Lead Opinion
OPINION
Section 117(a)
Section 1.117-4 (c) of the regulations provides that certain payments are not to be considered scholarships or fellowship grants for purposes of the section 117 exclusion:
Sec. 1.117-4 Items not considered as scholarships or fellowship grants.
The following paymеnts or allowances shall not be considered to be amounts received as a scholarship or a fellowship grant for the purpose of section 117:
(c) Amounts paid as compensation for services or primaA'ily for the benefit of the grantor. (1) Except as provided in paragraph (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 compensation for past, present, or future employment services or represents pаyment for services which are subject to the direction or supervision of the grantor.
(2) Any amount paid or allowed to, or on behalf of, an individual to enable him to pursue studies or research primarily for the benefit of the grantor.
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 purpose of section 117 if the primary purpose of the studies or research is to further the educаtion and training of the recipient in his individual capacity and the amount provided by the grantor for such purpose does not represent compensation or payment for the services described in subparagraph (1) of this paragraph. Neither the fact that the rеcipient is required to furnish reports of his progress to the grantor, nor the fact that the results of his studies or research may be of some incidental benefit to the grantor shall, of itself, be considered to destroy the essential character of such amount as a scholarshiр or fellowship grant.
The validity of the regulations was upheld by the Supreme Court in Bingler v. Johnson,
The applicability of section 117 to payments received by resident physicians has already received judicial consideration on a number of oсcasions. With a few exceptions, courts considering this issue have consistently held such payments to be “compensation for past, present, or future employment services” or “payment for services which are subject to the direction or supervision of the grantor” and consequently not excludable from the recipient’s gross income. See, e.g., Quast v. United States,
We think that like treatment should be accorded to the payments petitioner received from the Center.
As a resident in psychiatry, petitioner rendered services to the Center which were both extensive and valuable. Throughout 1967 he had general responsibilities for interviewing, examining, and evaluating patients to whom he was assigned. He instructed medical students assigned to the hospital. During the first half of 1967, he was on call at night every 10 to 14 days and, according to the Center’s manual, on such occasions had “primary responsibility for the entire hospital.” In addition the pamphlet issued to residents at the Center described still other duties which included scheduling and unscheduling electroshock therapy, completing death certificates for patients who have died, and notifying the referring physician and nearest of kit; in certain instances. See Aloysius J. Prоskey,
Furthermore, in carrying out his duties, petitioner acted under the direct or indirect supervision of staff psychiatrists. Petitioner’s work on individual patients was reviewed by members of the hospital staff. Moreover, residents were appointed on a yearly basis, and petitioner’s оverall work at the Center was thus at least potentially subject to review at such times. The hospital staff supervised petitioner’s work in such manner that it was quite unlikely that his work would not have been of benefit to the Center. See Aloysius J. Proskey,
The Center’s payments to petitioner enabled the hospital to gain his services. When petitioner originally was interviewed for a residency at the Center, he was informed of the availability of the payments made to residente — particularly those stemming from the NIMH grant. Cf. Wertzberger v. United States,
In view of tRe fact that in this case the resident received an increase in pay with each year’s experience, how can it be said that this increase in pay for a more experiеnced employee is within the ordinary understanding of scholarship or fellowship? Clearly the increase in pay is to compensate the doctor for his additional experience and greater value to the hospital.
Moreover, the “Hospital Koutine and Procedure” manual issued by the Center to its residents, set out highly specific duties, hours on duty, and procedures to ensure proper timing of holidays and vacations so that adequate hospital coverage could be maintained. Such provisions strongly suggest both the value of the residеnts to the Center and the employee-employer relationship between them. A major function of the Center was patient care, and, as a resident, petitioner made a valuable contribution to the performance of that function. Petitioner’s contribution wаs by no means an “incidental benefit” to the grantor. His services were precisely what he was being paid for and were sub-jeet to the Center’s continual supervision. See Income Tax Kegs., sec. 1.117-4 (c). We conclude that the full amount of the payments received by petitioner from the Center in 1967 is includable in his gross income.
