                            T.C. Memo. 1996-420



                          UNITED STATES TAX COURT



            DEAN W. SCHULZE AND LYNN M. SCHULZE, Petitioners v.
                COMMISSIONER OF INTERNAL REVENUE, Respondent



        Docket No. 16346-95.                 Filed September 17, 1996.



        Garven W. Videen, for petitioners.

        Katherine H. Ankeny, for respondent.



                            MEMORANDUM OPINION


        DINAN, Special Trial Judge:    This case was heard pursuant to

the provisions of section 7443A(b)(3) and Rules 180, 181, and

182.1

        1
          Unless otherwise indicated, all section references are
to the Internal Revenue Code in effect for the taxable year in
issue. All Rule references are to the Tax Court Rules of
Practice and Procedure.
     Respondent determined a deficiency in petitioners' 1992

Federal income tax in the amount of $3,655.

     A concession having been made by petitioners,2 the issues

remaining for decision are:    (1) Whether $7,141 of the $15,846

(rounded) received by Dean W. Schulze (petitioner) as a graduate

associate at the University of Arizona (University) is excludable

from gross income; and (2) whether petitioner may deduct $1,016

paid as tuition to the University in 1992.

     Some of the facts have been stipulated and are so found.

The stipulations of fact and attached exhibits are incorporated

herein by this reference.    Petitioners resided in Tucson,

Arizona, on the date the petition was filed in this case.

     In the fall of 1985, petitioner enrolled in the graduate

program at the University to obtain a Master of Science in

Physics (Masters Program).    On August 11, 1986, while in the

Masters Program, petitioner became a research assistant in the

Physics Department.   He testified at trial that his duties as a

research assistant were to engage in original research that would

be suitable for publication in a reference journal, which are the

University's and the Physics Department's requirements for a

Ph.D.

     We would note that in 1986 petitioner was not in a doctoral

program; he was not a candidate for a Ph.D.    He was in the

     2
          Petitioners concede that, under their theory of the
case, $8,705 of the $15,846 received by petitioner, Dean W.
Schulze, from the University of Arizona in 1992, is not
excludable from income.
                                - 3 -

Masters Program.    Petitioner did not complete the requirements

for a Master of Science degree until December 19, 1987.    He then

passed the examination given by the University that qualified him

for advancement to the Doctoral Program as a candidate for a

Ph.D.    Petitioner was admitted to the Doctoral Program as a

candidate for a Ph.D. in physics in the spring of 1988.3

     During 1992, petitioner's director for his Ph.D.

dissertation was Professor K. C. Hsieh of the Physics Department.

     At some point in time, not specified in the record,

Professor Lyle Broadfoot of the Lunar and Planetary Laboratory at

the University submitted a proposed contract to the National

Aeronautics and Space Administration (NASA) to obtain a research

grant.    Professor Broadfoot received a grant from NASA which

outlined research that was to be performed to assist NASA in

accomplishing various space missions.

     In 1992, Professor Broadfoot had approximately six Ph.D.

candidates working for him pursuant to the NASA grant.     Each of

the Ph.D. candidates was assigned a piece of the puzzle that

constituted the research required under the NASA grant.

Petitioner was one of those who was employed to perform research

under the NASA grant.    Professor Broadfoot assigned petitioner

his piece of the puzzle to research.    Professor Broadfoot


     3
          Petitioner has not obtained a Ph.D. and, in fact, left
the Doctoral Program in the summer of 1995 to take full-time
employment.
                                - 4 -

integrated petitioner's research with the research of the other

Ph.D. candidates that he employed and submitted periodic progress

reports to NASA.

     On August 3, 1992, petitioner signed a contract to be a

Graduate Associate in Research in the Lunar and Planetary

Laboratory at the University.   The contract read, in part:

          I herewith accept the appointment as * * *
     Graduate Associate in Research in the Lunar & Planetary
     Laboratory, 50% time (year to year) * * * for the
     academic year 1992-93, effective August 16, 1992 * * *
     at an annual salary rate of $10,836. Your appointment
     is dependent on the availability of funds from a source
     other than state appropriations, and is subject to
     termination if the non-state funds are not available.

