[Federal Register Volume 60, Number 165 (Friday, August 25, 1995)]
[Rules and Regulations]
[Pages 44274-44275]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-21089]



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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.

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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 August 25, 1995.
    For dates of applicability of these regulations, see Effective 
dates in Sec. 1.863-1(d)(4).

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 Sec. 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 
Sec. 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 
Sec. 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 

[[Page 44275]]
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 Sec. 1.863-1, paragraph (d) is added to read as follows:


Sec. 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 
this paragraph (d):
    (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 and the 
regulations thereunder.
    (iv) Grants are amounts described in subparagraph (3) of section 
4945(g) 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 (d), 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 September 25, 1995. 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 September 26, 1995.

Margaret Milner Richardson,
Commissioner of Internal Revenue.

    Approved: August 3, 1995.
Leslie Samuels,
Assistant Secretary of the Treasury.
[FR Doc. 95-21089 Filed 8-24-95; 8:45 am]
BILLING CODE 4830-01-U