Bachmura v. Commissioner

Frank Thomas Bachmura, Petitioner, v. Commissioner of Internal Revenue, Respondent Bachmura v. Commissioner Docket No. 60388 United States Tax Court 32 T.C. 1117; 1959 U.S. Tax Ct. LEXIS 101; August 24, 1959, Filed *101 Decision will be entered for the respondent. Beginning in September of 1954, the taxable year herein, petitioner, the holder of a Ph. D. degree, was employed by Vanderbilt University at a salary of $ 4,600 per year. Pursuant to this employment, he devoted one-fourth of his working time to the teaching of classes in economics and the remaining three-fourths to work on a research project entitled "Southern Economic Development, with Particular Reference to Agriculture." The funds for the project were received by grant to Vanderbilt from the Rockefeller Foundation, for use over a period of 5 years beginning in 1952. The sources of petitioner's salary payments were Vanderbilt University general funds, one-fourth, and the funds received from the Rockefeller Foundation, three-fourths, appropriate amounts being transferred from the Rockefeller account into the general funds of the university at the proper time for making the monthly payroll payments. Petitioner was not a candidate for a degree and the teaching and research performed by him did not constitute any part of a regular course required to obtain a degree from Vanderbilt University. The research project was not instituted*102 or carried on for the purpose of furthering petitioner's education and training in his individual capacity. Held, under section 1.117-3(c) and section 1.117-4(c), Income Tax Regs., that the compensation received by petitioner, the source of which was the funds supplied to Vanderbilt University by the Rockefeller Foundation, was not excludible from gross income as amounts received as a fellowship grant within the meaning of section 117 of the 1954 Code, and held, further, that, as applicable under the facts herein, the said regulations are not shown to be unreasonable and plainly inconsistent with the statute. Frank Thomas Bachmura, pro se. Miller Bowen, Esq., for the respondent. Turner, Judge. TURNER *1117 The respondent determined a deficiency in income tax against the petitioner for the taxable year 1954 in the amount of $ 237. The question is whether certain payments received by*104 petitioner from Vanderbilt University are excludible from his gross income as a fellowship grant, under section 117 of the Internal Revenue Code of 1954. *1118 FINDINGS OF FACT. Some of the facts have been stipulated and are found as stipulated. Petitioner is a resident of Nashville, Tennessee. He filed his income tax return for 1954 with the district director of internal revenue for Tennessee. Petitioner received his bachelor of science degree from New York University. He began graduate work at the University of Chicago in 1948, and received a master of arts degree therefrom. During 1951 he was admitted to candidacy for the degree of doctor of philosophy, also at the University of Chicago. His graduate work was in the field of economics. The title of his thesis was "Geographical Differentials in Returns to Corn Belt Farmers: 1860-1950," and his research and preparation therefor were directed to what petitioner termed "regional disparities in farm income." As the geographical area for his research, petitioner selected the State of Iowa. He received the degree of doctor of philosophy from the University of Chicago in August of 1953. In the interim, but more specifically, *105 from September 1952 to June 1953, petitioner served as assistant professor of economics at the University of Wyoming. He taught 12 hours of classes per week, and during his spare time made alterations in his thesis and extended his research to additional geographical areas. Based on this extended research, he presented a paper before the Colorado-Wyoming Academy of Science on May 1, 1953, relative to regional income disparities in these additional areas. While at the University of Chicago, petitioner had received a request from Dr. William E. Nicholls, professor of economics at Vanderbilt University, for certain information as to statistics he had used to obtain estimates of rural populations for the earlier years covered by his thesis. From correspondence with Nicholls, he became aware of a grant which had been made by the Rockefeller Foundation to Vanderbilt University for a research project referred to as "Southern Economic Development, with Particular Reference to Agriculture," which research project Nicholls was to direct. The grant amounted to $ 112,000, which was to be used over the 5 years beginning in 1952. The grant also covered a second project relating to industrial*106 concentration and public policy. This latter project was to be directed by Dr. George W. Stocking, Director of the Institute of Research and Training in the Social Sciences and professor of economy at Vanderbilt University. The funds were earmarked by Vanderbilt to be used only for research, and were segregated from the general funds of the university. In April of 1953, petitioner contacted Nicholls, seeking to join in the above research project which was under Nicholls' supervision but *1119 on July 15, 1953, he was advised that the budgeted funds would not permit, but that petitioner's credentials had been obtained from the University of Chicago, and that something might be worked out the following spring, if petitioner should then be seeking employment. For the school year 1953-1954 petitioner was employed as professor of economics at Denison University, Granville, Ohio. He