     Arizona Board of Regents Policies Chapter 6-301
     Conditions of Professional Service is incorporated by
     this reference as the conditions of your employment.

     Petitioner's financial need was not considered when he was

selected for employment as a graduate associate.

     For the academic year 1991/1992, petitioner signed a

contract similar to the one he signed on August 3, 1992, for

academic year 1992/1993.

     Pertinent information taken from page 40 of the University's

Graduate Catalog, 1991-92, 1992-93 is as follows:

     Assistantships and Associateships

     Teaching and research assistantships are available in
     many University departments. Approximately 2,200 of
     these positions exist and many of them are for first-
     year graduate students. Salaries vary, but students
     may expect to receive an academic year salary in the
     range of $2,763 to $5,319 for services not exceeding
     ten hours a week, or $5,527 to $10,652 for half-time
     assistantships.
                               - 5 -


              *     *      *      *    *     *    *
     Minimum Enrollment

     Students employed as graduate assistants and associates
     are required to register for at least six units of
     graduate credit per semester as a condition of their
     appointments.

     Petitioner paid tuition of $1,016 during 1992 to participate

in the graduate program.

     The University issued petitioner a Form W-2 for 1992

reporting wages paid for the year in the amount of $15,845.50.

Petitioners included $15,846 in their wage income on their 1992

return and then deducted the same amount on line 22 of the return

to arrive at their total income for the year.

     Petitioner contends that the $15,846 (rounded) he received

from the University in 1992 was a "stipend" excludable from

income pursuant to section 117.   In particular, petitioner posits

the following:

          Code Section 117 changed effective August 17,
     1986, but Proposed Regulation 1.117-6(f)(3) provides
     that in the event a person is receiving a stipend prior
     to August 17, 1986 and continuously thereafter and
     meets the condition of the prior Code Section 117
     wherein his stipend would have been excluded from
     taxable income, to the extent of the amount that was
     being earned prior to 1987 the stipend would be
     excluded from taxable income even though received after
     1986. For the last six months of 1986 or from August
     11, 1986 to December 31, 1986 or for one semester,
     Schulze received $3,570.46 or $7,140.92 for two
     semesters or a year. That Schulze was paid a stipend
     as a graduate research assistant/associate continuously
     from August 11, 1986 through December 31, 1992. That
     his renewal of his contract each year was a mere
     formality, was automatic and the form was placed in
                              - 6 -

     front of him and he was told to sign it by his
     professor. [Emphasis added.]

          Therefore, at least $7,141 of his $15,846 stipend
     for 1992 should be excluded from taxable income
     according to the Proposed Regulation 1.117-6(f)(3). In
     addition, he was also required to enroll at the
     University of Arizona for six units each semester in
     order to maintain his position as a graduate research
     associate at an expense of $508 per semester or $1,016
     for the year 1992 which should also reduce his taxable
     income.

     Respondent contends that the $15,846 paid to petitioner by

the University in 1992 was not paid as a scholarship or a

fellowship but was, rather, compensation for services rendered.

     Section 117(a) provides that gross income does not include

any amount received as a "qualified scholarship" by an individual

who is a candidate for a degree at an educational organization.

Under section 117(b)(1), the term "qualified scholarship" means

any amount received by an individual as a scholarship or

fellowship grant to the extent such amount was used for

"qualified tuition and related expenses".   Under section

117(b)(2), the term "qualified tuition and related expenses"

means only tuition and fees required for enrollment and other

required fees, books, and equipment required for courses of

instruction at such educational organization.   Section 117(c)

provides that gross income includes any portion of amounts

received as a scholarship or fellowship grant representing

payment for teaching, research, or other services by the student

required as a condition for receiving the qualified scholarship.
                               - 7 -

     Section 123 of the Tax Reform Act of 1986 (the Act), Pub. L.

