Government Argues Visiting Researcher’s Wages Were Not Exempt

ARGUMENT
Taxpayer's wages are not tax-exempt under Article 18 of the Russia Convention as a “grant, allowance, or similar payment”

Standard of review

This Court reviews decisions of the Tax Court “in the same manner and to the same extent as decisions of the district courts in civil actions tried without a jury.” I.R.C. § 7482(a)(1). “Questions of law are reviewed de novo, and findings of fact for clear error.” Starnes v. Commissioner, 680 F.3d 417, 425 (4th Cir. 2012). Interpretation of an international treaty, such as the Russia Convention, is an issue of law subject to de novo review. United States v. Al-Hamdi, 356 F.3d 564, 569 (4th Cir. 2004).

A. Relevant statutes and treaty provisions

Generally, any “accessions to wealth, clearly realized, and over which the taxpayers have complete dominion” are included in gross income. Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 431 (1955). Unless otherwise excluded, gross income includes any form of compensation for services rendered. I.R.C. § 61(a)(1). This is true even for non-resident aliens, if the compensation is earned in connection with the performance of personal services within the United States. I.R.C. §§ 864(b), 872(a). Such income, less any applicable deductions, is ordinarily subject to the taxes imposed in the Internal Revenue Code. I.R.C. §§ 1(a)-(d), 63(a), 871(b), 873(a).

The Code is to be applied, however, “with due regard to any treaty obligation of the United States which applies[.]” I.R.C. § 894(a)(1). One such treaty obligation is the U.S.-Russia Convention for the Avoidance of Double Taxation, signed by the Presidents of the United States and the Russian Federation on June 17, 1992, ratified by Congress, and entered into force on December 16, 1993. See 1993 WL 841567. The Russia Convention replaced the 1973 treaty in effect between the United States and the former Soviet Union⁶ and was “intended to modernize tax relations” between the United States and Russia and “to facilitate greater private-sector U.S. investment in Russia.” S. Exec. Rept. 103-17, at 2 (1993), in William H. Manz, Legislative History of United States Tax Conventions, Russian Federation 175, 176 (Wm. S. Hein & Co. 2018).

The Russia Convention includes a provision entitled “Income from Employment,” dealing with “salaries, wages, and other similar remuneration” earned by a resident of one country while being employed in the other. Article 14(1) of the Russia Convention provides:

Subject to the provisions of Articles 15 (Directors' fees), 16 (Government service), and 17 (Pensions), salaries, wages, and other similar remuneration derived by a resident of a Contracting State in respect of an employment shall be taxable only in that State unless the employment is exercised in the other Contracting State. If the employment is so exercised, such remuneration as is derived therefrom may be taxed in that other State.

Russia Convention, 1993 WL 841567, at *9.

Thus, Article 14(1) provides that a resident of Russia who is employed in the United States is subject to tax in the United States with respect to his or her “salaries, wages, and similar remuneration.” Pursuant to Article 14(2), however, such salaries or wages are taxable in the United States only if, inter alia, the recipient is present in the United States for over 183 days.⁷ Russia Convention, 1993 WL 841567, at **9-10.

While Article 14(1) states that it is “[s]ubject to” the provisions of Articles 15, 16, and 17, it does not refer to Article 18. 1993 WL 841567, at *9. Article 18 provides, in pertinent part, as follows:

An individual who is a resident of a Contracting State at the beginning of his visit to the other Contracting State and who is temporarily present in the other Contracting State for the primary purpose of:

. . . . .

(c) studying or doing research as a recipient of a grant, allowance, or other similar payments from a governmental, religious, charitable, scientific, literary, or educational organization,

shall be exempt from tax by that other State with respect to payments from abroad for the purpose of his maintenance, education, study, research, or training, and with respect to the grant, allowance, or other similar payments.

Russia Convention, 1993 WL 841567, at *11.

Thus, under Article 18, a resident of Russia who is in the United States for the primary purpose of “doing research as a recipient of a grant, allowance, or other similar payments” from a scientific or governmental organization is exempt from tax “with respect to the grant, allowance, or other similar payments.” Russia Convention, 1993 WL 841567, at *11. Under Article 18(2), that exemption is limited to “such period of time as is ordinarily necessary” to complete the research, but in any event no more than five years. Ibid. Under Article 18(3), the exemption does not apply to income from research that is undertaken for the benefit of a private party, rather than for the public interest. Ibid.