taught 12 hours of classes per week, but in his spare time continued to work on problems of regional income disparities. On October 5, 1953, petitioner wrote Nicholls that his career interest was in the field of economic development, and though his employment at Denison was a "permanent-type appointment," *107 he was not completely happy there and would consider possible alternatives. Under date of January 18, 1954, Nicholls suggested that petitioner meet with Stocking to see if there was any possibility of an offer to petitioner for the next academic year. About the end of January 1954, petitioner made a trip to Nashville, at which time he met with Stocking and discussed with him the "matter of joining the project." Petitioner did not want to discontinue teaching entirely and the possibility of a permanent appointment was brought up. Stocking was of the view, however, that a permanent appointment was unlikely, inasmuch as the money for the project was coming, or had come, from the Rockefeller Foundation. Shortly thereafter, petitioner received a telephone call in Granville from Stocking, inviting him to join the project, at an annual figure of $ 4,200. Petitioner demurred, on the ground that the suggested figure would result in a salary cut. Later in the day, Stocking called a second time, and an annual figure of $ 4,600 was agreed upon. The terms of petitioner's employment were confirmed by letter received by him from the dean of the graduate school, Vanderbilt University, under *108 date of February 19, 1954, as follows: It gives me pleasure to invite you to join the faculty of Vanderbilt University as visiting assistant professor and research associate at a salary of $ 4,600, effective September 1, 1954. As Dr. Stocking has indicated to you, we expect this to be a two-year appointment with your primary service being association with Dr. Nicholls in his program of agricultural research. There will be some small teaching assignment, probably in the introductory course in economics or in economics for engineers. I hope very much that you will decide to come to Vanderbilt, and I can assure you of the support and cooperation of the administration in your work under Dr. Nicholls. I am sure that you would find working with him and Dr. Stocking, as well as your other colleagues in the department, a stimulating and profitable experience. Petitioner's employment with Vanderbilt began on September 1, 1954. He was required to teach 3 hours of classes per week. He spent approximately three-fourths of his working time on the research project for which the funds had been supplied by the Rockefeller *1120 Foundation and the other one-fourth in preparing for and teaching*109 his 3 hours of classes. He was free to perform research outside the immediate project outlined, and conducted his research according to an irregular and informal time schedule, largely of his own choosing. In his work on the project petitioner was subject to the control and direction of Nicholls, but very little control or direction was in fact exercised. He was not required to make periodic reports. Petitioner was not a candidate for a degree, and the project was not instituted to further his education and training. The teaching and research performed by him did not constitute any part of the regular course required to obtain a degree. Petitioner's salary of $ 4,600 was payable monthly, beginning September 1, 1954. During 1954, his gross income from Vanderbilt University was $ 1,533.32, from which $ 233.60 was withheld by the university for income taxes. Vanderbilt charged approximately three-fourths of petitioner's salary against the funds received from the Rockefeller Foundation, which amounts were transferred from the Rockefeller account into the general funds of the university at the proper time for making the monthly payroll payments. The remaining one-fourth of his salary*110 was paid from and charged to the Vanderbilt University general funds. The Rockefeller Foundation is an organization such as that described in section 501(c)(3) of the Internal Revenue Code of 1954, and exempt from tax under subsection (a) of that section. Vanderbilt University is an educational institution within the meaning of section 151(e)(4) of the 1954 Code, and an organization described by section 501(c)(3), and exempt from tax under the provisions of subsection (a) of that section. On his income tax return for 1954, petitioner reported as compensation only one-fourth of the $ 1,533.32, or $ 383.33, which he had received from Vanderbilt University, claiming that three-fourths of such compensation was excludible from gross income as a fellowship grant, under the provisions of section 117 of the 1954 Code. In his determination of deficiency, the respondent determined that all of the $ 1,533.32 received by petitioner from Vanderbilt University was taxable income. OPINION. Prior to the enactment of the Internal Revenue Code of 1954, there was no statutory provision specifically covering the treatment, for income tax purposes, of amounts received as scholarships and fellowship grants. *111 And in cases relating thereto, the question was whether the amounts so received were of such character as to fall within the statutory definition of gross income and the decisions usually turned on the conclusion as to whether the amounts *1121 represented compensation for services rendered, which did fall within the statutory definition of gross income, or were gifts, which by the definition were excluded from gross income. See George Winchester Stone, Jr., 23 T.C. 254; Ti Li Loo, 22 T.C. 220; Ephraim