Mueller
v.
Comm'r of Internal Revenue

Tax Court of the United States.Feb 20, 1964
41 T.C. 639 (U.S.T.C. 1964)
41 T.C. 639T.C.

Docket Nos. 94014 325-62 326-62 875-62 3938-62.

1964-02-20

HELMUT MUELLER AND GIOIA S. MUELLER, ET. AL.,1 PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Gabriel T. Pap, for the petitioners. Lawrence A. Wright, for the respondent.


Gabriel T. Pap, for the petitioners. Lawrence A. Wright, for the respondent.

Amounts paid by tax-exempt institute to scientists selected to engage in research at its laboratory held, on facts, to require substantial future services and accordingly not to be excludable from gross income as prizes or awards under sec. 74, I.R.C. 1954.

In these consolidated proceedings, respondent determined deficiencies in income tax as follows:

+-------------------------------------------------+ ¦Petitioners ¦Year¦Deficiency¦ +---------------------------------+----+----------¦ ¦Helmut and Gioia S. Mueller ¦1957¦$758.28 ¦ +---------------------------------+----+----------¦ ¦Andrew G. and Eva M Szent-Gyorgyl¦1957¦973.30 ¦ +---------------------------------+----+----------¦ ¦ ¦1958¦1,035.63 ¦ +---------------------------------+----+----------¦ ¦ ¦1959¦1,058.69 ¦ +---------------------------------+----+----------¦ ¦ ¦1960¦844.84 ¦ +---------------------------------+----+----------¦ ¦Albert and Marta Szent-Gyorgyl ¦1957¦2,727.17 ¦ +---------------------------------+----+----------¦ ¦ ¦1958¦2,617.36 ¦ +---------------------------------+----+----------¦ ¦ ¦1959¦4,130.23 ¦ +---------------------------------+----+----------¦ ¦ ¦1960¦4,353.37 ¦ +-------------------------------------------------+

As to petitioners Helmut and Gioia S. Mueller, respondent at the trial conceded a reduction in the deficiency to $391.60.

The issue is whether amounts received by the petitioners for the years involved from the Institute for Muscle Research, Inc., are taxable or are excludable from gross income under section 74(b) of the Internal Revenue Code of 1954. All other issues raised in the deficiency notices have been concede by petitioners.

FINDINGS OF FACT

Some of the facts have been stipulated and are found accordingly.

Petitioners Helmut (hereinafter referred to as Mueller) and Gioia S. Mueller, husband and wife, filed a joint Federal income tax return for 1957.

Petitioners Andrew G. (hereinafter referred to as Andrew) and Eva M. (hereinafter referred to as Eva) Szent-Gyorgyi, husband and wife, resided at Wilson Road, Woods Hole, Mass. They filed joint income tax returns for the years 1957 through 1960.

Petitioners Albert (hereinafter refereed to as Albert) and Marta (hereinafter referred to as Marta) Szent-Gyorgyi, husband and wife, resided at The Seven Winds, Penzance Point, Woods Hole, Mass. They filed joint income tax returns for the years 1957 through 1960.

During the years involved, all petitioners were on a cash basis and their taxable year was the calendar year. All returns were filed with the district director of internal revenue, Boston, Mass.

Petitioners received the following amounts for the year indicated from the Institute for Muscle Research, Inc.:

+--------------------------+ ¦Petitioner ¦Year¦Amount ¦ +-----------+----+---------¦ ¦Mueller ¦1957¦$2,183.58¦ +-----------+----+---------¦ ¦Andrew ¦1957¦1,344.00 ¦ +-----------+----+---------¦ ¦ ¦1958¦1,344.00 ¦ +-----------+----+---------¦ ¦ ¦1959¦896.00 ¦ +-----------+----+---------¦ ¦Eva ¦1957¦3,000.00 ¦ +-----------+----+---------¦ ¦ ¦1958¦3,250.00 ¦ +-----------+----+---------¦ ¦ ¦1959¦3,600.00 ¦ +-----------+----+---------¦ ¦ ¦1960¦3,600.00 ¦ +-----------+----+---------¦ ¦Albert ¦1957¦12,000.00¦ +-----------+----+---------¦ ¦ ¦1958¦14,000.00¦ +-----------+----+---------¦ ¦ ¦1959¦18,000.00¦ +-----------+----+---------¦ ¦ ¦1960¦18,000.00¦ +-----------+----+---------¦ ¦Marta ¦1957¦3,100.00 ¦ +-----------+----+---------¦ ¦ ¦1958¦3,300.00 ¦ +-----------+----+---------¦ ¦ ¦1959¦3,300.00 ¦ +-----------+----+---------¦ ¦ ¦1960¦3,300.00 ¦ +--------------------------+

