and an individual does notarship at

ing as the prin had the power to die

an in die studies 17460) o

including fees, commissions, and simi- since the college acted mainly as a nuity received from the Civil Servlar items.

disbursing agent of the grant funds. ice Retirement Fund by an unSection 117(a) of the Code pro This is based on the facts which show married college student, the devides, subject to certain limitations that the foundation had the power to pendent of another taxpayer, is and qualifications, that gross income select the recipient and the grant is not "earned income" for computof an individual does not include contingent upon the recipient remain ing the percentage standard deducamounts received as a scholarship at ing as the principal investigator. Also, tion or low income allowance proan educational institution or as a fel- the foundation had the power to di- vided by section 141(e) of the lowship grant.

rect and control the use of the funds Code, although otherwise includWhether an amount received by an by means of its approval of the tax ible in adjusted gross income. individual is excludable from his gross payer's proposed research project and income under section 117 of the Code its responsibility for the scientific work. Rev. Rul. 73-355 depends upon the facts and circum- under the research project.

Advice has been requested whether stances under which the payment is In addition, the facts show that the a survivor annuity received under the made. The exclusion provision applies foundation placed special significance

circumstances described below is only to scholarship or fellowship on past research experience of the po

"earned income” to the recipient for grants. A scholarship or fellowship tential principal investigator as it regrant as defined in section 1.117-3 of

purposes of section 141(e) of the Inlated to the proposed project, stressed the Income Tax Regulations is an

ternal Revenue Code of 1954. This the importance of the continued partiamount paid to or for the benefit of cipation of the principal investigator

question arises only in the case of a an individual to aid him in the pur- in the proposed project, encouraged

taxpayer with respect to whom a desuit of studies.

pendency deduction under section recipients of grant funds to publish

151(e) is allowable to another taxSection 1.117-4(c) of the regula their research results, and reserved the tions provides, in

payer for the taxable year, inasmuch part, that any rights in patents and inventions arising amount or amounts paid or allowed from research performed under the

as section 141 (e) applies to no other to, or on behalf of, an individual to grant program. These facts indicate

class of taxpayer. enable him to pursue studies or re- that the foundation was primarily in

A survivor annuity was received search shall not be considered to be terested in obtaining a research work

from the United States Civil Service an amount received as a scholarship product. In particular, the reservation

Retirement Fund by an unmarried or fellowship grant if such amount of rights in patents and inventions

taxpayer attending college. A dependrepresents compensation for past, pres- does not further an educational pur

ency deduction with respect to this ent, or future employment services, pose with respect to an individual

taxpayer was allowable to another taxif such amount represents payment for grantee and thus contradicts any such

payer for the taxable year. Since the services which are subject to the direc- claimed purpose. Therefore, it is con

investment in the contract had been tion or supervision of the grantor, or cluded that the foundation, as the

recovered tax free in prior years, the if such studies or research are pri- grantor, extracted a quid pro quo taxpayer included in his gross income marily for the benefit of the grantor. grant was to benefit the foundation for the taxable year the entire amount Any of these conditions will negate Accordingly. it is held that the of the annuity received. the existence of a scholarship or fel unts paid to the taxpayer are com- Section 141(e) of the Code provides lowship grant as defined in these regu- pensation for services primarily for the that in the case of a taxpayer with relations.

benefit of the grantor, and as such, spect to whom a deduction under secThe Supreme Court of the United are not excludable as fellowship grants tion 151(e) is allowable to another States in the case of Bingler v. John- under the provisions of section 117 of taxpayer for the taxable year, the person, 394 U.S. 741 (1969), 1969-2 C.B. the Code but are includible in his centage standard deduction shall be 17, upheld the validity of the regula- gross income under section 61 of the computed only with reference to so tions under section 107 of the Code. Code.

much of his adjusted gross income as The Court held that the ordinary

is attributable to his earned income (as meaning of the term scholarship or

defined in section 911(b)), and the fellowship is a relatively disinterested, Part IV.-Standard Deduction for Individuals

low income allowance shall not ex"no-strings" educational grant, with

ceed his earned income for the taxno requirement of any substantial Section 141.-Standard Deduction

able year. "quid pro quo” from the recipient. Standard deduction; dependent Section 911(b) of the Code pro

In the instant case the foundation taxpayer; survivor annuity as vides, in part, that the term "earned and not the college is the grantor "earned income." A survivor an income” means wages, salaries, or pro

an

1, 1972. These are a de

fessional fees, and other amounts re- Definition of "dependent" with respect a resident of the Republic of the ceived as compensation for personal to American Samoans

