Court Opinion

ID: 7375419
Source: CourtListenerOpinion
Date Created: 2022-07-28 23:17:05.554183+00
Date Added: 2024-06-11T16:21:09.602103
License: Public Domain

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                                                PUBLISHED

                                   UNITED STATES COURT OF APPEALS
                                       FOR THE FOURTH CIRCUIT

                                                 No. 20-1648

        VITALY NIKOLAEVICH BATURIN,

                       Petitioner – Appellee,

           v.

        COMMISSIONER OF INTERNAL REVENUE,

                       Respondent – Appellant.

        ------------------------------

        AARON Z. ROPER,

                       Court-Assigned Amicus Counsel.

        Appeal from the United States Tax Court. (Tax Ct. No. 014796-14)

        Argued: March 8, 2022                                            Decided: April 6, 2022

        Before MOTZ and DIAZ, Circuit Judges, and KEENAN, Senior Circuit Judge.

        Reversed and remanded by published opinion. Judge Motz wrote the opinion, in which
        Judge Diaz and Senior Judge Keenan joined.

        ARGUED: Ivan C. Dale, UNITED STATES DEPARTMENT OF JUSTICE, Washington,
        D.C., for Appellant. Aaron Z. Roper, WILLIAMS & CONNOLLY LLP, Washington,
        D.C., for Court-Assigned Amicus Counsel. Vitaly Nikolaevich Baturin, Appellee Pro Se.
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        ON BRIEF: David A. Hubbert, Acting Assistant Attorney General, Joan I. Oppenheimer,
        Tax Division, UNITED STATES DEPARTMENT OF JUSTICE, Washington, D.C., for
        Appellant.

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        DIANA GRIBBON MOTZ, Circuit Judge:

               The Tax Court held that payments to a Russian scientist working in the United States

        were exempt from taxation under the United States-Russia Tax Treaty. 1 In doing so, the

        Tax Court misunderstood the basis of the Treaty’s distinction between a tax-exempt “grant,

        allowance, or other similar payments” and taxable “salaries, wages, and other similar

        remuneration.” For this reason, we reverse and remand for further proceedings consistent

        with this opinion.

                                                    I.

               In 2010 and 2011 (the two years at issue here), Dr. Vitaly Baturin, a Russian national

        and physicist, worked at Jefferson Lab, a Department of Energy facility in Newport News,

        Virginia. Jefferson Lab operates a particle accelerator, which smashes particles together

        to help researchers learn about the structure of the universe. Dr. Baturin’s work involved

        a detector that would better enable researchers to see what happens at the sub-atomic level

        inside the accelerator.

               During this period, Dr. Baturin held a J-1 exchange visitor visa as a researcher

        sponsored by Jefferson Lab. He received W-2s from Jefferson Lab that reflected income

        of $76,729 and $79,061, in 2010 and 2011, respectively, for “wages, tips, [or] other

        comp[ensation].” He filed 1040-NR (nonresident) forms with the IRS, which claimed an

               1
                The Treaty’s full title is the “Convention Between the United States of America
        and the Russian Federation for the Avoidance of Double Taxation and the Prevention off
        Fiscal Evasion with Respect to Taxes on Income and Capital.” See June 17, 1992, T.I.A.S.
        No. 93-1216; S. Treaty Doc. No. 102-39. The United States signed the Treaty in 1992 and
        the Senate ratified it in 1993, shortly after the dissolution of the Soviet Union.
                                                     3
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        exemption as to the entire amount he earned from Jefferson Lab each year pursuant to the

        United States-Russia Tax Treaty. In 2014, the IRS issued Dr. Baturin a Notice of

        Deficiency, stating that he owed a total of $22,229 in income taxes on his payments from

        Jefferson Lab for 2010 and 2011. After some administrative discussions, Dr. Baturin pro

        se petitioned the Tax Court, arguing that the Treaty exempted his income from taxation.

               The Tax Court agreed with Dr. Baturin, holding that the Treaty shielded from

        taxation his entire income in 2010 and 2011 as “a grant, allowance, or similar payments.”