Banks, 17 T.C. 1386. In section 117 of the 1954 Code, Congress legislated specifically with respect to scholarships and fellowship grants, and subject to the limitations stated therein, section 1171 provides that "(a) * * * [in] the case of an individual, gross income does not include -- (1) any amount received -- (A) as a scholarship at an educational institution * * * or (B) as a fellowship grant." The limitations are those relating to individuals who are candidates for degrees and contained in subsection (b)(1), and those relating to individuals who are not candidates for degrees*112 and contained in subsection (b)(2). In the case of an individual who is a candidate for a degree, the exclusion from gross income does not apply "to that portion of any amount received which *1122 represents payment for teaching, research, or other services in the nature of part-time employment required as a condition to receiving the scholarship or the fellowship grant," unless the teaching, research, or other services are required of all candidates, whether recipients of scholarships or fellowship grants, as a condition to the receiving of the particular degree, in which case such teaching or research is not to be regarded as part-time employment within the meaning of subsection (b)(1). In the case of an individual who is not a candidate for a degree, the exclusion applies "only if" the grantor of the scholarship or fellowship grant "is an organization described in section 501(c)(3) which is exempt from tax under section 501(a), the United States, or an instrumentality or agency thereof, or a State, a Territory, or a possession of the United States, or any political subdivision thereof, or the District of Columbia." Also, the amount to be excluded in the case of an individual*113 not a candidate for a degree is limited to an amount equal to $ 300 times the number of months for which the amounts were received during the taxable year, and to a period of 36 months in all. *114 According to the committee reports, 2 the purpose of section 117 is to provide rules for determining the extent to which amounts received as scholarships and fellowship grants are to be included in gross income, and to eliminate confusion which existed as to whether such payments were to be treated as income or gifts. Petitioner rests his claim on the proposition that he was the recipient of a fellowship grant. He makes no claim that he had a scholarship. He was not a candidate for a degree, and since, according to the stipulation of the parties, both the Rockefeller Foundation and Vanderbilt University are organizations described in section 501(c)(3) which are exempt from tax under the provisions of section 501(a), and petitioner has not claimed any exclusion in excess of $ 300 for each of the 4 months during the taxable year for which he received the said payments, the crucial question appears to be whether the payments received by him, and here*115 in question, were amounts received as a fellowship grant within the meaning of the term "fellowship grant" as used by Congress in section 117. Congress did not define fellowship grant in the statute, and we have found nothing in the committee reports or other legislative history to indicate that Congress thought that beyond the statute itself there was any necessity to elaborate on the meaning intended. The respondent, in his regulations, section 1.117-3(c) of the Income Tax Regulations, 3 has defined fellowship grant "generally" as meaning *1123 "an amount paid or allowed to, or for the benefit of, an individual to aid him in the pursuit of study and research," but as not including "any amount provided by an individual to aid a relative, friend, or other individual in the pursuit of study or research where the grantor is motivated by family or philanthropic considerations." Section 1.117-43 of the regulations describes certain payments or allowances which thereunder "shall not be considered to be amounts received *1124 as * * * fellowship grant for the purpose of section 117." And in section 1.117-4(c), 3 which specifically excepts therefrom the provisions of section*116 1.117-2(a), 3 prescribing the limitations relating to individuals who are candidates for degrees, it is provided that "(1) * * * 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 payment for services which are subject to the direction or supervision of the grantor," or "(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," are not to be regarded as amounts received as fellowship grants. The subsection further provides, however, that "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 education 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)," just*117 quoted. It is also provided that "[neither] the fact that the recipient 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 scholarship or fellowship grant." *118 As supporting his position, petitioner cites and relies on the definitions of the words "fellow" and "fellowship" as found in Webster's New International Dictionary. As to the word "fellowship," the definition referred to is in its relation to English and American universities, and is: "a The fellows of a college collectively. b The position and emoluments of a fellow. c A foundation for maintenance, on certain conditions, of a scholar called a fellow who usually resides at the university." As a pertinent definition of the word "fellow," petitioner cites the following: "9. In English universities: a An incorporated member of a college or a collegiate foundation. b By analogy, a holder of a position carrying an allowance from the collegiate funds, based upon the prosecution of certain studies for a term of years and called a fellowship. 