Docket No. 4220-67.
J. Nelson Young, for the petitioners. James F. Hanley, Jr., for the respondent.
J. Nelson Young, for the petitioners. James F. Hanley, Jr., for the respondent.
Held: That sec. 117(b)(2)(B), I.R.C. 1954, limits the exclusion from gross income of amounts received as a fellowship grant to 36 months of entitlement to such exclusion, whether claimed or not, and regulations sec. 1.117-2(b)(2) and (3) properly so interprets such section. Petitioner here has failed to negative 36 months of such entitlement prior to the year in issue.
Respondent has determined a deficiency in petitioners' Federal income tax of $353.35 for the calendar year 1964. The issue presented for decision is whether certain amounts received by petitioners in 1964 constituted an excludable fellowship grant as defined by section 117 of the Internal Revenue Code.
FINDINGS OF FACT
Some of the facts are stipulated and are so found. The stipulation and exhibits attached thereto are incorporated herein by this reference.
Petitioners Robert A. Wijsman and Gertrud Z. Wijsman are husband and wife. At the time of the filing of the petition herein, they resided in Champaign, Ill. For the calendar year 1964 they filed a joint individual income tax return as cash basis taxpayers with the district director of internal revenue at Springfield, Ill. Gertrud Wijsman is a party to these proceedings only by virtue of having joined with her husband in filing their Federal income tax return for the year in issue.
Robert A. Wijsman (hereinafter referred to as petitioner) was born in 1920. He completed his undergraduate studies at Delft Institute of Technology in 1945 and received a Ph.D. in physics from the University of California, at Berkeley (hereinafter referred to as Berkeley), in 1952.
In those early years petitioner had several fellowships, the last of which had terminated by the time he received his Ph.D. degree in 1952. Petitioner held various instructional positions at Berkeley between 1952 and 1957, during which time he was also on a project grant in the Department of Statistics for 2 years, but the source of the funds for this grant is undisclosed by the record. Between 1952 and 1957 petitioner was not involved in any other program which was funded by any organization other than Berkeley.
In 1957 petitioner became an assistant professor of mathematics at the University of Illinois (hereinafter referred to as the university) at Urbana, Ill. In 1960 he was promoted to associate professor and in 1965 became a full professor. From 1964 to 1967 he was also an associate editor of the ‘Annal of Mathematical Statistics.’ Petitioner has written in whole or in part more than 15 scholarly articles which have been published in various mathematical and biological journals.
Petitioner was not a candidate for any degree in 1964, the taxable year in issue.
During the period beginning September 1, 1957, through August 1963, petitioner was employed by the university under yearly contracts which provided for 12 equal monthly salary payments. The period of each contract ran from September to August, while the university's academic year extended from mid-September to mid-June of the contractual year.
Under the contracts petitioner was required to render teaching and administrative services during each academic year. These services demanded his full time and attention throughout the academic work week. During the academic year petitioner's obligations were first and foremost to teach courses and to deal with students. Petitioner had no required contractual duties during the summers between academic years. A tenured appointee of the university was not required to perform research as part of his contractual duties. Petitioner, himself, was under no pressure by the university to perform research or to write scholarly articles during the course of the academic year. In the academic year petitioner was able to conduct research on his own only during short vacations, weekends, holidays, and evenings.
The National Science Foundation (hereinafter referred to as NSF) is an instrumentality or agency of the United States which conducts a comprehensive program of funding research projects through grants of money. One of its purposes is to support basic research in the mathematical sciences by making grants and other forms of assistance available for the conduct of such basic research. NSF's main concern is that these ‘basic research grants' will be used in such a way as to make a maximum contribution to the progress of science. In order to carry out these purposes NSF makes its ‘basic research grants' directly to nonprofit organizations, educational institutions, and, occasionally, individuals. The great majority of these research grants result from proposals by research institutions on behalf of their staffs. Research proposals normally are initiated by the scientist interested in doing the work. Prior to formal submission by the scientist's institution the proposal may be discussed informally by the scientist and the NSF staff. In most cases the NSF grants are less than the amount requested by the institution.
