Court Opinion

ID: 9459044
Source: CourtListenerOpinion
Date Created: 2023-08-04 21:08:50.705767+00
Date Added: 2024-06-11T17:35:59.570138
License: Public Domain

BRIGHT, Circuit Judge
(dissenting).
In this case we are again called upon to answer the. question of whether amounts paid through residency programs to physicians obtaining advanced *865medical training are excludable from gross income and therefore nontaxable. We answered this question negatively in Wertzberger v. United States, 441 F.2d 1166 (8th Cir. 1971), and in Quast v. United States, 428 F.2d 750 (8th Cir. 1970). I would reach a similar result here, adverse to the taxpayers, notwithstanding that, unlike the earlier cases, the district court decision favored taxpayers.
I briefly recapitulate the underlying facts upon which there is no real dispute, aside from differing inferences which the parties seek to draw from them.
Dr. Leathers — Pathology Resident
Dr. Leathers received his license to practice medicine in Oklahoma. Prior to beginning his residency at UAMC, he served as a flight surgeon in the Navy. During 1969, the tax year in question, Dr. Leathers served as pathology resident at UAMC, spending the majority of his time in the second-year program. His duties under supervision of the staff doctors, included examining 1800 surgical specimens, determining that they were labeled properly and that slides were made, and dictating his opinion of the disease process indicated. He engaged in 58 frozen section studies, performed 28 autopsies, participated in weekly teaching conferences with staff members, assisted in the teaching of residents and medical students, and, on eight occasions, served as a pathological resident on emergency call. He lectured to medical school students and devoted the majority of his time, according to his testimony, to personal study.
Dr. Leathers received a stipend of $7,237.83 from UAMC through its residency program. In addition, he performed autopsies at $50 each for the Veterans Administration Hospital— these payments, however, are not in controversy here.
Dr. Blankenship — Orthopedic Surgery Resident
Dr. Blankenship, following graduation from medical school, served two years in the Army as a medical officer prior to entering the residency program in orthopedic surgery at UAMC in 1967. During the first six months of 1968, the tax year here in question, he completed service as a first-year resident and thereafter worked in the second-year residency program for the balance of the year.
During this one-year period, he performed or assisted in general surgery for the first six months, three of which were spent at the Little Rock Veterans Administration Hospital. He personally performed 20 operations, such as hernia repair, hemorrhoid operations, and surgical correction of stomach ulcers, and assisted in approximately 40 others. He also administered anesthetics in the operating room, taught senior medical students, and engaged in independent study.
His work as a second-year resident was similar except that it related solely to orthopedic medicine and surgery. Staff doctors supervised his work. Dr. Blankenship received a stipend of approximately $5,000 in 1968.

