Williamsen
v.
Comm'r of Internal Revenue

Tax Court of the United States.Apr 20, 1959
32 T.C. 154 (U.S.T.C. 1959)

Docket Nos. 65113 65130 65131 65241 65359 66017 66085 66943 69189.

1959-04-20

NORMAN R. WILLIAMSEN, JR., AND ANN WILLIAMSEN, HIS WIFE, ET AL.,1 PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

J. Murray Egan, Esq., for the petitioners. Donald W. Howser, Esq., for the respondent.


J. Murray Egan, Esq., for the petitioners. Donald W. Howser, Esq., for the respondent.

Petitioners, student-employees, attended a session of the Oak Ridge School of Reactor Technology, a division of the Oak Ridge National Laboratory, which is operated by Carbide and Chemicals Company, a private profit corporation under a contract with the Atomic Energy Commission, an instrumentality of the United States Government. Carbide, in accordance with its regular payroll procedure, paid to petitioners a monthly stipend commensurate with salaries paid to its own trainees and from which stipends it withheld income and FICA taxes. Petitioners claimed exclusions from gross income under section 117 of the 1954 Code. Held, petitioners have failed to establish that they have met all the requirements of section 117 entitling them to the benefit of the exclusions provided for in such section

These consolidated proceedings involve deficiencies in income tax of the respective petitioners as follows:

+-------------------------------------------------------+ ¦Docket¦Petitioner ¦Year¦Deficiency¦ +------+--------------------------------+----+----------¦ ¦No. ¦ ¦ ¦ ¦ +------+--------------------------------+----+----------¦ ¦65113 ¦Norman R. Williamsen, Jr., et ux¦1954¦$238.09 ¦ +------+--------------------------------+----+----------¦ ¦65130 ¦Stanley Kaplan, et ux ¦1954¦214.00 ¦ +------+--------------------------------+----+----------¦ ¦65131 ¦Truman Wayne Ball ¦1954¦181.00 ¦ +------+--------------------------------+----+----------¦ ¦65241 ¦Russell M. Ball ¦1954¦295.99 ¦ +------+--------------------------------+----+----------¦ ¦65359 ¦Carl E. Thomas, et ux ¦1954¦217.34 ¦ +------+--------------------------------+----+----------¦ ¦66017 ¦William Blair Klingler, et ux ¦1954¦230.95 ¦ +------+--------------------------------+----+----------¦ ¦66085 ¦Clifford J. Heindl ¦1955¦373.00 ¦ +------+--------------------------------+----+----------¦ ¦66943 ¦George Ronald Dalton ¦1954¦198.00 ¦ +------+--------------------------------+----+----------¦ ¦69189 ¦Russell L. Crowther, Jr ¦1955¦240.00 ¦ +-------------------------------------------------------+

The sole issue is whether the respondent properly determined that the monthly stipends received by petitioners while in attendance at the Oak Ridge School of Reactor Technology, and excluded from gross income under the provisions of section 117 of the Internal Revenue Code of 1954, are taxable as compensation.

FINDINGS OF FACT.

The facts which have been stipulated are found accordingly.

In each Docket No. 65113, 65130, 65359, and 66017, the petitioners are husband and wife and filed joint returns. In each Docket No., 65131, 65241, and 66943, the petitioner is a male individual.

The returns of the petitioners in the above docket numbers for the year 1954 were filed with the district director of internal revenue at Nashville, Tennessee. Petitioner, in Docket No. 66085, is a male individual, whose return for the year 1955 was filed with the district director of internal revenue at Nashville, Tennessee. Petitioner in Docket No. 69189 is a male individual whose return for the year 1955 was filed with the district director at Des Moines, Iowa. The male petitioners are hereinafter referred to as petitioners.

Each of the male petitioners, except petitioner in Docket No. 69189, was in attendance at the Oak Ridge School of Reactor Technology, hereinafter called Orsort, from about September 7, 1954, to August 1955, in the capacity of Category A, and was paid a stipend at the rate of $331 per month for the months of September and October 1954, and $341 per month thereafter. Petitioner in Docket No. 69189, was in attendance at Orsort from about September 8, 1955, to August 1956, in the same capacity and was paid a stipend of $359 per month.

Orsort is located within and is operated as a division of Oak Ridge National Laboratory hereinafter referred to as Ornl.

During the years 1954 and 1955, Ornl was operated by Carbide and Carbon Chemicals Company (now Union Carbide Nuclear Company), a division of Union Carbide and Carbon Corporation hereinafter called Carbide, under a contract with the United States Atomic Energy Commission, hereinafter referred to as AEC. Programs and budgets for the work to be performed by the Laboratory were submitted to the AEC for its approval and final approval of the Bureau of the Budget and Congress. Funds required for financing Orsort were included in such budgets. The job description and proposed salary rate range of the Category A student-employees were submitted by Carbide to the AEC for its approval, the same as all other job descriptions and proposed rate ranges. Government funds were advanced to Carbide from time to time as needed to operate the Laboratory. There was no difference in the financing of Orsort and the various other approved programs of the Laboratory.