NSF's directive pamphlet, ‘Grants for Scientific Research,‘ states that:
Grant funds may NOT be used to augment the total salary or rate of salary of faculty members of institutions of higher education during the period of time covered by the term of faculty appointment. As a general policy, the National Science Foundation assumes that when research proposals are submitted by educational institutions, institutional policies are based on the premise that research is one of the normal functions of their faculty members. Thus, time spent on research is deemed to be included within the regular institutional salary of the faculty member, and within the term of appointment, research is not an ‘extra’ function for which additional compensation, or compensation at a higher rate, should be requested:
It also provides that:
Grant funds may NOT be used to defray expenses, as a direct cost, of the grantee institution's contribution to employee ‘benefits' (social security, retirement, etc.) unless the usual accounting practices of the institution properly and consistently provide for such costs to be treated as direct costs.
The terms of the ‘basic research grant’ are expressed in a letter sent from NSF to the grantee institution at the time the grant is made. The standard conditions which, upon acceptance of the grant, are binding on the grantee institution and its researchers relate to the nature and scope of the research, revocation of the grant, return of unused funds, and patent rights. With respect to its ‘basic research grants,‘ NSF requires a short informal annual report and a more comprehensive report at the termination of the grant.
In February 1959 the university submitted to NSF a research proposal on behalf of petitioner and professors C. R. Blyth and D. L. Burkholder. The research was to be in the area of mathematical statistics and the proposed cost of the project was $41,741. The proposal stated that the work would be done by the three faculty members and various graduate students working under the faculty members' supervision. With respect to that proposal, NSF made a grant (NSF-G9104) of $13,500 to the university. In October 1959, the university, on behalf of petitioner and Professors C. R. Blyth, D. L. Burkholder, and D. M. Roberts, requested $41,509 from NSF for continuation of the research. Pursuant to the second request NSF, in February 1960, made another grant (NSF-G11382) of $35,000 to the university. In July 1961, the university made a third request to NSF on behalf of petitioner and the other three professors for $429,832 for continuation of the research project over a 5-year period. In December 1961, pursuant to this third request, NSF made a third grant (NSF-G21507) of $82,000.
The estimated costs of the research proposals included direct costs in the form of payments to the faculty members and graduate students, stenographic costs, travel costs, computer costs, workmen's compensation, and retirement contributions for the faculty members plus indirect or overhead costs calculated as a percentage of direct costs. In the case of the proposal that led to grant NSF-G21507, the direct costs also included an allotment for visiting speakers. The the three grants covered only a portion of the total anticipated costs of the research project.
NSF-G9104, NSF-G11382, and NSF-G21507 were ‘basic research grants' made to the university for the specific purpose of supporting the research project being conducted by petitioner and his fellow professors. A condition of all those grants was that they might be revoked in whole or in part by NSF after consultation with the principal researchers and the university. The university deposited the funds granted under NSF-G9104, NSF-G11382, and NSF-G21507 into three trust accounts separate from its own operating-fund account, and it had no authority to divert the funds to any other project or any other researchers. It was required to account for disbursement of the funds received under each grant. Petitioner submitted occasional reports to NSF with respect to the progress of the research project. Neither NSF nor the university supervised, controlled, or directed petitioner in any study of research supported by payments under any of the three grants. The research program that petitioner and his fellow professors began in 1959 with the partial support of ‘basic research grants' NSF-G9104, NSF-G11382, and NSF-G21507 is still continuing through partial support of successive grants from NSF.
Petitioner received payments under NSF-G9104 in June, July, and August 1959. He received payments under NSF-G11382 in July and August 1960, and June, July, and August 1961. He received payments under NSF-G21507 in June, July, and August 1962; in each of the months from June through December 1963; and in January, February, June, July, and August 1964. When the university charged payments to petitioner against the trust accounts established for NSF-G21507, it labeled the payments as ‘payroll.’ The university also deducted amounts from the payments for withheld income tax, retirement contribution, and medical insurance. However, the university regarded the amounts received by petitioner in 1964 under NSF-G21507 ‘substantially as a postdoctoral fellowship.’
Petitioner was on sabbatical leave from the university from September 1963 through August 1964. Petitioner spent most of his sabbatical leave at Cornell University in Ithaca, N.Y., returning to the Champaign-Urbana area by July 1964. He chose to spend his sabbatical leave at Ithaca, away from the university, in order to free himself from the temptations of engaging in administrative duties or seeing students and also because Cornell had a very good mathematics department with several people in his own field. During sabbatical he had no teaching or administrative duties at either university and was completely free to pursue research. He did, in fact, engage in research related to the project which underlay the grant of funds under NSF-G21507. Petitioner became familiar with a field that was outside his own area of statistics and was able to use this new knowledge for certain statistics problems.
