## Facts

- Westinghouse Electric Corp. employed the taxpayers as engineers at the Bettis Atomic Power Laboratory operated under contract with the Atomic Energy Commission.
- Westinghouse ran a two-phase fellowship program: (1) a work–study phase with part-time university attendance while working, and (2) an educational leave phase to pursue full-time doctoral dissertation work.
- During educational leave, participants received a “stipend” equal to roughly 70%–90% of prior salary plus a family allowance, and Westinghouse continued employee-related benefits (e.g., seniority, insurance, stock options).
- Dissertation topics required approval by Westinghouse and the Atomic Energy Commission, based in part on relevance to laboratory work; participants submitted progress reports.
- After completing leave, participants had to return to Westinghouse for at least two years.
- Westinghouse withheld federal income tax from stipend payments; the taxpayers sought refunds, claiming the payments were excludable “scholarships” or “fellowship grants” under I.R.C. § 117.

## Issues

1. Whether Treas. Reg. § 1.117-4(c), excluding from § 117 amounts that are compensation for employment services or primarily for the grantor’s benefit, is a valid interpretation of I.R.C. § 117.
2. Whether the educational leave stipends paid under Westinghouse’s program were excludable “scholarships” or “fellowship grants” under § 117 or taxable compensation.

## Decision

- The Supreme Court held Treas. Reg. § 1.117-4(c) valid as a reasonable implementation of § 117.
- The Court held the jury properly found the stipends were taxable compensation rather than excludable scholarships or fellowship grants.
- The Court reversed the Court of Appeals, which had invalidated the regulation and overturned the jury verdict.

## Legal Principles

- Where Congress leaves “scholarship” and “fellowship grant” undefined in § 117, Treasury may supply a reasonable interpretive rule consistent with the statute.
- Amounts paid to an individual are not excludable under § 117 to the extent they function as compensation for past, present, or future employment services.
- Amounts paid to enable study or research primarily for the grantor’s benefit are not excludable under § 117.
- “Scholarships” and “fellowship grants” under § 117 are understood as disinterested educational grants without a substantial quid pro quo; employer-tethered payments with employment-like features can be treated as compensation.
- In determining whether payments are compensation or a scholarship/fellowship, fact indicators include continued employee status and benefits, salary-linked payment levels, required return-to-service obligations, and employer control or work-related relevance of the studies.

## Conclusion

The Court upheld Treasury’s regulation limiting the § 117 exclusion and treated Westinghouse’s educational leave stipends as taxable compensation because they were closely tied to the employment relationship, reflected wage-like replacement, required post-leave service, and served the employer’s interests.


Bingler v. Johnson, 394 U.S. 741 (1969)