Doctoral Student's Fellowship Grant Is 100 Percent Taxable.
(Parker Tax Publishing April 27, 2014)

A Harvard doctoral student could not exclude part of a fellowship grant from income; nor could he avoid paying self-employment tax on income received from working in a laboratory performing research. Wang v. Comm'r, T.C. Summary 2014-39 (4/22/14).

Harris Wang received a bachelor's degree from the Massachusetts Institute of Technology in 2005. He then promptly enrolled as a full-time student pursuing a doctorate in biophysics at Harvard University. Harris completed the Harvard doctoral program in 2010.

In 2009, the American Society for Engineering Education (ASEE) awarded Harris the National Defense Science and Engineering Graduate Fellowship (i.e., fellowship grant). The fellowship grant paid all of Harris's tuition charges and mandatory fees in connection with his enrollment in Harvard University's doctoral program and provided him with an additional cash stipend of $18,375. For 2009, ASEE issued Harris a Form 1099-MISC, Miscellaneous Income, reporting that he had received other income of $18,375.

In 2010, 3W Consulting Co. paid $35,700 to Harris to perform research in connection with a nontaxable grant it was awarded to investigate therapies for cardiovascular disease. 3W Consulting issued Harris a Form 1099-MISC on which it reported the $35,700.

Harris timely filed Form 1040, U.S. Individual Income Tax Return, for 2009 and included $8,208 of the $18,375 ASEE stipend as an item of gross income. Harris excluded the $10,167 balance of the stipend because he allegedly used it to pay off student loans and other expenses related to his undergraduate and graduate studies. Harris did not provide any receipts, bank or credit card records, or similar documentation to substantiate these additional educational expenses.

On his 2010 tax return, Harris reported the $35,700 paid to him by 3W Consulting as other income, but did not report self-employment tax with respect to that income. Harris testified that he considered the payment to be similar to a graduate research grant and that he generally performed lab work and research that any graduate student would be doing as part of graduate study. Thus, Harris said, the payment was not subject to self-employment tax.

According to the IRS, Harris owed tax on the unreported $10,167 and also owed self-employment tax on the $35,700. At trial, Harris reported that he had received an ASEE stipend in 2007 that he did not include in gross income for that year and, when the IRS examined his 2007 return, it issued a "No Change" letter.

The Tax Court agreed with the IRS and held that the $10,167 was includible in Harris's 2009 taxable income and that Harris was subject to self-employment tax on the $35,700 received in 2010. The court noted that Code Sec. 117(a) and related provisions exempt from gross income any amount received as a qualified scholarship or fellowship grant by an individual who is a candidate for a degree at an educational organization.

The term "qualified scholarship" refers to any amount received by an individual as a scholarship or fellowship grant to the extent that such amount was used for qualified tuition and related expenses. Because Harris could not provide any documentation that he used the ASEE stipend for tuition and related expenses, the court concluded that the $10,167 was includible in Harris's gross income. Further, with respect to the fact that the IRS had examined a prior return and not made any change, the court said it is well settled that the acceptance of, or acquiescence in, returns previously filed by a taxpayer does not prevent the IRS from revisiting any item on the taxpayer's return and treating the item differently from prior years.

With respect to the medical research performed at 3W Consulting for which Harris was paid $35,700, the court noted there was no indication that 3W Consulting transferred the funds to Harris for a noncompensatory reason. The court recognized that some fellowship grants that are not excludable from gross income may nevertheless be exempt from self-employment tax. As an example, the court cited Spiegelman v. Comm'r, 102 T.C. 394 (1994), where a fellowship grant allowed the taxpayer to perform research and studies primarily to further his own education, training, and academic excellence and, thus, the grant was not compensation subject to self-employment tax. However, the court observed, 3W Consulting paid Harris to perform medical research in support of its pursuit of new therapies related to cardiovascular disease and thus, Harris's activities were easily distinguished from those of the taxpayer in the Spiegelman case.

For a discussion of the taxation of taxability of scholarships and fellowships, see Parker Tax ¶77,305. (Staff Editor Parker Tax Publishing)

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