*153 Decision will be entered for the petitioner.
Amount paid to petitioner as a participant in Veterans' Administration program in fulfillment of a unversity requirement as to candidates for a Ph. D. degree, held, on the facts, to have been primarily for training and hence excludable from income as a fellowship under sec. 117, I.R.C. 1954.
*40 Respondent determined a deficiency in petitioners' income tax for 1958 in the amount of $ 229.27, less $ 165.96 tax withheld, for a net deficiency of $ 63.31.
The issue is whether $ 1,290.64 paid to petitioner Doris Wells during 1958 as a participant in the Veterans' Administration psychology training program in fulfillment of a requirement*154 for a Ph. D. in clinical psychology at New York University is excludable income under section 117, I.R.C. 1954.
FINDINGS OF FACT
Petitioners are husband and wife presently residing at 210 West 21st Street, New York 11, N.Y. Their joint Federal income tax return for the calendar year 1958 was filed with the district director of internal revenue, Lower Manhattan, New York, N.Y.
Petitioner Doris Wells (hereinafter referred to as petitioner) was at all times here material enrolled as a candidate for the degree of Ph. D. in clinical psychology in the department of psychology at New York University, an "educational institution" as defined in section 151(e)(4), I.R.C. 1954. This course of study took 5 years.
*41 Commencing in June 1958, petitioner was enrolled as a first-year trainee in the Veterans' Administration psychology training program at the Franklin Delano Roosevelt Veterans Administration Hospital at Montrose, New York (hereinafter referred to as Montrose), and remained at the first-year level throughout that calendar year. Petitioner's participation in this training program at Montrose fulfilled in part a requirement imposed by New York University that each candidate for*155 the degree of Ph. D. in clinical psychology spend 1 year full time or 2 years part time receiving supervised clinical training in a mental hospital, mental health clinic, or similar installation approved by the American Psychological Association. Of the students seeking a Ph. D. in clinical psychology at New York University, about 60 percent participated in the psychological training program at Veterans' Administration hospitals and the remaining students sought their internship elsewhere.
Students working for a Ph. D. in clinical psychology at New York University may receive certain scholarships and fellowships ranging in amounts from $ 1,200 to $ 5,000 per year and designed primarily to enhance research training. Between 30 and 40 percent of the students in petitioner's class received such grants. No student receives any of these scholarships or fellowships while participating in the Veterans' Administration psychology training program. In the first year of academic study at New York University, such grants are conditioned upon a high academic record or upon financial need of the student.
The psychology training program of the Veterans' Administration is conducted at certain*156 installations in cooperation with universities approved for doctoral training in psychology by the American Psychological Association. It is a 4-year plan involving increasingly higher levels of training experience in each of the years. The announced purpose of the program is --
to furnish a continuing source of qualified staff psychologists for the Department of Medicine and Surgery and to provide needed services for which psychological technicians would otherwise have to be employed. Throughout the training period, trainees pursue their academic studies at the university and give part-time service toward meeting hospital and clinic needs, under the joint jurisdiction and supervision of university and VA staff. While preparing for full-time staff positions they function as a part of the work-force providing service to patients. The trainees, functioning as junior staff members under the supervision of the Chief of that unit, constitute an essential part of psychology services at the stations to which they are assigned.
The trainees are enrolled as temporary part-time Government employees. They are paid for hours actually worked at an hourly rate *42 established with *157 reference to the base full-time pay levels of the Civil Service GS scale as follows:
| Year | Base |
| First | GS-5 |
| Second | GS-7 |
| Third | GS-9 |
| Fourth | GS-9 |
The trainees are not necessarily required to work the same hours or the same number of hours every week. The trainees accumulate both annual and sick leave. Payments are made out of a separate allotment for the psychology training program (Appropriation No. 8418.9100) from the Psychology Training Control Unit at Brockton, Mass.
Trainees must submit an application for Federal employment (Standard Civil Service Form 57) and an application for security clearance (Standard Civil Service Form 85) which is used for a required background investigation. Other persons associated with the hospital, such as consultants drawn from the teaching staffs of participating universities, are also enrolled as employees and must fill out the same employment forms.