        The Tax Court rejected the argument of the Commissioner of Internal Revenue that wages

        are categorically ineligible for exemption from taxation under the Treaty, reasoning that

        “wages may be eligible for exemption so long as they are similar to a grant or allowance.”

        Tax Ct. Op. at 19.

               The Commissioner then noted this appeal, over which we have jurisdiction pursuant

        to I.R.C. § 7482(a)(1). 2 “Decisions of the tax court are subject on appeal to the same

        standard we apply to civil bench trials on appeal from the district courts. Under this

        standard, we review factual findings for clear error, legal questions de novo, and mixed

        questions of law and fact de novo.” QinetiQ US Holdings, Inc. v. Comm’r, 845 F.3d 555,

        562 (4th Cir. 2017) (internal citations omitted). “Interpretation of an international treaty is

        an issue of law subject to de novo review.” United States v. Al-Hamdi, 356 F.3d 564, 569

        (4th Cir. 2004). And “[t]he general rule . . . is that a taxpayer claiming immunity from a

               We appointed amicus counsel to argue in support of the Tax Court’s decision.
               2

        Amicus provided an excellent brief and argument, which we very much appreciate.
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        tax has the burden of establishing his exemption.” Norton Co. v. Dep’t of Rev., 340 U.S.

        534, 537 (1951).

                                                     II.

              Ordinarily, any income that a nonresident alien receives for personal services in the

        United States is taxable in this country. See I.R.C. §§ 864(b)(1); 872(a). However, “[t]he

        provisions of [the tax code] shall be applied to any taxpayer with due regard to any treaty

        obligation of the United States which applies to such taxpayer.” Id. § 894(a)(1). Thus, to

        resolve the case at hand, we must consider the United States-Russia Tax Treaty.

              “The interpretation of a treaty, like the interpretation of a statute, begins with its

        text.” Medellín v. Texas, 552 U.S. 491, 506 (2008). Two articles of that Treaty are

        particularly relevant here. On the one hand, Article 14 of the Treaty 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 [i.e., the United States or Russia]
              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.

        Art. 14(1) (emphasis added). On the other hand, Article 18 provides:

              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 that
              other State for the primary purpose of: . . . (c) studying or doing research as
              a recipient of a grant, allowance, or other similar payments from a . . .
              scientific . . . organization, shall be exempt from tax by that other State . . .
              with respect to the grant, allowance, or other similar payments.

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        Art. 18(1). 3

               The text of the Treaty does not define what differentiates “salaries, wages, and other

        similar remuneration” in Article 14 from a “grant, allowance, or other similar payments”

        in Article 18. But the text does tell us that these categories are mutually exclusive, given

        the simple fact that one is taxable and the other is not.

               The legislative history of the Treaty’s ratification reinforces our conclusion that

        salaries and grants are exclusive categories. See United States v. Stuart, 489 U.S. 353,

        366–67 (1989) (using legislative history of Senate ratification to establish a treaty’s

        meaning). Before the Senate ratified the Treaty, the Assistant Secretary for Tax Policy

        testified to the Senate Foreign Relations Committee that although “[s]pecial tax relief

        applies to grants . . . received by . . . researchers . . . the new treaty does not preserve the

        [predecessor Convention With the Union of Soviet Socialist Republics on Matters of

        Taxation, U.S.-U.S.S.R., June 20, 1973, 27 U.S.T. 3 (hereinafter “United States-Soviet

        Union Tax Treaty”)] two year exemption of personal service income earned by . . .

        researchers . . . . It is not the policy of . . . either of the two countries to provide special

        exemptions of the compensation earned by . . . researchers.” See Tax Conventions With:

        The Russian Federation, Treaty Doc. 102-39; United Mexican States, Treaty Doc. 103-7;

        the Czech Republic, Treaty Doc. 103-17; the Slovak Republic, Treaty Doc. 103-18; and

        the Netherlands, Treaty Doc. 103-6. Protocols Amending Tax Conventions With: Israel,

               3
                Articles 18(2) and 18(3) set out a five-year time limit and a provision allowing for
        taxation of income from research “undertaken not in the public interest but primarily for
        the private benefit of a specific person or persons,” respectively. Neither of these
        provisions is at issue in this case.
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        Treaty Doc. 103-16; the Netherlands, Treaty Doc. 103-19; and Barbados, Treaty Doc.