10. In some American and some newer British universities and colleges, a member of the corporation or governing body; also a graduate appointed to a fellowship." He also points out that the word "emolument" is defined as "[profits] from office, employment, or labor; compensation; fees or salary." Reasoning that payments received as fellowship*119 grants may constitute compensation for services, and that since Congress, according to the committee reports, was seeking through section 117 to eliminate *1125 the existing confusion as to whether such payments were to be treated as income or gifts, it is argued that the respondent's regulation, section 1.117-4 (c), is based upon the obsolete criterion of gift, is contrary to the will of Congress, and must be regarded as erroneous and invalid. This contention is based also in part on the proposition that in section 117(b)(1), relating to individuals who are candidates for degrees, Congress has specifically provided that the compensation for certain services required as a condition to the grant and which, according to the statute, are to be regarded as part-time employment, is not excludible from gross income under section 117(a), whereas in section 117(b)(2), relating to individuals who are not candidates for degrees, there is no comparable provision. We agree that amounts received as a fellowship grant may be compensatory in character, and that with the enactment of section 117 of the 1954 Code it no longer follows that such amounts are to be included in gross income merely*120 because they were in the nature of compensation for services rendered. But further, we are of the view that respondent's regulation, section 1.117-4(c), is not to the contrary as petitioner contends. By the same token, however, we do not think it follows as a matter of course that the amounts received by petitioner were received as a fellowship grant within the meaning of section 117, and excludible from his gross income under section 117(a). It is patent, we think, that Congress never intended that the exclusion provided in section 117(a) should apply to payments received by an individual not a candidate for a degree merely because they were received from an educational or charitable institution or foundation meeting the requirements as set forth in section 117(b)(2)(A). Petitioner does not contend otherwise, but agrees that the exclusion was not intended to cover payments received from such an institution by administrators, clerks, and stenographers, or professors or teachers generally. If we follow him aright, he distinguishes his position from that of such personnel insofar as the applicability of section 117(a) is concerned, on the ground that his work has been referred to*121 as research and was a special project not regularly constituting a part of the teaching program of Vanderbilt University. According to section 1.117-4(c), payments received, even though to enable the recipient to pursue studies or research, are not to be regarded as amounts received as fellowship grants within the meaning of section 117 and as such excluded from gross income, if the payments represent compensation for what in the regulation has been termed "employment services." On the other hand, the regulation recognizes as excludible under section 117(a) payments even though compensatory in character, provided they are amounts paid to the *1126 individual to enable him to pursue studies or research, if the primary purpose of such studies or research is to further the education and training of the recipient in his individual capacity, and provided they do not represent compensation for "employment services," as previously indicated. It would thus appear that the respondent in his interpretation and application of section 117 has concluded that where in the case of an individual who is not a candidate for a degree the arrangement between the parties is primarily one of employment*122 and the payments, even though for research, are primarily payments of compensation as such and their primary purpose is not that of enabling the recipient to carry on the studies or research in furtherance of his own education and training, such payments are not to be regarded as amounts received as a fellowship grant within the meaning of section 117. It is well settled that respondent's regulations must be regarded as valid, unless unreasonable or inconsistent with the statute, and that they constitute contemporaneous construction of the statute by those charged with its administration and will not be disturbed or overruled except for weighty reasons. Commissioner v. South Texas Lumber Co., 333 U.S. 496; Fawcus Machine Co. v. United States, 282 U.S. 375, 378; Brewster v. Gage, 280 U.S. 327. It also appears well settled that statutory provisions granting special tax exemptions are to be strictly construed. Commissioner v. Jacobson, 336 U.S. 28; Helvering v. Northwest Steel Rolling Mills, Inc., 311 U.S. 46;*123 Cappel House Furnishing Co. v. United States, 244 F. 2d 525; Estate of Shedd v. Commissioner, 237 F. 2d 345; Frederick Smith Enterprise Co. v. Commissioner, 167 F. 2d 356, 359; Peoples Finance & Thrift Co., 12 T.C. 1052. On the record before us, we are satisfied and convinced that the furtherance of petitioner's education and training in his individual capacity was neither the occasion for nor the purpose of petitioner's employment and participation in the research project. The facts indicate that petitioner's purpose in moving from Denison