Dr. Hollis K. (Iii) and Patricia D. Leathers v. United States of America Dr. William F. And June B. Blankenship v. United States , 471 F.2d 856 ( 1972 )

VOGEL, Circuit Judge.

These suits were initiated by Drs. Blankenship and Leathers, plaintiff-appellees herein,¹ for refunds of federal income taxes. The cases were consolidated prior to trial, involving as they did similar issues and facts. A jury trial was had, resulting in verdicts for plaintiffsappellees. The government then filed motions for judgment notwithstanding the verdicts, or in the alternative for new trials. The District Court denied the motions and a memorandum opinion was filed.² We affirm.

Taxpayers were both licensed physicians who were, during the years 1968 and 1969, in the residency program at the University of Arkansas Medical Center (UAMC). Neither doctor was a candidate for a degree. Upon completion of their residency they would have been “board certified” so as to be able to take the qualifying examinations in their specialties. During 1969, Dr. Leathers was a resident in pathology and received $7,237.83 from the UAMC as a “stipend”. In 1968, Dr. Blankenship was a resident in orthopedics and received $3,637.47 as “stipend” from the UAMC. In addition, he received $1,260.65 from the Veterans Administration. Of the amounts received, each taxpayer excluded $3,600 from his gross income,³ eon-' tending that such amounts were scholarship or fellowship grants as that term is defined in Section 117 of the Internal Revenue Code of 1954.⁴ Deficiencies re-suiting from this exclusion were assessed and paid, and timely-filed claims for refund were disallowed. Thereafter, the instant suits were filed in the District Court.

On appeal the government raises the following points:

(1) The District Court erred in refusing to grant the government’s motions either for directed verdicts or for judgments notwithstanding the verdicts.

(2) The District Court erred in the giving of certain instructions.

(3) The District Court erred in submitting to the jury certain interrogatories.

(4) The District Court erred in excluding certain evidence.

We consider first appellant’s contention that it was entitled to judgment in both eases as a matter of law. First, the question whether a payment may be excluded from income under 26 U.S.C.A. § 117 is a question of fact to be resolved by the finder of fact.

“Whether payments or allowances to an individual taxpayer were made to enable him to pursue studies and research primarily for the benefit of the grantor is basically a question of fact. Ussery v. United States, * * * 296 F.2d [582] pp. 586-587 [5th Cir., 1961]; Woddail v. Commissioner of Internal Revenue, 321 F.2d 721, 723-724 (10th Cir. 1963). Cf. Commissioner of Internal Revenue v. Ide, 335 F.2d 852, 855 (3d Cir. 1964); Stewart v. United States, 363 F.2d 355, 357 (6th Cir. 1966).” Reiffen v. United States, 180 Ct.Cl. 296, 1967, 376 F.2d 883, 890.

In a case relied upon by the government, Quasi v. United States, D.C.Minn., 1968, 293 F.Supp. 56, aff’d, 8 Cir., 1970, 428 F.2d 750, Judge Neville expressly considered this matter:

“Under the Regulations if the primary purpose was to further the education and training of the recipient, then the payment would have the characteristics of a fellowship. This was squarely a fact question and properly submitted to the jury.” 293 F.Supp. at 62. (Emphasis supplied.)

The standards for review are well settled and not in dispute here. This as an appellate court will not reverse a jury’s determination of a fact question where such determination is supported by substantial evidence, nor will we substitute our judgment for that of the finder of the facts, whether it be judge or jury. As the late Judge John Sanborn said in another tax case, “It is only when the evidence is all one way or so overwhelmingly one way as to leave no doubt as to what the fact is, that the issue becomes one of law. Gunning v. Cooley, 281 U.S. 90, 94, 50 S.Ct. 231, 74 L.Ed. 720; Tyson v. Commissioner, 8 Cir., 146 F.2d 50, 54. Cf. Lacy v. United States, 7 Cir., 207 F.2d 352, 354.” Weiss v. Commissioner, 8 Cir., 1955, 221 F.2d 152, 155-156. See, Woddail v. Commissioner, 10 Cir., 1963, 321 F.2d 721, 724 (dealing with 26 U.S.C.A. § 117). See, also, G. W. Van Keppel Co. v. Commissioner, 8 Cir., 1961, 296 F.2d 767, 771; Rubber Research, Inc. v. Commissioner, 8 Cir., 1970, 422 F.2d 1402, 1405; Idol v. Commissioner, 8 Cir., 1963, 319 F.2d 647. See generally, Commercial Union Assurance Co. v. Berry, 8 Cir., 1966, 359 F.2d 510, 516.

