Robert Logan, Jr., and Barbara D. Logan v. United States , 518 F.2d 143 ( 1975 )

WILLIAM E. MILLER, Circuit Judge.

This is an appeal by the government from a judgment awarding taxpayers, Barbara D. Logan and husband Robert L. Logan, Jr., a refund of $814.71, plus interest, on income taxes paid for the calendar year 1969. The sole issue for decision is whether the amount received by Mrs. Logan from the University of Toledo in the taxable year 1969 for a “graduate assistantship” is excludable from taxpayers’ gross income under Section 117 of the Internal Revenue Code.

Throughout the calendar year 1969 Mrs. Logan was enrolled as a full-time graduate student in the English Department at the University of Toledo. From January through August of that year she was a candidate for the degree of Master of Arts and from September through December she was a candidate for the degree of Doctor of Philosophy.

The University of Toledo hired a number of graduate students as graduate assistants to teach certain courses. These graduate assistants were required to teach one course per quarter. They were not selected on the basis of financial need but were compensated according to their seniority in the graduate program and at a rate determined on the basis of competition with other local universities.

Mrs. Logan served as a graduate assistant for the taxable year 1969, teaching one course per quarter and receiving $2,638.59, from which the university withheld federal income taxes on the assumption that she was an employee of the State of Ohio.

At the time of Mrs. Logan’s candidacy for the master’s degree, candidates for that degree were not required to teach courses as a condition for obtaining the degree. Candidates for the Ph.D. degree, on the other hand, were required to teach college courses in conjunction with certain required instructional seminars, a requirement which could be waived in the case of candidates who had had prior college teaching experience. During 1969, Mrs. Logan was not enrolled in any of the instructional seminars requiring teaching. The record does not reveal the amount of teaching experience necessary to obtain a waiver of such instructional seminars, nor is there any indication that the reason Mrs. Logan was not enrolled in an instructional seminar was that a waiver had been obtained.

On their 1969 joint federal income tax return, Mrs. Logan and her husband excluded from their gross income the $2,638.59 received from the University of Toledo for her graduate assistantship. It is claimed that this amount was ex-cludable under Section 117 of the Internal Revenue Code of 1954 as a scholarship or fellowship grant. The Internal Revenue Service audited the return and determined that the amount received was not excludable. A deficiency was assessed and duly paid by the taxpayers. A timely claim for refund was filed and denied. The present action was then instituted in the district court resulting in summary judgment in favor of the taxpayers.

Section 117(a)¹ of the Internal Revenue Code of 1954 provides for an exclusion from taxable income of “a scholarship at an educational institution” or for a fellowship grant. The terms “scholarship” and “fellowship grant” are not defined in the statute and it is therefore necessary to look to the case law for interpretation of the terms.

The courts have followed the guidelines set forth in the applicable regulations promulgated by the Internal Revenue Service in deriving the meaning of these terms.² Thus, the Supreme Court in Bingler v. Johnson, 394 U.S. 741, 89 S.Ct. 1439, 22 L.Ed.2d 695 (1969), relied upon and upheld Reg. § 1.117-4(c), which excepts from the definition of scholarship or fellowship grant any amount paid as compensation for services or primarily for the benefit of the grantor. In formulating its interpretation of Section 117(a), the Court thus stated:

The thrust of [Reg. § 1.117^4(c)] 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 ex-cludable from income as “scholarship” funds. That provision clearly covers this case. 394 U.S. at 757-58, 89 S.Ct. at 1448 — 49. [Footnote omitted]

This court in interpreting these regulations has expressed the belief that “consideration of the facts as indicia of compensation for services is a more meaningful test than that of whether the stipend was primarily for the benefit of the grantors.” Stewart v. United States, 363 F.2d 355, 357 (6th Cir. 1966). This preference is consistent with the statement of the Supreme Court in Bingler that the “primary benefit” test is “merely an adjunct to the initial ‘compensation’ provision” of the regulation. 394 U.S. at 758, n. 32, 89 S.Ct. at 1449, n. 32.

It is evident, however, under either formulation of the test, that the payments made here to the student-taxpayer were payments for services rendered for the primary benefit of the university. Affidavits filed in connection with motions for summary judgment showed that the school required a service in return for its payments, that approximately 1300 of the university’s undergraduate students were taught English courses by graduate assistants each year, and that graduate assistants were paid approximately the same amount as other part-time teachers. Other evidence established that graduate assistants were added to fill the gap when other personnel resigned, that budget requests indicate that graduate students were hired to meet increased teaching requirements resulting from expanded undergraduate enrollment, and that salaries for graduate assistants were determined on the basis of competition with other local universities.

Any employment relationship is, of course, theoretically for the benefit of both the employer and employee. It would, therefore, be possible in this case to demonstrate a substantial benefit conferred upon the university’s graduate assistants. This does not alter the fact, however, that payments made to such teachers constitute compensation for teaching services and, as such, are not excludable under Section 117(a). The mere conclusory statement by the Chairman of the English Department of the University of Toledo that the primary function of the Graduate Assistants program was to provide the financial means for such students to pay for their education is insufficient to compel the opposite conclusion since it appears without dispute that financial need was never a factor considered by the university in appointing graduate assistants. Payments under virtually identical programs have been found by numerous courts not to be excludable. See, e. g., Worthington v. Commissioner, 476 F.2d 589 (10th Cir. 1973); Steinmetz v. United States, 343 F.Supp. 384 (N.D.Cal.1972); Reese v. Commissioner, 45 T.C. 407 (1966), aff’d per curiam, 373 F.2d 742 (4th Cir. 1967).