Petitioner has emphasized that the $3,600 here in issue is attributable to the NIMH grant to the Center, that petitioner did not perform services for the benefit of NIMH or under its supervision, and that the purpose of the NIMH program was to enable a greater number of persons to pursue careers in mental health disciplines and to improve the quality of mental health in the United States. Petitioner urges that NIMH is the “grantor” of the funds in issue and that it made disinterested payments primarily for the purpose of furthering petitioner’s eduсation. We disagree. We think that, under the circumstances herein, the Center, and not NIMH, must be considered the grantor of the payments. NIMH’s own publication provided that “Trainee stipend grants are not awarded directly to individuals by the National Institute of Mental Health; ” that such grants werе made only to training institutions; that in order to benefit from the grants individual physicians were required to apply to the funded institutions; and that the institutions would select and pay the individuals they had chosen. Apart from establishing minimum educational and citizenship requirements, NIMH left selection of the recipient entirely to the Center. The Center’s “program director,” not NIMH, was responsible for the residents’ duties at the Center. In light of all the additional evidence revealing the compensatory nature of the payments, we consider the foregoing circumstances to be highly significant. Although NIMH’s grant to the Center may well have been disinterested and non-compensatory in nature, the Center’s grant to petitioner was quite different. The payments were made in return for petitioner’s income.
To be sure, petitioner’s training at the Center may make a substantial contribution to the health and welfare of the general public. But the existence of such a contribution is hardly inconsistent with our finding that the payments were made “primarily for the benefit of the grantor.” See Jerry S. Turem,
There can be no serious doubt that work as a resident physician provides highly valuable training, particularly in preparing for specialties in the various fields of medicine. Yet virtually all work as an apprеntice, whether in medicine or law, carpentry or masonry, provides valuable training. Nothing in section 117 requires that an amount paid as compensation for services rendered be treated as a nontaxable fellowship grant, merely because the recipient is learning a trade, business, or profession. Whatever training petitioner received during the years of his residency — and we do not deny that it was substantial — was merely “incidental to and for the purpose of facilitating the raison d’etre of the Hospital, namely, the care of its patients.” Ethel M. Bonn,34 T.C. 64 , 73 (1960) ; Woddail v. Commissioner, supra. * * *
At the trial herein, the medical director of the Center testified that the Center “probably could operate [without residents] without increasing its staff” by having its staff members care for patients during periods previously spent teaching residents. We do not find that testimony convinсing. The services performed by residents at the Center were extensive. Even if the hospital could “operate” without residents, we think it quite doubtful that the Center could continue to care for as many patients and as effectively as it could with their help. Cf. Ethel M. Bonn,
Petitioner relies upon Wrobleski v. Bingler,
Decision will be entered for the respondent.
Notes
SEC. 117. SCHOLARSHIPS AND FELLOWSHIP GRANTS.
(a) General Rule. — In the case of an individual, gross income does not include— 01) any amount received—
(A) as a scholarship at an educational institution (as defined in section 161 (e) (4)), or
(B) as a fellowship grant,
Including the value of contributed services and accommodations;
See also Emerson Emory,
The statement of NIMH that the stipends “are not considered to be salary for services” was apparently made for рurposes of determining the eligibility of trainees for fringe benefits and not for Federal income tax purposes. In any case, such a statement is certainly not determinative herein.
In Haley, the Court stated (p. 647) :
“The petitioner also attempts to support an exclusion for 75 percent of her educational grant under the theory that the grantor was the united States, not the State of Oregon. Her argument is that, as she had no employment relationship with the Federal Government, the grant, to the extent funded by Federal moneys under a 75 percent matching program, could not be in consideration of her ‘past, present, or future services’ to the Federal Government. Petitioner’s argument must fail as her agreement was not with the Federal Government and as she did not receive funds from the Department of Health, Education, and Welfare or any other Federal Agency. The Federal government was not the grantor. Cf. Norman R. Williamsen, Jr.,32 T.C. 154 (1950). The grantor of the funds was the State Commission, and the funds were distributed from the general funds of the State of Oregon.”
See also Emerson Emory,
It is far from clear to us that the Center would continue to be as attractive to staff physicians if It ceased to be a teaching hospital. Cf. Marvin Flicker,
Cf. Janis Dimants, Jr.,