Problems caused by the tax law and Department of the Treasury regulations related to the income exclusion for scholarships and fellowships and the deduction of job-related educational expenses were studied. Legislative changes that may reduce the amount of controversy generated by these two sections of the Internal Revenue Code are recommended. A detailed examination was conducted of 257 randomly selected cases pending review in the Appellate Division of the Internal Revenue Service and 281 court cases already decided. The tax rules and Treasury regulations were found to be confusing and difficult to apply. Determination of the tax status of educational grants and expenses depends upon the naming of precise factual and legal distinctions in fact situations that are essentially comparable. The result is that taxpayers similarly situated are treated in a dissimilar manner. The General Accounting Office suggests a solution designed to: (1) simplify the tax rules applicable to educational grants and deductions, and (2) accord approximately equal tax treatment for persons in similar situations. (SW)