As a condition to being granted sabbatical leave petitioner was required to return to the university after completing the sabbatical and to remain in its service for at least 1 additional year. He was also expected to conduct study and research while on leave.
The university's sabbatical leave program gave petitioner the choice of receiving his full monthly salary for half the leave year or half the monthly salary for half the leave year or half the monthly salary for the full full leave year. He chose the former option and received from university operating funds his full monthly salary ($900) for each of the 6 months from March 1964 through August 1964. From September 1963 through February 1964, petitioner received $900 monthly from the trust fund set up under NSF-G21507. During those months he received no payments from the university's operating funds. Petitioner did, however, receive additional payments under NSF-G21507 in the summer of 1964: $600 in June, $1,200 in July, and $600 in August. He resumed teaching and administrative duties at the university in September 1964.
In his Federal income tax return for 1964, petitioner excluded $300 from gross income for each of the 5 months in which he received payments under NSF-G21507. Petitioner had made similar exclusions in his returns in prior years based on payments he had received under NSF-G9104, NSF-G11382, and NSF-G21507. He made two exclusions in 1960, three in 1961, three in 1962, and seven in 1963. Petitioner made no such exclusions prior to 1960. Petitioner excluded these amounts because he considered the amounts received under the NSF grants to be a postdoctoral fellowship.
Respondent disallowed the $1,500 exclusion for 1964 and also limited petitioner's medical expense deduction accordingly. In denying the $1,500 exclusion and holding that the entire amount received by petitioner from the university as regular salary and as payments under NSF-G21507 was gross income, respondent explained in his notice of deficiency that ‘no part thereof constitutes an excludible scholarship or fellowship grant as defined in Section 117 of the Internal Revenue Code of 1954.’
Petitioner seeks to exclude from gross income in 1964 $1,500 which he received from the fund of NSF grant NSF-G21507. He contends that the amount constituted an excludable fellowship grant within the meaning of section 117.
Petitioner, who was not a candidate for a degree in 1964, must prove essentially three propositions in order to comply with the requirements of section 117. He must first show that the amounts he received under NSF-G21507 constituted a ‘fellowship grant’ within the meaning of section 117(a)(2) and the regulations thereunder. Then he must show that the grantor of the fellowship grant was one of the public-oriented organizations favored by section 117(b)(2)(A). Finally, petitioner must prove that, prior to 1964, he had not exhausted the 36-month limitation on the extent of the exclusion. Sec. 117(b)(2)(B).
SEC. 117. SCHOLARSHIPS AND FELLOWSHIP GRANTS.(a) GENERAL RULE.— In the case of an individual, gross income does not include—(1) any amount received—(A) as a scholarship at an educational institution (as defined in section 151(e)(4)), or(B) as a fellowship grant including the value of contributed services and accomodations; and(b) LIMITATIONS.—INDIVIDUALS WHO ARE NOT CANDIDATES FOR DEGREES.— In the case of an individual who is not a candidate for a degree at an educational institution (as defined in section 151(e)(4)), subsection (a) shall apply only if the condition in subparagraph (A) is satisfied and then only within the limitations provided in subparagraph(B).(A) CONDITIONS FOR EXCLUSION.— The grantor of the scholarship or fellowship grant is—(i) an organization described in section 501(c)(3) which is exempt from tax under section 501(a).(ii) a foreign government.(iii) an international organization, or a binational or multinational educational and cultural foundation or commission created or continued pursuant to the Mutual Educational and Cultural Exchange Act of 1961, or(iv) the United States, or an instrumentality or agency thereof, or a State, a territory, or a possession of the United States, or any political subdivision thereof or the District of Columbia.(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)).
We find that petitioner has failed to present sufficient evidence to enable us to make a determination with respect to this last element. The main issue which the parties focused upon at trial was whether the payments petitioner received under NSF-G21507 possessed the proper characteristics of a ‘fellowship grant’ as defined and qualified in the regulations. Sec. 1.117-3(c), 1.117-4(c), Income Tax Regs. However, both parties recognized that even if this issue was decided favorably to petitioner he must also prove that the 36-month limitation had not been exhausted prior to 1964.
