Respondents, who held engineering positions at a laboratory which the Westinghouse Electric Corp. operates under contract with the Atomic Energy Commission, participated in a two-phase Fellowship Program. In the first, or "work-study," phase, a participating employee holds a regular job at Westinghouse and attends university classes part time, for which the tuition and other expenses are paid by the company. A qualified employee may then be granted an educational leave of absence (the second phase) to work on his doctoral dissertation, approval of which by Westinghouse and the AEC is based partly on general relevancy to work at the laboratory. He then devotes full time to the dissertation for a period of several months, during which he receives a "stipend" from Westinghouse ranging from 70% to 90% of his prior salary plus a family allowance; retains seniority status; and receives insurance, stock option privileges, and other employee benefits. He is obligated to submit progress reports while on leave, and on its completion to return to Westinghouse for at least two years. Respondents filed refund claims for federal income taxes withheld by Westinghouse from the amounts paid them while on leave, contending that these payments were "scholarships" and hence excludable under 117 of the Internal Revenue Code of 1954. On rejection of their claims respondents brought this refund suit in District Court. At the trial the court instructed the jury in accordance with Treas. Reg. 1.117-4 (c), which was promulgated under 117 and provides that amounts representing "compensation for . . . employment services" and amounts paid "to enable [an individual] to pursue studies . . . primarily for the benefit of the grantor," are not excludable as scholarships. The jury found that the amounts that respondents received were taxable income. The Court of Appeals, holding the regulation invalid, reversed. Held: Treas. Reg. 1.117-4 (c) is valid, and the jury properly found that the amounts respondents received were not excludable "scholarships" but taxable "compensation." Pp. 747-758.
396 F.2d 258, reversed. [394 U.S. 741, 742]
Harris Weinstein argued the cause for petitioner. With him on the briefs were Solicitor General Griswold, Assistant Attorney General Walters, former Assistant Attorney General Rogovin, Jonathan S. Cohen, and Michael B. Arkin.
James C. Larrimer argued the cause and filed a brief for respondents.
MR. JUSTICE STEWART delivered the opinion of the Court.
We are called upon in this case to examine for the first time 117 of the Internal Revenue Code of 1954, which excludes from a taxpayer's gross income amounts received as "scholarships" and "fellowships." The question before us concerns the tax treatment of payments received by the respondents 1 from their employer, the Westinghouse Electric Corporation, while they were on "educational leave" from their jobs with Westinghouse.
During the period here in question the respondents held engineering positions at the Bettis Atomic Power Laboratory in Pittsburgh, Pennsylvania, which Westinghouse operates under a "cost-plus" contract with the Atomic Energy Commission. Their employment status enabled them to participate in what is known as the Westinghouse Bettis Fellowship and Doctoral Program. That program, designed both to attract new employees seeking further education and to give advanced training to persons already employed at Bettis, offers a two-phase schedule of subsidized postgraduate study in engineering, physics, or mathematics. [394 U.S. 741, 743]
Under the first, or "work-study," phase, a participating employee holds a regular job with Westinghouse and in addition pursues a course of study at either the University of Pittsburgh or Carnegie-Mellon University. 2 The employee is paid for a 40-hour work week, but may receive up to eight hours of "release time" per week for the purpose of attending classes. 3 "Tuition remuneration," as well as reimbursement for various incidental academic expenses, is provided by the company. 4
When an employee has completed all preliminary requirements for his doctorate, he may apply for an educational leave of absence, which constitutes the second phase of the Fellowship Program. He must submit a proposed dissertation topic for approval by Westinghouse and the AEC. Approval is based, inter alia, on a determination that the topic has at least some general relevance to the work done at Bettis. If the leave of absence is secured, the employee devotes his full attention, for a period of at least several months, 5 to fulfilling his dissertation requirement. During this period he receives a "stipend" from Westinghouse, in an amount based on a specified percentage (ranging from 70% to 90%) of his prior salary plus "adders," depending upon the size of his family. 6 He also retains his seniority status and receives all employee benefits, such as insurance and stock option privileges. In return he not only must submit periodic progress reports, but under the written agreement that all participants in the program must sign, [394 U.S. 741, 744] also is obligated to return to the employ of Westinghouse for a period of at least two years following completion of his leave. 7 Upon return he is, according to the agreement, to "assume . . . duties commensurate with his education and experience," at a salary "commensurate with the duties assigned."