101-514, 100 Stat. 2085, 2112, amended section 117, relating to

the exclusion of the scholarship and fellowship grants from gross

income.   Before amendment by the Act, section 117(b)(1) excluded

from gross income amounts received representing payments for

teaching or research that were in the nature of part-time

employment, if such teaching or research was required of all

candidates (whether or not recipients of scholarships or

fellowship grants) as a condition of receiving a degree.    Thus,

the Act repealed the provisions under section 117 that excluded

from gross income amounts received by degree candidates under a

scholarship or fellowship grant where such amounts actually

represented payment for services.   See Staff of Joint Comm. on

Taxation, General Explanation of the Tax Reform Act of 1986 (J.

Comm. Print 1987).   Also, as a result of the Act, amounts from

grants that were used for other expenses, such as room and board,

were not includable in the gross income of the recipient.   Sec.

117(b) and (c).

     The amendments to section 117, while made generally

applicable to taxable years beginning on or after January 1,

1987, were only made applicable to scholarships or fellowships

"granted" after August 16, 1986.    H. Conf. Rept. 99-841, at II-17

(1986), 1986-3 C.B. (Vol. 4) 1, 17.
                                - 8 -

     Under section 1.117-6(f)(3), Proposed Income Tax Regs., 53

Fed. Reg. 21693 (June 9, 1988), a notice of award is considered

granted prior to August 17, 1986, if the grantor made a firm

commitment to provide the recipient with a fixed or readily

determinable dollar amount.   If a scholarship or fellowship was

granted for a period exceeding one academic period (e.g.,

semester), amounts received in subsequent academic periods will

be treated as granted before August 17, 1986, only if all of the

following conditions are met:   (1) The amount awarded for the

first academic period is described in the original notice of

award as a fixed cash amount or readily determinable amount; (2)

the original notice of award contains a firm commitment by the

grantor to provide the scholarship or fellowship grant for more

than one academic period; and (3) the recipient is not required

to reapply to the grantor in order to receive the scholarship or

fellowship in future academic periods.   Sec. 1.117-6(f)(3),

Proposed Income Tax Regs.

     We note at the outset that proposed regulations "carry no

more weight than a position advanced [on brief] by respondent."

Estate of Wallace v. Commissioner, 95 T.C. 525, 547 (1990), affd.

965 F.2d 1038 (11th Cir. 1992); Miller v. Commissioner, 70 T.C.

448, 460 (1978) (quoting F.W. Woolworth Co. v. Commissioner, 54

T.C. 1233, 1265-1266 (1970)).   However, we may use such proposed
                                - 9 -

regulations as guidelines or because petitioner relies on the

proposed regulations, we will discuss them briefly.

     We will address ourselves to requirements three and two of

the proposed regulations, in that order, as these are the issues

disputed most vigorously.   Under the third requirement, the

recipient must not be required to reapply to the grantor in order

to receive the scholarship or fellowship in future academic

periods.   Petitioner testified that an appointment must be

reapplied for each year, although petitioner contends that such

an appointment was automatic.

     Under the second requirement, the original notice of award

must contain a firm commitment by the grantor to provide the

scholarship or fellowship grant for more than one academic

period.    There is no evidence of any such firm commitment by the

University in the original notice of award herein.

     There is no documentary evidence in this record of the

alleged original notice of award or appointment by which

petitioner first became a research assistant in 1986.

     Petitioner has not submitted into evidence any of the

documents appointing him as a research assistant in the Physics

Laboratory or as a research associate in the Lunar and Planetary

Laboratory, other than the Acceptance of Appointment document

that he signed on August 3, 1992.   The document signed August 3,

1992, clearly reflects that petitioner was appointed as a
                               - 10 -

research associate for 1 year, the academic year 1992-1993,

effective August 16, 1992.    Petitioner argues that his

appointments as a research assistant or as a research associate

were renewed automatically.    If such were the case, it was

incumbent upon petitioner to establish that fact, other than by

his own self-serving testimony.    Tokarski v. Commissioner, 87

T.C. 74, 77 (1986); see Wichita Terminal Elevator Co. v.

Commissioner, 6 T.C. 1158 (1946), affd. 162 F.2d 513 (10th Cir.