Residency Program

The residency programs at UAMC do not lead to a degree but provide necessary training for certification in a specialty. UAMC also supervises the training afforded residents at the affiliated Veterans Administration Hospital in Little Rock. The UAMC brochure explaining the post-graduate program notes that “Hospital and clinic patients, numbering about 100,000 annually, come under scrutiny of the staff, and interns and residents play the predominant role in their care.”
At the time of trial, the stipend for residents began at $6,800 per annum and increased $300 each succeeding year. Amounts were not geared to need. Residents were furnished uniforms and medical malpractice insurance. Similar stipends and benefits were provided during the tax years in question. According to the testimony of the Dean of the School of Medicine, the mission of UAMC is to “provide educational programs to edu*866cate and train physicians, nurses, pharmacists, and other individuals involved in taking care of the ill.” The University Hospital of UAMC is described as a “teaching hospital,” and UAMC’s full-time faculty of 180 persons is supplemented by the services of Arkansas practicing physicians. Residents are not required to remain in the state after residency training. The hospital does not specifically bill patients for the services of residents.
The plaintiffs introduced testimony indicating that, with rearrangement of time, the faculty could provide professional care for patients without the aid of residents, except in obstetrics- — not here involved. The Dean of the Medical School testified that the payment of stipends, such as paid to taxpayers here, provides the necessary economic support for young physicians to pursue the advanced training programs offered by UAMC.
In each case the jury responded affirmatively to an interrogatory asking whether the payments in question were “scholarship or fellowship grants within the meaning of the Internal Revenue law and regulations.” The trial court, in refusing to set aside this verdict, ruled the evidence sufficient to show:
* * * that the Medical Center’s purpose in accepting doctors for its residency programs is to train them as specialists hoping that they will remain in Arkansas to help meet the great shortage of medical professionals here; that Dr. Leathers’ and Dr. Blankenship’s personal objectives during the years in question were to further their education and to be trained as specialists; that the payments made to them were made to allow them to pursue studies and advance their training in their individual capacities; that any services rendered to the Medical Center or to patients by the two doctors were only incidentally of benefit to the Medical Center; and that the payments did not represent compensation for services rendered.
I reject this analysis. The “primary purpose” test as reflected in the ruling of the trial court is not determinative of the taxability of the stipends received by Drs. Leathers and Blankenship. I would hold that these stipends did not qualify for favorable tax treatment as fellowships under 26 U.S.C. § 117 and the Treasury Regulations supplementing this section since, under the facts not in dispute, the amounts in question represent “compensation for * * * present * * * employment services” or “payment for services which are subject to the direction or supervision of the grantor” within the meaning of Regulation § 1.117-4(c).1 I make my analy*867sis in light of Bingler v. Johnson, 394 U.S. 741, 89 S.Ct. 1439, 22 L.Ed.2d 645 (1969), and its construction of § 117 and the applicable Treasury Regulations.2
Historically, under the 1939 Code, scholarships and fellowships had not been given special treatment under a separate subject classification. Payments in furtherance of a taxpayer’s education which were claimed excludable were examined under the test of “gift” versus “compensation.” See Stone v. Commissioner, 23 T.C. 254 (1954). This made taxability determinable only on a case-by-case method, a procedure Congress desired to end by the passage of § 117 of the Internal Revenue Code of 1954. See Bingler v. Johnson, supra,, 394 U.S. at 752-753, 89 S.Ct. 1439, 22 L.Ed. 2d 695.
In enacting § 117, Congress did not specifically designate those grants subject to favorable tax treatment from those not so favored. As the Supreme Court observed:
* * * Congress was merely “recognizing] that scholarships and fellowships are sufficiently unique to merit [tax] treatment separate from that accorded gifts,” and attempting to provide that grants falling within those categories should be treated consistently — as in some instances, under the generic provisions of the 1939 Code, they arguably had not been. Delineation of the precise contours of those categories was left to the Commissioner. [Id. at 753, 89 S.Ct. at 1446 (footnotes omitted).]
Treasury Regulation § 1.117 at least superficially accomplished the congressional purpose of eliminating the old “gift” versus “compensation” test, but squaned at least three basic approaches in its place: the “primary purpose” test, the “indicia of compensation” test, and a third test which was a combination of the other two.3 The “primary purpose” approach came from the language of Treasury Regulation § 1.117-4(c) (2) which excludes from scholarship or fellowship treatment amounts paid to an individual to enable him to pursue “studies or research primarily for the benefit of the grantor.” See Ussery v. United States, 296 F.2d 582 (5th Cir. 1961). This regulation also recites the converse proposition, permitting the exclusion from gross income “if the primary pdrpose 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 * * * services * *
In the “indicia of compensation” test, the court examines the grant to see if it carries characteristics usually associated with compensation, Stewart v. United States, 363 F.2d 355 (6th Cir. 1966). Finally, in some instances, courts have combined both tests, “primary purpose” and “indicia of compensation,” to determine the taxability of the grant. Woddail v. Commissioner, 321 F.2d 721 (10th Cir. 1963). See Evans v. Commissioner, 34 T.C. 720 (1960).