to Vanderbilt was primarily a matter of changing to employment which would be of greater interest to him. He was not happy in his work at Denison, and felt that the work at Vanderbilt, consisting of part-time teaching and part-time work on the project, was more attractive, even though to all appearances of limited duration. He demurred, however, at accepting the employment at the figure of $ 4,200 annually as originally offered, since it would result in a salary cut. The annual figure of $ 4,600, on the other*124 hand, was acceptable. It is accordingly our opinion and we conclude that under the respondent's regulations the amounts in question were not amounts received as a fellowship grant within the meaning of section 117 of *1127 the 1954 Code, and when applied on the facts herein, we are unable to say that the regulations are unreasonable and plainly inconsistent with the statute. Decision will be entered for the respondent. Footnotes 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 educational institution (as defined in section 151(e)(4)), or (B) as a fellowship grant, including the value of contributed services and accommodations; 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. (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 the 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. (2) Individuals who are not candidates for degrees. -- In the case of an individual who is not a candidate for a degree at an educational institution (as defined in section 151(e)(4)), subsection (a) shall apply only if the condition in subparagraph (A) is satisfied and then only within the limitations provided in subparagraph (B). (A) Conditions for exclusion. -- The grantor of the scholarship or fellowship grant is an organization described in section 501(c)(3) which is exempt from tax under section 501(a), the United States, or an instrumentality or agency thereof, or a State, a Territory, or a possession of the United States, or any political subdivision thereof, or the District of Columbia. (B) Extent of exclusion. -- The amount of the scholarship or fellowship grant excluded under subsection (a)(1) in any taxable year shall be limited to an amount equal to $ 300 times the number of months for which the recipient received amounts under the scholarship or fellowship grant during such taxable year, except that no exclusion shall be allowed under subsection (a) after the recipient has been entitled to exclude under this section for a period of 36 months (whether or not consecutive) amounts received as a scholarship or fellowship grant while not a candidate for a degree at an educational institution (as defined in section 151(e)(4)).↩ 2. H. Rept. No. 1337, pp. 17, a37; S. Rept. No. 1622, pp. 17, 188.↩ 3. Sec. 1.117-2 Limitations. -- (a) Individuals who are candidates for degrees. -- (1) In general. -- Under the limitations provided by section 117(b)(1) in the case of an individual who is a candidate for a degree at an educational institution, the exclusion from gross income shall not apply (except as otherwise provided in subparagraph (2) of this paragraph) to that portion of any amount received as 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. Payments for such part-time employment shall be included in the gross income of the recipient in an amount determined by reference to the rate of compensation ordinarily paid for similar services performed by an individual who is not the recipient of a scholarship or a fellowship grant. A typical example of employment under this subparagraph is the case of an individual who is required, as a condition to receiving the scholarship or the fellowship grant, to perform part-time teaching services. A requirement that the individual shall furnish periodic reports to the grantor of the scholarship or the fellowship grant for the purpose of keeping the grantor informed as to the general progress of the individual shall not be deemed to constitute the performance of services in the nature of part-time employment. (2) Exception. -- 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 the degree, such teaching, research, or other services on the part of the recipient of a scholarship or fellowship grant who is a candidate for such degree shall not be regarded as part-time employment within the meaning of this paragraph. Thus, if all candidates for a particular education degree are required, as part of their regular course of study or curriculum, to perform part-time practice teaching services, such services are not to be regarded as part-time employment within the meaning of this paragraph. * * * * Sec. 1.117-3 Definitions. -- * * * * * * * (c) Fellowship grant. -- A fellowship grant generally means an amount paid or allowed to, or for the benefit of, an individual to aid him in the pursuit of study or research. * * * However, the term does not include any amount provided by an individual to aid a relative, friend, or other individual in the pursuit of study or research where the grantor is motivated by family or philanthropic considerations. * * * * Sec. 1.117-4 Items not Considered as Scholarships or Fellowship Grants. -- The following payments 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 primarily for the benefit of the grantor. (1) Except as provided in § 1.117-2(a), 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 payment 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 education 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 recipient is required to furnish report 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 scholarship or fellowship grant.