Opinion
Docket No. 94017.
1963-05-23
ALEX L. SWEET, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Leon Schiller, for the petitioner. Daniel L. Stewart, for the respondent.
Leon Schiller, for the petitioner. Daniel L. Stewart, for the respondent.
Petitioner during the taxable year was a candidate for a degree in medicine at the University of Kansas. Through the university, he obtained a grant from the U.S. Public Health Service for the conduct of research on the hearing of cats. The performance of the research was a condition to receiving the grant. The research was not required of him or of other candidates for the degree he was seeking as a condition to receiving such degree, and he received no credit toward his degree for the research done. Held, that the limitation in section 117(b)(1) of the Internal Revenue Code of 1954, applicable to individuals who are candidates for degree, applies and the payments received by petitioner for the research done are not excludable from his gross income under section 117(a).
The respondent determined a deficiency in income tax against the petitioner for the taxable year 1958 in the amount of $387.95. The only question presented for decision is whether or not $3,270 received by petitioner in 1958 is excludable from his gross income, under section 117 of the Internal Revenue Code of 1954.
FINDINGS OF FACT
Petitioner is a resident of Beverly Hills, Calif. He filed his income tax return for 1958 with the district director of internal revenue for the district of Kansas.
Petitioner received a bachelor of arts degree in 1941, and a master's degree in 1942 from the College of the City of New York, majoring in each instance in psychology. Beginning sometime thereafter in 1942, and up to the middle of 1943, he was a predoctoral student of psychology at New York University. From the middle of 1943 to the middle of 1944, he taught physics at New York University. From the middle of 1944 to the middle of 1945, he worked in a civilian capacity with the National Defense Research Committee. During the next 12 months he taught psychology at College of the City of New York. Thereafter, until the middle of 1949, he attended Johns Hopkins University, and was awarded a Ph.D. degree in 1949. His doctoral work included experimental and physiological psychology.
Following his work at Johns Hopkins University, he worked as a research psychologist for the Naval Research Laboratory in Washington, D.C. He then left Washington for the University of Kansas, in Lawrence, Kans., where he was employed as an assistant professor of psychology,
until September of 1955, when he resigned his teaching job and enrolled as a candidate for a degree in medicine at the University of Kansas Medical School.
Although not definitely shown, it would appear from one of the questions by petitioner's counsel that petitioner began teaching at the University of Kansas in the fall of 1949, which would indicate that in all probability his service with Naval Research Laboratory was for only a brief period in the summer of 1949.
As assistant professor of psychology at the University of Kansas, petitioner's students were both undergraduate and graduate students. He gave seminars for students for M.A. and Ph.D. degrees, including a seminar in research methodology. In the summer of 1954, he gave a seminar for professors from various departments of medicine ‘in research methods and statistical methods as applied to medicine.’
In May or early June of 1954, petitioner called on Dr. G. O'Neil Proud, chairman of the Department of Otolaryngology at the University of Kansas Medical School, to whom he expressed an interest in doing research in the field of hearing. He acquainted Dr. Proud with his background, and Dr. Proud was agreeable to petitioner's proposal and willing to let petitioner have space in which to work. In the course of the conversation a question was raised as to what petitioner would do ‘to get by in terms of daily existence and so forth,’ and upon being told by petitioner that he worked only 9 months out of the year, Dr. Proud agreed to grant petitioner some funds for living expenses during the summer period.
Petitioner was given a room, which he set up as a laboratory with equipment for measuring hearing in the cat. The cat was chosen as a representative mammal for hearing mechanisms in general and for procuring data on a pilot basis. The experiment as conducted in the summer of 1954 involved only a few cats and was merely that of keeping them off water to see how it would affect their hearing. Petitioner had read that when people afflicted with Meniere's disease, a disease affecting their hearing, were given drugs that drove water from their bodies they seemed to hear better.
