Since section 117 of the Internal Revenue Code was enacted in part to end the confusion created by the gift-compensation test under the 1939 Code, one might expect the section to resolve the basic definitional issue: which payments qualify as scholarship and fellowships? Yet, nowhere in section 117 or in its legislative history are the terms scholarship and fellowship defined. Either Congress was satisfied that these terms had generally accepted meanings which were not open to question or that there was no simple definition which would resolve the hard cases and that these might better be left to resolution by the Service and the courts on a case by case basis. On the one hand, the broad exclusion of the section might indicate that all payments to a student are to be excluded. Within the same section, however, exclusion is denied to compensatory payments. This provision, if logically extended would require any payment to a student that had a compensatory element to be included in gross income. Thus, the statutory language, instead of resolving the gift-compensation problem created by the 1939 Code, perpetuates the problem as a scholarship or fellowship-compensation problem under section 117. The purpose of this comment is to determine how the Service and the courts have faced the problem.

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