Bingler v. Johnson

• Citation: 394 U.S. 741,89 S.Ct. 1439,22 L.Ed.2d 695
• Decision Date: 23 April 1969
• Docket Number: No. 473,473
• Parties: John H. BINGLER, District Director of Internal Revenue, Petitioner, v. Richard E. JOHNSON et al
• Court: United States Supreme Court

394 U.S. 741

89 S.Ct. 1439

22 L.Ed.2d 695

John H. BINGLER, District Director of Internal Revenue, Petitioner,

v Richard E. JOHNSON et al.

No. 473.

Argued March 3 and 4, 1969.

Decided April 23, 1969.

Harris Weinstein, Washington, D.C., for petitioner.

James C. Larrimer, Pittsburgh, Pa., for respondents.

Mr. Justice STEWART delivered the 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 respondents¹ 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.² 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.³ 'Tuition remuneration,' as well § reimbursement for various incidental academic expenses, is provided by the company.⁴

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,⁵ 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. ⁶ 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.⁷ 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—1962,⁸ 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.⁹ 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 * * *.'¹⁰

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 exclud- able as scholarships.¹¹ 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.¹² 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.'¹³

In addition, subsection (b)(2) limits the exclusion from income with regard to nondegree candidates in two re- spects: 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.¹⁴ 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...