Trainees enrolled in this training program are not obligated to commit themselves to future employment with the Veterans' Administration. Nor is the Veterans' Administration obligated to accept a trainee for a full-time staff position upon completion of his training. In order to be eligible*158 for such a position, a trainee must have received 2 full years of qualifying experience and have received his Ph.D.
The psychology training program at Montrose is planned and supervised jointly by the hospital and the participating universities. A psychology training committee composed of hospital staff members and representatives of the universities makes recommendations on the professional aspects of such matters as appointment, assignment, promotion, and separation of trainees. Consideration of training needs is weighed heavily in making assignments to particular installations and rotational assignments within an installation. Other suggestions by university representatives regarding the program are also given serious consideration by the Veterans' Administration.
The application and appointment of trainees is handled in the following manner: Trainee candidates are selected initially by the department of psychology in a Veterans' Administration approved university according to established standards of the university. Applications are then referred to the psychology training committee. The Veterans' Administration reserves ultimate authority to pass on *43 the committee's*159 recommendations. At least as early as 1954, the students selected by New York University were invariably accepted by the Veterans' Administration installation to which the application was forwarded. Candidates for appointment are subject to standards promulgated by the Veterans' Administration, one of which is that a candidate must be admitted at a level which will insure sufficient time in the program to complete his doctorate and to obtain enough experience to qualify him for a full-time Veterans' Administration position.
Trainees in the Veterans' Administration training program can, for a period of time, be sent to clinics where the training is accredited even if they do not treat veterans, in addition to work for the Veterans' Administration, but they will be paid by the Veterans' Administration only for work in installations of the Veterans' Administration.
Under certain circumstances, when Veterans' Administration hospital and clinic facilities are limited, the psychology trainees can work in hospitals, clinics, and vocational guidance centers having contracts with the Veterans' Administration. They will then be paid for services only if: (1) The services are offered only*160 to veterans for whose care the Veterans' Administration is legally responsible, and (2) the services were not originally contracted for. The services performed by the trainees are not included in the charges to the Veterans' Administration for services under the contracts.
Where other Federal agencies, States, and universities have psychology training programs and affiliated agencies approved by the American Psychological Association, exchange of trainees can be carried out in order to provide training and experience that would not be available in the Veterans' Administration, such as counseling centers, child guidance clinics, and the like, or that would not be available outside Veterans' Administration hospitals and clinics. Any Veterans' Administration trainee given such a stipulated assignment will, when possible, be replaced by a trainee from another program who is at a comparable year and experience level and will be carried on Veterans' Administration rolls on a leave-without-pay status.
Recommendations for promotions, continuance in grade, or separation are made through the psychology training committee. A trainee will not be promoted unless work has been satisfactory at*161 both the university and the Veterans' Administration and unless he has met certain independent standards set forth by the Veterans' Administration. If a trainee's performance has been of borderline caliber, the committee could recommend conditional continuance in his grade in exceptional cases for a period not to exceed a year. If a trainee has failed to do satisfactory work, he would be conditionally continued *44 at his training grade for a trial period or separated from the Veterans' Administration. Separation from the Veterans' Administration does not affect an individual's relationship with his university.
A trainee is expected to spend at work in the Veterans' Administration installations not less than 960 hours a year on the average over his full course of training and is able to work any number of hours per week up to, but not including, full time. The rest of the time is available for training under the direction of the department of psychology at the university, carried on at the Veterans' Administration installation, the university, or elsewhere.
Members of the department of psychology of participating universities can be appointed as part-time consultants to the*162 Veterans' Administration in order to advise on difficult questions in clinical practice and to work on research programs in the Veterans' Administration. In this capacity, they will also supervise employees of the Veterans' Administration, including trainees, in carrying out psychological research and performing the duties of their positions.
There were three major types of Veterans' Administration hospitals and clinics participating in the Veterans' Administration psychology training program: The general medical and surgical hospital, the neuropsychiatric hospital, and the out-patient clinic. Montrose is classified as a neouropsychiatric hospital. It does, however, have a limited number of medical and surgical patients who did not have psychiatric conditions.
During 1958, Montrose had approximately 1,700 beds available for its patients, all of which were occupied. There was also a waiting list of patients seeking admission to Montrose.
