You will review two research memos addressing the same question. Discuss the two memos and what changes you would make if any to EACH memo in order to improve it.
Date: October 18, 20XX
From: Terry Intern
Re: Sabrina (Tax Year 2015)
Sabrina Student is currently enrolled full-time at Florida International University (FIU) and is in
the process of completing a Bachelor of Physics. Sabrina was awarded a $20,000 scholarship to
attend FIU due to academic excellence. Sabrina is not required to perform any services in
exchange for this scholarship. In the current year Sabrina paid $14,000 for tuition expenses, $300
for required lab fees and $1,000 for her required books and supplies. Sabrina also paid $4,800 for
her room and board. Sabrina paid total fees of $20,100 to FIU in this current year.
Issue 1: Is the $20,000 considered a scholarship?
Conclusion 1: Yes, this money qualifies as a scholarship based on the Internal Revenue Code.
In determining the tax consequences of the $20,000 scholarship awarded to Sabrina the Internal
Revenue Code Section 117(c)(1) states tuition and related expenses are not included as income
because they do not require future service from the student receiving the scholarship. Sabrina
meets the requirement to be a candidate for a degree eligible for a scholarship because she is an
undergraduate student at a University who is pursuing studies to meet the requirements for a
Issue 2: Is the full amount of the $20,000 scholarship excluded from Sabrina’s gross income?Conclusion 2: No, based on the Internal Revenue Code and Proposed Federal Tax Regulations
only $15,300 is eligible to be excluded from the taxpayer, Sabrina’s income.
The IRC Sec. 117(c)(1)(B) further states that amounts received must be used for qualified tuition
related expenses in order to be excluded from gross income. IRC Sec. 117(c)(2)(A) provides the
guidelines for qualified tuition and related expenses. This section states these expenses include
fees, books, supplies and any equipment required for courses. Sabrina will not be providing
future service to FIU and will not have any tax liability on the scholarship money used to pay for
tuition and her required tuition related expenses. Sabrina’s qualified tuition related expenses are
her lab fees, supplies and books required for her courses. A total of $15,300 of Sabrina’s
scholarship is excluded from the current year’s gross income. Sabrina cannot exclude this
income if she acts beyond the scope of a student in a lab. Any benefits provided to FIU from
Sabrina could compromise the income exclusion. In the case of Barney Reiffen and Constance
Reiffen v. The United States, [67-1 USTC ¶9439], two electrical engineers performing research
in labs at Massachusetts Institute of Technology were scrutinized for filing a tax return
requesting a return on money they received as a scholarship. The Reiffen’s were under the
impression they were being compensated for their discoveries at the lab and not receiving all
excludable income. All discoveries made by the Reiffen’s were of no benefit to MIT and used
for their education only. The couple was not eligible for a refund and could not include the
amounts paid by the institution in their gross income.
Issue 3: Does Sabrina have to pay taxes on the remaining amount of the scholarship not used for
tuition and course required material?Conclusion 3: Sabrina will not pay taxes on the remaining amount if that is her only income for
According to the Proposed Federal Tax Regulation Section 1.117-6, any income in excess of the
tuition and qualified expenses is included gross income. Sabrina would be required to report the
remaining $4,700 received from the scholarship not used on tuition and qualified expenses even
though she used it for room and board. According to the regulation, room and board is
considered an incidental expense because the room and board is not required for her enrollment
at FIU. If the remaining $4,700 was the only income generated by Sabrina in the current year she
would not be required to file a tax return because her income is below the $10,300 applicable
gross income threshold.
FROM: Tracy Tax
RE: Sabrina Student (Tax year 2015)
My client, Sabrina Student, is a full-time physics major at Florida International University
(FIU) in Miami, FL. Sabrina currently receives $20,000 per year as a scholarship. Her
expenses for this year include:
– $14,000 for tuition
-$300 required lab fees
-$1,000 required books and supplies
-$4,800 room and board expense
Issue and Conclusion 1
Is Sabrina required to pay taxes on her $20,000 scholarship?
Yes, Sabrina is required to pay taxes on a portion ($4,700) of the scholarship.
Scholarships are considered to be tax-free as long as they meet certain requirements.
The scholarship should not exceed her expenses, it is not designated for other
purposes (such as room and board), and it should not represent payment for any
services. All of her expenses qualify as educational expenses and would be tax-free
except for the room and board. Since the total of her educational expenses is $15,300,
this is the amount of the scholarship that is tax-free. The remaining $4,700 of the
scholarship is taxable.
Issue and Conclusion 2
Can Sabrina deduct any educational expenses for herself?
Yes, Sabrina can deduct certain educational expenses.
Sabrina is able to deduct educational expenses because she meets all three
1. She pays qualified educational expenses of higher education
2. She pays the educational expenses for an eligible studentA2
3. The eligible student is herself
The maximum that she can reduce her income subject to tax is $4,000.
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