Petitioner continued to serve as assistant professor of psychology for the school year 1954-1955, but became interested in the idea of studying medicine, and in the fall of 1954 discussed the matter with Dr. Proud, who approved of the idea. Attending medical school would require petitioner to give up his teaching employment at the university, and would make it necessary for him to obtain from some other source the funds necessary for his medical school costs and his living expenses. Dr. Proud thought that it might be possible to procure the necessary funds from the U.S. Public Health Service on the basis of the experiments petitioner had been conducting in the hearing of cats. As a consequence, an application was made by the University of Kansas Medical Center to the Public Health Service for a grant to support a project entitled ‘Effects of Water Balance and Electrolyte Factors on Auditory Sensitivity in the Cat.’ Dr. Proud was listed as the principal investigator, and petitioner, described as research associate, department of otolaryngology, as coinvestigator. The payments of any grant awarded were to be made to Russell Miller, associate director, University of Kansas Medical Center. The Public Health Service approved the application, and funds to finance the project were paid to the University of Kansas Medical Center as the administering agency.
Petitioner thereafter engaged in research on the project from about September 1, 1955, through December 31, 1958, receiving $1,056 in 1955, $2,700 in 1956, $3,000 in 1957, and $3,270 in 1958. For each of the years covered, the University of Kansas Medical Center made application to the Public Health Service for a renewal grant. In each instance, Dr. Proud was listed as the principal investigator, and petitioner as coinvestigator. The application for renewal for 1958 was dated May 18, 1957. The application stated the understanding and agreement ‘That funds granted as a result of this request are to be expended for the purposes set forth herein.’ Request was made for $8,872, of which $3,060 was for professional personnel, $4,080 for other personnel, $175 for supplies, $300 for travel, $100 for other expenses, and $1,157 for ‘Indirect Costs (Overhead).’
The application for renewal of the grant for 1958 was approved under date of July 31, 1957. The notification and statement of grant award listed $7,715 as the amount granted for ‘Direct Costs (Exclusive of Trainee Stipends),‘ and $1,157 for ‘Indirect Costs (Overhead).’ The form of notification and statement carried a space for the amount rewarded as ‘Trainee Stipends.’ This space was lined through, showing that no amount was granted therefor.
Petitioner set up the experiments and was in full charge of the project. He did, on occasions, discuss some matters with Dr. Proud, accepting Dr. Proud's suggestions in some instances and not in others.
Beginning with September of 1955, petitioner resigned from his teaching duties and devoted his time primarily to his studies in the medical school. He worked on the project according to his own volition, sometimes in the evenings and sometimes on weekends. He had some research assistants who carried out activities as outlined to them. The work done on the project was not work required for the degree in medicine he was working for. Petitioner made reports on the project at two conferences in otolaryngology at the University of Kansas, one in 1956 and one in 1957. He also made the required progress reports to the Public Health Service in connection with the applications for renewal of the grant. He did not receive credit toward his degree for the research done.
When petitioner graduated from medical school the project was terminated. Beyond the reports above, the results have not been disclosed to anyone, or anybody, or any organization. Petitioner removed and took with him all papers, notes, and data, all of which he still has.
Petitioner received his M.D. degree at the University of Kansas Medical Center in July of 1959, after which he was an intern at Mount Zion Hospital in San Francisco. He is presently a resident in psychiatry at Mount Sinai Hospital in Los Angeles.
In reporting his income for 1958, petitioner did not include the $3,270 received by him in that year as above shown. Attached to his return was a statement that ‘All income received from the State of Kansas is held to be exempt under section 117.’
During 1958 petitioner was a student and a candidate for a degree in medicine at the University of Kansas. The research done by him in that year was not research required of him or of all or other candidates for degrees in medicine as a condition to receiving such degree. Petitioner did not receive credit toward his degree for the research done by him.
The respondent in his determination of deficiency included the $3,270 in income as salary.