In the instant case, we must analyze the factors present as against the statute (26 U.S.C.A. § 117), the regulations issued pursuant to the statute ⁵ and existing case law.

The constitutional validity of the Regulation § 1.117-4(c) was upheld by the Supreme Court in Bingler v. Johnson, 1969, 394 U.S. 741, 89 S.Ct. 1439, 22 L.Ed.2d 695, a case much relied upon by the appellant. There the taxpayers were employees of the Westinghouse Electric Corporation. They desired to take advantage of a company-sponsored educational leave program. During the time they were on the educational leave program, they received compensation from Westinghouse based in part on a percentage of their base salary. They retained seniority status and all employee benefits such as insurance and stock option privileges. They were obligated, among other things, to return to Westinghouse for a period of at least two years after completing the program. A jury in the District Court found that the amounts paid the taxpayers were taxable “compensation” rather than excludable “scholarships”. The Court of Appeals for the Third Circuit, in Johnson v. Bingler, 396 F.2d 258, 263, reversed, holding that the issue should not have been submitted to the jury, there being involved “ * * * a question solely of statutory construction, requiring only judicial exegesis.” 396 F.2d at 263. The Supreme Court, in reversing the Court of Appeals, said, at page 755 of 394 U.S., at page 1447 of 89 S.Ct., at page 707 of 22 L.Ed.2d:

“Under that provision, [Treasury Regulation § 1.117-4(c)] as set out in the trial court’s instructions, the jury here properly found that the amounts received by the respondents were taxable ‘compensation’ rather than ex-cludable ‘scholarships.’ The employer-employee relationship involved is immediately suggestive, of course, as is the close relation between the respondents’ prior salaries and the amount of their ‘stipends.’ In addition, employee benefits were continued. Topics were required to relate at least generally to the work of the Bettis Laboratory. Periodic work reports were to be submitted. And, most importantly, Westinghouse unquestionably extracted a quid pro quo. The respondents not only were required to hold positions with Westinghouse throughout the ‘work-study’ phase of the program, but also were obligated to return to Westinghouse’s employ for a substantial period of time after completion of their leave. The thrust of the provision dealing with compensation is that bargained-for payments, given only as a ‘quo’ in return for the quid of services rendered — whether past, present, or future — should not be excludable from income as ‘scholarship’ funds. That provision clearly covers this case.” (Emphasis supplied.)

As will appear more in detail later, the facts in Bingler are clearly distinguishable from the facts in the instant case. Additionally, in reversing the Court of Appeals, the Supreme Court was sustaining the right of the jury to make the determination of whether the payments were “compensation” and therefore taxable or were “scholarships” and accordingly deductible. The Supreme Court held that under the facts in Bingler “ * * * the jury here properly found that the amounts * * * were taxable ‘compensation’.”

To recapitulate, the facts which existed in Bingler and which, according to the Supreme Court, justified the jury in “properly” finding that the amounts received were compensation instead of scholarships, are non-existent herein; There was prior employer-employee relationship. There was close relationship between respondents’ prior salaries and the amount of their “stipends”. There was continuation of employee benefits. Topics of study were required to relate at least generally to the work of the Bettis Laboratory. Periodic work reports were required. Taxpayers were required to hold positions with Westinghouse throughout the work-study phase of the program. Taxpayers were obligated to return to the employ of Westinghouse. All of the foregoing factors were present in Bingler and thereby, as the Supreme Court put it, “ * * * most importantly, Westinghouse unquestionably extracted a quid pro quo.” The jury found that lacking in the instant case, and we believe they were entitled to so find.

