Bingler v. Johnson
22 L. Ed. 2d 695, 89 S. Ct. 1439, 1969 U.S. LEXIS 3275 (1969)
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Rule of Law:
Amounts paid 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' representing compensation for past, present, or future services.
Facts:
- Richard Johnson, Richard Wolfe, and Martin Pomerantz were engineers employed by Westinghouse Electric Corporation at the Bettis Atomic Power Laboratory.
- They participated in the Westinghouse Bettis Fellowship and Doctoral Program, which subsidized postgraduate study for employees.
- The employees were granted educational leaves of nine to twelve months to work full-time on their doctoral dissertations.
- During their leaves, Westinghouse paid them 'stipends' ranging from 70% to 90% of their prior salaries, and they retained their seniority and other employee benefits like insurance and stock options.
- The dissertation topics required approval from Westinghouse and had to have at least some general relevance to the work done at the laboratory.
- As a condition of the program, the employees signed an agreement obligating them to return to Westinghouse's employ for a period of at least two years following the completion of their leave.
- Westinghouse accounted for the payments as 'indirect labor' expenses on its books.
- All three employees completed their doctorates and returned to work for Westinghouse for the required period.
Procedural Posture:
- Westinghouse withheld federal income tax from the stipends paid to the respondents.
- The respondents filed claims for a tax refund with the Internal Revenue Service, which were rejected.
- The respondents 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, a jury found that the payments constituted taxable income, and judgment was entered for the government.
- The respondents, as appellants, 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 excludable scholarships as a matter of law.
- The District Director, as petitioner, successfully petitioned the U.S. Supreme Court for a writ of certiorari.
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Issue:
Do payments made by an employer to an employee on educational leave, which are based on a percentage of prior salary and are conditioned on the employee's agreement to return to work for a specified period, constitute excludable 'scholarships' or 'fellowship grants' under § 117 of the Internal Revenue Code?
Opinions:
Majority - Mr. Justice Stewart
No. The payments made by Westinghouse to its employees on educational leave do not constitute excludable 'scholarships' or 'fellowship grants' because they represent a bargained-for exchange for services rather than disinterested educational grants. The Court upheld the validity of Treasury Regulation § 1.117-4(c), which states that amounts representing compensation for past, present, or future employment services are not excludable as scholarships. The ordinary understanding of 'scholarship' comports with a disinterested, 'no-strings' grant, not a payment involving a substantial 'quid pro quo' from the recipient. Here, the existence of a quid pro quo was clear: the stipends were based on prior salary, the employees retained their benefits, and most importantly, they were contractually obligated to return to their employment for a substantial period. These facts indicate that the payments were compensation, not disinterested grants intended to aid education.
Dissenting - Mr. Justice Douglas
Yes. Mr. Justice Douglas would affirm the judgment of the Court of Appeals, which held that the payments were excludable scholarships. He did not write a separate opinion but expressed his agreement with the reasoning of the lower court, which had found the Treasury Regulation invalid and ruled that the payments qualified for the § 117 exclusion.
Analysis:
This decision significantly narrowed the scope of the § 117 scholarship exclusion by cementing the 'quid pro quo' test. It affirmed the Treasury Department's authority to define ambiguous statutory terms, establishing that payments from an employer to an employee for education are generally taxable if they are conditioned on future or continued employment. The case provides a clear, though fact-intensive, framework for distinguishing between non-taxable educational grants and taxable compensation. As a result, employer-sponsored education programs that require any form of service commitment from the employee are highly likely to result in taxable income for the recipient.