        102-41, Before the Sen. Foreign Relations Comm., 103rd Cong., S. Hrg. 103-335, at 26

        (1993) (statement of Leslie B. Samuels, Assistant Sec’y for Tax Pol’y, Treasury Dep’t)

        [hereinafter “Senate Hearing”]. 4 In short, the United States and Russia intentionally

        drafted the Tax Treaty to narrow a prior exemption that had covered a much broader swathe

        of researchers’ compensation.

               Thus, given the Treaty’s text and history, we must reject the Tax Court’s holding

        that under the Treaty, “wages may be eligible for exemption so long as they are similar to

        a grant or allowance.” Tax Ct. Op. at 19. The argument of amicus in support of this theory

        that “[g]rants are routinely paid out as salaries” misses the mark for the same reason.

        Amicus Br. at 28. Grants may be dispersed periodically, but for purposes of the Treaty, a

        grant paid as a salary is an oxymoron. The two are dichotomous and mutually exclusive.

        Either payments are Article 14 wages, salaries, or similar remuneration (and taxable); or

        they are Article 18 grants, allowances, or other similar payments (and thus tax-exempt).

        They cannot be both.

               4
                 Article VI(1)(c)(1) of the United States-Soviet Union Tax Treaty provides: “An
        individual who is a resident of one of the Contracting States and who is temporarily present
        in the other Contracting State at the invitation of a . . . scientific research institution in that
        other Contracting State for the primary purpose of . . . engaging in research . . . shall not
        be subject to tax in that other Contracting State on his income from . . . research.” As
        should be immediately apparent from the text, this exemption is far broader than the current
        United States-Russia Tax Treaty’s exemption for grants, allowances, and similar payments.
        The United States-Soviet Union Tax Treaty still applies with respect to former Soviet states
        that have not signed successor tax treaties with the United States, such as Belarus.
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                The central question in this case is thus whether Jefferson Lab’s payments to Dr.

        Baturin are taxable as “salar[y], wages, [or] other similar remuneration” under Article 14,

        or tax-exempt as “grant, allowance, or other similar payments” under Article 18.

                                                     III.

                                                     A.

                Beyond establishing mutual exclusivity, however, the United States-Russia Tax

        Treaty is not very helpful in defining what distinguishes salaries and wages from grants

        and allowances. But Article 3(2) of the Treaty gives some guidance. It provides:

                As regards the application of the Convention by a Contracting State, any term
                not defined therein shall, unless the context otherwise requires or the
                competent authorities agree to a common meaning pursuant to [an
                inapplicable section], have the meaning which it has under the laws of that
                State concerning the taxes to which this Convention applies.

        Art. 3(2) (emphasis added); see also Rebecca M. Kysar, Interpreting Tax Treaties, 101

        Iowa L. Rev. 1387, 1412 (2016) (“Tax treaties . . . invoke domestic law concepts by leaving

        terms vague . . . . The characterization of income is one such area, the outcome of which

        has a profound effect on tax liability.”).

                We turn, then, to the law of the United States. As the closest domestic tax law

        analogue, the Commissioner points us to I.R.C. § 117, which exempts from taxation as a

        “‘qualified scholarship’ . . . any amount received by an individual as a scholarship or

        fellowship grant.” I.R.C. § 117(b) (emphasis added). The implementing regulations

        provide: “[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.” Treas. Reg. § 1.117-

        3(c).

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               The regulations further provide:

               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 [two inapplicable sections], 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.