The psychology service personnel at Montrose consisted of not over 18 staff psychologists. There was also a variable number of 10 to 15 psychology trainees on the staff during 1958. Other than clinical help, orderlies, and the like, there were*163 no other professional personnel assigned to the psychology service during this period.
Except for rare emergencies, all patients admitted to Montrose are veterans. There is a preference or priority in admissions for those veterans who have a psychiatric illness that emanates from their active military service.
Montrose is primarily for the care and treatment of patients and is not a training institution. Patients at Montrose are admitted and treated on the basis of their individual need for psychiatric help and not according to their value for training purposes.
The training program functions as a vital part of New York University's educational program for clinical psychology students enrolled in it, implementing their training toward an ultimate independent exercise of responsibilities as psychologists. New York University's *45 continued participation in the program is contingent upon its assessment that the program is adequately fulfilling this training purpose. On two occasions, New York University has withdrawn from participation at Veterans' Administration hospitals where the program was regarded as deficient. The normal course of training for New York University students*164 participating in the training program is a 4-year, part-time assignment to participating Veterans' Administration installations.
The typical first-year trainee, including petitioner, enters the program after 1 year of graduate school training in clinical psychology which is devoted primarily to academic subjects but which includes courses in testing skills in which the student obtains practice by administering individual psychological tests to friends and neighbors. Most first-year trainees, including petitioner, have had no previous clinical experience and limited exposure to, or contact with, mental patients or mentally ill persons. At the time she entered the program, petitioner had never conducted tests in an effort to derive a diagnostic evaluation of the individual tested, nor administered any tests to a mentally ill person. Psychology trainees from New York University receive no clinical training in psychotherapy at the university until they reach a time at which they would be in their third year of the Veterans' Administration program.
As a first-year trainee, petitioner spent 3 days (24 hours) per week in the training program. About 8 hours per week were spent attending*165 academic seminars of a generally theoretical nature conducted by university consultants or members of the hospital staff. Other activities and the approximate average time devoted to them each week are as follows: Administering psychological tests to patients -- 2 hours; writing reports -- 3 hours; conducting individual therapy with patients -- 2 hours; receiving supervision of work by staff members -- 3 hours; observing staff members conducting interviews or psychotherapy sessions -- 3 hours.
The psychodiagnostic testing is conducted under the close supervision of hospital staff psychologists. Trainees administer a battery of tests measuring intelligence and personality functioning on an individual basis. These tests take the beginning trainee from 2 to 4 hours to complete. The trainee then prepares a report or analysis based upon the tests which is submitted to the supervisor who thoroughly reviews or revises it. When finally approved, this report is included in the clinical file maintained by the hospital on the patient but may not in practice be utilized to any great extent. This testing procedure takes longer than testing by a more experienced staff member. Patients to*166 whom petitioner administered tests were selected by hospital staff personnel from referrals to the psychology service *46 section. An effort was made to select patients in a variety of diagnostic categories, consonant with the primary mission of the hospital to treat and care for patients.
Patients to whom petitioner gave psychotherapy were selected with regard to their appropriateness to beginning therapist training. Such patients also had been or were scheduled to be treated with medication or shock therapy, which are the forms of treatment utilized for the greater part of the patient population at Montrose but which cannot be effectively utilized concomitantly with psychotherapy. In at least one instance, medical therapy was resumed after psychotherapy by petitioner had been terminated. The psychotherapy activities were closely supervised by members of the psychology staff of the hospital with consideration given to the training aspects. Persons with the amount of training and experience possessed by first-year trainees cannot contribute significantly to the cure or rehabilitation of patients by means of psychotherapy.
Petitioner was stationed at Montrose from June 1958*167 until the end of September 1959. In June 1959, petitioner was promoted to a higher grade level resulting in an increase in the rate of compensation paid to petitioner by the Veterans' Administration.
Psychology trainees at Montrose were subject, as Veterans' Administration employees, to all rules and regulations of the hospital.
The purpose of having a predoctoral student appointed to a hospital such as Montrose was to train him to give the type of service which the hospital offered. The psychology training program is analogous to an internship or externship in which the trainee learns by participating in the services rendered by the hospital to its patients. This type of experience greatly benefits a trainee.
