Decision will be entered for the respondent.
T, a resident physician in psychiatry at the Philadelphia Psychiatric Center, received payments from the Center totaling $ 7,415.37 during 1967. Of that amount, $ 4,503.87 was attributable to funds granted to the Center by the National Institute of Mental Health to be used to provide "trainee stipend awards" for young doctors engaged in psychiatric residency programs. Held, T may not exclude any portion of the payments from his gross income as a scholarship or a fellowship grant. Sec. 117, I.R.C. 1954; sec. 1.117-4(c), Income Tax Regs.
56 T.C. 1201">*1201 The Commissioner determined a deficiency of $ 819.13 in petitioner's income tax for the calendar year 1967. The only question for decision is whether petitioner is entitled to exclude $ 3,600 from his 1967 gross income as a scholarship or fellowship grant under section 117, I.R.C. 1954.
FINDINGS OF FACT
The parties have stipulated certain facts which, together with the attached exhibits, are incorporated herein by this reference.
Petitioner Frederick Fisher filed an 1971 U.S. Tax Ct. LEXIS 68">*69 individual income tax return for the calendar year 1967 with the district director of internal revenue at Philadelphia, Pa., and resided in Radnor, Pa., at the time he filed his petition herein.
Petitioner is a physician. He received his M.D. degree from Temple University School of Medicine in Philadelphia in 1964. Thereafter he spent 1 year as an intern at the University of Kansas Medical Center.
During 1964 or early 1965 petitioner applied to the Philadelphia Psychiatric Center (the Center) for a position in its residency program. The Center was a hospital, and its psychiatric training program was accredited by the American Council on Medical Education. The parties have stipulated that the Center was an organization described in section 501(c)(3), I.R.C. 1954, which is exempt from tax under section 501(a). The Center had at least four major functions. (1) It was devoted to psychiatric patient care, providing both diagnostic evaluation and therapy to inpatients and outpatients. (2) It served as a community mental health center with a view toward prevention and early treatment of emotional disturbances, particularly among disadvantaged groups which had not previously been reached 1971 U.S. Tax Ct. LEXIS 68">*70 by psychiatric services. (3) The Center had a research program which encompassed 56 T.C. 1201">*1202 a variety of clinical and experimental approaches to the study of personality and the etiology and process of mental illness. (4) In conjunction with the foregoing, the Center also trained residents in psychiatry, as well as nurses, medical students, social workers, psychologists, and therapists. The Center's residency program was designed to help prepare physicians for the practice of general psychiatry as a specialty and was integrated with the other activities of the Center which were outlined above. The Center's residency program was comparable to those offered by the psychiatric departments of large general hospitals with excellent residency programs.
A pamphlet, entitled "Residencies in Psychiatry" and dated 1967-1968, described the Center's facilities as follows:
FACILITIES
The Center is a non-sectarian, non-profit community mental health facility, a Constituent of the Federation of Jewish Agencies -- United Fund. It is dedicated to the treatment of the mentally and emotionally ill, with the emphasis on treatment for those who are unable to afford private care. The Inpatient Service has 154 1971 U.S. Tax Ct. LEXIS 68">*71 beds and admits approximately 1200 patients per year. Over half of the beds are set aside for ward service patients.
The Outpatient Service offers approximately 7000 treatment hours annually, with the major emphasis on analytically oriented therapy of neurotic patients.
The table of organization of the Center includes the following full-time personnel: Medical Director, Clinical Director, Director of Outpatient Service, Director of Resident Training, Director of Psychological Research, Senior and Staff Psychiatrists, Chief Clinical Psychologist, Directors of Occupational and Recreational Therapy, Director of Social Service, 20 residents, psychologists, social workers, research personnel, adjunctive therapists, and a Director of Nursing Services with a staff of psychiatric nurses and aides.