The problem of whether or not stipend payments received by a resident constitute taxable income has been considered in numerous other cases. Various factors have been utilized by the fact-finders, both judge and jury, to aid in determining whether or not such payments are excludable fellowships or includable compensation. Some cases have hinged upon the existence or absence of a requirement to stay with the employer after completion of the residency training.⁶ Others have carefully scrutinized the degree of supervision over residents and the extent of services performed by residents,⁷ whether the hospital in question was primarily engaged in teaching or patient care,⁸ whether the hospital could perform the same services without the residents.⁹ Finally, such diverse factors as the classification of an employee as a physician,¹⁰ whether taxes have been deducted from his stipend,¹¹ whether the residents have received the normal incidental benefits of an employee such as free laundry service, free parking, free health and malpractice insurance, sick leave and paid vacations,¹² or whether yearly increases in pay are contemplated.¹³

The UAMC, at which both plaintiffappellees received their residency training, is strictly a teaching institution with its primary purpose being the education and training of physicians, nurses, pharmacists and other individuals involved in taking care of the ill. The UAMC has a full-time faculty membership of approximately 180, with many more practicing physicians donating their time to the medical school teaching program without compensation and on a part-time basis. Neither the UAMC nor the State of Arkansas requires any resident to remain in that state after the completion of residency training. The residents are closely supervised by faculty members in the hospital, and UAMC does not bill patients for the services provided by the residents.

During the course of their training at the UAMC, many residents are rotated to one of the Veterans Administration Hospitáis in Little Rock for three months of the year. In the instant case, Dr. Blankenship worked at the VA Hospitals three months during the year in question. Although Dr. Blankenship performed some patient care services while at the VA Hospital, we agree with the District Court that the residency program as a whole rather than one segment of it must be looked to in order to determine the issue before us.

Dr. Winston Shorey, Dean of the School of Medicine at the UAMC, was asked whether the work of the Medical Center could be performed without residents. He replied:

“A There would have to be some rearrangement, but the faculty, I believe, could perform the professional responsibilities, take care of the patients without the residents.

“I would make possibly one exception, the very heavy load in obstetrics requires a lot of hands, and the staff, the faculty in that department right now, is small and I would want to make that one exception. I think the hands of the residents, but not only the residents, but the medical students participating on this service, would be necessary, too.

“Q Dr. Shorey, neither Dr. Blankenship nor Dr. Leathers was involved in obstetrics in any way ?

“A. No. * * * ”

Dean Shorey’s testimony was generally corroborated by Dr. Jaques, Chairman of the Department of Pathology, and Dr. Chambers, head of the Orthopedic Surgery Division, as well as by James A. Crank, Director of the University Hospital. Somewhat conflicting testimony was elicited from Kenneth J. O’Brien, Director of the Veterans Administration Hospitals in Little Rock. Mr. O’Brien testified:

“Q Is there a learning situation presented for the resident at the Veterans Hospital?

“A We feel that there is.

* * ->:• * * *

“A We feel that the resident, when he’s with the VA, performs a dual function. He is there primarily as — I’ll have to clarify that word— ‘partially’ as a student; but we can’t discount the fact that we feel there is some service provided, and the basis is that if we could relate it to the orthopedic service, as Dr. Chambers indicated, we have three one-quarter-time orthopedic men on the staff. This is less than one full-time man.

“We have a forty bed ward. We have better than a hundred out-patient visits a week; and if suddenly, Monday morning all the orthopedic residents left, that three-quarters of one person couldn’t handle the job.

“From an economic standpoint, we would have to hire some staff people to make up for that loss of residents. From this standpoint, they perform a service, we believe.

“Q So if these residents were not present, there would have to be additional staff to care for the patients?