The number of staff psychologists employed at Montrose does not vary with the number of trainees.
First-year trainees, such as petitioner, provide only limited service to Montrose and require considerable supervision by staff members. Services performed for Montrose by petitioner as a first-year trainee were primarily to obtain practical experience.
The primary purpose of the first-year training program in which petitioner was enrolled was to aid in training students as *168 clinical psychologists in their individual capacities. The first-year trainees were neither expected nor required to perform services of any substantial value to the Veterans' Administration. They were not bound to do so in the future.
OPINION
The parties are in disagreement in at least two respects as to whether payments to petitioner by the Veterans' Administration*47 are, under section 117, I.R.C. 1954, excludable from her income as a fellowship. 1 Petitioner contends that we need never reach the pre-1954 test of gift versus compensation, see George Winchester Stone, Jr., 23 T.C. 254 (1954), in view of section 117(b), which is specific and by its terms 2 applies to petitioner's situation.
*169 There may be force to this argument. The record is clear that the "payment" in question must, in order to support respondent's position, be viewed as "for * * * other services in the nature of part-time employment required as a condition to receiving * * * the fellowship grant." But, if so, it is equally clear that the "services are required of all candidates * * * as a condition to receiving such degree." This varies from the circumstances in Frank Thomas Bachmura, 32 T.C. 1117 (1959), where the taxpayer was not a degree candidate. The outcome would rather be governed by the statement in Chandler P. Bhalla, 35 T.C. 13, 17 (1960), "that the present situation falls directly within the letter, the spirit, and the intent of the * * * last sentence of section 117(b)(1); and that petitioner is entitled to exclude his stipend from gross income."
This approach is fortified by the legislative purpose to enact a "clear-cut method of distinguishing between taxable and nontaxable grants" 3 which the case-by-case factual review of every situation will not accomplish. But in the view we take of the present record, we need not pass*170 upon the question of law thus presented.
Even if we assume that primary purpose is the initial criterion, see Frank Thomas Bachmura, supra at 1125-1126, our findings have disposed of this factual issue. In Chander P. Bhalla, supra at 17, we agreed with respondent's conclusion that:
The problem is usually somewhat difficult of solution because * * * in most of the situations there is a dual or mutual benefit involved. The question * * * must be resolved on a factual basis and depends upon the facts and circumstances in each particular case.
*48 The Veterans' Administration announced a dual purpose for its training program: "[To] furnish a continuing source of qualified staff psychologists for the Department of Medicine and Surgery and to provide needed services for which psychological technicians would otherwise have to be employed." One of these stated*171 purposes -- to provide services -- may perhaps be for the primary benefit of the grantor. 4 But the other could not be attained without first assuring that prospective staff members be qualified, that is, adequately trained. 5 Petitioner and others participating in the program are not bound in any way to join the Veterans' Administration staff in the future. Looked at realistically, the purpose is to train petitioner and others to be qualified clinical psychologists with nothing more than the hope that they may become associated with the Veterans' Administration upon graduation, a situation comparable to any research, teaching, or training fellowship.
*172 And the program, as planned and executed as to first-year trainees, involved far more concern with learning and training than with the performance of services of value to the Veterans' Administration. Approximately one-third of the time in the first-year schedule was devoted to seminars of a theoretical nature. Much of the remaining time was spent in observation and counseling with training supervisors. Those services which were performed -- testing and some psychotherapy -- were of limited usefulness to the hospital and were conducted only under close supervision by staff psychologists. See Rev. Rul. 57-560, 1957-2 C.B. 108. These services did not appreciably lighten the workload of the staff, since no reduction occurred in the number of regular employees and staff members apparently could have accomplished the same tasks in little more time than they spent supervising and counseling first-year trainees. We have accordingly found that the primary purpose of the first-year training program in which petitioner was enrolled was to aid in training students as clinical psychologists and that the first-year trainees were neither expected nor*173 required to perform services of any substantial value to the Veterans' Administration, nor were they bound to do so in the future.