OPINION
TURNER, Judge:
By section 117(a) of the Internal Revenue Code of 1954,
it is provided that in ‘the case of an individual, gross income does not include * * * any amount received at an educational institution (as defined in section 151(e) (4)), or * * * as a fellowship grant.’ By section 117(b)(1),
SEC. 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 education institution (as defined in section 151(e) (4)), or(B) as a fellowship grant, including the value of contributed services and accomodations; and(2) any amount received to cover expenses for—(A) travel,(B) research,(C) clerical help, or(D) equipment, which are incident to such a scholarship or to a fellowship grant, but only to the extent that the amount is so expended by the recipient.
it is provided that in the case of an individual who is a candidate for a degree at an educational institution, ‘subsection (a) shall not apply to that portion of any amount received which represents payment for teaching, research, or other services in the nature of part-time employment required as a condition to receiving the scholarship or fellowship grant.’ If, however, the ‘teaching, research, or other services are required of all candidates (whether or not recipients of scholarships or fellowship grants) for a particular degree as a condition to receiving such degree, such teaching, research, or other services shall not be regarded as part-time employment within the meaning of this paragraph.’
SEC. 117(b). LIMITATIONS.—(1) INDIVIDUALS WHO ARE CANDIDATES FOR DEGREES.— In the case of an individual who is a candidate for a degree at an educational institution (as defined in section 151(e)(4)), subsection (a) shall not apply to that portion of any amount received which represents payment for teaching, research, or other services in the nature of part-time employment required as a condition to receiving the scholarship or fellowship grant. If teaching, research, or other services are required of all candidates (whether or not recipients of scholarships or fellowship grants) for a particular degree as a condition to receiving such degree, such teaching, research, or other services shall not be regarded as part-time employment within the meaning of this paragraph.
As sustaining his position, petitioner cites and relies on Chander P. Bhalla, 35 T.C. 13. Patently, Bhalla is not this case. Bhalla was a candidate for a degree, as was petitioner here, but there, unlike the instant case, the research for which Bhalla received his grant was required of all candidates for the degree Bhalla was seeking. Not only did he receive credit toward his degree for the research done; but he would have been required to complete the research assignment as a condition to receiving the degree even if he had had no grant. Thus the grant to Bhalla was within the second sentence of section 117(b)(1). Section 117(a) was applicable and the payments received by him under the grant were not includable in his gross income.
In the instant case, as noted, petitioner likewise was a candidate for degree and the performance of the research was required of him as a condition to his receiving the grant. He does not contend otherwise. On the other hand, the research so required of him was not required of all candidates for the degree he was seeking as a condition to receiving such degree so as to make the second sentence of section 117(b)(1) applicable, as in Bhalla, and petitioner received no credit toward his degree for the research done. Compare also Doris Wells, 40 T.C. 40. It follows, we think, that the limitation appearing in the first sentence of section 117(b)(1) applies, and the payments received by petitioner are not to be excluded from his gross income under section 117(a).
It is the contention of the petitioner, however, that the primary purpose of the grant was to further his education and training and that under the reasoning in Bhalla, the limitations of section 117(b)(1) do not apply.
Even if we should accept as sound the proposition that regardless of the expressed limitation in section 117(b)(1) and the presence of facts bringing a case within those limitations, that section is not to apply if the purpose of the grant was primarily to further the education and training of a person engaging in the research, we would still be unable to find that such was the primary purpose of the grant to petitioner. We did have in the course of petitioner's testimony assertions and statements of conclusions to the effect such was the primary purpose. But, on the other hand, other parts of his testimony tend to support the conclusion that the grant was not sought and acquired primarily for the purpose of furthering his education and training, but primarily to enable him to earn the money needed for his medical school instruction looking to a degree in medicine, in respect of which the research engaged in by him was not required and for which he received no credit. Petitioner was his only witness. He did not offer the testimony of either Dr. Proud or of any others having to do with the procuring of the grant as to their purpose in so doing.
Decision will be entered for the respondent.