        Treas. Reg. § 1.117-4 (emphasis added). Such payments are “a scholarship or fellowship

        grant . . . if the primary purpose of the . . . research is to further the education and training

        of the recipient . . . [and the payments do] not represent compensation or payment for . . .

        services.” Id. 5

               The Supreme Court interpreted and upheld these regulations in Bingler v. Johnson,

        394 U.S. 741 (1969). Bingler involved Westinghouse Electric engineers who, through a

        company program, took leaves of absence to receive postgraduate education at local

        universities. Id. at 742–44. Westinghouse paid these engineers “tuition remuneration” and

               5
                The Tax Court declined to consider I.R.C. § 117, reasoning that if an Article 18
        “grant” meant the same thing as a § 117(a) “fellowship grant,” the Treaty’s “grant”
        exemption would be superfluous. Tax Ct. Op. at 12. But § 117’s exemption only covers
        “scholarships and fellowship grants” for “qualified tuition and related expenses” at certain
        educational institutions. I.R.C. § 117(b). Article 18 of the Treaty, in contrast, has no such
        expense-specific restrictions, and a grant need only be “from a . . . scientific . . .
        organization.” Thus, the two provisions are not coterminous. Rather, I.R.C. § 117, a
        provision of domestic law that Article 3(2) of the Treaty tells us to consider, properly
        informs our understanding of Article 18.
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        “stipend[s]” during their studies, but required the engineers to agree “to return to the

        employ of Westinghouse for a period of at least two years following completion of [their]

        leave[s].” Id. at 742–44. The Supreme Court held that these payments were taxable: “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.” Id. at 751. Because “Westinghouse unquestionably extracted

        a quid pro quo,” id. at 757, the Court held these payments to be taxable compensation,

        rather than tax-exempt grants.

               In short, Bingler draws a line between work done as part of a “substantial quid pro

        quo,” which is taxable as compensation, and “relatively disinterested, ‘no-strings’

        educational grants,” which are tax-exempt. Id. at 751. This distinction parallels the United

        States-Russia Tax Treaty’s distinction between taxable “salaries, wages, and other similar

        remuneration” and a tax-exempt “grant, allowance, or other similar payments.” 6 Because

        the Treaty directs us to U.S. law, and because of the parallels between the Bingler

               6
                  The Commissioner relies on several revenue rulings that interpret the phrase
        “grant, allowance or award” in the then-operative U.S.-Japan Income Tax Convention and
        similar tax treaties. Comm’r Br. at 30–32 (first citing Rev. Rul. 80-36, 1980-1 C.B. 366,
        1980 WL 129605, and then citing Rev. Rul. 87-40, 1987-1 C.B. 372, 1987 WL 383678).
        These revenue rulings rely in part on I.R.C. § 117 and its implementing regulations. We
        usually do defer to the Executive Branch’s interpretation of a treaty. See Abbott v. Abbott,
        560 U.S. 1, 15 (2010). But because these revenue rulings interpret a different (albeit
        similar) treaty, and because “revenue rulings are entitled to considerably less deference
        than an agency’s properly promulgated regulations,” Dominion Res., Inc. v. United States,
        219 F.3d 359, 366 (4th Cir. 2000), we do not here rely on them except to illustrate the
        viability of drawing on I.R.C. § 117 in the tax-treaty context.
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        framework and the Treaty’s structure, we look to I.R.C. § 117 and its implementing

        regulations to inform whether payments are tax-exempt “grant[s], allowance[s], or other

        similar payments” under Article 18 of the United States-Russia Tax Treaty.

                                                     B.

               Amicus makes two arguments against relying on Bingler’s quid pro quo framework

        here. First, he contends that Bingler and the relevant regulations involved a prior version

        of the statute, which Congress has since altered. Amicus Br. at 34–35. It is true that

        Congress revised the statute in 1986. See 100 Stat. 2085, 2112 (1986). But that revision

        did not eliminate the concept of fellowship grants. Rather, it deleted a separate exemption

        for “research expenses,” but retained the exemption for “fellowship grants” as a kind of

        “qualified scholarship.” Id. Courts have continued to apply Bingler’s quid pro quo

        framework to the revised tax code. See, e.g., United States v. Mem. Sloan-Kettering Cancer

        Ctr., 563 F.3d 19, 30–32 (2d Cir. 2009); United States v. Det. Med. Ctr., 557 F.3d 412, 416

        (6th Cir. 2009). Thus, Bingler’s distinction between “‘no strings’ educational grants” and

        payments for compensation made as part of a “substantial quid pro quo” is still very much

        part of United States tax law. 394 U.S. at 751.