Philippines, and if the taxpayer was a services actually rendered, but does

member of the Armed Forces of the

DepaRTMENT OF THE TREASURY, not include that part of the compensa

OFFICE OF COMMISSIONER

United States at the time the child tion derived by the taxpayer for per

OF INTERNAL REVENUE, was born to him or legally adopted sonal services rendered by him to a

Washington, D.C. 20224.

by him, or corporation which represents a distri To Officers and Employees of the (B) Legally adopted by him, if, for bution of earnings or profits rather Internal Revenue Service and the taxable year of the taxpayer, the than a reasonable allowance as com Others Concerned:

child has as his principal place of pensation for the personal services ac

This Treasury decision conforms

abode the home of the taxpayer and tually rendered. In the case of a tax

is a member of the taxpayer's housethe Income Tax Regulations (26 CFR payer engaged in a trade or business

hold, and if the taxpayer is a citizen in which both personal services and Part 1) to subsection (a) of the Act

or national of the United States. of October 27, 1972 (Public Law 92capital are material income producing factors, a reasonable allowance as

580, 86 Stat. 1276). These amend

ments extend the definition of “de- (Sec. 152 as amended by sec. 2, Act of compensation for the personal services

Aug. 9, 1955 (Pub. L. 333, 84th Cong., rendered by the taxpayer, not in expendent” to include "nationals” of the

69 Stat. 626) (1955-2 C.B. 764); sec. 4, cess of 30 percent of his share of the

United States who otherwise would Technical Amendments Act of 1958 (72 qualify as dependents under prior law

Stat. 1607) net profits of such trade or business,

[Pub. L. 85-866, 1958-3

C.B. 254); sec. 1, Act of Sept. 23, 1959 shall be considered as earned income. but for the fact that they are not citi

(Pub. L. 86-376, 73 Stat. 699) [1959-2 Inasmuch as the taxpayer in the inzens of the United States. In practice, C.B. 707); sec. 1, Act of Aug. 31, 1967

(Pub. L. 90-78, 81 Stat. 191) [1967-2 this change will apply only to Ameristant case receives the annuity only as

C.B. 590]; sec. 1, Act of Oct. 27, 1972 a survivor and not because of any can Samoans as the residents of

(Pub. L. 92-580, 86 Stat. 1276) (1972-2 personal services rendered by him, the

Puerto Rico, Guam, and the Virgin C.B. 703]). annuity payments he received are not Islands are United States citizens.

Par. 2. Paragraph (a) of g 1.152-2 "earned income” as that term is de- Adoption of amendments to the regu. is amended to read as follows: fined in section 911(b) of the Code. lations

§ 1.152-2 Rules relating to general See Rev. Rul. 56-524, 1956-2 C.B. 504. The Income Tax Regulations (26

definition of dependent. Accordingly, the survivor annuity is CFR Part 1) are amended as set forth

(a)(1) Except as provided in subnot "earned income” to the recipient below:

paragraph (2) of this paragraph, to in the instant case for purposes of sec Paragraph 1. Section 1.152 is

qualify as a dependent an individual tion 141(e) of the Code and, there- amended by revising section 152(b)

must be a citizen or resident of the fore, the survivor annuity payments to read as follows:

United States or be a resident of the are not taken into account for pur§ 1.152 Statutory provisions; depen

Canal Zone, the Republic of Panama, poses of determining his percentage

dent defined.

Canada, or Mexico, or, for taxable standard deduction and his low in

Sec. 152. Dependent defined-(a) years beginning after December 31, come allowance, although otherwise General definition. * * *

1971, a national of the United States, includible in the adjusted gross in

(b) Rules relating to general defini. at some time during the calendar year come of the taxpayer under section 62. tion. * * *

in which the taxable year of the tax

(3) The term “dependent” does payer begins. A resident of the RePart V.-Deductions for Personal Exemptions not include any individual who is not public of the Philippines who was

a citizen or national of the United born to or legally adopted by the Section 152.-Dependent Defined States unless such individual is a resi taxpayer in the Philippine Islands be26 CFR 1.152-2: Rules relating to general

dent of the United States, of a country fore January 1, 1956, at a time when definition of dependent.

contiguous to the United States, of the taxpayer was a member of the

the Canal Zone, or of the Republic Armed Forces of the United States, T.D. 7291

of Panama. The preceding sentence may also be claimed as a dependent TITLE 26.—INTERNAL REVE shall not exclude from the definition if such resident otherwise qualifies as NUE.—CHAPTER I, SUBCHAP- of “dependent" any child of the tax a dependent. For definition of "Armed TER A, PART 1.-INCOME payer