Although a finding that the payments to the student-taxpayer did not constitute a scholarship or fellowship grant within the meaning of Section 117(a) is sufficient to disallow the exclusion, it is clear that the taxpayers’ claim also fails for another reason.³ Assuming arguendo that the amounts received would otherwise qualify as a scholarship or fellowship grant under Section 117(a), it is evident to us that the payments would fall within the limitation of Section 117(b)(1).⁴ This limitation disallows the scholarship exclusion for payments for teaching or other services in the nature of part-time employment required as a condition to receiving a scholarship. Taxpayers argue that this case comes within the exception to the limitation found in the last paragraph of Section 117(b)(1). Under this exception, the scholarship exclusion is still allowed for payments for such teaching or other services if required of all candidates for a particular degree. It is apparent from the record that payments to Mrs. Logan fall squarely within the limitation of Section 117(b)(1) and not within the narrow exception to that limitation. The evidence is undisputed that the student-taxpayer was paid for teaching which was not required of all candidates for the degrees for which she was a candidate.

While the district court found that “[a]ll those involved in the master’s or doctoral program are required to teach”, there is no basis in the record to sustain such finding. At the time Mrs. Logan was a master’s candidate, teaching was not a requirement for that degree. Doctoral candidates were required to teach only in conjunction with certain instructional seminars in which Mrs. Logan was not enrolled. While it is true that a few doctoral candidates had had this requirement waived by reason of prior college teaching experience, there was no showing that the teaching performed by Mrs. Logan was the equivalent of the required teaching of the candidates taking the required seminars or that she was able to obtain a waiver of those seminars on the basis of her teaching as a graduate assistant. The exception to the Section 117(b)(1) limitation applies only to “such teaching . . . required of all candidates.” The fact that some teaching is required of all candidates is not a sufficient reason for excluding payments for teaching in excess of the minimum required for a degree.

Since taxpayers offered no evidence to rebut the government’s showing that the payments received were for teaching in the nature of part-time employment and that such teaching was not a condition to receiving either the master’s or doctoral degree, the government was entitled to prevail on its motion for summary judgment.

The judgment of the district court is therefore reversed and the action is remanded for entry of summary judgment in favor of the government. .

1 . 26 U.S.C. § 117(a) provides, in pertinent part:

§ 117. Scholarships and fellowship grants (a) General rule. — In the case of an individual, gross income does not include—

(1) any amount received—

(A) as a scholarship at an educational institution (as defined in section 151(e)(4), or

(B) as a fellowship grant,

including the value of contributed services and accommodations:

* * * * * *

2 . The revenue regulations provide, in pertinent part:

§ 1.117-2 Limitations.

(a) Individuals who are candidates for degrees — (1) In general. Under the limitations provided by section 117(b)(1) in the case of an individual who is a candidate for a degree at an educational institution, the exclusion from gross income shall not apply (except as otherwise provided in subparagraph (2) of this paragraph) to that portion of any amount received as payment for teaching, research, or other services in the nature of part-time employment required as a condition to receiving the scholarship or fellowship grant. Payments for such part-time employment shall be included in the gross income of the recipient in an amount determined by reference to the rate of compensation ordinarily paid for similar services performed by an individual who is not the recipient of a scholarship or a fellowship grant. A typical example of employment under this subparagraph is the case of an individual who is required, as a condition to receiving the scholarship or the fellowship grant, to perform part-time teaching services. A requirement that the individual shall furnish periodic reports to the grantor of the scholarship or the fellowship grant for the purpose of keeping the grantor informed as to the general progress of the individual shall not be deemed to constitute the performance of services in the nature of part-time employment.

(2) Exception. If 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 the degree, such teaching, research, or other services on the part of the recipient of a scholarship or fellowship grant who is a candidate for such degree shall not be regarded as part-time employment within the meaning of this paragraph. Thus, if all candidates for a particular education degree are required, as part of their regular course of study or curriculum, to perform part-time practice teaching services, such services are not to be regarded as part-time employment within the meaning of this paragraph.

§ 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.

******

(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.

§ 1.117-4 Items not considered as scholarships or fellowship grants.

The following payments or allowances shall not be considered to be amounts received as a scholarship or a fellowship grant for the purpose of section 117:

He * * * # #

(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, 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 sub-paragraph (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.

3 . It is well settled that for a taxpayer to prevail in claiming an exclusion under Section 117 it must first be shown that the amount received was a scholarship or fellowship grant under Section 117(a). This requirement must be met even though the teaching or service for which payment was received was required of all candidates for a degree and thus comes within the exception to the limitation of Section 117(b)(1). See, e. g., Reese v. Commissioner, 45 T.C. 407 (1966), aff'd per curiam, 373 F.2d 742 (4th Cir. 1967); Steiman v. Commissioner, 56 T.C. 1350 (1971); Steinmetz v. United States, 343 F.Supp. 384 (N.D.Cal.1972).

4 . 26 U.S.C. § 117(b)(1) provides as follows:

(b) Limitations.—

(1) Individuals who are candidates for degrees. — In the case of an individual who is a candidate for a degree at an educational institution (as defined in section 151(e)(4)), subsection (a) shall not apply to that portion of any amount received which represents payment for teaching, research, or other services in the nature of part-time employment required as a condition to receiving the scholarship or the fellowship grant. If 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, such teaching, research, or other services shall not be regarded as part-time employment within the meaning of this paragraph.