The Institute for Muscle Research, Inc. (hereinafter referred to as the Institute), originally the Szent Gyorgyi Research Foundation, Inc., was organized in 1948 as a non profit membership corporation under the laws of New York State to engage in basic scientific research in muscles in all their aspects. The Institute is a tax-exempt organization under section 501(c) (3), I.R.C. 1954. It maintains executive offices in New York City and a research center at the Marine Biological Laboratory in Woods Hole, Mass. During the years involved here, the work of the Institute was financed by grants largely from foundations and associations.

Albert was a member of the board of directors of the Institute and its director-in-chief of research, heading a group of approximately 14 colleagues at Woods Hole. Albert, a 1937 Nobel Prize winner and 1947 Hungarian refugee, originated the Institute and ‘transplanted’ all of the original members from the University of Budapest in Hungary. There is a constant flow of scientists into and out of the Institute.

Albert selected outstanding scientists from anywhere in the world to do research at Woods Hole, based upon their past achievements and their standing in a field related to the type of research being done there. These scientists were selected with little or no initiative on their part.

To petitioners and other scientists who came to Woods Hole the Institute made payments which it denominated ‘awards.’ The amounts of these ‘awards' were set on a yearly basis but were paid in monthly installments. The amounts of the ‘awards' were largely determined by Albert, including those for himself and his wife. Some of the recipients, including some of the petitioners, received ‘awards' for more than 1 year.

There were no formal contracts between the Institute and the . recipients. In order to receive payments, the scientists had to work at the research center in Woods Hole. If a recipient left Woods Hole or if he failed to live up to Albert's expectation, the payments ceased.

The bylaws of the Institute set out the duties of the director-in-chief of research as follows:

He shall supervise and have full charge of all research in which the Institute is engaged, including setting up all projects. He shall sign all reports and scientific papers as to findings and progress. He shall supervise the scientific personnel, and their duties.

The other scientists consulted with Albert and, as the senior scientist, he had to advise the other research personnel and be familiar with what they were doing. He performed some administrative functions, including applying for grants from various foundations and associations.

The research scientists worked on their own projects and individually published papers and articles reporting their research. The Institute published a list of these papers and articles.

Mueller contacted the Institute first by writing Albert and expressing a desire to do research associated with the work Albert was doing.

The minutes of meetings of the directors of the Institute of August 8, 1957, and June 16, 1958, reflect the granting of the ‘awards' in issue here to Albert, Marta, Andrew, and Eva with the statement of the executive secretary that such awards should be made ‘in order to safeguard the continuity of the scientific research work which is being done by Dr. Szent-Gyorgyi and his staff.’

The minutes of the meetings of the directors of the Institute of June 15, 1959, and June 5, 1960, reflect the granting of ‘awards' to Albert, Marta, and Eva with the statement of the executive secretary that they were advisable ‘in order to secure the continuation of the research work undertaken by Prof. Szent-Gyorgyi.’

The minutes of the meeting of August 8, 1957, also state that the Office of the Surgeon General of the United States had made a grant to the Institute for ‘a research program under the direction of Dr. Andrew G. Szent-Gyorgyi.’

In a letter to Mueller dated August 7, 1958, the executive secretary of the Institute stated:

I am in receipt of your letter of July 29th, 1958 in reference to your monthly stipend from the American Heart Association.