* * * *
The Inpatient Service
* * * *
It is the policy of the Center to accept any patient who is likely to benefit from an inpatient treatment experience up to several months in duration. Thus, most patients are admitted with acute illnesses, i.e., psychoses, neuroses, or adjustment reactions. * * * In brief, the patient population reflects the types of illnesses seen in private psychiatric practice 1971 U.S. Tax Ct. LEXIS 68">*72 which require hospitalization. In addition, through affiliation with the Commonwealth of Pennsylvania, a number of patients are admitted who would otherwise be the responsibility of public agencies. * * *
* * * *
Admission to the Center may be effected through a member of the psychiatric staff or the Outpatient Service or Commonwealth Reception Center. Referring psychiatrists are responsible for the supervision of the semi-private and private cases. Supervision for ward cases is the responsibility of the visiting chiefs, each of whom is assisted by one or two associates on his service. These services rotate every four months and the chiefs and associates provide supervision of the 56 T.C. 1201">*1203 psychotherapy for each resident. First and second-year residents are assigned to a chief of service for the direction of therapy, and the responsibility for the supervision for the case is in the hands of the various visiting chiefs and their associates. Individual supervision of each resident's psychotherapy is arranged through members of the teaching staff. The residents are also directly under the supervision of a full-time senior staff psychiatrist, with approximately three residents per senior 1971 U.S. Tax Ct. LEXIS 68">*73 staff member. Thus, each resident receives three to four hours of individual supervision per week, so that he receives adequate personal instruction.
The Adult Outpatient Service
The Adult Outpatient Service accepts patients for diagnostic evaluation without regard to race or religion. Continued psychotherapy is limited to those patients above the age of 16 to 18 who can benefit from outpatient treatment.
* * * *
Table of organization of the Outpatient Service consists of the Director, Senior Consultant, associate psychiatrists, supervising psychiatrists, psychologists, psychiatric social workers, and the resident physicians. Social workers, psychologists and group psychotherapists participate and assist in the treatment of certain patients as part of the ongoing services of the clinic.
There is extensive individual supervision for each resident assigned to the Outpatient Service usually amounting to three hours per week. This program is in keeping with the emphasis on sufficient personal attention and instruction for each resident as required by his training needs. The supervisory staff meets periodically with the Medical Director, Director of Resident Training, and Director and 1971 U.S. Tax Ct. LEXIS 68">*74 Senior Consultant of the Outpatient Service, in order to evaluate the performance of the residents in their work.
The experience of the resident in the Outpatient Service is an inherent part of the general resident training program. It complements his inpatient work in providing him an opportunity to treat patients with psychoneuroses and character disorders. He thereby has an opportunity to carry a well-rounded caseload so that he has an experience in psychotherapy comparable to that of a psychiatrist in private practice.
The outpatient caseloads of the residents vary according to the level of training. Third-year residents have almost full-time assignments to the Outpatient Service with the caseload of 28-32 patient hours of therapy per week. The average caseload for the second-year resident is 20 patient therapy hours per week. First-year residents are permitted to follow selected former hospital patients for therapy in the Outpatient Service on a limited basis, with appropriate supervision, during the last half of the year.
Periodically the Center applied to the U.S. Department of Health, Education and Welfare, Public Health Service, National Institute of Mental Health (NIMH) for 1971 U.S. Tax Ct. LEXIS 68">*75 Mental Health Training Grants. The parties agree that during the year in issue, NIMH was an instrumentality or agency of the United States. NIMH awarded Mental Health Training Grants to the Center for the fiscal years ending June 30, 1967, and June 30, 1968, respectively. The grants included funds to be used to provide "trainee stipend awards" for young doctors engaged in psychiatric residency programs. An NIMH publication, entitled "Grants and Awards of the National Institute of 56 T.C. 1201">*1204 Mental Health for Graduate and Undergraduate Training" (December 1966), described the grants:
Part I -- General Information
Authority for Support
The Public Health Service Act, as amended by the National Mental Health Act, authorizes the Surgeon General of the Public Health Service to award grants of funds to public and private nonprofit institutions to assist in the establishment, expansion, and improvement of training programs in the mental health disciplines and in other fields having relevance to mental health. * * *
Purpose of Grants and Awards
The objectives of these grants are to improve the quality of mental health training; to enlarge the capacity for training people; to help in the development of 1971 U.S. Tax Ct. LEXIS 68">*76 specialized training programs; and, through trainee stipend awards, to enable a greater number of persons to pursue careers in the mental health disciplines and related areas. The grantee is free to pursue the training program in whatever manner is deemed most promising to achieve the proposed training objectives.
