Exclusion of Scholarships and Other Receipts for Education (Portfolio 518)

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Exclusion of Scholarships and Other Receipts for Education addresses several important income tax issues relating to educational costs.

 Specifically, this Portfolio analyzes qualified tuition programs (Part III), Coverdell Education Savings Accounts (Part IV), interest on educational loans (Part V), penalty-free withdrawals from IRAs for amounts used to pay qualified higher education expenses (Part VI), and forgiveness of student loans (Part VII) and provides a discussion of information reporting requirements related to higher education tuition and related expenses (Part VIII).



Bloomberg BNA Portfolios are written by leading tax professionals who set the standard as leaders in their fields. The Exclusion of Scholarships and Other Receipts for Education portfolio was authored by the following attorney.  


Lisa Starczewski

Lisa Starczewski focuses her practice on several areas of tax law, including corporate and partnership tax planning and leveraged leasing. Lisa is a member of the Bloomberg BNA U.S. Income Advisory Board.


Prior to joining Buchanan, Lisa was self-employed as a tax consultant. In addition to her work on various Bloomberg Tax Portfolios, Lisa also periodically writes an Internet newsletter on business and personal tax planning.


In 2001, Lisa developed "TaxCruncherPro," a software program designed to compute complex business and personal tax planning calculations. From 1995 to 2001, Lisa was an adjunct faculty member at Villanova University School of Law, where she taught courses in the graduate tax program.


From 1997 to 1999, Lisa was a developer at Tax Management, Inc., where she focused on efforts to integrate tax and technology to add interactivity and web-based delivery to its educational products.


Lisa earned her J.D. from Villanova School of Law where she graduated summa cum laude and was Editor-in-Chief of the Villanova Law Review.  She received a Bachelor of Art's degree from Smith College, graduating magna cum laude in 1985. 


Credentials /

Lisa Marie Starczewski, J.D.: (summa cum laude), Villanova University School of Law; B.A. (magna cum laude), Smith College. Starczewski served as Editor-in-Chief of the Villanova Law Review (1987–88) and has practiced law with Morgan, Lewis & Bockius and Schnader, Harrison, Segal & Lewis. She taught at Villanova University School of Law. Ms. Starczewski has authored and coauthored several Accounting Policy and Practice Portfolios, including 5101, Revenue Recognition: Fundamental Principles; and 5114, Accounting for Leases: Fundamental Principles. She has also authored numerous Tax Management Portfolios, including 714 T.M., Partnerships — Allocation of Liabilities; Basis Rules; 565 T.M. Installment Sales, 587 T.M., Noncorporate Alternative Minimum Tax, 752 T.M., Corporate Alternative Minimum Tax, 621 T.M., IRS National Office Procedures — Rulings, Closing Agreements, 550 T.M., At-Risk Rules, and 523, T.M. Deductibility of Legal Fees and Other Professional Expenses. She is also the author and co-author of numerous Tax Practice Series chapters. She has received the Tax Management Distinguished Author Award and is a member of the Tax Management U.S. Income Advisory Board.

Table of Contents

Portfolio 518-1st: Exclusion of Scholarships and Other Receipts for Education

 Portfolio Description


 Technical Advisors


 Detailed Analysis

 I. Introduction

 II. Exclusion of Scholarships, Fellowships, and Other Receipts for Education

 A. Historical Perspective

 1. Prior to the 1986 Tax Reform Act

 2. The 1986 TRA

 B. Current Law

 C. Section 117(a) Exclusion for Qualified Scholarships

 1. Definition of “Qualified Scholarship”

 a. In General

 b. Definition of Scholarship or Fellowship Grant

 (1) In General

 (2) Bingler — The Quid Pro Quo Test

 (3) Employer-Employee Relationship

 (a) In General

 (b) Grants by Private Foundations

 (4) Athletic Scholarships

 (5) Payments of “Prizes” Denominated as Scholarships

 (6) Self-Employment Taxes

 c. Definition of Qualified Tuition and Related Expenses

 2. Definition of Degree Candidate

 3. Definition of Educational Organization

 a. In General

 b. Teaching Hospitals and “Apprentice” Work

 4. Section 117(c) Exception from Exclusion for Payments for Services

 a. In General

 b. Health Professionals

 c. Grants to Faculty Members/Students

 d. Payments by or for the Benefit of Governmental Units

 e. Employment Tax Issues

 5. Recordkeeping Requirements

 6. Requirements for Obtaining Private Rulings

 D. Qualified Tuition Reduction Plans

 E. Miscellaneous Exclusions Related to Education

 1. Section 127

 2. Section 132

 3. Section 135

 F. Interrelationship of § 117 and § 74 and § 102

 III. Qualified Tuition Programs

 Introductory Material

 A. In General

 B. Definitions

 C. Eligibility Requirements for Qualified Tuition Programs

 D. Permissible Uses of Contributions

 E. Former Penalties on Refunds

 F. Reporting Requirements

 1. Return Filed with the IRS

 2. Statement Furnished to the Distributee

 3. Reports Between § 529 Programs

 G. Tax Treatment of Distributions from QTP

 1. In General

 2. Rollover Distributions

 3. Additional Tax

 4. Computing Earnings

 a. Amount of Earnings in a Distribution

 b. Examples

 5. Change in Designated Beneficiaries

 6. Aggregation of Accounts

 H. Estate, Gift and Generation-Skipping Transfer Tax Rules

 IV. Coverdell Education Savings Accounts

 A. In General

 B. Qualified Education Expenses

 1. Expenses for Higher Education

 2. Expenses for Elementary and Secondary Education

 C. Eligible Education Institution

 D. Contribution Limitations

 E. Distributions

 F. Transfers upon Divorce or Death

 G. Estate, Gift and Generation-Skipping Transfer Tax Rules

 H. Other Rules

 V. Interest on Educational Loans

 A. In General

 1. Treatment of Capitalized Interest and Certain Fees

 2. Interest Payments Made During Periods when Not Required

 3. Third Party Payments

 B. Maximum Deductible Amount and Phase-Out Rules

 C. Qualified Education Loan

 1. In General

 2. Qualified Higher Education Expenses

 3. Eligible Education Institution

 4. Eligible Student

 D. Pre-2002 60-Month Limitation

 1. Deferments and Forbearances

 2. Late Payments

 3. Refinancings, Consolidated Loans, and Collapsed Loans

 VI. Penalty-Free Withdrawal from IRA

 VII. Forgiveness of Student Loans

 VIII. Information Reporting Requirements

 A. In General

 B. Who Must File

 C. Content of Information Returns

 D. Payee Statements

 E. Penalty for Noncompliance

Working Papers

 Working Papers

 Table of Worksheets

 Worksheet 1 IRS Pub. 970, Tax Benefits for Education (Excerpt — Highlights of Tax Benefits for Education)

 Worksheet 2 IRS Publication 17, Your Federal Income Tax (Excerpt — Tax Benefits for Work-Related Education)

 Worksheet 3 Flow Chart — Taxation of Scholarships and Fellowship Grants