Now, the situation is as follows:

From the American Heart Association you receive a stipend in the amount of $425.00; we have been sending you every month a check for $43.93 and have been paying your rent in the amount of $150.00 per month, which results in a total of $618.93.

Thus, you are receiving $168.93 more than the other fellows of the Institute for Muscle Research in your status.

Therefore, I suggest that you pay every month the rent to Miss Claudia Pendergast, Woods Hole; we shall continue sending you our check for $43.93 monthly so that you will receive $18.93 per month more than your colleagues.

I hope this proposal will be convenient to you and am looking forward to your confirmation.

In a letter to Dr. Stefan Beszedits dated July 11, 1951, the Institute stated:

May we advise you that in our research work we came across a by-product, regarding the utilization of which we should like to have your advice as an expert in the field. We are confident that your scientific background and experience will enable you to collaborate successfully with our staff on the above outlined problem.

Regarding finances: We are willing to grant you a fellowship of $250.00 monthly during your stay with us.

In a letter to the Immigration and Naturalization Service concerning a Dr. Marsigli dated September 19, 1956, the Institute states:

We were very happy to know of his presence in the United States and are anxious to employ him in connection with several research projects which we have in mind which are specifically in the field of his own knowledge and experience.

We have offered Dr. Marsigli a fellowship in our laboratory at Woods Hole, Mass., working under the Nobel Prize Winner Professor Albert Szent Gyorgyi, M.D., Ph. D.

This is a fellowship for one year period carrying a grant of $350.00 per month. The research requires the services of a physician who is also experienced in biochemistry, general research work in biochemical laboratory, and knowledge of protein electrophoresis.

In a letter to Lorand Magyar dated July 28, 1954, the Institute stated:

We are pleased to inform you that the Board of Directors of this Institute has resolved to extend to you an invitation to join the scientific research staff of our Institute at Woods Hole, Mass.; the research work assigned to you would be in the field of ultrasound waves in which, as we understand, you are an expert. At the same time, you were awarded a research fellowship in the amount of $350.00 (Three Hundred Fifty Dollars) monthly, for a period of two (2) years, beginning with the day of your arrival in this country.

In letters to Dr. Zoltan Korenyi (1951), Dr. Nelly Frick 1951), Andreas Hegyeli (1957), and Mrs. George Hubay (1957), the Institute stated it was extending ‘an invitation to join the scientific research staff of this Institute,‘ or words to that effect.

Andrew and Eva received payments from the Institute for most of a 10Year period including the years in issue.

Petitioners would not have received payments from the Institute if they had not been performing research in muscles at the research center at Woods Hole, Mass.

Petitioners were required to render substantial future services in order to receive the ‘awards' from the Institute.

OPINION

OPPER, Judge:

Petitioners apparently found their claim of exclusion solely on the provisions of section 74 referring to ‘prizes and awards.' They correctly suggest that no comparable provision existed prior to 1954. The same appears to be true of section 117 referring to ‘fellowship grants.' That the two sections are somewhat related is clear. But we think it cannot be presummed that they duplicate each other and as a consequence they seem to us in essence to be mutually exclusive. See Max Isenbergh, 31 T.C. 1046, 1052 (1959).

SEC. 74 (I.R.C. 1954). PRIZES AND AWARDS.(b) EXCEPTION.— Gross income does not include amounts received as prizes and awards made primarily in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievement, but only if—(1) the recipient was selected without any action on his part to enter the contest or proceeding; and(2) the recipient is not required to render substantial future services as a condition to receiving the prize or award.

SEC. 117 (I.R.C. 1954). SCHOLARSHIPS AND FELLOWSHIP GRANTS.(a) GENERAL RULE.— In the case of an individual, gross income does not include—(1) any amount received—(B) as a fellowship grant, including the value of contributed services and accommodations; * * *

SEC. 74 (I.R.C. 1954). PRIZES AND AWARDS.(a) GENERAL RULE.— Except as provided in subsection (b) and in section 117 (relating to scholarships and fellowship grants), gross income includes amounts received as prizes and awards.