1947).   We would also note that, although petitioner refers to

the total payments in issue as a "stipend", the University refers

to the payments as "salary" or "supplemental compensation".    In

no instance in the record does the University refer to the

payments in issue as a "scholarship" or a "fellowship".

     The words "scholarship" and "fellowship" are not defined in

the Code.   However, the regulations define a scholarship as "an

amount paid or allowed to, or for the benefit of, a student,

whether an undergraduate or a graduate, to aid such individual in

pursuing his studies."   Sec. 1.117-3(a), Income Tax Regs.

Similarly, a fellowship is defined as "an amount paid or allowed

to, or for the benefit of, an individual to aid him in the

pursuit of study or research."    Sec. 1.117-3(c), Income Tax Regs.

The regulations also provide that scholarship and fellowship

grants do not include "any amount * * * if such amount represents

either compensation for past, present, or future employment
                              - 11 -

services or represents payment for services which are subject to

the direction or supervision of the grantor."    Nor do they

include amounts paid to "an individual to enable him to pursue

studies or research primarily for the benefit of the grantor."

Sec. 1.117-4(c)(1) and (2), Income Tax Regs.    The Supreme Court

has upheld the validity of these regulations, stating that the

definitions contained therein comport with "the ordinary

understanding of 'scholarships' and "fellowships' as relatively

disinterested, 'no strings' educational grants, with no

requirement of any substantial quid pro quo from the recipients."

Bingler v. Johnson, 394 U.S. 741, 751 (1969).

     There is nothing in this record to persuade us that the

payments in issue were anything other than payments for services

and we so hold.

     The University requires students employed as graduate

assistants and associates to register for at least six units of

graduate credit per semester as a condition of their

appointments.   Petitioner paid $508 tuition per semester, for two

semesters, to the University in 1992, to register as a graduate

student.   Petitioner seeks to deduct his total $1,016 tuition

payment as a "condition of employment as a graduate associate"

pursuant to either section 161 or section 212.

     The Arizona Board of Regents Policies provides at page 25:

     B. Graduate research assistants and associates are
     full-time graduate students, selected for excellence in
                               - 12 -

     scholarship and promise as researchers, who do part-
     time research as a portion of their training under the
     direct supervision of regular faculty members.

     Although a condition precedent to being appointed as a

research assistant or associate is that one be a graduate

student, the tuition paid is obviously for the purpose of

registering as a student in the graduate program.    Tuition is, by

definition, the price of or payment for instruction.    Webster's

Third New International Dictionary, 2461 (1971).

     Section 162 allows as a deduction all the ordinary and

necessary expenses, including education expenses, paid or

incurred during the taxable year in carrying on any trade or

business.    See sec. 1.162-5, Income Tax Regs.   Whether a taxpayer

is carrying on a trade or business is a question of fact.

     To be engaged in a trade or business, the taxpayer must be

involved in the activity with continuity and regularity, and the

taxpayer's primary purpose for engaging in the activity must be

for income or profit.    Commissioner v. Groetzinger, 480 U.S. 23,

35 (1987).

     Petitioner matriculated in the graduate school of the

University, first in the fall of 1985, as a candidate for a

Master of Science in physics and then, in the spring of 1988, as

a candidate for a Ph.D. in physics.     It appears from the record

that petitioner was a full-time student from the fall of 1985

through the summer of 1995, when he left the University.
                              - 13 -

Although he received part-time employment at the University as a

research assistant or associate, the work did not interfere with

his education; in fact, his research activities contributed to

his learning process as a graduate student.

     In 1992, therefore, we hold that petitioner was not actively

engaged in a trade or business.   His tuition expenses were

nondeductible personal education expenses.    Sec. 262; see Lenihan

v. Commissioner, T.C. Memo. 1977-379.

     Petitioner also contends that he is entitled to deduct his

tuition payments as amounts expended for the production of income

pursuant to section 212.   For the reasons stated, supra, we

reject petitioner's argument and hold that the tuition payments

were nondeductible personal education expenses.

     We have considered all arguments made by petitioner and, to

the extent not discussed above, find them to be without merit.

     To reflect the foregoing,

                                         Decision will be entered

                                         for respondent.