Orsort is located within the Oak Ridge National Laboratory and is supported by AEC as a training facility to serve directly agencies and organizations throughout the United States which contribute to the national nuclear reactor program. Its management is a direct responsibility of the Laboratory. It is the principal activity of the Laboratory's Educational Relations and Training Division, and is a part of the Laboratory's reactor-development program. The role played by Orsort in the nuclear-reactor industry is similar to the role played by the employee-in-training programs provided for new technical personnel by other industries.

Orsort was established to provide advanced specialized education in reactor theory and technology to engineers and scientists who will engage directly in reactor research, development, and design.

Students are selected by the AEC Committee on Admissions from two categories, i.e., Category A and Category B.

Category A students are recent graduates with a degree in chemistry, engineering, metallurgy, physics, or engineering-physics. The brochures state that these students will join Ornl as student-employees, and will be paid a monthly stipend for the duration of the session. At the end of the course, these students will be available for regular employment by the AEC, its contractors, or other organizations actively interest in reactor development. Appointment as a student in the school carries no commitment on future employment.

Category B students are experienced engineers or scientists who are employed by AEC, its contractors, or industrial organizations, having an active interest in the development of reactors. Category B students remain on the payrolls of their home organizations and will return to their sponsors upon completion of the course.

The Thirteenth Semi-Annual Report of AEC submitted to Congress on or about January 28, 1953, with respect to Orsort stated: ‘Of the current class, 31 are recent college graduates who attend as employees of the Oak Ridge National Laboratory and 50 are experienced men from industry and government.’ (Ex. E-6).

The Fifteenth Semi-Annual Report of AEC submitted to Congress on or about January 30, 1954, with respect to Orsort stated: ‘Thirty of the recent college graduates who were employees of the school accepted employment with the Atomic Energy Commission and 26 with A.E.C. contractors.’ (Ex. G-7).

In addition to a small faculty who are responsible for planning the courses, staff members of the Ornl research division contribute heavily to the courses by instructing student sections or in presenting a series of lectures.

Texts used in Orsort consist primarily of notes prepared by members of the faculty. These notes are revised periodically. Annually the scope and content of the curriculum are reviewed and altered in order to maintain its relevance with respect to the latest advances achieved in rapidly developing atomic energy enterprises.

Tuition is free for Category A students. Use of reference and textbooks, materials, supplies, and equipment, required by students is free of charge. Orsort grants no academic degree.

The monthly stipends were paid to the petitioners by Carbide in accordance with its regular payroll procedure. Income taxes and FICA taxes were withheld from such stipends. FICA taxes on employers and Federal unemployment taxes were paid by Carbide with respect to such stipends. A Form W-2 (U.S. Treasury Department Withholding Tax Statement), was issued to each petitioner. For the month of September each petitioner was paid an amount computed by multiplying the amount of the monthly stipend in effect by the number of required attendance days remaining for such month, and dividing by 22. Each of the petitioners, excepting petitioner in Docket No. 69189, received either $240.73, $255.77, or $270.82 for the month of September 1954, depending on the date he was placed on the payroll.

According to the information the AEC then had the stipends paid to petitioners and others attending Orsort in the capacity of Category A were commensurate with salaries paid to industrial trainees by companies such as Carbide, General Electric, and General Motors.

The Orsort brochures state that Category A students upon enrollment will be placed on the Ornl payroll at the salary rate currently in effect for Orsort student-employees, and that they will remain on the payroll for the duration of the session, except for dismissal for reasons of academic failure or for cause.

Each petitioner was classified on the employee payroll department form used by Carbide as having the job title of ‘Reactor Technology Student’ with the explanation that the employment was ‘New Hire.’

Petitioners and other Category A student-employees were granted service credit from the beginning of the course. The length of the company service credit determines the employee's eligibility to participate in employee benefit plans. An employee is eligible to participate in the savings and retirement plans upon the completion of 1 year's company service.

Petitioners were eligible for insurance and hospitalization benefits offered to regular employees of the Laboratory. Fifty per cent of the cost of such benefits was paid by the company, and 50 per cent by the employee. The hospitalization and surgical expense insurance became effective following 2 months of ‘employment’ according to company service credit rules. Group life, health, and accident insurance was availed to the petitioners upon the completion of 3 months of ‘employment’ according to company service credit rules.

Some of the student-employees accepted permanent employment with Carbide at the close of the training period.

Since at least the year 1950, the AEC has supported a fellowship program to encourage graduate work in nuclear science and related fields. Posters and brochures announcing such fellowships all bear the title ‘Atomic Energy Commission Special Fellowships.’ In reports submitted by the AEC to Congress, in evidence, its fellowship program is described as such, and is discussed separately and apart from the discussion relating to the training program at Orsort. Among the fellowships sponsored by the AEC are:

(1) Special fellowships in radiological physics for the academic year 1956-1957, with basic annual stipend of $1,600 for 12 months.

