Straumfjord v. Commission ( 1967 )

ON THE MERITS Suit to set aside commission order requiring that fellowship moneys be includible in gross income. The court held the grant was includible income because plaintiff was paid compensation in return for his undertaking training in psychiatry to better equip himself to serve the public. Decision for defendant rendered July 12, 1967. This proceeding involves the question of whether certain funds received by plaintiff Agnar A. Straumfjord are includible in gross income as compensation under ORS 316.105¹ or excluded under ORS 316.110² as a gift.

The plaintiff graduated from the University of Oregon Medical School in 1955. After a tour of duty in the military service he returned to the medical school and became a resident physician in internal medicine. In January 1963 plaintiff decided to apply for a fellowship to study psychiatry under a grant from the National Institute of Mental Health, a division of the United States Public Health Service. The grant is administered by the University of Oregon Medical School. Plaintiff was a resident physician training in psychiatry during this period and received $1,000 per month through the university with no deductions for pensions or social security, but state and federal taxes were withheld from his salary. He testified that he received a vacation, had some voice as to where he would be assigned to work and that the grant would terminate if he ceased to study psychiatry. In 1963 and 1964 the plaintiff studied psychiatry, worked with patients in the psychiatric ward at the University of Oregon Medical School and the State Hospital in Salem, in the child guidance clinic and the Multnomah County Court. The plaintiff stated that he considered he was practicing medicine during this period and that he was performing a beneficial service for the patients at the various clinics and hospitals.

The tax commission found that the grant was compensation paid to plaintiff for professional services, not a gift, and issued a deficiency assessment.

3. Like ORS 316.110(8), section 102 of the Internal Revenue Code of 1954 also excludes gifts from gross income. No statutory definition of gift is found in either the federal code or in the Oregon tax statutes. However, in the leading case of Commissioner v. Duberstein, 363 U.S. 278, 80 S Ct 1190,4 Led2d 1218, 5 AFTR2d 1626, 60-2 USTC ¶ 9515 (1960), the United States Supreme Court found that the common law definition of a gift as a voluntary executed transfer of one's property to another without consideration or compensation therefor is not necessarily a gift within the meaning of the Internal Revenue Code. The court then stated the following as tests to be applied to determine whether payments are gifts or compensation for services:

"* * * if the payment proceeds primarily from 'the constraining force of any moral or legal duty,' or from 'the incentive of anticipated benefit' of an economic nature, Bogardus v. Commissioner, 302 U.S. 34, 41, 82 L ed 32, 37, 58 S Ct 61, it is not a gift. And, conversely, '[w]here the payment is in return for services rendered, it is irrelevant that the donor derives no economic benefit from it.' Robertson v. United States, 343 U.S. 711, 714, 96 L ed 1237, 1240, 72 S Ct 994. A gift in the statutory sense, on the other hand, proceeds from a 'detached and disinterested generosity,' Commissioner v. Lo Bue, 351 U.S. 243, 246, 100 L ed 1142, 1147, 76 S Ct 800; 'out of affection, respect, admiration, charity or like impulses.' Robertson v. United States, supra (343 US at 714). And in this regard, the most critical consideration, as the Court was agreed in the leading case here, is the transferor's 'intention.' Bogardus v. Commissioner, 302 U.S. 34, 43, 82 L ed 32, 38, 58 S Ct 61. 'What controls is the intention with which payment, however voluntary, has been made.' Id. 302 US at 45 (dissenting opinion)." 4 Led2d at 1225.

See also U.S. v. Pixton, 326 F.2d 626 (5th Cir 1964), 13 AFTR2d 379, 64-1 USTC ¶ 9176; Dejong v. Comm., 309 F.2d 373 (9th Cir 1962), 10 AFTR2d 5863, 62-2 USTC ¶ 9794 (1962); Crosby Valveand Gage Co. v. Commissioner, 46 TC 641 (1966).

In Stone v. Commissioner, 26 TC 254 (1954), the petitioner was the recipient of a grant from the Guggenheim Foundation to do research in English drama. The commissioner contended the grant was paid as compensation to the taxpayer. The Tax Court, however, relying on the intent of the donor, found the grant to be a gift and not compensation for services.