Against this background of varying approaches, the Supreme Court decided Bingler v. Johnson, supra, 394 U.S. 741, 89 S.Ct. 1439, 22 L.Ed.2d 695. Unlike the situation here, the taxpayers in Bingler were performing no present services for the grantor-employer. Taxpayers, who were engineers at the Bettis *868Atomic Power Laboratory operated by Westinghouse, received stipends through a Westinghouse “fellowship” program while they were on leave pursuing an advanced course of study. Taxpayers had made an agreement with Westinghouse to submit written progress reports during their advanced study and to return to active employment for at least two years following the educational leave. In resolving the issue of whether the stipends were scholarships or fellowships, the Court focused on the “compensation” provision of Regulation § 1.117-4(c) and determined that it was not “ ‘unreasonable or plainly inconsistent with the . . . statut[e]’.” Id. at 755, 89 S.Ct. at 1447. The Court also noted that the definitions provided by the Regulation 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.” Id. at 751, 89 S.Ct. at 1445.
The Court concluded that the payments were not excludable from income because:
[M]ost 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. [Id. at 757-758, 89 S.Ct. at 1448-1449 (footnotes omitted).]
Significantly, the Court omitted any mention of “primary purpose” as a consideration in resolving the issue, and the Court’s comments, which I quote below, cast considerable doubt upon the vitality of the “primary purpose” test in cases of this nature:
We accept the suggestion in the Government’s brief that the second paragraph of Treas.Reg. § 1.117-4(c) —which excepts from the definition of “scholarship” any payments that are paid to an individual “to enable him to pursue studies or research primarily for the benefit of the grantor” — is merely an adjunct to the initial “compensation” provision: “By this paragraph, the Treasury has supplemented the first in order to impose tax on bargained-for arrangements that do not create an employer-employee relation, as, for example, in the case of an independent contractor. [Emphasis added.] But the general idea is the same: ‘scholarship’ or ‘fellowship’ does not include arrangements where the recipient receives money and in return provides a quid pro quo.” Brief for Petitioner 22. [Id. at 758 n. 32, 89 S.Ct. at 1449.]
The Court’s footnote implies that the “primary purpose” rationale applies to a nonemployee relationship only, thus removing from primary-purpose considerations a relationship which presents the ordinary elements of an employer-employee arrangement, such as grantor supervision and control of services performed and payment by the grantor of an agreed upon stipend. In any event, I construe this language of Bingler to mean that the “primary purpose” test is secondary to “compensation” aspects of the relationship between grantor-payor and payee-taxpayer.
An examination of the relationship between the resident doctors and UAMC reveals that this relationship contained many of the indicia that are ordinarily associated with an employer-employee arrangement. First, the doctors were required to perform numerous valuable medical services for UAMC. Although these services allegedly could have been performed by staff doctors, that does not alter the fact that they were performed by residents, thus freeing staff *869doctors from devoting their time to these tasks. The services rendered were valuable to UAMC and the affiliated hospitals both in providing health care to patients and in providing education to others in the medical training hierarchy, such as undergraduates, interns, and less experienced residents. Secondly, UAMC retained the right to control and direct all work performed by the residents. Thirdly, UAMC did not pay residents on the basis of need, but on the basis of a flat, fixed sum, which increased yearly as the resident attained additional skill and experience. Finally, UAMC made the payments to all physicians whom it accepted as residents, and it expected all residents in turn to perform certain services. Under these circumstances, I think that an employer-employee relationship was clearly established and the payments constituted compensation for services rendered rather than no-strings-attached fellowship grants. I am satisfied that where an employment relationship exists between an educational institution and its student, the motives of each do not become crucial in determining the tax status of the payments made by the school. I find support for this view in a decision of the Fourth Circuit, Hembree v. United States, 464 F.2d 1262 (1972), which held that stipends paid under circumstances similar to those found here did not qualify as fellowships and thus could not be excluded from gross income. In that case the district court had determined that the payments were nontaxable since they were made for , the purpose of furthering the taxpayer’s education and training. The district court based its conclusion upon a finding that the primary purpose of the Medical College of South Carolina was the training of physicians rather than the treatment of patients.
The Fourth Circuit opinion by Judge Field observed:
On the facts of this case, however, we conclude that the district court erred in using the primary purpose of the hospital facility as the criterion for the test enunciated in the Regulations. It is not the purpose of the facility to which the Regulation refers but the primary purpose of the payment made to the taxpayer that is controlling. * * * The arrangements under which Dr. Hembree served that portion of his internship and residency at MCSC had all of the indicia of an employer-employee relationship, and differed in no material respect from his service at the VA and County hospitals. [Id. at 1264.]
The court added:
There is another and more compelling reason for holding the subject payments taxable. The regulations require that in order to qualify for exclusion the payments must be made for the primary purpose of furthering the education and training of the recipient, and, additionally, the amount provided for such purpose shall not represent compensation or payment for services. In considering and sustaining the validity of Treasury Regulation 117-4(c) in Bingler v. Johnson, 394 U.S. 741 [,89 S.Ct. 1439, 22 L.Ed. 2d 695] (1969), the Supreme Court bypassed discussion of the “primary purpose” dialogue and bluntly stated that “the definitions supplied by the Regulation clearly are prima facie proper, comporting as they do 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.” The clear import of this language is that if there is any substantial quid pro quo, i. e., compensation for services, the payments cannot qualify for exclusion from income as “fellowship” funds. [Id. at 1265.]
