To CAT:
I did a little research to check on your above statement. Well, it turns out you were right, in a technical sense. Apparently, the taxation was based on a 1986 tax revision (Reagan Administration), but was not enforced by the IRS until a re-interpretation by them that took place around 1994-97, i.e, the Clinton Administration. So in a sense, I was also right. However, I probably should have done my homework before I spouted my mouth off a bit too soon. Thanks for not "slamming" me.
Hopefully this law will be removed soon.
For further clarification, here is an excerpt from a joint statement by the AAMC/AACOM:
On August 29, 1997, the NHSC sent notification to health professions schools and students of their intention, based on the result of a new Internal Revenue Service (IRS) interpretation, to begin withholding
federal income tax on the entire amount of scholarships awarded to NHSC scholarship recipients. According to the IRS, taxation of the entire scholarship amount is required to comply with a change in the
tax code, specifically a 1986 amendment to 26 USC 117 (c).
In 1994, the NHSC sought clarification of the 1986 amendment to section 117 (c) from the IRS. The IRS interpretation concluded that NHSC scholarships are awarded as payment for substantial future
services and therefore are not excludable from gross income under section 117 (c). The IRS distinguishes NHSC scholarships from other award programs administered by the Department of Health and
Human Services such as Scholarships for Students with Exceptional Financial Need (EFN), Financial Assistance for Disadvantaged Health Professions Students (FADHPS), and Mental Health Clinical
Traineeship (MHCT). The IRS concluded that these programs "do not impose the same substantial quid pro quo service requirements on the participants as are imposed upon NHSC participants" and
therefore are not subject to the same federal taxation.
Prior to 1986, NHSC scholarship recipients were required to pay federal tax only on the stipend portion of the scholarship. Tuition and related expenses were excluded from gross income. Although an
unintended effect of the Tax Reform Act of 1986 was to levy tax on NHSC scholarships, the provision went unnoticed and unenforced until the NHSC's 1994 inquiry. To comply with the 1997 IRS
interpretation, the NHSC began withholding the entire tax obligation from the stipend part of the scholarship, beginning December 1, 1997. Many NHSC scholarship recipients encountered drastic
reductions in the amount of their monthly stipends as a result of the IRS interpretation.
[This message has been edited by Nanook (edited 12-15-2000).]