[1] A qualified scholarship is “any amount received by an individual as a scholarship or fellowship grant to the extent the individual establishes that, in accordance with the conditions of the grant, such amount was used for qualified tuition and related expenses.”[2] However, this “qualified scholarship exemption” under IRC § 117(a) does not apply towards “any amount received which represents payment for teaching, research, or other services by the student required as a condition for receiving the qualified scholarship or qualified tuition reduction.”[3] It is this limitation on § 117(a) that has raised some concerns, and the IRS recently provided guidance as to how this limitation applies.In a Private Letter Ruling (“PLR”),[4] the Taxpayer was an IRC § 501(c)(3)[5] entity who sponsored a program that would provide college funds to high school students that satisfied certain community service and academic performance standards.

4945(g). See IRC Sec. 117. Note that more and more private foundations are restricting the purposes for which a public charity may use the foundation’s grant.

The TCJA repealed this exclusion, unless the grant is part of a plan approved before the passage of the TCJA. With respect to individuals, certain government grants are specifically excluded from gross income in certain circumstances, including educational grants when used for qualified tuition and related expenses under 26 USC § 117 and grants issued to low and moderate-income individuals to assist them in their individual needs are nontaxable under general welfare principles (see CCA 200431012).As enacted, the CARES Act does not specifically exclude the Relief Payments from recipients’ gross income and the Internal Revenue Code does not contain a specific income exclusion for the Relief Payments. Additionally, grant payments reimbursing taxpayers for lost revenues or operating expenses are generally held to be includible in gross income.

Of greatest concern is the provision to tax tuition waivers, which could negatively impact the number of students who pursue degrees. This will likely cause an even greater disparity for those communities who are not widely represented in higher education, including a reduction in the number of students currently enrolled in higher education programs.Impact on Taxing Tuition Waivers Under the current tax code, 26 U.S. Code § 117(d)(5), tuition waivers given to graduate students are not counted as taxable income. However, under the House version of the tax bill, such waivers will be taxed.

While acknowledging the NLRB Regional Director’s decision in Northwestern, the motion to dismiss notes the contradiction between the two cases:Here, Plaintiffs do not allege that scholarships received by some student-athletes are compensation for their athletic activities; in fact, they explicitly allege the opposite. See Am. Compl., ¶ 10(i); see also 26 U.S.C. §§ 117(a) (“gross income does not include any amount received as a qualified scholarship by an individual who is a candidate for a degree at an educational organization.”); Rev. Rul. 77-263, 1977-2 C.B. 47 (athletic scholarships are not considered taxable income to student-athlete).