Article 18 “limits host-country taxation to a lesser extent than the corresponding provisions in the USSR treaty” it replaced. S. Exec. Rep. No. 103-17, supra, at 40. Under the USSR Treaty, a resident of one country who was temporarily present in the other “at the invitation of a governmental agency or institution or an educational or scientific research institution . . . for the primary purpose of teaching, engaging in research, or participating in scientific, technical or professional conferences shall not be subject to tax” in the host country “on his income from teaching or research or participating in such conferences.” USSR Treaty, Article VI, § 1(c), available at https://www.irs.gov/pub/irs-trty/ussr.pdf (last accessed Aug. 4, 2020). The Russia Convention, by contrast, restricts the tax exemption to a person “doing research as a recipient of a grant, allowance, or other similar payments” and only with respect to the “grant, allowance, or other similar payments.”⁸ 1993 WL 841567, at *11.

In sum, Article 14 of the Russia Convention provides that “salaries, wages, and other similar remuneration” are taxable in the host country, while a “grant, allowance, or other similar payment” made to a researcher is not. As explained below, taxpayer's payments from Jefferson Lab were of the former category, and therefore cannot be a “grant, allowance, or other similar payment” within the meaning of the Russia convention.

B. Taxpayer received a salary from JSA, rather than a research grant or similar payment

In this case, the documents in the record uniformly show that the income taxpayer received from JSA was in the nature of “salaries, wages, and other similar remuneration.” The initial offer from JSA, which taxpayer accepted, stated that his “starting salary” would be $75,000, “contingent upon satisfactory performance and the continuing availability of funds.” (Ex. 5-J at 1-2.) JSA reported the payments to taxpayer and the IRS as “wages, tips, other compensation” (Ex. 1-J at 1; Ex. 2-J at 1), and explained that taxpayer was “employed” in his position throughout the period in issue, “receiving full salary and benefits as all other employees during this time.” (Ex. 11-J at 1.) The Tax Court referred to taxpayer's income from JSA as “salary” or “wages” throughout its opinion (e.g., Doc. 32 at 4, 5, 16, 18, 20), as did taxpayer himself in his testimony (e.g., Tr. 5, 8, 28, 31). Taxpayer's income at Jefferson Lab was therefore in the category of “salaries, wages, and other similar remuneration,” which when earned by a Russian resident “may be taxed” in the United States under the express terms of the the Russia Convention.⁹ 1993 WL 841567, at *9.

1. Under the Russia Convention, Article 18 does not limit the scope of Article 14

The Tax Court, however, concluded that, “wages, salaries, and other similar remuneration” can be excluded under Article 18, if they are also a “grant, allowance, or other similar payment[ ].” (Doc. 32 at 19.) The court held that the two categories of income are not mutually exclusive, and that “Article 18 should be treated consistently as an exception to both Articles 13 and 14.” (Id. at 14.) The Tax Court's novel holding, however, is not supported by the text of the treaty.

“The interpretation of a treaty, like the interpretation of a statute, begins with its text.” Medellin v. Texas, 552 U.S. 491, 506 (2008). As indicated above, Article 14 of the Russia Convention expressly states that it is “subject to” the provisions of Articles 15, 16, and 17. If Article 18 were an “exception” to Article 14, one would expect Article 18 to be in included in the provisions to which Article 14 was “subject.” Cf. S. Exec. Rept. 103-17, supra, at 39 (1993) (noting that Article 14 is “modified in some respect” by Articles 15, 16, 17, but making no mention of Article 18). It is a cardinal canon of construction that, where exceptions to general rule are explicitly enumerated, additional exceptions are not to be implied, at least in the absence of evidence of contrary intent. See, e.g., TRW Inc. v. Andrews, 534 U.S. 19, 28 (2001).

The Tax Court acknowledged (Doc. 32 at 14) that Article 14 did not identify Article 18 as an exception to its provisions, but believed that it found contrary intent in the Treasury Department's Technical Explanation,¹⁰ which the court said “identifies Article 18 as an exception to both Articles 13 and 14.” (Doc. 32 at 14) But the Technical Explanation does not state that Article 18 is an exception to Article 14. Rather, the Technical Explanation states that Article 18 is among a group of provisions (Articles 15 through 18) that “provide exceptions and additions to” the general rules of Articles 13 and 14. Technical Explanation, pp. 19-20 (emphasis added). Article 18 of the Russia Convention, unlike the corresponding provisions of the USSR Treaty, permits taxation of research grants when the research is primarily for private benefit (Art. 18(3)), or when the research extends beyond five years (Art. 18(2)). 1993 WL 841567, at *11. Thus, it is just as likely that the Treasury Department viewed Article 18 as providing rules for taxation of research grants that were in addition to the rules for taxation of salaries and wages in Article 14.

