The issue presented on this appeal is whether certain payments received by Eugene E. Hembree, Jr. 1 during his in *1263 ternship and a portion of his residency at the Medical College of Sоuth Carolina were excludable from gross income as a fellowship within the meaning of section 117 of the Internal Revenue Code of 1954. 2 The district court determined that such amounts reсeived constituted a fellowship grant and ordered a refund of federal income taxes and interest.
Dr. Hembree, in June, 1966, received a Doctor of Medicine degree from the Medical College of South Carolina, now the Medical University of South Carolina (hereinafter referred to as MCSC). On July 1, 1966, taxpayer began his internship at the MCSC Hospital, which continued fоr one year, immediately after which he became a resident in obstetrics and gynecology at the same hospital. The program for interns and residents at the MCSC Hospital involvеs a rotation among three hospitals, namely, the MCSC Hospital, the Veterans Administration Hospital, Charleston (hereinafter referred to as VA Hospital), and the Charleston County Hosрital. During his internship, Dr. Hembree spent four months at the VA Hospital, seven months at the MCSC Hospital and one month at the County Hospital. From July to December, 1966, taxpayer received $1,434.06 from thе MCSC Hospital and $358.67 from the VA Hospital, or a total of $1,792.73; and in 1967, he received $3,273.07 from the MCSC Hospital and $1,029.73 from the VA Hospital, or a total of $4,302.80. The original suit for refund claimed that $1,792.73 receivеd in 1966 and $3,600 of the amount received in 1967 were excludable under Section 117. 3
Under the rotational plan there were no differences between the taxpayer’s duties and his relatiоnship to the VA Hospital and the MCSC Hospital. The interns and residents of both hospitals were paid every two weeks and the pay scale at the VA Hospital was keyed to that at the MCSC Hospital, the salaries at the former being slightly higher to compensate for benefits provided by MCSC which were not provided by the VA. During the years in question the taxpayer was paid by the hоspital where he currently worked and income taxes were withheld and W-2 Forms issued showing the withholdings. After a year of service the interns and residents of the VA and MCSC were granted two weeks annuаl leave with no salary deduction, and during their service they were provided with free uniforms and laundry service and entitled to participate in the group health insurance program of the MCSC Hospital employees.
Although is was undisputed that under the rotational system the educational pattern of Dr. Hembree embraced all three hospitals, the district cоurt had no difficulty in concluding that the amounts received by the taxpayer from the VA Hospital and the County Hospital did not qualify as a fellowship grant but represented compensation for services performed. The court made this determination upon its finding that both the VA and County Hospitals were established for the primary purpose of providing medical services to discharged veterans and other patients. However, the court concluded that the payments made to Dr. Hembree by MCSC quali *1264 fied as a nontaxable fellowship grant since thеy were made for the primary purpose of furthering his education and training and did not represent compensation for services. This conclusion of the district court was based uрon its finding that the primary purpose of MCSC Hospital was the training of physicians rather than the treatment of patients. In support of this finding, the court placed considerable emрhasis upon legislation of the General Assembly of the State of South Carolina which authorized the issuance of bonds to purchase land “to be used by the Medical College of South Carolina as a site for a teaching hospital.” 4 The court also relied upon the language of the Charter of the Medical College which states in substance that it was established for the purpose of training physicians. 5
In reaching its decision with respect to the payments received from MCSC the court below applied the so-called “primary рurpose” test, citing Reese v. Commissioner of Internal Revenue,
Ҥ 1.117-4 Items not considered as scholarship or fellowship grants.
The following payments or allowances shall not be considered to be amounts received as a scholarship or а fellowship grant for the purpose of section 117:
******
(c) Amounts paid as compensation for services or primarily for the benefit of the grantor.
(1) Except as provided in parаgraph (a) of § 1.117-2, any amount paid or allowed to, or on behalf of, an individual to enable him to pursue studies or research, if such amount represents either compensatiоn for past, present, or future employment services or represents payment for services which are subject to the direction or supervision of the grant- or.
(2) Any amount pаid or allowed to, or on behalf of, an individual to enable him to pursue studies or research primarily for the benefit of the grant- or. However, amounts paid or allowed to, or on behalf of, an individual to enable him to pursue studies or research are considered to be amounts received as a scholarship or fellowship grant for the purposе of section 117 if the primary purpose of the studies or research is to further the education and training of the recipient in his individual capacity and the amount provided by the grаntor for such purpose does not represent compensation or payment for the services described in subparagraph (1) of this paragraph. * # *»
On the facts of this cаse, however, we conclude that the district court erred in using the primary purpose of the hospital facility as the criterion for the test enunciated in the Regulations. It is not the purpose of the facility to which the Regulation refers but the primary purpose of the payment made to the taxpayer that is controlling. In Reese v. Commissioner of Internal Revenue, supra, this court upheld the tax court’s conclusion that “the primary purpose test requires a determination of the raison d’etre of the payment.” The arrangements under which Dr. Hembree servеd that portion of his internship and residency at MCSC had all of the indicia of an employer-employee relationship, and differed in no material respect from his service at the VA and County Hospitals. Witnesses, including the taxpayer, testified that the interns and residents performed valuable services for MCSC, and without them the hospital would have found it necessary to hire other *1265 doctors to carry on its medical programs. Clearly, the raison d’etre of the payments from MCSC to Dr. Hembree was to compensate him for services performed for it. Under these circumstances, the ’fact that the institutional purpose of MCSC differed from the VA and County Hospitals is immaterial.
There is another and more compelling reason for holding the subject payments taxable. The regulations require that in order to qualify for exclusion the payments must be made for the primary purpose of furthering the education and training of the recipient, and, additionally, the amount provided for such purрose shall not represent compensation or payment for services. In considering and sustaining the validity of Treasury Regulation 117-4(c) in Bingler v. Johnson,
We conclude, therefore, that the payments received by Dr. Hеmbree from MCSC represented compensation for services performed and, accordingly; were not excludable as a fellowship grant under section 117.
Reversed.
Notes
. Belle D. Hembreе is a party to this appeal solely because she and her husband filed joint income tax returns.
. Internal Revenue Code of 1954 (26 U.S.C.) :
Ҥ 117. Scholarships and fellowship grants
(a) General rule. — In the case of an individual, gross income does not include—
(1) any amount received—
(A) as a scholarship at an educational institution (as defined in section 151(e) (4), or
(B) as a fellowship grant, including the value of contributed services and accommodations ; * * * ”
. Since Dr. Hembree was not a сandidate for a degree, the amount received as a fellowship excludable from gross income cannot exceed an amount equal to $300 times the number of months for which the recipient received the fellowship grant during the taxable year. Internal Revenue Code of 1954 § 117(b) (2).
. Act 920, v. 45, S.C. Statutes at Large, p. 2430.
. Act 2580, v. 8, S.C. Statutes at Large, p. 379.