Pre-Bingler decisions sometimes arrived at opposing answers to the question of whether payments to resident physicians pursuing advanced studies should be deemed excludable from *870income.4 However, the post-Bingler decisions called to our attention have uniformly and consistently held that payments made to medical residents and to interns who perform medical services do not qualify for exclusion from gross income as fellowships or scholarships within the meaning of § 117. See, e. g., Hembree v. United States, supra, 464 F.2d 1262; Wertzberger v. United States, supra, 441 F.2d 1166; Quast v. United States, supra, 428 F.2d 750; Tobin v. United States, 323 F.Supp. 239 (S.D.Tex.1971); Kwass v. United States, 319 F.Supp. 186 (E.D.Mich.1970).5
Since the salient facts clearly establish a “quid pro quo,” the motivation of the parties is not controlling; thus, I believe we are required to reverse the judgment of the district court and direct that each taxpayer’s cause be dismissed.6 See Wertzberger v. United States, supra, 441 F.2d 1166; Ward v. Commissioner, 449 F.2d 766 (8th Cir. 1971); Quast v. United States, supra, 428 F.2d 750.
But even if motivation were relevant, I find that the evidence in this case does not justify a finding that the stipend qualified as a scholarship or fellowship under the primary purpose criteria of Treasury Regulation § 1.117-4(c) (2).
In discussing the evidence which it finds conflicting and thus justifying submission of the case to the jury, the majority indicates that the primary purpose of UAMC is the education and training of medical personnel. As has been previously discussed, the Hembree court specifically held that this was an irrelevant factor in applying the primary purpose test enunciated in the Regulation. The majority also states that the residents are closely supervised and are not required to remain in the state upon completion of the residency. But the Regulations state that “a payment for services which are subject to the direction and control of the grantor” are not excludable from gross income and both the Regulations and Bingler *871explicitly state that these services may be rendered presently as well as in the future.
Finally, the majority calls particular attention to testimony of the Dean of the School of Medicine who expressed the opinion that with “rearrangement” the faculty could “take care of the patients without the residents” and contrasted this testimony with that of the Director of the Veterans Administration Hospital in Little Rock who testified that the Medical staff could not handle the patient load without the help of residents. I do not agree with the majority’s characterization of this evidence as conflicting. The only inference that I draw from this testimony is that residents at both facilities performed vital and necessary tasks in patient care; to provide the needed services without the aid of the residents would require in one case more staff services, and in the other, more staff members.
What I believe to be revealing in the Dean’s testimony is his disclosure that neither economic need nor scholastic attainments of the residents govern the eligibility to receive or the amount of the stipend. This is in sharp contrast to the hospital’s graduate scholarship program in which need and academic standing are important considerations in the awarding of the scholarship.
In sum, as I view the evidence, the verdict can be justified only if the purpose of the institution becomes a relevant and crucial subject of inquiry. Such purpose is immaterial to the issue. Accordingly, I find no justification for the jury verdict upon a “primary purpose” approach.
I add two additional comments. First, the result of the majority opinion is to permit disparate tax treatment to similarly situated resident doctors. In Wertzberger, supra, 441 F.2d 1166, we affirmed Judge Oliver’s holding that payments received by a resident physician at the University of Kansas Medical Center constituted compensation for services and did not qualify for exclusion from gross income under § 117. Now, the court affirms the finding in the trial court that payments received by a resident physician at the University of Arkansas Medical Center under virtually identical circumstances can be excluded as a fellowship grant under § 117. Under the majority view another resident physician at UAMC could be held liable for taxes upon all of the stipend paid him contrary to the tax treatment afforded taxpayers here. The effect of the court’s decision is to return to the pre-§ 117 case-by-case determination of the grantor’s motives, Bingler, supra, 394 U.S. at 752, 89 S.Ct. 1439, 22 L.Ed.2d 695, thus frustrating the congressional intent to provide consistent tax treatment by its enactment of § 117.
Secondly, contrary to the majority’s implication that these taxpayers fall within the terms of § 117, I believe that the Court’s statement in regard to the alleged scholarships in Bingler is applicable :
One may justifiably suppose that the Congress that taxed funds received by “part-time” teaching assistants, presumably on the ground that the amounts received by such persons really represented compensation for services performed, would also deem proper a definition of “scholarship” under which comparable sorts of compensation — which often, as in the present case, are significantly greater in amount — are likewise taxable. [Id. at 754, 89 S.Ct. at 1447 (footnotes omitted).]
I strongly dissent from the action of the majority in this case, for its precedent can only serve to widen a “tax-break” beyond the dimensions intended by Congress and to make it virtually impossible for resident physicians to know without litigation whether they owe taxes upon stipends paid them by the institutions in which they train.