The respondents all took leaves under the Fellowship Program at varying times during the period 1960-1962, 8 and eventually received their doctoral degrees in engineering. Respondents Johnson and Pomerantz took leaves of nine months and were paid $5,670 each, representing 80% of their prior salaries at Westinghouse. Respondent Wolfe, whose leave lasted for a year, received $9,698.90, or 90% of his previous salary. Each returned to Westinghouse for the required period of time following his educational leave.
Westinghouse, which under its own accounting system listed the amounts paid to the respondents as "indirect labor" expenses, withheld federal income tax from those amounts. 9 The respondents filed claims for refund, contending that the payments they had received were [394 U.S. 741, 745] "scholarships," and hence were excludable from income under 117 of the Code, which provides in pertinent part:
The holding of the Court of Appeals with respect to Treas. Reg. 1.117-4 (c) was contrary to the decisions of several other circuits - most notably, that of the Fifth [394 U.S. 741, 748] Circuit in Ussery v. United States, 296 F.2d 582, which explicitly sustained the Regulation against attack and held amounts received under an arrangement quite similar to the Bettis Program to be taxable income. 12 Accordingly, upon the District Director's petition, we granted certiorari to resolve the conflict and to determine the proper scope of 117 and Treas. Reg. 1.117-4 (c) with respect to payments such as those involved here. 393 U.S. 949 .
In holding invalid the Regulation that limits the definitions of "scholarship" and "fellowship" so as to exclude amounts received as "compensation," the Court of Appeals emphasized that the statute itself expressly adverts to certain situations in which funds received by students may be thought of as remuneration. After the basic rule excluding scholarship funds from gross income is set out in 117 (a), for instance, subsection (b) (1) stipulates:
Congress' express reference to the limitations just referred to concededly lends some support to the respondents' position. The difficulty with that position, however, lies in its implicit assumption that those limitations are limitations on an exclusion of all funds received by students to support them during the course of their education. Section 117 provides, however, only that amounts received as "scholarships" or "fellowships" shall be excludable. And Congress never defined what it meant by the quoted terms. As the Tax Court has observed:
The implication of the respondents' expressio unius reasoning is that any amount paid for the purpose of supporting one pursuing a program of study or scholarly research should be excludable from gross income as a "scholarship" so long as it does not fall within the specific limitations of 117 (b). Pay received by a $30,000 per year engineer or executive on a leave of absence would, according to that reasoning, be excludable as long as the leave was granted so that the individual could perform work required for a doctoral degree. This result presumably would not be altered by the fact that the employee might be performing, in satisfaction of his degree requirements, precisely the same work which he was doing for his employer prior to his leave and which he would be doing after his return to "employment" - or by the fact that the fruits of that work were made directly available to and exploited by the employer. Such a result would be anomalous indeed, especially in view of the fact that under 117 the comparatively modest sums received by part-time teaching assistants are clearly subject to taxation. 15 Particularly in light of the principle [394 U.S. 741, 752] that exemptions from taxation are to be construed narrowly, 16 we decline to assume that Congress intended to sanction - indeed, as the respondents would have it, to compel - such an inequitable situation. 17
The legislative history underlying 117 is, as the Court of Appeals recognized, "far from clear." 18 We do not believe, however, that it precludes, as "plainly inconsistent" with the statute, a definition of "scholarship" that excludes from the reach of that term amounts received as compensation for services performed. The 1939 Internal Revenue Code, like predecessor Codes, contained no specific provision dealing with scholarship grants. Whether such grants were includable in gross income depended simply upon whether they fell within the broad provision excluding from income amounts received as "gifts." 19 Thus case-by-case determinations regarding grantors' motives were necessary. The cases decided under this approach prior to 1954 generally involved two types of financial assistance: grants to research or teaching assistants - graduate students who perform research or teaching services in return for their stipends - and foundation grants to post-doctoral researchers. In cases decided shortly before the 1954 Code was enacted, the Tax Court, relying on the "gift" approach to scholarships and fellowships, held that amounts received by a research assistant were taxable [394 U.S. 741, 753] income, 20 but reached divergent results in situations involving grants to post-doctoral researchers. 21
In enacting 117 of the 1954 Code, Congress indicated that it wished to eliminate the necessity for reliance on "case-by-case" determinations with respect to whether "scholarships" and "fellowships" were excludable as "gifts." Upon this premise the respondents hinge their argument that Congress laid down a standard under which all case-by-case determinations - such as those that may be made under Treas. Reg. 1.117-4 (c) - are unnecessary and improper. We have already indicated, however, our reluctance to believe that 117 was designed to exclude from taxation all amounts, no matter how large or from what source, that are given for the support of one who happens to be a student. The sounder inference is that Congress was merely "recogni[zing] that scholarships and fellowships are sufficiently unique . . . to merit [tax] treatment separate from that accorded gifts," 22 and attempting to provide that grants falling within those categories should be treated consistently - as in some instances, under the generic provisions of the 1939 Code, they arguably had not been. Delineation of the precise contours of those categories was left to the Commissioner.
