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(I would like to note beforehand that I am not discussing the taxability of a scholarship or fellowship here. This is purely about finding the right category for some certainly taxable income, for example, for a researcher who is not a degree candidate. The category is important for stuff like tax withholding and tax treaties with foreign countries, where a scholarship/fellowship may be treated differently from wages in terms of tax rate, exemptions, limits, etc.)

I feel the following treatments of fellowship grants (from IRS Publication 515 and the IRS Instructions for Form 8233) are at least slightly contradictory:

A scholarship or fellowship grant is an amount given to an individual for study, training, or research, and which does not constitute compensation for personal services.

(IRS Publication 515, page 32, bottom of left column in pdf; or here in html)

However:

In general, scholarship or fellowship income is compensatory to the extent it represents payment for past, present, or future services (for example, teaching or research) performed by a nonresident alien as an employee and the performance of those services is a condition for receiving the scholarship or fellowship (or tuition reduction).

(IRS Instructions for Form 8233, page 2, top of right column in pdf; or here in html)

And in line with that:

Grants given to students, trainees, or researchers which require the performance of personal services as a necessary condition for disbursing the grant do not qualify as scholarship or fellowship grants. Instead, they are compensation for personal services considered to be wages. It does not matter what term is used to describe the grant (for example, stipend, scholarship, fellowship, etc.).

(IRS Publication 515, page 33, middle of left column in pdf; or here in html)

My premise is that any research fellowship requires the grantee to carry out research; I have not come across any fellowship "for research" so far that does not require the performance of (past, present, but mostly future) "research", but lets the grantee do whatever they like with the money.

So why does IRS Publication 515 mention fellowship grants for research, when effectively the requirement to do research disqualifies the grant as a fellowship grant?

For Fulbright Grants, I have found the following answer, but I wonder if this ruling still applies today, and whether it applies to similar types of grants as well:

Thus, if the proceeds of a Fulbright grant were paid to enable the Fulbright grantee to perform study, training, or research abroad mostly for his/her own benefit, then such grant constitutes scholarship/fellowship income. On the other hand, if the proceeds of the Fulbright grant were paid as compensation for lecturing or teaching abroad, then the grant is compensation for personal services and is usually considered to be wages.

Edit: I was interested in the history of the statement in the Instructions for Form 8233; here it is:

1996:

Any part of a scholarship, fellowship, or grant paid for past, present, or future services to the institution paying the grant or fellowship is compensation for personal services.

The phrase has then been changed to the one cited above in 2001, and has not been changed in 2005 or 2009; 2011 is the most recent version. So the phrase in question is at least 15 years old, if that changes anything.

Edit 2: I try to clarify my question with regard to @littleadv's answer. From the title:

Is a fellowship grant for research automatically "for personal services", and thus wages?

Initially, my interpretation of Publication 515, in conjunction with the Instructions for Form 8233 and my premise, let me conclude that a research fellowship is always compensatory because some kind of service (namely, research -- the example research is explicitly being given in the Instructions for Form 8233) is always required. @littleadv has answered that research is not necessarily a service; so I wonder what kind of research would be considered a service (again, the example research is explicitly being given in the Instructions for Form 8233, so there should be one).

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    Is the research performed and directed by you for the purpose of your publication (dissertation or future paper), or to fulfil a lead PI's needs?
    – user662852
    Apr 4, 2016 at 19:19
  • We are talking about the former: The researcher designed and wrote the research proposals, submitted the applications in their own name, and was given two personalized, single-person fellowships in their name. The researcher received the first fellowship directly from the funder; for the second (later) fellowship, the host institution received the money and employed (I hope this is the correct term) the researcher for the duration of the fellowship grant with the specific aim of working on the research project proposed earlier.
    – bers
    Apr 4, 2016 at 19:43

1 Answer 1

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The difference is in the clear definition of the scope of work. Wages are paid for a specific work done. Scholarships/grants are given to perform some undefined future work. You do not receive scholarship to teach 20 hours of classes per week or to speak at 5 conferences. You receive scholarship to research certain topic, based on your research proposal. As such, while compensatory, it doesn't correlate 1:1 to a specific service you've performed or are going to perform.

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    Thanks, I see. So you are basically saying the statement in Form 8233 does not categorically exclude research fellowships from being fellowships, correct? Do you happen to know an example for a type of research that would be considered a service?
    – bers
    Apr 4, 2016 at 16:19
  • I didn't understand what you're asking that well, I was just pointing out the substantial difference between a scholarship and wages.
    – littleadv
    Apr 4, 2016 at 16:24
  • If you did not understand my question, maybe your answer should have been a comment then :) Anyway, I have tried to clarify my question above.
    – bers
    Apr 4, 2016 at 16:38
  • So Is a fellowship grant for research automatically "for personal services", and thus wages? - that is what I was answering. The answer is no, if I wasn't clear.
    – littleadv
    Apr 4, 2016 at 16:42

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