Category: Individuals Copyright 1998, The Tax Resource Group. All rights reserved. Telephone 800-578-3498. Internet: www.taxresourcegroup.com Taxpayer (TP) is a medical student now finishing his educational requirements. TP recently received scholarship funds to help defray the costs of his education. TP is not required to perform any services under the conditions of the scholarship. TP has no further tuition and related expenses left to pay since he is at the end of his education, but the taxpayer has substantial student loans, the proceeds of which were used in the past to pay for tuition, books, and other required educational materials. Section 117 allows exclusion of amounts received as a qualified scholarship to the extent such amounts are used as a condition of the grant to pay for qualified tuition and related expenses. I will assume that over the course of his medical education, TP has expended amounts vastly in excess of the scholarship received to pay for medical school tuition, books, and required supplies. The issue here is whether the fact that the taxpayer has already incurred qualified tuition and related expenses prior to receipt of the scholarship for which TP used either personal funds or a school loan would qualify TP for the exclusion under Section 117. In essence, is a scholarship received "after-the-fact" excludible? This is a novel situation. Normally, scholarships are awarded at or near the time the student is required to pay tuition and related expenses; accordingly, this issue does not normally arise. As expected, I cannot locate any case, ruling, or commentary addressing this point. We must rely on the language of the statute, the committee reports, and the underlying regulations. The statute provides in pertinent part as follows. (a): 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). (b)(1): 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. Nothing in the statute addresses the timing issue. More importantly, however, nothing in the statute precludes exclusion for grants received after the related expenses were incurred. There are no final regulations under the statute now in effect (the 1986 statute). Proposed regulations under the 1986 statute neither address the timing issue nor preclude exclusion of grants made after the fact. Section 117 in its current form was enacted by Section 123 of the Tax Reform Act of 1986. The committee reports thereunder provide in part as follows. ...the committee intends that the amounts of scholarships or fellowship grants received that do not exceed this amount [the amount expended for qualified tuition and related expenses] are excludible without the need to trace particular grant dollars to particular expenditures for tuition and equipment, provided that the grant requires the recipient to use the funds for such purposes. The General Explanation of the Tax Reform Act of 1986 (a.k.a., the Blue Book), provides in pertinent part as follows. The exclusion available under the Act for degree candidates is not limited to a scholarship or fellowship grant that by its express terms is required to be used for tuition or course-related expenses. Also, there is no requirement that the student be able to trace the dollars paid for tuition or course-related expenses to the same dollars that had been deposited in his or her checking account, for example, from a scholarship check. Both these passages indicate that Congress did not intend any kind of tracing requirement; rather, the exclusion is based on having qualified expenditures in an amount equal or exceeding the amount of the grant. Having explicitly addressed tracing and chosen not to deal with timing, I conclude there is no evidence that Congress intended any kind of restriction on timing. One troubling point in this matter is there is no written document accompanying the grant. Despite the statutory language that the amounts be expended for qualified tuition and related expenses in accordance with the conditions of the grant, it seems clear that the grant does not need to explicitly say the money must be used for qualified tuition and related expenses. See Proposed Regulation 1.117-4(c)(1) and the Blue Book language set forth above. The more troubling point about lack of a grant document is how does the taxpayer bear the factual burden that the grant is intended to defray educational expenses rather than, for example, to compensate the taxpayer for services performed? I think if the matter is challenged, whether the taxpayer is successful or not will depend on the ability to make that factual case. It is important to note at this juncture that the taxpayer does have the burden of proving entitlement to the exclusion. I feel strongly that particularly in light of the novel fact pattern presented here, the taxpayer's uncorroborated statements about the reason for the grant would be wholly insufficient to carry the day. As a conclusion, I think if the taxpayer feels he can bear his factual burden through whatever means, there is nothing that clearly prevents exclusion under Section 117. It seems to me if the taxpayer could get a written statement corroborating the reason for the grant, that would greatly increase the taxpayer's chances of success if this matter were ever questioned. If that would be possible and the taxpayer has any ability to influence what such a statement might say, he should suggest language to the effect that the grant was made to help defray the cost of the taxpayer's medical school tuition, books, and required supplies and is not related to any services performed by the taxpayer for the granting organization. |