We need not speculate on the cause of petitioners' sole reliance on section 74, though one is not difficult to envisage. But since none of the parties bases any contention on section 117, nothing we say here should be construed as deciding any issue with reference to it.

SEC. 117 (I.R.C. 1954). SCHOLARSHIPS AND FELLOWSHIP GRANTS.(b) Limitations.—(2) INDIVIDUALS WHO ARE NOT CANDIDATES FOR DEGREES.— * * *(B) EXTENT OF EXCLUSION.— The amount of the scholarship or fellowship grant excluded under subsection (a) (1) in any taxable year shall be limited to an amount equal to $300 times the number of months for which the recipient received amounts under the scholarship or fellowship grant during such taxable year, except that no exclusion shall be allowed under subsection (a) after the recipient has been entitled to exclude under this section for a period of 36 months (whether or not consecutive) amounts received as a scholarship or fellowship grant while not a candidate for a degree at an educational institution (as defined in section 151 (e) (4)).

In order to reconcile section 74 with section 117, it seems most appropriate to regard the former as primarily related to past activities of the recipient, while section 117 is obviously prospective in its objective. The language, the legislative history, and the accepted meaning of the words lead us to this conclusion.

Sec. 117 does not define ‘scholarship’ or ‘fellowship grants,‘ but sec. 1.117-3, Income Tax Regs., defines them broadly as amounts paid or allowed to a student, in the case of a scholarship, to aid him in pursuing his studies, and to an individual, in the case of a fellowship grant, to aid him in the pursuit of study or research. (Aileene Evans, 34 T.C. 720, 724 (1960).)

It (sec. 74) is a new section which includes in gross income all prizes and awards with certain specified exceptions. * * *Subsection (b) excludes from income those prizes and awards which are made primarily to recognize past achievements of the recipient in one of the specified fields, provided the recipient was selected without any action on his part to enter the contest or to submit his works in the proceeding and provided he is not required to render any substantial future services as a condition to receiving the prize or award. * * *This (Sec. 117) will tax those grants which are in effect merely payments of a salary during a period while the recipient is on leave from his regular job. Hence, in the case of persons who have completed their formal education and are continuing to teach or carry on research as part of their life work, the grant will be excluded only if it is merely a supplement to the individual's own funds which make it possible for him to carry on research or further his educational development. (H. Rept. No. 1337 to accompany H. R. 8300 (Pub. L. 591), 83d Cong. 2d Sess., p. 17 (1954).)

Looking to the ordinary meaning of the statutory terms we find no inconsistency in the interpretation adopted by the regulations. ‘Scholarship,’ by common acceptance, at least as indicated by the dictionary definition, is ‘an allowance to an undergraduate or a graduate, as of a university, to aid him in prosecuting his studies.’ Webster's New International Dictionary (2d ed. 1958.) A ‘fellow’ is the holder of a grant or allowance, usually from a university, based on his continuing his studies for a certain time. Although study or research undertaken in an educational program may be of benefit to a grantor, the terms ‘scholarship’ and ‘fellowship’ connote a purpose of assistance that stands in distinction to the self-interest of an employer in the compensation of his employee. The restriction of the terms to exclude payments for work primarily for the benefit of the grantor is a natural reflection of this difference. (Ussery v. United States, 296 F.2d 582 at 585 (C.A. 5, 1961).)

Although section 74 requires the application of a threefold test— (1) primarily recognition of past achievements, (2) selection without significant initiative on the part of the recipient, and (3) absence of a requirement of substantial future services— Max Isenbergh, supra— we think decision here turns on whether the recipients of the ‘awards' from the institute were required to render substantial ‘future’ services as a condition to receiving the payments in question. This is so whether the beneficiary is ‘mankind,‘ as petitioners insist, or the Institute. '(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 (1952).

Respondent argues initially as to Mueller that he applied for his position and therefore is disqualified under the second requirement listed above. Mueller stated only that he first established contact with Albert. He did not even know of the Institute or its ‘awards.’ We need not decide whether such initial contact constituted an application or the entering of a proceeding. But see Rev. Rul. 57-67, 1957-1 C.B. 33; cf. Max Isenbergh, 31 T.C. 1046 (1959).

