[4830-01-u]
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 8615]
RIN 1545-AQ81
Special Rules for Determining Sources of Scholarships and Fellowship
Grants
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulation.
SUMMARY: This document contains a final Income Tax Regulation that
provides guidance for determining the source of scholarships, fellowship
grants, grants, prizes and awards. The final regulation will affect
both individuals and withholding agents. It will provide guidance
concerning whether scholarships, fellowships, other grants, prizes and
awards are U.S. source income subject to tax and withholding.
DATES: This regulation is effective [INSERT DATE THIS DOCUMENT IS
PUBLISHED IN THE FEDERAL REGISTER].
For dates of applicability of these regulations, see Effective
Dates under SUPPLEMENTARY INFORMATION.
FOR FURTHER INFORMATION CONTACT: David Bergkuist (202) 622-3860 (not a
toll-free number).
SUPPLEMENTARY INFORMATION:
Background
This document contains a final Income Tax Regulation (26 CFR part
1) under section 863 of the Internal Revenue Code. On June 15, 1993, a
notice of proposed rulemaking (INTL 0041-92) was published in the
Federal Register (58 FR 33060) (1993-2 C.B. 634). No public
hearing was requested or held.
Written comments responding to the notice were received. After
consideration of all of the comments, the regulation proposed under
INTL-0041-92 is adopted as revised by this Treasury decision.
Explanation of Revisions and Summary of Comments
Section 863(a) authorizes the Secretary to provide regulations
regarding the source of items of gross income other than those items
specified in sections 861(a) and 862(a). Rules for determining the
source of scholarships, fellowship grants, grants, prizes and awards are
not provided by sections 861(a) and 862(a).
The notice of proposed rulemaking proposed in 1.863-1(d)(1) that
scholarships and fellowship grants be sourced by reference to the status
of the grantor. However, it also provided a special rule in 1.863-
1(d)(2) for nonresident aliens who receive scholarships or fellowship
grants, as defined in the regulations under section 117, from U.S.
grantors with respect to study or research activities to be conducted
outside the United States. Under these circumstances, the scholarship
or fellowship grant would be treated as income from sources outside the
United States.
The final regulation adopts the proposed regulation with certain
changes. Paragraph (d)(1) clarifies that these rules do not apply to
salaries or other compensation for services.
The final regulation provides rules for sourcing scholarships and
fellowship grants in paragraphs (d)(2)(i) and (ii) by reference to the
status of the grantor. The special rule of paragraph (d)(2)(iii)
provides that scholarships or fellowship grants received by a person
other than a U.S. person for activities conducted outside the United
States are treated as income from sources without the United States.
Commentators asked that the regulation be expanded to encompass
grants that fall outside the scope of section 117. In addition,
commentators also suggested that the special rule be expanded to include
prizes and awards given to nonresident aliens for their past artistic,
scientific, or charitable achievements. These suggestions are included
in this final regulation.
The source of grants, prizes and awards is determined by reference
to the status of the grantor under the general rules set forth in
paragraph (d)(2)(i) and (ii). The term grants is defined in paragraph
(d)(3)(iv) as amounts described in subparagraph (3) of section 4945(g)
of the Code and the regulations thereunder and that are not otherwise
scholarships, fellowship grants, prizes or awards as defined in 1.863-
1(d)(3). For purposes of paragraph (d)(3)(iv), the reference to section
4945(g)(3) is applied without regard to the identity of the payor or
recipient and without the application of the objective and
nondiscriminatory basis test and the requirement of a procedure approved
in advance.
The term prizes and awards is defined in paragraph (d)(3)(iii) of
this final regulation as having the same meaning as that set forth in
section 74 and the regulations thereunder.
Under paragraph (d)(2)(iii), certain targeted grants and
achievement awards received by a person other than a U.S. person for
activities conducted outside the United States are treated as foreign
source income. The term targeted grants does not appear elsewhere in
the Code or the regulations. Targeted grants are a subset of the more
inclusive term grants. Targeted grants may be received only from an
organization described in section 501(c)(3), the United States, the
States, or the District of Columbia and must be undertaken in the public
interest without private financial benefit. The term achievement award
does not appear elsewhere in the Code or regulations. An achievement
award is an award issued by an organization described in section
501(c)(3), the United States, a State, or the District of Columbia for a
past activity undertaken in the public interest and not primarily for
the private financial benefit of a specific person or persons or
organization.
Commentators requested that the final regulation provide express
guidance for the issuance of scholarships or fellowship grants by agents
on behalf of foreign grantors. No change is made in the final
regulation because an actual payment made by a genuine agent of the
payor does not alter the source. The final regulation looks to the
status (i.e., whether the person is a U.S. person or a foreign person)
of the payor rather than the agent.
The term international agency in paragraph (d)(1) of the proposed
regulation has been replaced in the final regulation with the term
international organization as defined in section 7701(a)(18). This
clarification uses the Code definition for such organizations.