Forces of the United States," see secTAX; TAXABLE YEARS BE- (A) Born to him, or legally adopted tion 7701 (a) (15). GINNING AFTER DECEMBER by him, in the Philippine Islands be- (2) (i) For any taxable year begin31, 1953

fore January 1, 1956, if the child is ning after December 31, 1957, a tax

Unitt be a citi pendent an igraph, to canal Zone, or be a resident of the

pay rice beyin the Philippidopted by the

U.S.C. 553(b) or subject to the alta

Code of

(1) of this ) (3) and ments of sec.

payer who is a citizen, or, for any tax- Treasury decision with notice and The stated purpose of the taxpayer able year beginning after December public procedure thereon under 5 in providing the availability of the day 31, 1971, a national, of the United U.S.C. 553(b) or subject to the effec- care center is (1) to provide an emStates is permitted under section 152 tive date limitation of 5 U.S.C. 553 ployee with a place to send his or her (b)(3)(B) to treat as a dependent (d).

child while at work knowing that the his legally adopted child who lives (This Treasury decision is issued child is receiving proper care, (2) to with him, as a member of his house under the authority contained in sec- reduce absenteeism, increase produchold, for the entire taxable year and tion 7805 of the Internal Revenue tivity, and reduce company training who, but for the citizenship, national Code of 1954 (68A Stat. 917; 26 costs, and (3) to reduce employee ity, or residence requirements of sec- U.S.C. 7805).).

turnover. tion 152(b)(3) and subparagraph

Section 162 of the Code allows as a

Donald C. ALEXANDER, (1) of this paragraph, would qualify

deduction all the ordinary and necesas a dependent of the taxpayer for

Commissioner of

sary expenses paid or incurred during such taxable year.

Internal Revenue.

the taxable year in carrying on any Approved

trade or business. Section 1.162-10 of (ii) For purposes of section 152

the Income Tax Regulations provides,

FREDERIC W. HICKMAN, (b)(3)(B) and this subparagraph,

in part, that amounts paid or accrued

Assistant Secretary of any child whose legal adoption by

within the taxable year for recrea

the Treasury. the taxpayer (a citizen or national of

tional, welfare, or similar benefit plans the United States) becomes final at (Filed by the Office of the Federal Register

are deductible under section 162(a)

on Dec. 3, 1973 at 8:45 a.m. and pubany time before the end of the tax

of the Code, if they are ordinary and

lished in the issue of the Federal Register able year of the taxpayer shall not be

necessary expenses of the trade or for Dec. 4, 1973)

business. disqualified as a dependent of such

In the instant case the amounts taxpayer by reason of his citizenship,

Part VI.-Itemized Doductions for Individuals paid by the taxpayer to the day care nationality, or residence, provided the

and Corporations child lived with the taxpayer and was

center are directly related to its busia member of the taxpayer's household

ness and are, accordingly, ordinary Section 162.-Trade or Business

and necessary business expenses defor the entire taxable year in which Expenses

ductible under section 162 of the the legal adoption became final. For

Code. example, A, a citizen of the United 26 CFR 1.162-1: Business expenses. States who makes his income tax re- Business expenses: day care proturns on the basis of the calendar vision for employees' preschool

26 CFR 1.162-1: Business expenses.

26,CI year. is emploved in Brazil by an children. A corooration's navments Assochons ol, 02, 102;1.01.1, 1.02-1,

9.102-1.) agency of the United States Govern- to a day care center to provide care ment. In October 1958 he takes into for the preschool children of its

Congressman's newsletters, etc.; his household C, a resident of Brazil factory employees while they are at

receipts and disbursements. Subwho is not a citizen of the United work are ordinary and necessary

scription fees or solicited contribuStates, for the purpose of initiating business expenses deductible un

tions received by a congressman to adoption proceedings. C lives with A der section 162 of the Code.

be used solely to defray the cost and is a member of his household for

of newsletters, reports, and questhe remainder of 1958 and for the Rev. Rul. 73-348

tionnaires sent to constituents are entire calendar year 1959. On July 1,

includible in his gross income. Ex

Advice has been requested whether 1959, the adoption proceedings were

penses of publishing and distributcertain expenditures made by an emcompleted and C became the legally

ing such material are deductible ployer, under the circumstances deadopted child of A. If C otherwise

as business expenses incurred as scribed below, are deductible under qualifies as a dependent, he may be

an employee; I.T. 4095 superseded. section 162 of the Internal Revenue claimed as a dependent by A for 1959. Code of 1954.