. The relevant text of Treas.Reg. on Income Tax (1954 Code), 26 CFR § 1.117-4 reads:
§ 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:
♦ * sfs *
(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 *867of liis 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 in (c) (1) added.]

. For a pve-Bmgler summary, see Tabac Scholarships and Fellowship Grants : An Administrative Merry-Go-Round, 46 Taxes 485 (1968). For post-Bingler discussions, see Hutton, Scholarships and Fellowships: What’s in a Name?, 56 A.B. A.J. 592 (1970) ; 7 San Diego L.Rev. 154 (1970) ; 35 Missouri L.Rev. 393 (1970) ; 31 Ohio State L.J. 186 (1970).

. See 31 Ohio State L.J. 186 (1970).

. For stipends held includable in gross income, see, e. g., Proskey v. Comm’r, 51 T.C. 918 (1969) ; Taylor v. United States, 22 AFTR 2d 5246 (E.D.Ark.1968) ; Lingl v. Charles, 21 AFTR 2d 410 (S.D.Ohio 1967) ; Woddail v. Comm’r, 321 F.2d 721 (10th Cir. 1963) ; Bonn v. Comm’r, 34 T.C. 64 (1960).
For stipends held excludable from gross income, see, e. g., Pappas v. United States, 19 AFTR 2d 1276 (E.D.Ark.1967) ; Wrobleski v. Bingler, 161 F.Supp. 901 (W.D.Pa.1958). Cf. Wells v. Comm’r, 40 T.C. 40 (1963).

. Accord, Taylor v. Comm’r, 31 CCH Tax Ct.Mem. 57, T.C.Memo 1972-20 (1972) ; Calick v. Comm’r, 31 CCH Tax Ct.Mem. 69, T.C.Memo 1972-23 (1972) ; Birnbaum v. Comm’r, 30 CCH Tax Ct.Mem. 989, T.C.Memo 1971-231 (1971) ; Steinhaus v. Comm’r, 30 CCH Tax Ct.Mem. 1197, T.C. Memo 1971-279 (1971) ; Rundell v. Comm’r, 30 CCH Tax Ct.Mem. 177, T.C. Memo 1971-40 (1971), aff’d, 455 F.2d 639 (5th Cir. 1972) ; Emory v. Comm’r, 30 CCH Tax Ct.Mem. 785, T.C.Memo 1971-191 (1971) ; Fuller v. Comm’r, 30 CCH Tax Ct.Mem. 1116, T.C.Memo 1971-259 (1971) ; Fisher v. Comm’r, 56 T.C. 1201 (1971) ; Anderson v. Comm’r, 54 T.C. 1547 (1970) ; Coggins v. United States, 26 AFTR 2d 70-5775 (N.D.Tex.1971) ; Dimants v. Comm’r, 29 CCH Tax Ct.Mem. 1138, T.C.Memo 1979-257 (1970) ; Katz v. Comm’r, 29 CCH Tax Ct.Mem. 511, T.C.Memo 1970-116 (1970) ; Ballerini v. Comm’r, 29 CCH Tax Ct.Mem. 1595, T.C.Memo 1970-334 (1970) ; Flicker v. Comm’r, 29 CCH Tax Ct.Mem. 1115, T.C.Memo 1970-252 (1970). Cf. Moll v. Comm’r, 57 T.C. 579 (1972) ; Utech v. Comm’r, 55 T.C. 434 (1970) ; MacDonald v. Comm’r, 52 T.C. 386 (1969).

. This is not to say that stipends paid medical residents will never qualify as an exclusion from income. An example of an approved fellowship exclusion for a resident doctor was noted in Wertzberger, supra, 315 F.Supp. 34, 37 n. 3:
For a factual situation which permits a § 117 exclusion for physicians engaged in post-graduate study, see Revenue Ruling 57-560, 1957-2, Cum.Bull. 108. There, physicians studying under the auspices of the Mayo Foundation and Mayo Properties Association received actual fellowship grants and cost-of-living allowances, but “render[ed] no service, replace [d] no personnel who would be employed on a salary basis, and perform [ed] no functions for the benefit of the grantor or training institution * * *."