To accomplish these purposes training institutions may request funds: (1) to defray teaching costs; and (2) to provide trainee stipends for residents and students enrolled in the training programs. Funds for both teaching costs and trainee stipends may be requested in the same application form. The trainees are selected and appointed by the training institution, and the funds allocated for trainee stipends are paid by the training institution to the appointees. Trainee stipend grants are not awarded directly to individuals by the National Institute of Mental Health.
* * * *
Use of Grant Funds
* * * *
B. Trainee Expenses* * * *
Under the provisions of the Public Health Service Act, as amended, trainee stipends are awarded to provide subsistence to permit individuals to take advanced training in one of the mental health specialty fields; these awards, therefore, are not considered 1971 U.S. Tax Ct. LEXIS 68">*77 to be salary for services, and trainees are not eligible for the fringe benefits (social security, pension plans, etc.) normally associated with an employer-employee relationship.
* * * *
| Annual Rates For Trainee Stipends in Psychiatry | ||
| Year of residency training | Level | Annual rate |
| 1 | 5 | $ 3,600 |
| 2 | 6 | 4,200 |
| 3 | 7 | 5,000 |
| 1 4 | 9 | 7,000 |
| 1 5 | 10 | 8,000 |
* * * *
56 T.C. 1201">*1205 Specific Eligibility Requirements for Trainee Stipends in Psychiatry
1. Psychiatry (Graduate Training).
Residency Training -- The candidate shall be a graduate of an approved medical school in the United States or its equivalent outside the United States and shall have completed at least one year of clinical internship other than psychiatric internship.
* * * *
Note: A psychiatric resident at the first, second or third-year level in either the graduate or the general practitioner training program may not receive income for professional services while receiving a Public Health Service stipend.
* * * *
C. General Eligibility Requirements for All TraineesThe training institution will select and appoint candidate for trainee stipends in accordance with its own procedures. The level 1971 U.S. Tax Ct. LEXIS 68">*78 of the stipend must be appropriate to the academic level of the trainee.
Following are the general eligibility requirements for all trainees. * * *
1. The candidate must be a citizen or national of the United States or have been lawfully admitted to the United States for permanent residence.
* * * *
2. The candidate is not eligible to receive a Public Health Service trainee stipend while receiving any other Federal educational benefit.
3. Form PHS-2271 (Statement of Appointment of Trainee) must be submitted to the National Institute of Mental Health for each trainee at the time the trainee enters on duty.
D. Procedure for Appointment1. Trainee: A person interested in a Public Health Service trainee stipend must apply to a training institution eligible to administer trainee stipends under the Public Health Service program. Selection of trainees is made by the training institution in accordance with the requirements outlined in these instructions.
Trainee stipend recipients must reapply to the institution in the same manner as for original appointment upon completion of each year of training in order to continue the stipend at the appropriate level.
2. Training Institutions: From those candidates 1971 U.S. Tax Ct. LEXIS 68">*79 who meet all the specific eligibility requirements, the training institution staff will select on the basis of merit the applicants to whom trainee stipends are to be awarded.
F. Other InformationTrainee stipends must be used for the specific training program for which they are requested.
The training institution is not permitted to require any work from trainees which is not considered a part of the training program.
Persons who receive trainee stipends are not required to work for the Public Health Service at the conclusion of their training; and, conversely, the Public Health Service assumes no responsibility for employing or placing such persons.