2. Even if Article 18 limits the scope of Article 14, taxpayer's salary is not a “grant, allowance, or other similar payment” under Article 18

Assuming, arguendo, that under the Russia Convention income can both be a “salary” or “wage,” on the one hand, and a “grant, allowance, or other similar payment” on the other, the Tax Court erred in concluding that taxpayer's salary was a “grant, allowance, or other similar payment.” Under relevant domestic law, the term “grant” means “an amount paid or allowed to, or for the benefit of, an individual to aid him in the pursuit of study or research,” and generally does not include compensation for services. Moreover, there is no evidence of a grant or a grant-like program in the record and no evidence that taxpayer was a recipient of a grant.

a. The term “grant” is properly defined as “an amount paid or allowed to, or for the benefit of, an individual to aid him in the pursuit of study or research.”

The Russia Convention does not define the terms “grant” or “allowance.” Article 3, section 2 of the Russia Convention provides that any undefined term shall “have the meaning which it has under the laws of that State concerning the taxes to which this Convention applies.” 1993 WL 841567, at *2. As the Tax Court noted (Doc. 32 at 11), the Internal Revenue Code also does not provide a definition of the terms “grant” or “allowance.” But the tax laws do provide some guidance.

I.R.C. § 117 provides an exclusion from gross income for amounts received as a “qualified scholarship.” A “qualified scholarship” is “any amount received by an individual as a scholarship or fellowship grant to the extent the individual establishes that, in accordance with the conditions of the grant, such amount was used for qualified tuition and related expenses.” I.R.C. § 117(b)(1). An exclusion from gross income for certain “scholarships” and “fellowship grants” has been part of domestic tax law since at least 1954. See Internal Revenue Code of 1954, Pub. L. No. 83-591, Ch. 736, 68A Stat. 38.

Treasury regulations define “fellowship grant” as “an amount paid or allowed to, or for the benefit of, an individual to aid him in the pursuit of study or research.” Treas. Reg. (26 C.F.R.) § 1.117-3(c). The regulations provide that such a grant “also includes any amount received in the nature of a family allowance as a part of a fellowship grant.” Ibid. Treas. Reg. § 1.117-4(c)(1) provides, however, that payments are not considered a fellowship grant if they represent “compensation for past, present, or future employment services,” or “payment for services which are subject to the direction or supervision of the grantor.” In addition, the term “fellowship grant” does not include “[a]ny amount paid or allowed to . . . an individual to enable him to pursue studies or research primarily for the benefit of the grantor.” Treas. Reg. § 1.117-4(c)(2).

These regulatory interpretations of the term “fellowship grant,” which exclude amounts received as “compensation,” were upheld by the Supreme Court, because they comported with “the ordinary understanding of 'scholarships' and 'fellowships' as relatively disinterested, 'no-strings' educational grants, with no requirement of any substantial quid pro quo from the recipients.” Bingler v. Johnson, 394 U.S. 748, 751 (1969). Although § 117 has been amended since the promulgation of these regulations,¹¹ they continue to be relied upon by courts in distinguishing taxable “compensation” from non-taxable “scholarships” and “fellowship grants.” See, e.g., United States v. Memorial Sloan-Kettering Cancer Center, 563 F.3d 19, 31-32 (2d Cir. 2009).

The IRS ruled, before and after the amendments to § 117, that the use of the term “grant” in the United States-Japan Income Tax Convention of 1971¹² and similar treaties derives its meaning and scope from the regulatory definition of “fellowship grants.” The 1971 Japan Convention, like the Russia Convention, provided a tax exemption for the amount of a “grant, allowance, or award” where the resident of one  country was studying or doing research in the other. 1971 Japan Convention, Art. 20(1). And like the Russia Convention, the 1971 Japan Convention did not define “grant,” but stated that undefined terms shall have the same meaning as under the laws of the taxing jurisdiction. 1971 Japan Convention, Art. 2(2).

In Rev. Rul. 80-36, 1980-1 C.B. 366, 1980 WL 129605, the IRS concluded that “the term 'grant'” in the 1971 Japan Convention, “has a meaning similar to that of 'fellowship grant' as used in section 117 of the Code and defined in section 1.117-4(c) of the regulations.” 1980 WL 129605, at *3. Under this definition a research grant of $15,000 per year for two years that a Japanese research specialist in cardiology had obtained, before coming to the United States, from organization Y to do research at organization X was a nontaxable “grant, allowance, or award” under the 1971 Japan Convention under the following circumstances: (1) the researcher's work was not subject to the direction or supervision of any other person; (2) no other person had any right to the product of his research; and (3) the researcher was entitled, but not required, to publish his research results. Id. at *1, *3

