Question

Cathy Coed is a full-time senior student at Big Research University (BRU). Cathy is considered by most as a brilliant student and has been given a $35,000-per-year scholarship. In the current year, Cathy pays the following amounts to attend BRU:

Tuition                                     $26,000

Required Lab Fees                         300

Required Books and Supplies     1,000

Room and Board                         7,500

What are the tax consequences (i.e., how much is income) of the $35,000 current year’s scholarship to Cathy? In answering this case, use RIA Checkpoint, and cite only the Internal Revenue Code in your memo.

Required: After researching the tax code in RIA Checkpoint, prepare, in good form, a short research memo for the client file stating the issue(s), conclusion(s), and rationale for your conclusion(s). Use only the Code as your authority.

Style: The memo should not exceed one page, one-inch margins, Times New Roman font at 12 point, single-spaced. Use good form and check your writing against the “EAGLE Online Writing

Tutorial” checklist

Answer 1

Issues:

• Is  scholarship received considered as Tax Free Income?
• If yes, what part of $ 35000 is to be treated as Taxable income?
• What are the deductions allowed i.e. what are the expenses incurred out of $ 35000 would be elegible for reduction from income

Conclusions

• As per IRC Topic Number 421: Scholarships, Fellowship Grants, and Other Grants, it is to be treated as tax free income if prescribed two conditions are satisfied
• Amount spent on Room and Board and miscalenous would be taxable as it violates the conditions prescribed.
• Only the amoount spent on tution, lab fees and books will be considered as tax free and would be elegible for reduction from income

Rationale:

As per IRC Topic 421,

Scholarships, fellowship grants, and other grants are tax-free if meet the following conditions:

• A candidate is for a degree at an educational institution that maintains a regular faculty and curriculum and normally has a regularly enrolled body of students in attendance at the place where it carries on its educational activities; and
• The amounts you receive are used to pay for tuition and fees required for enrollment or attendance at the educational institution, or for fees, books, supplies, and equipment required for courses at the educational institution.

However it is specifically given in the text to include in gross income Amounts used for incidental expenses, such as room and board, travel, and optional equipment.