The NIMH publication further provided that each funded training program was to be under the direction of a designated "program director" who would be "functionally responsible for the program."
56 T.C. 1201">*1206 When petitioner applied to the Center's residency program, he was told by the medical director of the Center that if he were accepted, he would receive funds derived from an NIMH grant. The Center's pamphlet, "Residencies in Psychiatry," outlined the duties and salaries of the residents as follows:
Terms of Appointment
Residents are appointed on a yearly 1971 U.S. Tax Ct. LEXIS 68">*80 basis (July 1 to June 30), and because the curriculum is based on a full three year program for adult psychiatry, it is expected that the resident will remain for the full period of training. Applications for residencies in advanced standing (second-year, third-year), will be considered on the basis of the background and previous training of the applicant.
Residents are responsible for the thorough study and adequate treatment of all patients assigned to them. Regular duty hours are as follows: Monday through Friday -- 8:30 a.m. to 5:00 p.m., Saturday -- 8:30 a.m. to 12:00 noon. In addition, residents are on call at stated times nights and weekends.
* * * *
| Salaries and Employment Benefits | |
| First-year residents receive | $ 6,800 |
| Second-year residents receive | 7,500 |
| Third-year residents receive | 8,600 |
Satisfactory completion of a residency at the Center was a prerequisite to petitioner's eventual certification as a psychiatrist by the American Psychiatric Association.
Petitioner was appointed to a residency by the Center and commenced training in psychiatry there on or about July 5, 1965. On or about July 19, 1965, petitioner was appointed a trainee by the Center under a grant which it had received 1971 U.S. Tax Ct. LEXIS 68">*81 from NIMH. The Center subsequently renewed petitioner's appointment in July of 1966 and in July of 1967. On each occasion, petitioner signed the following statement which appeared on the form "Statement of Appointment of Trainee" to be submitted to NIMH:
I certify that I will not accept during the period of this appointment any other educational benefit from the U.S. Government concurrently with a stipend from this grant.
As a resident at the Center petitioner was not a candidate for a degree. Petitioner was not required to render any service to the Center, NIMH, or the Public Health Service after completion of his residency. However, a substantial number of the Center's residents did join its staff after completion of their residencies.
During 1967, approximately 17 doctors participated in the Center's residency program. At the same time the Center had 25 full-time staff psychiatrists, of whom 8 were assigned to the Center's inpatient services and 17 were assigned to its outpatient clinic. A total of approximately 190 psychiatrists were on the Center's staff -- that is, were permitted to treat patients and to teach in the hospital.
56 T.C. 1201">*1207 During 1967, the year here in issue, petitioner 1971 U.S. Tax Ct. LEXIS 68">*82 completed the second half of his second year of residency and the first half of his third year of residency at the Center. During this period his hours of duty were generally from 8:30 a.m. until about 4:30 p.m. during the week. He also worked on an undisclosed number of Saturdays. In addition, during the first half of 1967, petitioner was on call at night once every 10 to 14 days. In any event, he worked a minimum of 40 hours per week. Petitioner spent approximately 11 to 12 hours per week seeing outpatients at the Center and an undisclosed number of hours seeing inpatients. At such times he was under the direct or indirect supervision of a member of the hospital staff. At least during the first half of 1967 petitioner spent about an hour to an hour and one half per week instructing medical students from the University of Pennsylvania who had been assigned to the hospital.
The Center provided its residents in psychiatry with a detailed manual entitled "Hospital Routine and Procedures." A recent edition of the manual, substantially similar to the edition issued in 1967, made the following provisions with regard to working hours:
Professional Personnel Practices
Hours on dutyHours 1971 U.S. Tax Ct. LEXIS 68">*83 are 8:30 a.m. to 5:00 p.m., Monday through Friday, and Saturday morning, 8:30 a.m. to 12:00 noon.
Please sign in and out with telephone operator whenever you arrive or leave the Hospital.