On the other hand, the $15,000 payment was taxable compensation under the Convention under the following circumstances: (1) the cardiologist performed research at X, a tax-exempt foundation, funded by a grant from a charitable organization for a specific project that was expected to continue after the researcher returned to Japan; (2) after the Japanese cardiologist's completion of his two-year term, he would be replaced by another cardiologist, who will continue to work on the project; (3) the research project is directed by a physician employed by X who supervises the cardiologist's work, and (4) X will publish the research results upon its completion. In these circumstances, the payments are primarily for the benefit of X, the grantor of the payments, and the cardiologist is essentially in an employment relationship. 1980 WL 129605, at *1, *3.

Similarly, in Rev. Rul. 87-40, 1987-1 C.B. 372, 1987 WL 383678, the IRS determined that amounts received by visiting associates and scientists under a program administered by the National Institutes of Health (“NIH”) were “compensation for services in what is essentially an employment relationship” and were therefore subject to tax under the 1971 Japan Convention and under “substantially similar” provisions in 16 other treaties. Id. at 2. In so ruling, the IRS relied on provisions of NIH's Manual, under which visiting associates and scientists were to be treated like employees, were to receive a level of compensation similar to that of NIH's civil service employees performing comparable services, and were eligible for leave and benefits similar to NIH civil service employees performing comparable services. Id. at *1.

Although Revenue Rulings are entitled to “considerably less deference” than that accorded Treasury regulations, Dominion Resources, Inc. v. United States, 219 F.3d 359, 366 (4th Cir. 2000), they do constitute the “official interpretation” of the agency charged with implementing the relevant tax laws, Treas. Reg. § 601.601(d)(2)(i)(a), and therefore “are entitled to some degree of deference,” Mellow Partners v. Commissioner, 890 F.3d 1070, 1077 (D.C. Cir. 2018). At a minimum, it is relevant that the United States' taxing authority twice ruled, in the decade preceding the Russia Convention, that the phrase “grant, allowance, or award” in various tax treaties did not encompass payments in the nature of “compensation for services” in “what is essentially an employment relationship.”

Interpreting the phrase “grant, allowance, or other similar payments” to exclude payments in the nature of “compensation for services” does not mean that Article 18 would “apply only to funds which are already exempted” from federal income tax, as the Tax Court erroneously concluded. (Doc. 32 at 12.) Even if the term “grant” in Article 18 is so interpreted, the federal income tax exclusion is still narrower than the Article 18 exclusion: it applies only to grants which are required to be used for “qualified tuition and related expenses” at an educational institution. I.R.C. § 117(b)(1). Moreover, interpreting the term “grant” consistently with I.R.C. § 117 complies with the requirement of Article 3, section 2 of the Russia Convention, that the undefined term “grant” shall “have the meaning which it has under the laws of that State concerning the taxes to which this Convention applies.”¹³ 1993 WL 841567, at *2.

Furthermore, because the Convention refers to local law for the definition of any undefined term, the definition of “grant” in Treas. Reg. §1.117-3(c) is a more appropriate definition than the American Heritage Dictionary's overly broad definition of “grant,” relied on by the Tax Court; this dictionary definition of “grant” as an amount of funds given for a specific purpose could apply to almost any form of remuneration. Furthermore, the court cited no authority for its multi-factor test for “grant,” which appears to have been made up out of whole cloth. At least one of the factors in this multi-factor test — the taxpayer's immigration status — is irrelevant. Since, as the Tax Court concedes, the applicant for a J-1 visa, may, but need not be, a grant recipient (Doc. 32 at 17), the issuance of such a visa has little value in determining whether the taxpayer qualifies for the exemption.

b. The record evidence does not support a finding that taxpayer received a “grant” or grant-like payments

The record evidence in this case is notably bereft of any evidence of a grant or a grant-like payment, whereas there is plenty of evidence that taxpayer's salary is compensation for services. JSA offered, and taxpayer accepted, “employment” at Jefferson Lab. (Ex. 5-J at 1.) He received a “paycheck,” which he was required to have direct deposited into his account, as was required of “[a]ll employees . . . within 30 days from their date of employment.” (Ibid.) He was eligible to participate in “employee” benefit programs. (Ibid.)

“As an employee of JSA/Jefferson Lab” working on the 12 GeV upgrade he gained access to “privileged information and patent and invention rights,” which he was required to keep confidential. (Ibid.) The fruits of his “research,” in other words, were not his own but were Jefferson Lab's; he was required to “follow the rules of the company,” and take “lots of security tests, lots of security exams.” (Tr. 25.) He had an immediate supervisor, received “full salary benefits as all other employees,” and “[a]s is the case for all JSA/Jefferson Lab employees,” his “continued employment” was “contingent upon satisfactory performance and the continuing availability of funds.”¹⁴ (Ex. 5-J at 1, 2; Ex. 6-J; Ex. 7-J; Ex. 11-J.)