*49 Because the payments to petitioner come from a governmental source, the argument is made that they must be compensatory and hence includable in income. After emphasizing the provisions of the statute under which petitioner received her payment, 6*174 respondent contrasts it with another section of the law which he presumably regards as primarily educational in purpose without apparently recognizing that this is as much an "employment" provision as the other. 7
And, again, relying on a broad and general regulation, 8 he proceeds to the conclusion that if any services are rendered which are "subject to the direction or supervision of the grantor," the payment cannot be a scholarship, thereby, and contrary to express statutory provision, neatly eliminating all university research fellowships which are conducted under university direction and supervision.
Respondent's*175 argument does an injustice to his own regulations. The portion cited is applicable to all situations and not merely to those in which a candidate for a degree is performing required services. But the language of section 117 and its legislative history 9 make it clear that amounts received as a scholarship or fellowship grant may be compensatory in character and may still be excludable from income. See Chander P. Bhalla, supra. Respondent's regulations, viewed in their entirety, reflect this. The regulation cited by respondent, in order to give meaning to it in its context and not to be in contravention of the statutory purpose, must be read as referring to an amount received primarily for the purpose of rendering services or performing supervised activities as contrasted with furthering the education and training of the recipient in his individual capacity. Cf. Frank Thomas Bachmura, supra.We think petitioner has brought herself clearly within the factual dimensions of the primary purpose test.
*176 Decision will be entered for the petitioner.
Footnotes
1. 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 accommodations * * *↩
2. SEC. 117. SCHOLARSHIPS AND FELLOWSHIP GRANTS.
(b) Limitations. --
(1) Individuals who are candidates for degrees. -- In the case of an individual who is a candidate for a degree at an educational institution (as defined in section 151(e)(4)↩), subsection (a) shall not apply to that portion of any amount received which represents payment for teaching, research, or other services in the nature of part-time employment required as a condition to receiving the scholarship or the fellowship grant. If teaching, research, or other services are required of all candidates (whether or not recipients of scholarships or fellowship grants) for a particular degree as a condition to receiving such degree, such teaching, research, or other services shall not be regarded as part-time employment within the meaning of this paragraph.
3. H. Rept. No. 1337, to accompany H.R. 8300 (Pub. L. 591), 83d Cong., 2d Sess., p. 16 (1954).↩
4. But respondent's own regulations make clear that "the fact that * * * the results of his studies * * * may be of some incidental benefit to the grantor shall [not], of itself, be considered to destroy the essential character of such amount as a * * * fellowship grant." Sec. 1.117-4, Income Tax Regs.↩
5. As respondent himself phrases it in his brief: "To qualify for that [Ph. D.] degree, the university required each candidate to spend * * * two years part-time receiving supervised clinical training in a mental hospital * * *. Trainees who were appointed to Montrose, were concerned with learning how to give the service which the hospital offered to its patients. They learned by doing * * *."
And we have found as a fact in respondent's own language that "The purpose of having a pre-doctoral student appointed to a hospital such as Montrose was to train him↩ to give the type of service which the hospital offered." (Emphasis added.)
6. 72 Stat. 1247 (1958), 38 U.S.C., sec. 4114(a).
"The Administrator, upon the recommendation of the Chief Medical Director, may employ, without regard to the Classification Act of 1949, physicians, dentists, and nurses, on a temporary full-time, part-time, or fee basis; and dietitians, social workers, librarians, and such other professional, clerical, technical, and unskilled personnel * * * on a temporary full-time or part-time basis at such rates of pay as he may prescribe. * * *"↩
7. 72 Stat. 1248 (1958), 38 U.S.C., sec. 4114(b).
"The Administrator shall have authority to establish residencies and internships; to appoint qualified persons to such positions without regard to civil-service or classification laws, rules, or regulations; and to prescribe the conditions of such employment, including necessary training, and the customary amount and terms of pay during the period of such employment↩ and training." (Emphasis added.)
8. Sec. 1.117-4(c), Income Tax Regs.↩
9. H. Rept. No. 1337, supra at pp. 17, A37.
S. Rept. No. 1622, to accompany H.R. 8300 (Pub. L. 591), 83d Cong., 2d Sess., pp. 17, 188 (1954).↩