Furthermore, a congressional intention that not all grants received by students were necessarily to be "scholarships" may reasonably be inferred from the legislative history. In explaining the basis for its version of 117 (b) (2), 23 the House Ways and Means Committee stated [394 U.S. 741, 754] that its purpose was to "tax those grants which are in effect merely payments of a salary during a period while the recipient is on leave from his regular job." 24 This comment related, it is true, to a specific exception to the exclusion from income set out in subsection (a). But, in view of the fact that the statute left open the definitions of "scholarship" and "fellowship," it is not unreasonable to conclude that in adding subsection (b) to the statute Congress was merely dealing explicitly with those problems that had come explicitly to its attention - viz., those involving research and teaching assistantships and post-doctoral research grants - without intending to forbid application to similar situations of the general principle underlying its treatment of those problems. One may justifiably suppose that the Congress that taxed funds received by "part-time" teaching assistants, presumably on the ground that the amounts received by such persons really represented compensation for services performed, 25 would also deem proper a definition of "scholarship" under which comparable sorts of compensation - which often, as in the present case, are significantly greater in amount - are likewise taxable. 26 [394 U.S. 741, 755] In providing such a definition, the Commissioner has permissibly implemented an underlying congressional concern. 27 We cannot say that the provision of Treas. Reg. 1.117-4 (c) that taxes amounts received as "compensation" is "unreasonable or plainly inconsistent with the . . . statut[e]." 28
Under that provision, as set out in the trial court's instructions, 29 the jury here properly found that the [394 U.S. 741, 756] amounts received by the respondents were taxable "compensation" rather than excludable "scholarships." 30 The employer-employee relationship involved is immediately [394 U.S. 741, 757] suggestive, of course, as is the close relation between the respondents' prior salaries and the amount of their "stipends." In addition, employee benefits were continued. Topics were required to relate at least generally to the work of the Bettis Laboratory. Periodic work reports were to be submitted. And, most importantly, Westinghouse unquestionably extracted a quid pro quo. The respondents not only were required to hold positions with Westinghouse throughout the "work-study" phase of the program, but also were obligated to return to Westinghouse's employ for a substantial period of time after completion of their leave. 31 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 [394 U.S. 741, 758] "scholarship" funds. 32 That provision clearly covers this case.
Accordingly, the judgment of the Court of Appeals is reversed, and that of the District Court reinstated.
[ Footnote 2 ] Formerly Carnegie Institute of Technology.
[ Footnote 3 ] A maximum of 156 hours of release time per year is allowed.
[ Footnote 4 ] The Fellowship Program is funded jointly by Westinghouse and the AEC, but the amounts paid to participating employees are channeled through the company's payroll office.
[ Footnote 5 ] The ordinary leave period is nine months.
[ Footnote 6 ] Maximum monthly limits are placed on the amounts paid.
[ Footnote 7 ] Respondent Wolfe began his leave at a time when Westinghouse did not require agreement in writing to the two-year "return" commitment. He was formally advised before he went on leave, however, that he was "expected" to return to Westinghouse for a period of time equal to the duration of his leave, and he in fact honored that obligation.
