Tax Consequences of Cathy Coed Scholarship

Posted: August 27th, 2021

Student’s Name

Instructor’s Name

Course

Date

Taxation Research Memo

TO:                  (Instructor)

FROM:            (Student)

DATE:                        (mm/dd/yyyy)

SUBJECT:      Tax Consequences of Cathy Coed Scholarship

Facts of the Case:

Cathy Coed is one of the brilliant full-time students in Big Research University who has been awarded a scholarship of $ 35,000 per year, out of which she pays Tuition fees of $ 26,000, Lab fees of $ 300, books and supplies worth $1,000, and room and board $ 7,500.

Issues:

In the given case study, it needs to be determined how much the income is out of the scholarship amount received, and it needs to be done as per the RIA checkpoint and relevant Internal Revenue Code.

Authorities:

The U.S. Code covers the case in Title 26, Subtitle A, Chapter 1, Subchapter B, Part III, & 117 related to Qualified scholarships. The fundamental rule and related exemptions from the Gross income are provided in IRC 117 and Rev. Rul. 89-67, 1989-1 C.B. 233.

Conclusions:

Under the Internal Revenue Code Section 117 (b), for the Qualified Scholarships, Gross income excludes any amount that has been received as a qualified scholarship by any individual who is a candidate for a degree at an educational organization. Any other amount received by an individual as a scholarship and or a grant to the level that the individual establishes that, according to the grant’s institutional provisions, the amount was utilized for qualified tuition and the related expenses.

Analysis:

The IRC 117 (2006b) stipulates that the recipients of scholarships should be candidates at the educational institution before they qualify for a tax deduction. In this case, an educational institution refers to an institution that maintains curriculum and faculty with a regular enrollment of the student’s body in their educational activities (IRS, 2006c). Thus, payments made to individuals to facilitate their studies or research activities are regarded as qualified scholarships, given that the main objective is to further the individual’s education (Treas. Reg. 1.117 – 4 (c)(2)). Thus, this requires that the target student is attending the school program.

However, according to IRC 117, one would be exempted from tax exclusion if the amount of scholarship is regarded as compensation for future, present, or past services rendered. The same applies when the amount is a payment of the services that a grantor provides. Hence, in examining Cathy Coed’s case, the allocation is tax-exempt since it is made to facilitate her educational progress. The payments for Tuition, Books, and lab fees, and the rest of the services are not subject to the grantor, or are they compensation for services offered at any other time. Besides, there have been several cases exploring the provisions of Treas. Reg. 1.117 – 4 (c)(2) to recipients of a scholarship such as the case of Bingler v. John-son (1969). According to this case, Westinghouse Electric Corporation engineers developed a scholarship program for its engineers interested in advancing their training. Employees were awarded 80% of their annual salary and educational leave to pursue their doctoral degrees. The program included engineers conducting part-time training and working for the company. They were also given stipends. The engineers filed relevant Federal tax returns with Westinghouse stipends categorized as scholarships. However, the IRS rejected this, informing the engineers that they should file stipends as income. Thus, this issue was challenged in court and concluded by the jury as income and be represented as so.