               Next, amicus contends that the Commissioner’s interpretation of Article 18

        “grants,” which mirrors Treas. Reg. § 1-117.4(c)’s exclusion of “payment for services

        which are subject to the direction or supervision of the grantor,” is “staggeringly broad,”

        and if the exemption in Article 18 of the Treaty were interpreted as the Commissioner

        contends, it would cover only “a tiny sliver of grantees.” Amicus Br. at 35. This is so,

        amicus asserts, because “[e]ssentially all grants are ‘subject to the direction or supervision

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        of the grantor.’” Id. But this argument ignores the regulations. They provide that

        “[n]either 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

        benefits to the grantor shall, of itself, be considered to destroy the essential character of

        such amount as a scholarship or fellowship grant.” Treas. Reg. § 1-117.4(c).

                                                      IV.

               Two other arguments bear mentioning here. First, amicus and the Tax Court point

        to the United States-Russia Tax Treaty’s preamble, which proclaims its purpose to be the

        promotion of “scientific . . . cooperation.” Tax Ct. Op. at 12; Amicus Br. at 21–22. Amicus

        argues that exempting Dr. Baturin’s income from taxation advances this salutary purpose,

        such that we must affirm the Tax Court’s decision. We disagree.

               Although it is true that “[t]reaties generally are liberally construed,” Tabion v. Mufti,

        73 F.3d 535, 537 (4th Cir. 1996), “[i]t is a mistake to allow general language of a preamble

        to create an ambiguity in specific . . . treaty text where none exists.” Jogi v. Voges, 480

        F.3d 822, 834 (7th Cir. 2007). And “[w]e may not read international treaties so broadly as

        to create unintended benefits or to reach parties not within the scope of a treaty’s language.”

        Int’l Bank for Reconstr. & Dev. v. Dist. of Columbia, 171 F.3d 687, 691 (D.C. Cir. 1999)

        (citing Maximov v. United States, 373 U.S. 49, 55–56 (1963)). This seems especially so

        when, as here, the cited language does not appear in operative text.

               Moreover, courts construe treaties liberally to effectuate the intent of the parties, not

        simply in favor of the party invoking the treaty. See Nielsen v. Johnson, 279 U.S. 47, 51

        (1929) (“Treaties are to be liberally construed, so as to effect the apparent intention of the
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        parties.”). Here, the intent of the parties to the Treaty was to balance the promotion of

        scientific cooperation with each country’s sovereign right to tax productive activities

        within its borders. Indeed, as the legislative history makes clear, the United States-Russia

        Tax Treaty was deliberately written to narrow the United States-Soviet Union Tax Treaty’s

        broad “exemption of personal service income earned by . . . researchers.” Senate Hearing

        at 26. Adopting the arguments of amicus and the Tax Court would effectively rewrite that

        history and ignore the actual intent of the Treaty.

               Second, Dr. Baturin argues that his immigration status renders him per se eligible

        for Article 18’s exemption. He points to his DS-2019, a form necessary to obtain a J-1

        exchange visa. An applicant’s sponsor (here, Jefferson Lab) fills out the DS-2019 and the

        applicant signs it to verify the document’s accuracy. One box on the form, Box 5, asks for

        the following information: “During the period covered by this form, the total estimated

        financial support (in U.S. $) is to be provided to the exchange visitor by:” Jefferson Lab

        filled in Box 5 as follows:

                5. During the period covered by this form, the total estimated financial
                support (in U.S. $) is to be provided to the exchange visitor by:

                Current Program Sponsor funds: $75,000.00
                Total: $75,000.00

               Dr. Baturin argues that this “money, allotted in the DS[-]2019 certificate, [was] used

        to fund the specified . . . research program.” Baturin Br. at 11 (emphasis deleted). Thus,

        he contends, “the funds specified in block 5 of the Taxpayer’s DS[-]2019 certificate satisfy

        the requirements of the Treaty Art. 18 as [an] allowance (or grant), and, therefore, the

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        Taxpayer is exempt from taxes.” Id. at 12 (emphasis deleted). Dr. Baturin similarly

        argued 7 to the Tax Court:

               Baturin:          [A]fter the funds are secured, the sponsor selects an exchange
                                 visitor, only after [the funds are] secured, put into some box
                                 and locked.

               The Court:        How is the amount established?

               Baturin:          How the amount is established? It’s specified in the DS[-]2019
                                 Form per year.

        In short, Dr. Baturin argues that Box 5 represents a pot of money set aside specifically for

        him — i.e., a grant.

               Even assuming that Jefferson Lab set aside this money specifically for Dr. Baturin,

        that does not make it a grant. As amicus necessarily conceded at argument, an employer

        might well earmark certain funds for payroll. Oral Argument at 33:16–33:30, Baturin v.

        Comm’r,           (4th        Cir.      Mar.        8,      2022)          (No.     20-1648),

        https://www.ca4.uscourts.gov/OAarchive/mp3/20-1648-20220308.mp3.                      Amicus

        similarly had to acknowledge that under this theory, if those employees were researchers,

        the employer’s mere setting aside of payroll funds could constitute a tax-exempt “grant.”

        Id. But it is not the internal accounting method of a grantor/employer that matters here. It

               7
                Amicus contends that Dr. Baturin so testified, rather than argued, and that the Tax
        Court’s conclusions as to the meaning of Box 5 thus constitute factual findings that we
        review for clear error. Amicus Br. at 38–42. But the transcript is quite clear that Dr.
        Baturin developed his understanding of the program and Box 5 not from any statement or
        assurance made to him, but from his reading of the relevant J-1 visa program regulations.
        So Dr. Baturin’s “testimony” is really legal argument, and the Tax Court’s conclusions as
        to the meaning of Box 5 are thus legal, rather than factual. In any case, as discussed herein,
        whether this money was specifically set aside for Dr. Baturin is largely irrelevant to
        whether those funds are a “grant.”
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        is instead whether there is a “requirement of any substantial quid pro quo” that

        distinguishes compensation for employment from a “relatively disinterested, ‘no-string’”

        grant. Bingler, 394 U.S. at 751.

                                                V.

              The Tax Court, of course, did not have the benefit of our decision when it heard

        testimony and decided this case. As a result, the record is not entirely clear as to the

        specifics of Dr. Baturin’s relationship with Jefferson Lab. We are not a fact-finding body,

        and the question of how best to characterize the payments at issue here is a largely fact-

        dependent question.

               Thus, on remand, the Tax Court should determine what Jefferson Lab gained from

        having Dr. Baturin on staff. In doing so, the court should consider, for example, the

        following questions: If not Dr. Baturin, would Jefferson Lab have brought someone else

        to work on upgrading the detector? Did the projects Dr. Baturin worked on pre- and/or

        post-date his tenure at Jefferson Lab, or were they dependent on his presence? Did

        Jefferson Lab retain the rights to the product of Dr. Baturin’s research? How much

        discretion did Dr. Baturin have to direct the day-to-day performance of his work? Cf. Rev.

        Rul. 80-36, 1980 WL 129605, *1 (outlining relevant considerations to determine whether

        researchers’ income was tax-exempt under U.S.-Japan Income Tax Convention). In short,

        was there a “substantial quid pro quo” here? Bingler, 394 U.S. at 751. We trust the Tax

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        Court to answer these questions, and we think it appropriate to allow that court the

        opportunity to apply the framework we have described here in the first instance.

                                          REVERSED AND REMANDED FOR FURTHER
                                          PROCEEDINGS CONSISTENT WITH THIS OPINION

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