“A We feel there would have to be some additional staff, although we feel there is certainly a training environment that can’t be separated from service. They both go on at the same time.

“Q Would you say it’s about half and half then?

“A Basically, that’s the way the residency program in VA started. We were charged a half an employee per resident.

“I think different residency programs have different proportions of how much is service and how much is training. There is a service aspect of each one because we are a service hospital. We are a teaching hospital, but primarily give services, too.

“Q Primarily — I’m sorry ?

“A We are required by Congress to furnish service to veterans, primarily, not to be a teaching hospital primarily.”

It should be noted that Dr. Blankenship was the only one of the taxpayers who worked at the VA Hospital and that he spent approximately three months during the year there.

All of the witnesses testified that the work of the residents was closely scrutinized and carefully checked and very little, if any, discretion was permitted regarding patient diagnosis and care.

Residents were permitted a two-week paid vacation if possible. Uniforms and laundry service were provided free of charge. Pay increases were unrelated to financial need. Various taxes were deducted from the residents’ stipend checks.¹⁴ Malpractice insurance was provided to the residents by the hospital. Residents belonged to a separate health insurance plan and were not eligible for the hospital’s retirement plan. A resident was required to sign an employee termination clearance form' upon the completion of his residency and the hospital by-laws stated that interns and residents shall provide medical care.

Enough has been noted to indicate that conflicting evidence presented genuine questions of fact for the jury to resolve. Judge Eisele was eminently correct in submitting the cases to the jury for its determination and in denying motions for judgments notwithstanding after the verdicts had been rendered by the jury in behalf of the plaintiff taxpayers. This, as an appellate court, may not substitute its judgment for determinations by the triers of the facts where such determinations are based upon conflicting and substantial evidence.¹⁵

The argument is suggested that this is a tax loophole and the use of tax loopholes should not be encouraged. We do not agree to the classification, but assuming arguendo that this is a tax loophole, then it is a Congressionally created one, done so by the Congress and the Executive with the specific intent of allowing deductions from income tax in accordance with the provisions of § 117. If these taxpayers come within the embracing terms of the section and meet the provisions of the regulation which received the approval of the Supreme Court in Bingler, then any reversal of the jury’s determination which was made on substantial facts would be nothing more nor less than judicial legislation or legislation by judicial veto. If § 117 establishes a loophole and is unfair to other taxpayers, then the remedy lies with Congress and not with this or any other court.

In its appeal, the government raises several additional points, each of which we find to be without merit and requiring but brief comment. Complaint is made with reference to certain instructions which the government claims were more favorable to the taxpayers’ view than that of the government, as well as the wording of the interrogatories. We have carefully read the instructions and have examined the interrogatories submitted to the jury. We find no error therein. A trial court is not required to use the exact language of a requested instruction or the exact language of a requested interrogatory in order to avoid error. Instructions and interrogatories in the court’s own language, as long as they are accurate and fair to both parties, may not be used as a basis for error. We find the instructions and the interrogatories here completely accurate, unbiased and without prejudice.

The government also complains that various evidence it sought to introduce was erroneously excluded and that certain exhibits in evidence were kept from the jury room. While some of the evidence could have been admitted, its exclusion we find to be not prejudicial. Note, supra, comment regarding evidence of payroll deductions. The refusal of the trial court to send all of the exhibits, many of which were irrelevant, to the jury room was a discretionary matter and we find no abuse of that discretion.

We are in accord with Judge Eisele’s well-considered opinion in which he denied motions for judgments notwithstanding the verdicts. This case is in all things affirmed.

1 . Patricia D. Leathers and June B. Blankenship are parties to these appeals due to the fact that they filed joint returns with their husbands for the tax years in issue. For brevity, reference will be made to the husbands only.

2 . 352 F.Supp. 1244.

3 . Since taxpayers were not degree candidates, the exclusion was limited to $3,600. See note 4 infra, esp. § 117(b) (2) (B).