In 1954, subsequent to the tax year involved inStone, Congress enacted section 117 of the Internal Revenue Code in an attempt to settle the controversy of gift or compensation in scholarship and fellowship grants.³ Bachmura v.Commissioner, 32 TC 1117 (1959). Section 117(a) provides that gross income does not include amounts received as a scholarship at an educational institution or as a fellowship grant. Paragraph (1) of subsection (b) limits subsection (a) in cases where the individual is a candidate for a degree by making section 117(a) inapplicable to amounts received for teaching or other services required as a condition to receiving the grant. In cases where the recipient of the grant is not a candidate for a degree subparagraph (2) of subsection (b) provides that section 117(a) is applicable if the grantor is an instrumentality of the United States (among others) and limits the exclusion to $300 times the number of months, not exceeding 36 months, that the recipient receives amounts under the grant.

4, 5. Scholarships are defined as amounts paid to a student to aid him in pursuing his studies at an educational institution. Section 117(a)(1)(A), Reg § 1.117-3(a). Fellowships are amounts paid to an individual to aid him in the pursuit of study or research. Reg § 1.117-3(c).

The enactment of section 117 did not solve the problem of whether the grant amounts to compensation for services, and therefore includible in gross income. See Gordon,Scholarship and Fellowship Grants, 1960, Wash L Rev. Moreover, federal Reg § 1.117-4 recognizes that if the payments amount to compensation for services they cannot qualify for exclusion from gross income as scholarship or fellowship grants.⁴ InBachmura v. Commissioner, supra, the Tax Court interpreted the intention of Congress in enacting section 117 in these words:

"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). * * *

"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 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. * * *" 32 TC at 1125, 1126.

In the following cases the courts held that the amounts received were primarily for the additional education and training of the donee and were not compensation for personal services: Wrobleski v. Bingler, 161 F. Supp. 901 (DC Penn 1958), 1 AFTR2d 1987, 58-2 USTC ¶ 9556; William Wells v.Commissioner, 40 TC 40 (1963); Clarence Peiss v. Commissioner,40 TC 78 (1963); Aileene Evans v. Commissioner, 34 TC 720 (1960). The following cases held to the contrary: Reiffen v.United States, 376 F.2d 883 (Ct Cl 1967), 19 AFTR2d 1419, 67-1 USTC ¶ 9439; Woddall v. Commissioner, 321 F.2d 721 (10th Cir 1963), 12 AFTR2d 5421, 63-2 USTC ¶ 9672; Ethel M. Bonn v.Commissioner, 34 TC 64 (1960). See also the revenue rulings and cases listed in Professor Gordon's article, Scholarship andFellowship Grants, 1960, Wash L Rev, Supra.

6, 7. As Oregon did not have a statute in 1963 similar to section 117 of the Internal Revenue Code the question of whether the fellowship grant constituted a gift or compensation must be decided considering all the facts, including the intention of the transferor and the reasons for the transfer.Commissioner v. Duberstein, supra. Did the grant proceed from "a detached and disinterested generosity" from the United States Public Health Service or "out of affection, respect, admiration, charity or like impulse?" Duberstein, supra. The obvious reason the United States Department of Public Health made the grant available to plaintiff and other qualified individuals was to increase the number of physicians trained in psychiatry for the benefit of the citizenry of the country.Evans v. Commissioner, supra. It could hardly be said that the grant was made out of affection or charity for plaintiff or from a detached generosity. The United States Government has a definite interest in training specialists in the field of emotional illness and health for the benefit of the public. The plaintiff was paid $12,000 per year to better equip himself to practice medicine. He testified that he was practicing his profession and rendering a benefit to the parties involved. He was under the supervision of the University of Oregon Medical School which assigned him to the various places. If the plaintiff failed to pursue his course of psychiatric study, the grant would terminate. State and federal taxes were deducted from his salary. The grant to plaintiff was not a gift as discussed in Duberstein but was a contract whereby plaintiff was being paid compensation in consideration of his undertaking training in psychiatry in order to better equip himself to serve the public.

The order of the tax commission is affirmed.

¹ ORS 316.105 defines gross income as "[G]ains, profits and income derived from salaries, wages or compensation for personal service, of whatever kind and in whatever form paid * * *."

² ORS 316.110(8) excludes from gross income the "value of property acquired by gift * * *."

³ The 1967 Oregon legislature passed similar legislation by enacting ch 61, Or L 1967, but it does not affect the instant case.

⁴ § 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 § 1.177-2, 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." (Emphasis supplied.)