[ Footnote 8 ] Respondent Wolfe was on leave from March 1, 1960, to February 28, 1961; respondent Johnson from October 1, 1960, to June 30, 1961; and respondent Pomerantz from November 1, 1961, to July 31, 1962.
[ Footnote 9 ] Tuition and incidental fees were also paid by Westinghouse, but no withholding was made from those payments, and their tax status is not at issue in this case. Although conceptually includable in income, such sums presumably would be offset by educational expense deductions. See Treas. Reg. on Income Tax (1954 Code) 1.162-5, 26 CFR 1.162-5.
[ Footnote 10 ] The entire section reads as follows:
[ Footnote 11 ] " 1.117-4. Items not considered as scholarships or fellowship grants.
[ Footnote 12 ] Generally in accord with Ussery are Reese v. Commissioner, 373 F.2d 742 (C. A. 4th Cir.); Stewart v. United States, 363 F.2d 355 (C. A. 6th Cir.); and Woddail v. Commissioner, 321 F.2d 721 (C. A. 10th Cir.). See also Reiffen v. United States, 180 Ct. Cl. 296, 376 F.2d 883.
[ Footnote 13 ] Subsection (b) goes on to except from that limitation situations in which "teaching, research, or other services are required of all candidates (whether or not recipients of scholarships or fellowship grants) for a particular degree as a condition to receiving such degree . . . ." In those situations, scholarship or fellowship funds received for such services are nontaxable. See n. 10, supra.
[ Footnote 14 ] See also Treas. Reg. on Income Tax (1954 Code) 1.117-3 (a), (c), 26 CFR 1.117-3 (a), (c), which set out the "normal characteristics" associated with scholarships and fellowships:
[ Footnote 15 ] Cf. 1 J. Mertens, Law of Federal Income Taxation 7.42, p. 110 (P. Zimet & W. Oliver rev. ed. 1962).
[ Footnote 17 ] The opinion of the Court of Appeals reiterates that the stipends received by the respondents were "reasonable." Those payments approximated, of course, the respondents' previous engineering salaries. In any event, given the court's expressio unius reasoning, the source of a limitation based on the "reasonableness" of amounts granted to bona fide students is difficult to identify.
[ Footnote 18 ] 396 F.2d, at 263.
[ Footnote 19 ] Int. Rev. Code of 1939, c. 1, 22 (b) (3), 53 Stat. 10; see Int. Rev. Code of 1954, 102.
[ Footnote 20 ] See, e. g., Banks v. Commissioner, 17 T. C. 1386.
[ Footnote 21 ] Compare Ti Li Loo v. Commissioner, 22 T. C. 220 (university grant for National Health Service research held taxable), with Stone v. Commissioner, 23 T. C. 254 (foundation grant held nontaxable).
[ Footnote 22 ] Gordon, Scholarship and Fellowship Grants as Income: A Search for Treasury Policy, 1960 Wash. U. L. Q. 144, 151.
[ Footnote 23 ] That version provided for the exclusion only of grants that, together with compensation received from the recipient's former [394 U.S. 741, 754] employer, were less than 75% of his salary for the preceding year. Noting that the House bill would have taxed many modest grants simply because the recipient had no substantial earned income in the previous year, the Senate rejected that formulation and substituted the present $300 per month, 36-month provision of 117 (b) (2). See H. R. Rep. No. 1337, 83d Cong., 2d Sess., 17; S. Rep. No. 1622, 83d Cong., 2d Sess., 18.
[ Footnote 24 ] H. R. Rep. No. 1337, supra, n. 23, at 17.
[ Footnote 25 ] The House version of 117 (b) (1) taxed only amounts received as payment for teaching and research services. The Senate amended the provision, however, to include payments for "other services" as well. See S. Rep. No. 1622, supra, n. 23, at 18.
[ Footnote 26 ] In connection with the question of what Congress may have intended to denote by the terms "scholarship" and "fellowship," it is noteworthy that the House Report stated, "Such grants generally [394 U.S. 741, 755] are of small amount and are usually received by individuals who would have little or no tax liability in any case." H. R. Rep. No. 1337, supra, n. 23, at 17.
