Ann is a graduate student at State University in the School of Economics. She received a scholarship from the University. Further, she works as a part-time teaching assistant in the Economics Department at the University. Further, she earns a salary of $7,000 from a part-time job and her tuition fee is also waived. The amount of salary that she earns is equivalent to what other part-time instructors earn. Besides, the total amount of tuition that is waived is $8,000. On the expense side, she spent $500 on books and supplies and $7,400 in living expenses.
How much gross income should Ann report?
The gross income that Ann should report is $7,500.
Based on IRS Code § 117(a), the general rule is that the gross income of an individual does not include sums of money that are received as a qualified scholarship who is a student for a degree at an educational organization (Legal Information Institute 1). Section 117(b)(1) states that a qualified scholarship is an amount that is received as a grant or scholarship and was used for qualified tuition and other related expenses. According to Section 117(b)(1), qualified tuition and related expenses comprise fees, books, supplies, equipment required for the course, tuition and fees that are required for enrollment at an educational organization (Legal Information Institute 1). Section 117(c) outlines that the general rule shall not apply to the percentage of any amount received for services rendered as a condition for receiving the scholarship (Legal Information Institute 1). Further, Section 117(d) states that gross income will not include qualified tuition reduction (Legal Information Institute 1).
Based on the Proposed Income Tax Regulations § 1.117-6(d)(2), a scholarship or fellowship grant amounts to pay for services rendered when the grantor expects the recipient to carry out some services in return for the scholarship or fellowship received (Internal Revenue Services 10). The proposed regulation further outlines that a scholarship that is conditioned upon past, present or future teaching, research, or the rendering of other services by the recipient constitutes payment of services. The guidelines in this Proposed Regulation are supported by the case Richard E. Johnson v. Bingler, 23 AFTR 2d 69-1212, 69-1 USTC 9348 (USSC, 1969)) (Pope, Rupert, and Anderson 1:4-7).
Therefore, based on Section 117, the criteria that must be met is that the payment must be a qualified scholarship, the recipient must be a candidate for a degree, and the amount received must be used for attendance at an educational organization. Besides, the amount received as a scholarship must be used for the approved purposes (Lyon 231). Further, if services are rendered, then it is important to estimate the market value of the services. In summary, scholarships are excluded from gross income. The scholarship is limited to ‘qualified tuition and related expenses’ (Chirelstein and Zelenak 201).
The case of Ann is consistent with the guidelines that are provided in Section 117 and the Proposed Regulations (Miller and Oats 117). The salary of $7,000 represents the free market value of the services rendered because other part-time workers are paid at the same rate. The total amount that she received from the university is $9,000 ($1000 + $8,000). Therefore, the amount that will be excluded when estimating gross income is the sum of $8,000 that was spent on tuition and $500 for books and supplies. The living expenses amounting to $7,400 are not classified as ‘qualified tuition and related expenses’. Therefore, the gross income will be $7,500 ($7,000 + ($9,000 – $8,500).
Chirelstein, Marvin, and Lawrence Zelenak. Federal Income Taxation, USA: Foundation Press, 2015. Print.
Internal Revenue Services. Response Paper Number 201516030. 2015. Web.
Legal Information Institute. 26 U.S. Code § 117 – Qualified Scholarships. 2016. Web.
Lyon, Hastings. Principles of Taxation, USA: BiblioBazaar, 2009. Print.
Miller, Angharad, and Lynne Oats. Principles of International Taxation, UK: Bloomsbury Publishing PLC.
Pope, Thomas, Timothy Rupert, and Kenneth Anderson. Prentice Hall’s Federal Taxation 2016 Comprehensive, USA: Pearson Education, 2015. Print.