4 . 26 U.S.C.A. § 117 provides in pertinent part:

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; 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—

(i) an organization described in section 501(c)(3) which is exempt from tax under section 501(a),

* * * *

(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)).”

5 . In particular, we are concerned with 26 CFR §§ 1.117-3 (c) and 1.117-4, which provide in pertinent part:

Ҥ 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. The term includes the value of contributed services and accommodations (see paragraph (d) of this section) and the amount of tuition, matriculation, and other fees which are furnished or remitted to an individual to aid him in the pursuit of study or research. The term also includes any amount received in the nature of a family allowance as a part of a fellowship grant. 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.”

“§ 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 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 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 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.”

6 . Compare Bingler v. Johnson, supra, 394 U.S. 741, 89 S.Ct. 1439, 22 L.Ed.2d 695; Woddail v. C. I. R„ 10 Cir., 1963, 321 F.2d 721; Quast v. United States, D.C. Minn.1968, 293 F.Supp. 56, aff’d, 8 Cir., 1970, 428 F.2d 750; Steinhaus v. Commissioner, 1971, P-H Memo T.C., par. 71,279 (requirement of employment after completion of residency program evidence of payment of compensation for future services) with Wrobleski v. Bingler, 1958, W.D.Penn., 161 F.Supp. 901; Lingl v. Charles, 1967, S.D.Ohio, 21 AFTR2d 410; Wells v. Commissioner, 1963, 40 T.C. 40. Cf. Coggins v. United States, 1970, N.D.Tex., 26 AFTR2d 70-5775; Birnbaum v. Commissioner, P-H Memo T.C., par. 71-231; Fisher v. Commissioner, 1971, 56 T.C. 1201 (no requirement of future services after completion of residency evidence of fellowship).

7 . Coggins, supra; Fisher, supra; Birnbaum, supra; Steinhaus, supra; Wrobleski, supra (close supervision indicates no benefit to hospital) ; Tobin v. United States, 1971, S.D.Tex., 323 F.Supp. 239; Dimants v. Commissioner, 1970, P-H Memo T.C., par. 70,257; Proskey v. Commissioner, 1969, 51 T.C. 918.

8 . Compare Woddail, supra; Dimants, supra ; with Wrobleski, supra. Cf. Birnbaum., supra; Coggins, supra.

9 . See, Wrobleski, supra; Wells, supra. But cf. Steinhaus, supra.

10 . See Woddail, supra.

11 . Wertzberger v. United States, 1970, W.D.Mo.W.D., 315 F.Supp. 34, aff’d, 8 Cir., 1971, 441 F.2d 1166; Woddail, supra; Dimants, supra; Proskey, supra; Coggins, supra; Quast, supra.

12 . Woddail, supra; Tobin, supra; Quast, supra; Wertzberger, supra; Birnbaum, supra; Steinhaus, supra; Proskey, supra ; Coggins, supra; Wells, supra; Lingl, supra; Fisher, supra.

13 . Wertzberger, supra; Birnbaum, supra; Proskey, supra; Coggins, supra; Fisher, supra.

14 . The District Court did not permit the government to introduce evidence of payroll deductions. In light of the cases cited in note 11, supra, such evidence could have been admitted, but we cannot say that its exclusion was prejudicial error.

15 . We think it significant to note that in all of the reported cases dealing with this particular problem, with the single exception of the very recent ease of Hembree v. United States, 464 F.2d 1262, 4 Cir., 1972, dec. August 3, 1972, and which is distinguishable on its facts, the determination of the fact-finder (whether judge or jury) has never been overturned. See, Wertzberger v. United States, supra, 441 F.2d 1166 (judge as fact-finder) ; Quast v. United States, supra, 293 F. Supp. 56, aff’d, 8 Cir., 1970, 428 F.2d 750 (on motion for judgment n. o. v.) ; Kwass v. United States, 1970, E.D.Mich.S.D., 319 F.Supp. 186. The same is true of Bingler, supra, where the Supreme Court reversed the Court of Appeals and affirmed the jury’s determination.