Rev. Rul. 73-356

Advice has been requested as to the Because this Treasury decision is gaged in the manufacturing business, tax treatment of amounts received not adverse to the interests of any tax- entered into an agreement with an es- and amounts expended by Congresspayer and merely conforms the regu- tablished day care center to provide men A and B, who use the cash relations to statutory changes it is found child care for preschool children of its ceipts and disbursements method of that it is unnecessary to issue this factory employees.

accounting, in connection with publi

en.

cation and distribution of newsletters, posited in a bank account that is segre- subscription proceeds received by Conreports, and questionnaires they send gated from all other funds maintained gressman A must be included in his to constituents under the circumstances by Congressman B's office, no part of gross income under section 61 of the described below.

which account is ever used for cam- Code. Situation (A).-Congressman A

ressman A

paign purpos

paign purposes. If the fund is insuffi- Under the facts of Situation (B), sends out a newsletter at regular in

cient to pay the expenses of publishing although the contributions described tervals to report to his constituents on

and distributing the reports and ques are not given as payment for the pubmatters of general interest such as

tionnaires, the Congressman pays the lications, they are made to assure the taxes, social security, foreign relations,

remainder from his own personal continued publication of the materials. and other subjects pertaining to the

funds. Any excess in the fund at the Therefore, such amounts are not gifts affairs of the Federal Government and end

end of any particular year is carried within the meaning of section 102 of on such matters as his activities and

over to the following year to be used the Code. findings in connection with an official

for the same purpose. The annual cost The performance of the official inspection trip to foreign countries. To to the Congressman of publishing and

e Congressman of publishing and

duties of a Co

duties of a Congressman in his trade help defray the expenses of producing,

e distributing these materials is less than or business as an elected official inprinting, and preparing it for mailing, his annual salary.

cludes keeping his constituents inhe offers constituents subscriptions to Section 61 of the Internal Revenue formed with respect to the affairs of the newsletter for a reasonable price, Code of 1954 provides, in part, that the Federal Government and his own and sends it to subscribers only. The the term gross income means "all in- official actions, and seeking opinions subscription proceeds are available to come from whatever source derived," from them on pertinent issues. Thus, Congressman A upon their receipt, but including, among other things, gross any amount received by a Congresshe applies all such proceeds to the ex- income from business, compensation man for the purpose of defraying part penses associated with publication of for services, fees, commissions, and of the cost of reporting to constituents the newsletter. From his personal similar items.

or of seeking opinions from his confunds, he pays the remaining cost of Section 102(a) of the Code pro- stituents is a substantial benefit to him publishing and distributing it. The an- vides, in pertinent part, that gross in- in that it offsets a portion of the cost nual out-of-pocket cost to the Con- come does not include the value of to him of performing the duties of his gressman of publishing and distribut property acquired by gift. A gift is office. Therefore, such amounts reing the newsletter is less than his an- generally defined as a voluntary trans- ceived by Congressman B must be innual salary.

fer of property by its owner to another cluded in his income under section 61 Situation (B).-Congressman B with donative intent and without con- of the Code in the year received.

sideration. If a payment proceeds pri

sideration. If a payment proceeds prisends legislative reports to his constitu

Furthermore, section 162(a) of the ents from 12 to 15 times a year to

to marily from the incentive of antici. Code provides for the deduction of all keep them informed regarding the

pated benefit of an economic nature the ordinary and necessary expenses affairs of the Federal Government and

to the payor, it is not a gift. Where paid or incurred during the taxable nis official activities. He also sends

the payment is in return for services year in carrying on any trade or busiout questionnaires from time to time

rendered, it is irrelevant that the donor

rendered, it is irrelevant that the don ness. Section 7701(a) (26) provides seeking the opinions of his constituents

receives no economic benefit from it. that the term “trade or business” inon various issues. To help defray the

See Commissioner v. Duberstein, 363 cludes the performance of the funccosts involved, Congressman B solicits

U.S. 278 (1960), 1960-2 C.B. 428. tions of a public office. contributions, by notation on the re

Moreover, when a payment is made I.T. 4095, 1952-2 C.B. 90, holds that

by a customer to a taxpayer who proports and by telephone requests initi

expenses incurred by a Congressman vides services to assure continuation of ated by a member of his staff, to be

in printing and addressing a letter to those services, that payment is not a used solely for the printing and related

his constituents, which letter consists costs of these reports and question

gift even though not made in consid- principally of a report of his activities naires. However, he sends the reports

eration for past or current services. and findings in connection with an and

See Publishers New Press, Inc., 42 questionnaires to constituents

official inspection trip to foreign coun. whether or not they contribute. Con

T.C. 396 (1964), acq., 1964-2 C.B. 7.

tries but also contains a brief personal tributions received by him in response Under the facts of Situation (A), message, qualify as ordinary and necesto these requests are available to him the subscription fees are given as di- sary business expenses. upon receipt but he retains no part of rect payment for the publications, and Inasmuch as it is considered an apthem for his personal services in pre- such funds are available to Congress- propriate part of the official duties of paring the materials. They are de- man A upon receipt. Therefore, the a Congressman to keep his constituents