-1 CB 40A stipend paid by the National Institutes of Health (NIH) to a physician for postdoctoral research training at a medical school is not excludable from gross income as a scholarship or fellowship 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.

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