Both parties made excellent arguments on the delicate question of the main issue, but we cannot reach or decide it because petitioner has failed to carry his burden of proof on the threshold question of whether any exclusion remains available to him.
Section 117(b)(2)(B) provides that a fellowship grant recipient who is not a candidate for a degree may exclude up to $300 per month for each month for which he received payments under such grant. However, such a recipient may no longer take advantage of this exclusion after having been entitled to it for a total of 36 months in his lifetime. The clear language of the statute leaves no room for doubt that the bare fact of entitlement to the exclusion in any month is enough to reduce the balance in the 36-month exclusion reserve. Section 1.117-2(b)(2) and (3), Income Tax Regs., confirms this interpretation. The critical language of section 1.117-2(b)(2)(ii) is, ‘This limitation applies if the individual has received any amount which was either excluded or excludable.’ Thus, the recipient must claim the exclusion for the entitlement year or he may forever lose it.
The critical language is: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) * * *
Petitioner concedes that he has availed himself of the $300 exclusion for at least 15 months in the period from 1960 through 1963. He also received three monthly payments to which he was ‘entitled’ under NSF-G9104 during 1959. Respondent argues that the payments under the NSF grants, although actually received by petitioner during only 18 separate months from June 1959 through1963, were, in fact, intended to support petitioner's research efforts for the entire 55-month period. The record lends some support to respondent's contention, however, we need not discuss the merits of that argument because petitioner has failed to show that payments which he received under the earlier project grant at Berkeley were not excludable pursuant to section 117.
The existence of the Berkeley grant was not revealed until respondent's re-cross-examination of petitioner. Petitioner recalled that he had received payments from a grant that lasted for a 2-year period sometime between 1952 and 1957. He did not know how that grant had been funded, but asserted that it was the only grant which he received between 1952 and 1957.
On further redirect examination, petitioner's counsel asked petitioner, ‘Were you employed as an employee during that entire period in which you were subjected to income tax fully upon your earnings as an employee?’ Respondent properly objected to this question as calling for a legal conclusion. We let petitioner answer that, to the best of his knowledge, the Berkeley grant was fully taxable; this answer was adequately qualified to meet respondent's objection.
This is not an issue that has taken petitioner by surprise. In his opening brief he argues that the fellowship exclusion claimed for the year 1964 is not barred by the 36-month limitation as established by the stipulation of facts and petitioner's uncontradicted testimony. The only support for this found in the stipulation of facts in an attachment to petitioner's 1964 return in which it is stated that petitioner claimed the exclusion for only 15 months prior to 1964; and the only testimony we have is petitioner's testimony that in his opinion the Berkeley grant was fully taxable.
Consequently we are unable to ascertain whether the 2-year period of the Berkeley grant began or ended before or after 1954, the first year of the applicability of section 117. Sec. 7851(a)(1)(A). More importantly, petitioner has not apprised us of the terms and conditions of that early grant to permit us to determine whether it was taxable or excludable under section 117. If it was taxable, none of the 24 months of its duration could have been used to effect any change in the 36-month lifetime exclusion reserve which section 117(b)(2)(B) establishes. If, on the other hand, the Berkeley grant was excludable (subject to the $300 per month limitation), petitioner might have expended up to 24 months of his 36-month reserve. If those 24 months are added to the 15 months during which petitioner concedes he was entitled to the exclusion from 1960 through 1963, it becomes evident that he has exhausted his 35-month exclusion prior to 1964, the year in issue. Absent some showing of the factors which would enable us to settle the taxability of that early grant, we cannot accept petitioner's uncorroborated opinion that the grant was fully taxable.
Petitioner's memory of that early grant was not very clear. It is to be expected that he would have difficulty recalling the characteristics of a grant which terminated over 12 years before trial. However, this circumstance does not change the fact that the burden of proof is on petitioner to show that he had not completely exhausted the 36-month exclusion reserve prior to 1964. We are bound by the operative words of section 117(b)(2)(B) and the unequivocal explanatory provisions of section 1.117-2(b)(2) of the regulations to hold that since petitioner has failed to adequately disclose the nature of the Berkeley grant, we cannot determine whether he should be allowed in 1964 to claim any exclusion under section 117. Aloysius J. Proskey, 51 T.C. 918 (1969).
Decision will be entered for the respondent.