So regarded, it seems reasonably clear that these could not have been tax-exempt, ‘awards,‘ as envisaged by section 74(b). They were not given ‘primarily’ as a recognition of past achievement but entirely, or, at least, substantially, for the purposed of enabling the recipient to continue the work for the future accomplishment of which he was considered worthy of assistance. While the issue, at least as to some of the petitioners, is not entirely free from doubt, the uncontradicted conditions or the payments seem to us to require this conclusion.

Albert's status presents the simplest problem. As director-in-chief of research, he carried forward the work of the Institute. He had general supervision of the activities of the other scientists as well as the duty of selecting them for the Institute. He performed administrative functions in connection with the operation of the Institute and its research center.

Q. Did you (Albert) review their work?A. It's a very difficult question to answer. They came for advice from me, and when they published the paper they usually showed it to me because, me as a senior, I have to know what's going on from this; it is difficult to define. (Tr. 40.)

As to all of the petitioners, the service sought and received in return for the ‘awards' was continued basic research in muscles. It is true that the Institute was nonprofit. It may have received nothing tangible from the work of its researchers, as petitioners argue, although the grants it was given appear to have required the fulfillment of certain projects. The Institute was founded and solicited funds to do research. It established its own laboratories in which to accomplish this research and created the position of director-in-chief of research. It assembled a group of scientists at Woods Hole to accomplish its goal. There is no question that payment received for research can be compensatory. Frank Thomas Bachmura, 32 T.C. 1117, 1125, 1126 (1959). Under section 74, as contrasted with section 117, it is not significant whether the research here was primarily for the benefit of the ‘awardees' or furthered the work of the Institute. Cf. Ti Li Loo, 22 T.C. 220 (1954), with George Winchester Stone, Jr., 23 T.C. 254 (1954).

Q. Now, during these taxable years, did you, on behalf of the Institute, make application for grants from foundations and associations to the Institute? * * *A. Yes, because they usually continued year by year, but when it started—which I couldn't give the date— then we had to ask for it. 13* * * *Q. And as part of that application, did you indicate areas of research that you were going to use this money for if you got it?A. Yes, sir. I asked about which I am interested. (Tr. 40-41.)

It is admitted that petitioners would not have received payments if they had not been physically present at Woods Hole. They argue that, because of the excellent laboratory facilities and unique equipment available, it is natural that any research should be done there. It is nevertheless evident that if an ‘awardee’ chose not to come, or to leave, or if he failed to live up to Albert's ‘expectation,‘ he did not receive any further payments. Performance of research and association with the staff at Woods Hole was the essential requirement without which the ‘award’ would not have been given. The correspondence from the Institute indicates that it looked for particular specialties in its scientists which would accord with its research program. ‘The conclusion is inescapable, upon the evidence before us, that the petitioner(s) gave (their) skill, training, and experience in consideration for the stipend (they) received from the (Institute) which received funds for * * * research.’ Ti Li Loo, supra at 223-224.

Petitioners argue that the ‘awardees' were chosen because of their reputations and accomplishments. We have no doubt that professional competence was the crucial factor in selecting the individual researchers to work at Woods Hole, but these criteria are equally consistent with selection for the performance of future services.

Petitioners further argue that, because the scientists worked on projects of their own rather than being assigned specific tasks, they were not rendering services. It is the nature of basic research such as the Institute conducted that advances in knowledge are made by new ideas pursued and new projects engaged in by individuals. There is no contention that all of the research being done was not related to muscles, which is the broad field in which the Institute pursued new knowledge and received grants. Albert consulted with the scientists and knew of their work. There were substantial services required of the recipients. It seems to us to follow that one of the essential conditions of section 74 has not been met.

The other points argued by petitioners on brief are not supported by the record before us.

To take account of a concession by respondent,

Decision will be entered under Rule 50 in docket 94014; decision will be entered for the respondent in the remaining dockets.