[ Footnote 27 ] The Court of Appeals viewed the "primary purpose" of 117 as the "encourage[ment of] financial aid to education through tax relief." 396 F.2d, at 262. But while some desire to aid scholarship students no doubt underlay enactment of the statute, that desire must be reconciled with an apparent congressional intent - manifested in the limitations set out in subsection (b) - to tax amounts that represent compensation for services performed. As the text makes clear, we cannot view the Commissioner's attempt to achieve that reconciliation as improper.
[ Footnote 28 ] The Court of Appeals seems to have recognized that in some circumstances the Commissioner's approach is justified. Its opinion stated:
[ Footnote 29 ] The instructions included, inter alia, the following passage:
[ Footnote 30 ] We thus endorse the decisions of the Fifth and Sixth Circuits in Ussery v. United States, 296 F.2d 582, and Stewart v. United States, 363 F.2d 355. In Ussery, the Court of Appeals for the Fifth Circuit specifically upheld Treas. Reg. 1.117-4 (c) and held taxable monthly payments received by an employee of the Mississippi Department of Public Welfare who had been given leave to secure a master's degree in social work. The taxpayer there received employee benefits while on leave, and was obligated to return to the department following completion of his studies. Stewart involved a similar arrangement under which an employee of the Tennessee Department of Public Welfare received monthly stipends and other benefits during an educational leave of absence but was required to return thereafter to her previous position. See Reese v. Commissioner, 373 F.2d 742 (C. A. 4th Cir.), affirming 45 T. C. 407 (student-teacher); Woddail v. Commissioner, 321 F.2d 721 (C. A. 10th Cir.) (resident physician; obligated to remain following part-time participation in training program); cf. Reiffen v. United States, 180 Ct. Cl. 296, 376 F.2d 883 (relying solely on characterization of payments as "primarily for benefit of grantor"). Several Tax Court decisions point in the same direction, although treatment of various factual situations under 117 has not been marked by a great deal of consistency. See generally Tabac, Scholarships and Fellowship Grants: An Administrative Merry-Go-Round, 46 Taxes 485 (1968).
The Commissioner has acquiesced in Evans v. Commissioner, 34 T. C. 720 (see 1965-1 Cum. Bull. 4), which allowed exclusion where, although the taxpayer was obligated to work for the grantor following completion of her studies, there had been no previous employment relationship. See Rev. Rul. 65-146, 1965-1 Cum. Bull. 66. We are informed by the Solicitor General, however, that the Evans acquiescence will be modified. See also Broniwitz v. Commissioner, [394 U.S. 741, 757] P-H 1968 TC Mem. Dec. § 68,221 (Sept. 30, 1968) (requirement of summer employment with grantor; held excludable).
[ Footnote 31 ] The contract's provision that employees who avail themselves of educational leave will be assigned duties "commensurate with [their] education and experience," and compensated at rates "commensurate with" those duties, is hardly sufficient to avoid the clear inference that their grants are fully bargained for and in the nature of compensation. The program is featured in Westinghouse's recruiting efforts as a benefit attractive to many potential employees. Moreover, as suggested in the text, participation in the program undeniably means giving up the right to take more remunerative employment elsewhere for a considerable period of time. Had the company modified its program so that the amounts of the "fellowship" grants were spread over the years preceding and following the educational leave - as increments to the respondents' salary, set aside in a company-administered "educational fund" - there could be little doubt that those amounts would have represented compensation. We see no persuasive reason why a different tax result should be reached under Treas. Reg. 1.117-4 (c) on the actual facts involved here. There is no merit in the respondents' oblique suggestion that payment for present services is somehow different, with respect to the question before us, from deferred or anticipatory payments.
[ Footnote 32 ] We accept the suggestion in the Government's brief that the second paragraph of Treas. Reg. 1.117-4 (c) - which excepts from the definition of "scholarship" any payments that are paid to an individual "to enable him to pursue studies or research primarily for the benefit of the grantor" - is merely an adjunct to the initial "compensation" provision: