Rev. Rul. 61-65

Advice has been requested regarding the proper treatment, for Federal income tax purposes, of amounts paid to United States citizens for study, research, or lecturing and teaching in foreign countries under the circumstances described below.

The Fulbright Act, Public Law 584, 79th Congress, Second Session, 50 U.S.C. 1641, authorizes the Secretary of State to enter into agreements with foreign governments for the use in an educational exchange program of currencies, or credits for currencies, of such governments held or available for expenditure by the United States or any agency thereof. Specifically, it provides for financing studies, research, instruction, and other educational activities of or for United States citizens in schools and institutions of higher learning located in foreign countries. The objective of the program is to promote understanding between the people of the United States and foreign countries through furthering their mutual knowledge. To achieve this purpose, stipends are given to three categories of individuals, i.e. , students, research scholars, and professors and teachers.

The student grantees are selected by a Board of Foreign Scholarships, consisting of ten members appointed by the President, which functions under the terms of the Fulbright Act. They receive grants which are usually made for one-year periods and are calculated to cover only necessary expenses of a year of study abroad. Each student chooses his own subject of study and he is under no obligation to enter the employ of either the home or host government at the termination of his course of study. The student's grant is designed to cover maintenance, tuition, travel expenses, for himself only, to and from a particular country and, to a limited extent, necessary local travel within the country of assignment.

The grants to research workers are, like student grants, made for the training and education of the individual, even though in some cases the grantees have already received graduate degrees. They work in the capacity of students at an advanced level and with a greater degree of independence. The research carried on by these grantees is conducted in fields selected by the research scholars for their own benefit and without any obligation on their part to perform services either for the United States or any foreign government or institution. The reports submitted by these grantees to the State Department are not a means of making available the results of a project, but are conditions which are of assistance in administering the program: They do not constitute consideration for the grants. Basically, the grants are for one-year periods and conform to the usual academic school year, plus reasonable travel time. The amounts of the grants are relatively modest and reasonably calculated to reflect living costs rather than the value of the projects.

Professors who lecture and teachers who receive grants are selected by the Board of Foreign Scholarships on the basis of personal qualifications affecting their value as representatives of the United States abroad and are awarded one-year grants which may be renewed under exceptional circumstances. The grantee is under no employment obligation to the United States or the host country at the end of his grant period, but will normally return to teach at an academic institution in this country. The grants to professors and teachers are defined by the Board of Foreign Scholarships and the Department of State as `basic living allowances.'

In some cases, grantees in the three categories mentioned above may also receive a supplemental grant under the United States Information and Educational Exchange Act of 1948, 22 U.S.C. chapter 18 (Smith-Mundt Act).

Section 61 of the Internal Revenue Code of 1954 provides that, except as otherwise provided by statute, gross income means all income from whatever source derived.

Section 117(a) of the Code permits an individual to exclude from his gross income, subject to certain conditions and limitations, amounts received as a scholarship at an educational institution or as a fellowship grant, including the value of contributed services and accommodations. Also excludable is any amount received to cover expenses for travel, research, clerical help, or equipment, which are incident to the scholarship or fellowship grant, but only to the extent that such amount is so expended by the recipient.

In the case of individuals who are not candidates for degrees, section 117(b)(2) of the Code provides that the exclusion applies only if the grantor is an organization of the type described in section 117(b)(2)(A) and is limited to an amount not in excess of $300 per month times the number of months for which the recipient received amounts under the fellowship grants during the taxable year. Any excess is includible in gross income. No exclusion is allowable beyond a total of 36 months, whether or not consecutive. The grants under consideration are made by the United States Government and are of the type described in section 117(b)(2)(A) of the Code.

Section 1.117-4(c)(2) of the Income Tax Regulations provides, in part, that 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 of the Code, 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 services.

It is held that the amounts received for study and research abroad, under the Fulbright Act and the United States Information and Educational Act of 1948, by United States citizens are scholarship or fellowship grants within the meaning of section 117 of the Code. In the case of candidates for degrees, whether students or research scholars, such amounts are wholly excludable from gross income under section 117(a) of the Code. The amounts received by individuals who are not candidates for degrees, whether students or research scholars, are excludable to the extent provided by section 117(b)(2)(B) of the Code.

On the other hand, amounts paid to United States citizens for lecturing or teaching abroad are not paid to enable the recipients to pursue studies or research but are compensation for services rendered and are includible in their gross incomes under section 61 of the Code.