According to the IRC Code Section 117, Gross income generally does not include any amount received:
1. As a qualified scholarship, fellowship, grant or qualified tuition reduction;
2. By a degree candidate;
3. At an educational institution;
4. If used for qualified tuition and related expenses which include tuition,
fees, books, supplies and equipment;
5. The recipient must actually use the money for its intended purpose.
But, the income exclusion does not apply to amounts representing payment for teaching, research, room, board or other incidental services. Thus, as long as your daughter uses the scholarship for tuition, fees, books, supplies and equipment and not for living expenses, then generally speaking none of the scholarship income would be taxable. So, there really is no reason to shelter the income from taxation!