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Ps held engineering positions at the Bettis Atomic Power Laboratory, which Westinghouse operates under a 'cost-plus' contract with the Atomic Energy Commission. Ps participated in what is known as the Westinghouse Bettis Fellowship and Doctoral Program. That program, designed both to attract new employees seeking further education and to give advanced training to persons already employed at Bettis, offers a two-phase schedule of subsidized postgraduate study in engineering, physics, or mathematics. Ps got 8 hours of their 40-hour work week for work-study. 'Tuition remuneration,' as well as reimbursement for various incidental academic expenses, is provided by the company. When an employee has completed all preliminary requirements for his doctorate, he may apply for an educational leave of absence, which constitutes the second phase of the Fellowship Program. Westinghouse and the AEC must approve his dissertation. If approved, the employee devotes his full attention, for a period of at least several months, to fulfilling his dissertation requirement. He receives a 'stipend' from Westinghouse, in an amount based on a specified percentage (ranging from 70% to 90%) of his prior salary plus 'adders,' depending upon the size of his family. He also retains his seniority status and receives all employee benefits, such as insurance and stock option privileges. He is obligated to return to the employ of Westinghouse for a period of at least two years following completion of his leave. Ps all participated in the program. Westinghouse listed the amounts paid as 'indirect labor' expenses and withheld federal income tax from those amounts. Ps filed claims for refund, contending that the payments they had received were 'scholarships,' and hence were excludable from income under § 117 of the Code. D refused, and Ps sued. The jury found for D. Ps appealed, and the court reversed. D appealed.

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