(2) Special fellowships in radiological physics for the academic year 1959-1960, with a basic annual stipend of $2,500 for 12 months.

(3) Special fellowships in nuclear science and engineering for the academic year 1959-1960, with a basic annual stipend of $1,800, $2,000, or $2,200, for first, intermediate, or terminal year (12 months), of graduate study as the applicant's case may be.

Each of these special fellowships also provides for additional allowances for spouse and dependents, and for the payment of tuition and required fees. The graduate work under the special fellowships could be undertaken at colleges and universities specified in the respective announcements.

Each of the petitioners on his income tax return included in gross income only so much of the stipend paid to him as exceeded $300 per month, claiming an exclusion of $300 per month under section 117 of the Internal Revenue Code of 1954.

In the deficiency notice, the respondent determined that the stipend paid to each petitioner was taxable compensation, and accordingly increased gross income reported by the amount claimed as excludible.

Petitioners have failed to carry the burden of showing that the conditions presented by section 117 of the 1954 Code entitled them to exclusions from gross income have been met.

OPINION.

LEMIRE, Judge:

Each of the petitioners claimed exemption from gross income to the extent of $300 per month of the stipend paid while in attendance at the Oak Ridge School of Reactor Technology as a scholarship under the provisions of section 117 of the Internal Revenue Code of 1954. The provisions of section 117 here pertinent are set forth in the margin.

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 * * *(b) LIMITATIONS.—(1) INDIVIDUALS WHO ARE CANDIDATES FOR DEGREES.— * * *(2) 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 * * * , the United States, or an instrumentality or agency thereof, * * *(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 $300.00 times the number of months for which the recipient received amounts under the scholarship or fellowship grant during such taxable year * * *

At the outset, it is to be noted that in our Findings of Fact, we have adopted the specific stipulated facts, and after careful study of the various documentary exhibits stipulated, have extracted therefrom facts which, in our opinion, have a material bearing on the question presented.

Section 117 is a new section which has no counterpart in the 1939 Code. It provides rules for determining the extent to which amounts received as scholarships and as fellowship grants are includible in gross income. The section first states the general rule that amounts received as scholarships or fellowship grants are excludible from gross income, and then prescribes specific rules for limiting the amounts which may be excluded. (Conference Committee Report on H.R. 8300.)

In considering the question presented we think there can be no disagreement with the propositions that the AEC is an instrumentality or agency of the United States; that Orsort is one of its ‘activities,‘ and that Ornl is operated by Carbide, a private profit corporation under a contract with the AEC.

Since the record establishes that petitioners were not candidates for a degree, they have the burden of showing that the conditions for exclusion provided for in subsection (a)(2)(A) of section 117 have been met.

Petitioners base their claim for exclusion on the ground that the grantor of the scholarship was the AEC, an agency or instrumentality of the United States as those terms are used in the pertinent provisions of the statute in question. Unless the record supports the petitioners' claim, and assuming without deciding, that the monthly stipends received by petitioners qualify as scholarships as defined in subsection (a)(1)(A) of section 117, we think petitioners have not shown that they are entitled to the benefits of the limited exclusion which the statute grants. The brief of the respective parties refers to no decisions of the courts bearing directly upon the issue here presented.

However, this Court in the case of Robert W. Teskey, 30 T.C. 456, in connection with the application of section 116(a)(2) of the Internal Revenue Code of 1939, an exclusionary provision, considered the clause ‘amounts paid by the United States or an agency thereof.’ In the belief that the rationale of the Teskey case might furnish support to the claim of these petitioners we have carefully reviewed the facts and the logic applied, and have concluded that the facts presented in the instant case are insufficient to justify us in holding the rationale of the Teskey case is applicable here.

Although many of the facts presented in the case at bar parallel in many respects the facts involved in the Teskey case, there is here lacking material evidence which we think is essential to justify a holding that the Teskey case is a controlling authority.

It is at once apparent that in the Teskey case, the terms of the agreement between the National Shipping Authority of the Maritime Administration, representing the United States, and the Pacific-Atlantic S.S. Co., a private corporation, were before the Court, enabling it to make a finding that Pacific-Atlantic was an agent of the United States and not an independent contractor.

The record before us does not contain the agreement executed between the AEC and Carbide, nor do the stipulated facts set forth the substance of such agreement. In the absence of such material evidence, we are unable to make a finding of fact as to what the actual relationship was between them.

In this posture of the record, we have no alternative except to conclude that petitioners have failed to carry their burden of showing that the conditions prescribed by section 117 of the 1954 Code have been met.

The respondent's determinations that the monthly stipends in controversy constitute compensation taxable under section 61(a)(1) of the 1954 Code are sustained.

Decisions will be entered for the respondent.