Comments were received regarding the proposed regulation
suggesting that the scope of the regulation be expanded to cover
scholarships and fellowship grants awarded by charitable trusts. The
final regulation changes the proposed language of "U.S. citizen or
resident, a domestic corporation, . . ." in paragraph (d)(2)(i) to
include a domestic partnership, or an estate or trust (other than a
foreign estate or trust within the meaning of section 7701(a)(31)). The
special rule of paragraph (d)(2)(iii) has been clarified to apply to
scholarships, fellowship grants, targeted grants, and achievement awards
received by a person other than a U.S. person as defined in section
7701(a)(30). Special Analyses
It has been determined that this Treasury decision is not a
significant regulatory action as defined in EO 12866. Therefore, a
regulatory assessment is not required. It also has been determined that
section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5)
and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply to
this regulation, and, therefore, a Regulatory Flexibility Analysis is
not required. Pursuant to section 7805(f) of the Internal Revenue Code,
the notice of proposed rulemaking preceding this regulation was
submitted to the Small Business Administration for comment on its impact
on small business.
Drafting Information
The principal authors of this regulation are George A. Hani,
formerly of the Office of Associate Chief Counsel (International), IRS
and David Bergkuist of the Office of the Associate Chief Counsel
(International), IRS. However, other personnel from the IRS and
Treasury Department participated in its development.
List of Subjects in 26 CFR Part 1
Income taxes, Reports and recordkeeping requirements.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR part 1 is amended as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 is amended by
adding an entry in numerical order to read as follows:
Authority: 26 U.S.C. 7805. * * *
Section 1.863-1 also issued under 26 U.S.C.
863(a). * * *
Par. 2. In 1.863-1, paragraph (d) is added to read as follows:
1.863-1 Allocation of gross income under section 863(a). * * * * *
(d) Scholarships, fellowship grants, grants, prizes and awards--
(1) In general. This paragraph (d) applies to scholarships, fellowship
grants, grants, prizes and awards. The provisions of this paragraph (d)
do not apply to amounts paid as salary or other compensation for
services.
(2) Source of income. The source of income from scholarships,
fellowship grants, grants, prizes and awards is determined as follows:
(i) United States source income. Except as provided in paragraph
(d)(2)(iii) of this section, scholarships, fellowship grants, grants,
prizes and awards made by a U.S. citizen or resident, a domestic
partnership, a domestic corporation, an estate or trust (other than a
foreign estate or trust within the meaning of section 7701(a)(31)), the
United States (or an instrumentality or agency thereof), a State (or any
political subdivision thereof), or the District of Columbia shall be
treated as income from sources within the United States.
(ii) Foreign source income. Scholarships, fellowship grants,
grants, prizes and awards made by a foreign government (or an
instrumentality, agency, or any political subdivision thereof), an
international organization (as defined in section 7701(a)(18)), or a
person other than a U.S. person (as defined in section 7701(a)(30))
shall be treated as income from sources without the United States.
(iii) Certain activities conducted outside the United States.
Scholarships, fellowship grants, targeted grants, and achievement awards
received by a person other than a U.S. person (as defined in section
7701(a)(30)) with respect to activities previously conducted (in the
case of achievement awards) or to be conducted (in the case of
scholarships, fellowships grants, and targeted grants) outside the
United States shall be treated as income from sources without the United
States.
(3) Definitions. The following definitions apply for purposes of
paragraph (d) of this section:
(i) Scholarships are defined in section 117 and the regulations
thereunder.
(ii) Fellowship grants are defined in section 117 and the
regulations thereunder.
(iii) Prizes and awards are defined in section 74 of the Internal
Revenue Code and the regulations thereunder.
(iv) Grants are amounts described in subparagraph (3) of section
4945(g) of the Internal Revenue Code and the regulations thereunder, and
are not amounts otherwise described in paragraphs (d)(3)(i), (ii), or
(iii) of this section. For purposes of this paragraph, the reference to
section 4945(g)(3) is applied without regard to the identity of the
payor or recipient and without the application of the objective and
nondiscriminatory basis test and the requirement of a procedure approved
in advance.
(v) Targeted grants are grants--
(A) Issued by an organization described in section 501(c)(3), the
United States (or an instrumentality or agency thereof), a State (or any
political subdivision thereof), or the District of Columbia; and
(B) For an activity undertaken in the public interest and not
primarily for the private financial benefit of a specific person or
persons or organization.
(vi) Achievement awards are awards--
(A) Issued by an organization described in section 501(c)(3), the
United States (or an instrumentality or agency thereof), a State (or
political subdivision thereof), or the District of Columbia; and
(B) For a past activity undertaken in the public interest and not
primarily for the private financial benefit of a specific person or
persons or organization.
(4) Effective dates. The following are the effective dates
concerning this paragraph (d):
(i) Scholarships and fellowship grants. This paragraph (d) is
effective for scholarship and fellowship grant payments made after
December 31, 1986. However, for scholarship and fellowship grant
payments made after May 14, 1989, and before June 16, 1993, the
residence of the payor rule of paragraph (d)(2)(i) and (ii) of this
section may be applied without applying paragraph (d)(2)(iii) of this
section.
(ii) Grants, prizes and awards. This paragraph (d)
is effective for payments made for grants, prizes and awards, targeted
grants, and achievement awards after [INSERT DATE THAT IS 30 DAYS AFTER
THIS DOCUMENT IS PUBLISHED IN THE FEDERAL REGISTER]. However, the
taxpayer may elect to apply the provisions of this paragraph (d) to
payments made for grants, prizes and awards, targeted grants, and
achievement awards after December 31, 1986, and before [DATE THAT IS 31
DAYS AFTER THIS DOCUMENT IS PUBLISHED IN THE FEDERAL REGISTER].
Commissioner of Internal Revenue
Margaret Milner Richardson
Approved: August 3, 1995
Assistant Secretary of the Treasury
Leslie Samuels