Johnson worked for
Westinghouse. Westinghouse gave him a scholarship so he could go back to school and get a PhD.
The scholarship gave Johnson a stipend and paid for his
tuition. He had to agree to provide reports of his progress, and commit
to come back to work for Westinghouse after he finished his degree.
The IRS stepped in and said
that the scholarship money was
taxable as gross income.
Johnson disagreed.
Johnson argued that the scholarships were excludable based on 26 U.S.C. §117.
The Tax Court found for the
IRS. Johnson appealed.
The Trial Court affirmed.
Johnson appealed.
The Trial Court looked to
the IRS's regulation interpreting §117 (Treas. Reg. §1.117-4(c)) which said that amounts representing "compensation for ...
employment services" and amounts paid "to enable [an
individual] to pursue studies ... primarily for the benefit of the
grantor," are not excludable as scholarships.
The Appellate Court reversed.
The IRS appealed.
The Appellate Court found
that the IRS regulation was invalid.
The US Supreme Court reversed
and found for the IRS.
The US Supreme Court found
that Treas. Reg. §1.117-4(c) was
valid, and the money Johnson received was not an excludable scholarship,
but taxable "compensation."
Basically, this case said that
if your employer gives you money to go to school, then it is considered to
be compensation for your work, and not really a scholarship.
Note that the Tax Reform
Act of 1986 changed §117, so the holding in this case may no longer be
applicable.