Indeed, taxpayer himself testified that he was “employed” by JSA, pursuant to 22 C.F.R. § 62.16. (Tr. 24, 33.) That section authorizes exchange visitors to receive “compensation” from the sponsor for services rendered “when employment activities are part of the exchange visitor's program” and makes no mention of “grants” or “allowances.” The State Department knows how to characterize a payment as a “grant” in its regulations. See, e.g., 22 C.F.R. §§ 63.4 (entitled “Grants to foreign participants to lecture, teach, and engage in research”). But it refers to payments received by exchange visitors like taxpayer as “compensation.” 22 C.F.R. § 62.16. Thus, taxpayer's regular paycheck is not even a “grant” or “allowance” under the State Department's rules governing taxpayer's J-1 visa.

The Tax Court gave great weight (Doc. 32 at 18) to taxpayer's testimony that the funds from which he was paid were “earmarked specifically for him” and that “his funding could not have been redirected to another scientist.” But an examination of taxpayer's testimony (Tr. 16) reveals, with respect to earmarking, that his belief that “Jefferson Labs sets this money aside in a fund” was based upon his reading of the financial requirements the State Department regulations impose on sponsors.

To be sure, sponsors “must maintain the financial capacity” to meet their obligations as a sponsor, and may be required, if the State Department has “reasonable doubt” in this regard, to post a payment bond. 22 C.F.R. §§ 62.9(e)(1), (3). But provisions ensuring the solvency of an exchange visitor program do not mean that the sponsor has awarded a “grant.” And taxpayer's testimony with respect to other scientists was simply that “no other person can be employed for the same program, for the same money, with the same DS-2019 form.” (Tr. 30.) Obviously, however, the DS-2019 form is unique to taxpayer; it is the means by which an exchange visitor obtains a visa, so the exchange visitor's name is the first line of the form. (Ex. 4-J.) But taxpayer also testified that another research scientist could have been hired “[u]nder that same program but with different DS 2019 form.” (Tr. 31.)

Even if the Tax Court's proposed multi-factor test (Doc. 32 at 15-16) is applied, the factors do not support a finding that taxpayer received a “grant” or grant-like payment. There was no application for a grant or award in this case. The funds issued were based on taxpayer's individual's research or participation only insofar as taxpayer received compensation, after the fact, for the scientific research he performed. While funds may have been “earmarked” to cover taxpayer's salary, they were not necessarily for his maintenance, as a per diem allowance might be. And taxpayer's immigration status — as a J-1 visa holder — does not shed any light, one way or another, on whether taxpayer received a “grant.” As explained above, J-1 visa holders may be traveling on a “grant,” e.g., 22 C.F.R. § 63.4, or they may be coming to the United States for employment, 22 C.F.R. § 62.16.

That taxpayer was not the recipient of a “grant, allowance, or other similar payment” is supported by the only precedential case of which we are aware.¹⁵ In Sarkisov v. United States, 95 A.F.T.R.2d 2005-738 (Cl. Ct. 2005), as in this case, “[t]he record is replete with references to [taxpayer] as an employee, but . . . not . . . as a grant recipient.” As here, the employer in Sarkisov sponsored various research projects, but paid taxpayer a “salary.” The Court of Federal Claims held that to view taxpayer “as a grant recipient merely because his employer received grants to fund research in this area would amount to creating unintended benefits to parties outside the scope of the Treaty's language.”

CONCLUSION

For the foregoing reasons, the Tax Court's decision should be reversed and remanded with instructions to enter a decision for the Commissioner consistent with the inclusion of taxpayer's salary for 2010 and 2011 in gross income.

STATEMENT REGARDING ORAL ARGUMENT

Counsel for the United States respectfully submit that, the appellee's pro se status notwithstanding, oral argument would likely be helpful to the court in resolving the legal and factual disputes in this case.

Respectfully submitted,

RICHARD E. ZUCKERMAN
Principal Deputy Assistant Attorney General

JOAN I. OPPENHEIMER (202) 514-2954
IVAN C. DALE (202) 307-6615
Attorneys, Tax Division
Department of Justice
Post Office Box 502
Washington, D.C. 20044
Ivan.C.Dale@usdoj.gov
Appellate.Taxcivil@usdoj.gov

AUGUST 2020