Bingler v. Johnson
22 L. Ed. 2d 695, 394 U.S. 741, 1969 U.S. LEXIS 3275 (1969)
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Rule of Law:
Payments made by an employer to an employee on educational leave are not excludable from gross income as a 'scholarship' or 'fellowship' under § 117 of the Internal Revenue Code if the payments are a 'quid pro quo' that represents compensation for past, present, or future services.
Facts:
- Respondents Johnson, Wolfe, and Pomerantz were engineers employed by Westinghouse Electric Corporation at its Bettis Atomic Power Laboratory.
- They participated in the Westinghouse Bettis Fellowship and Doctoral Program, which provided subsidized postgraduate study.
- To enter the final phase of the program, employees applied for an educational leave of absence to complete their doctoral dissertations.
- During this leave, Westinghouse paid the employees a 'stipend' calculated as a percentage (70-90%) of their prior salaries.
- While on leave, the employees retained their seniority status and all other employee benefits, such as insurance and stock options.
- Participants' proposed dissertation topics required approval from Westinghouse, based in part on the topic's relevance to the work done at the laboratory.
- All participants in the program signed a written agreement obligating them to return to Westinghouse's employment for at least two years following the completion of their educational leave.
Procedural Posture:
- Westinghouse withheld federal income tax from the stipend payments it made to the respondents.
- The respondents filed claims for a tax refund with the Internal Revenue Service, arguing the payments were excludable scholarships; the claims were rejected.
- The respondents (Johnson, et al.) sued the District Director of Internal Revenue in the U.S. District Court for the Western District of Pennsylvania to recover the taxes paid.
- Following a trial, the jury found that the amounts received by the respondents were taxable income.
- The respondents appealed to the U.S. Court of Appeals for the Third Circuit.
- The Court of Appeals reversed, holding that the relevant Treasury Regulation was invalid and that the payments were scholarships excludable from income as a matter of law.
- The District Director of Internal Revenue (petitioner) successfully petitioned the U.S. Supreme Court for a writ of certiorari to resolve a conflict among the circuit courts.
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Issue:
Does a payment from an employer to an employee on educational leave, which is calculated as a percentage of prior salary and requires the employee to return to work for a specified period, constitute a 'scholarship' excludable from gross income under § 117 of the Internal Revenue Code?
Opinions:
Majority - Mr. Justice Stewart
No, payments from an employer to an employee on educational leave that are conditioned on future service are not excludable scholarships but are taxable compensation. The Court held that the definition of 'scholarship' and 'fellowship' implies disinterested, 'no-strings' educational grants. Here, the payments were not disinterested but were a 'quid pro quo' for services. The Court upheld Treasury Regulation § 1.117-4(c), which excludes payments that are compensation for past, present, or future employment from the definition of a scholarship. The arrangement had all the hallmarks of compensation: the stipends were based on prior salary, the employees retained benefits, and most importantly, they were contractually obligated to return to work for Westinghouse for a substantial period. The Court reasoned that these bargained-for payments, given in return for the 'quid' of services, do not qualify for the § 117 exclusion.
Dissenting - Mr. Justice Douglas
Yes, the payments should be considered scholarships. The dissent would have affirmed the judgment of the Court of Appeals, which held that the payments were excludable scholarships under § 117 and that the Treasury Regulation defining them as compensation was invalid.
Analysis:
This decision solidifies the 'quid pro quo' test as the primary standard for distinguishing between a tax-free scholarship and taxable compensation. It grants significant deference to Treasury Regulations in defining ambiguous statutory terms within the Internal Revenue Code. The ruling narrows the scope of the § 117 exclusion, making it difficult for employer-funded educational payments to employees to qualify as tax-free scholarships, particularly when future employment is a condition. This precedent has had a lasting impact on how employee education benefits, tuition reimbursement programs, and corporate fellowships are structured and taxed.
