Bingler v. Johnson/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 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 'costplus' 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 advance training to persons already employed at Bettis, offers a two-phase schedule of subsidized postgraduate study in engineering, physics, or mathematics.

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. 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. 'Tuition remuneration,' as well § reimbursement for various incidental academic expenses, is provided by the company.

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, 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. 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, also is obligated to return to the employ of Westinghouse for a period of at least two years following completion of his leave. 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, 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. The respondents filed claims for refund, contending that the payments they had received were 'scholarships,' and hence were excludable from income under § 117 of the Code, which provides in pertinent part:

'(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 * *  * .'

When those claims were rejected, the respondents instituted this suit in the District Court for the Western District of Pennsylvania, against the District Director of Internal Revenue. After the basically undisputed evidence regarding the Bettis Program and been presented, the trial judge instructed the jury in accordance with Treas.Reg. on Income Tax (1954 Code) § 1.117-4(c), 26 CFR § 1.117-4(c) which provides that amounts representing 'compensation for past, present, or future employment services,' and amounts 'paid * *  * to *  *  * an individual to enable him to pursue studies or research primarily for the benefit of the grantor,' are not excludable as scholarships. The jury found that the amounts received by the respondents were taxable income. Respondents then sought review in the Court of Appeals for the Third Circuit, and that court reversed, holding that the Regulation referred to was invalid, that the jury instructions were therefore improper, and that on the essentially undisputed facts it was clear as a matter of law that the amounts received by the respondents were 'scholarships' excludable under § 117. 396 F.2d 258.

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 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. 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, 89 S.Ct. 374, 21 L.Ed.2d 361.

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:

'In the case of an individual who is a candidate for a degree     at an educational institution *  *  *, 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   condition to      receiving the scholarship or the fellowship grant.'

In addition, subsection (b)(2) limits the exclusion from income with regard to nondegree candidates in two respects: first, the grantor must be a governmental agency, an international organization, or an organization exempt from tax under § 501(a), (c)(3) of the Code; and second, the maximum exclusion from income available to a nondegree candidate is $300 per month for not more than 36 months. Since these exceptions are expressly set out in the statute, the Court of Appeals, relying on the canon of construction that expressio unius est exclusio alterius, concluded that no additional restrictions may be put on the basic exclusion from income granted by subsection (a)-a conclusion forcefully pressed upon us by the respondents.

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:

'(A) proper reading of the statute requires that before the     exclusion comes into play there must be a determination that      the payment sought to be excluded has the normal      characteristics associated with the term 'scholarship." Reese      v. Commissioner, 45 T.C. 407, 413, aff'd, 373 F.2d 742.

The regulation here in question represents an effort by the Commissioner to supply the definitions that Congress omitted. And it is fundamental, of course, that as 'contemporaneous constructions by those charged with administration of' the Code, the Regulations 'must be sustained unless unreasonable and plainly inconsistent with the revenue statutes,' and 'should not be overruled except for weighty reasons.' Commissioner of Internal Revenue v. South Texas Lumber Co., 333 U.S. 496, 501, 68 S.Ct. 695, 698, 92 L.Ed. 831. In this respect our statement last Term in United States v. Correll, 389 U.S. 299, 88 S.Ct. 445, 19 L.Ed.2d 537, bears emphasis:

'(W)e do not sit as a committee of revision to perfect the     administration of the tax laws. Congress has delegated to the Commissioner, not to the courts, the     task of prescribing 'all needful rules and regulations for      the enforcement' of the Internal Revenue Code. 26 U.S.C. §     7805(a). In this area of limitless factual variations 'it is     the province of Congress and the Commissioner, not the      courts, to make the appropriate adjustments." Id., at 306      307, 88 S.Ct. at 449.

Here, the definitions supplied by the Regulation clearly are prima facie proper, comporting as they do with the ordinary understanding of 'scholarships' and 'fellowships' as relatively disinterested, 'no-strings' educational grants, with no requirement of any substantial quid pro quo from the recipients.

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. Particularly in light of the principle that exemptions from taxation are to be construed narrowly, we decline to assume that Congress intended to sanction-indeed, as the respondents would have it, to compel-such an inequitable situation.

The legislative history underlying § 117 is, as the Court of Appeals recognized, 'far from clear.' We do not believe, however, that it precludes, as 'plainly inconsistent' with the statute, a definition of 'scholarship' that excludes from the reac 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.' 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 income, but reached divergent results in situations involving grants to post-doctoral researchers.

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,' 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), the House Ways and Means Committee stated 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.' 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, 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. In providing such a definition, the Commissioner has permissibly implemented an underlying congressional concern. 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).'

Under that provision, as set out in the trial court's instructions, the jury here properly found that the amounts received by the respondents were taxable 'compensation' rather than excludable 'scholarships.' The employer-employee relationship involved is immediately 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. 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 'scholarship' funds. That provision clearly covers this case.

Accordingly, the judgment of the Court of Appeals is reversed, and that of the District Court reinstated.

It is so ordered.

Judgment of Court of Appeals reversed and judgment of District Court reinstated.

Mr. Justice DOUGLAS would affirm the judgment for the reasons stated by the Court of Appeals in 396 F.2d 258.