Residents assigned to the inpatient service will make rounds daily at 8:30 a.m. and will confer with the psychiatric supervisor and charge nurse of the floor about their patients.
Permission for absence from the hospital during working hours is to be obtained from the Medical Director through his secretary.
It is mandatory that you arrange to have another resident cover for you at the times when you are away (please be certain to give the name of the resident covering for you to the telephone operator when you sign out).
| Holidays | ||
| New Year's Day | January 1 | |
| 1 Easter | ||
| Memorial Day | May 30 | |
| Independence Day | July 4 | |
| Labor Day | ||
| Thanksgiving Day | ||
| Christmas Day | December 25 | |
| New Year's Eve (night) | December 31 |
If you are required to work any of the above holidays on your schedule you will be given another day off in lieu of this.
56 T.C. 1201">*1208 VacationResidents are authorized vacation time according 1971 U.S. Tax Ct. LEXIS 68">*84 to the length of their service at the Philadelphia Psychiatric Center.
| One year | 4 weeks per annum |
| Two years | 4 weeks per annum |
| Three years | 4 weeks per annum |
This vacation time may be taken during the appropriate academic year. Third year residents may take their accrued time just prior to termination of their residency here.
Vacations are coordinated in the office of the Clinical Director so that hospital coverage can be maintained. Requests will ordinarily be made several months before the summer.
* * * *
Telephone Service* * * *
When the telephone operator is on duty, be sure that she is always informed as to your whereabouts in order that you may be located immediately when needed. In the absence of an operator after working hours, keep the nurse on Radbill II informed where you can be reached.
* * * *
Night DutyFirst and second year residents are assigned to night and weekend duty on a rotating basis. (Schedule posted on Bulletin Board.) You are permitted to trade nights on call or to share half the weekend with other residents, provided that you notify the office of the Medical Director of such changes. You may not request another resident to cover a few hours or part of an evening of 1971 U.S. Tax Ct. LEXIS 68">*85 your duty time without specific permission from the Medical Director.
When on call, you will have primary responsibility for the entire hospital from 5:00 p.m. to 8:30 a.m. the following day. It will be your responsibility to make rounds and to check the patients; you make rounds on all the floors at 7:00 p.m. and 9:30 p.m., writing orders and caring for disturbed and physically ill patients. Making rounds at both times is essential. If any problems arise with which you need help, contact the senior staff psychiatrist on whose ward the problem arises. If he cannot be reached, then contact any senior psychiatrist.
The physician on night call is asked to remain in the Hospital building until 10:00 p.m. to supervise any acute problem personally.
In the event of night admissions, deaths, or escapes, please follow the procedure outlined elsewhere.
You should remain in close touch with the night nursing supervisor to cover any problems that arise. Under no circumstances may the doctor on call leave the Hospital grounds; medical or psychiatric emergencies can arise at any time.
When leaving the Hospital for your quarters, please lock the foyer doors to avoid prowlers. Should you notice any 1971 U.S. Tax Ct. LEXIS 68">*86 unauthorized person on the premises, please notify the night watchman immediately (ext. 314).
The manual also described hospital procedures which residents were expected to follow. According to the manual, after a newly admitted patient was assigned to him, a resident was to see the patient as soon as possible. The resident was expected to conduct and report an admission interview and a physical examination of each patient assigned. With regard to treatment, the manual provided:
56 T.C. 1201">*1209 In private cases, the referring physician will plan the treatment, which the resident will implement and in which he will assist. It is advisable that the resident check the order charts and progress notes on these patients daily.
In ward cases, the patient should be worked up promptly and presented to the ward service as soon as practicable.
According to the manual, the doctor on night call was responsible for seeing all patients admitted after 4 p.m., for completing admission procedures, and for writing appropriate orders at that time. When effecting an admission at night, the doctor was required to obtain 1 or 2 weeks' advance payment from the patient's family. The manual also stated that patients were 1971 U.S. Tax Ct. LEXIS 68">*87 scheduled for electroshock therapy three times per week and that each resident was responsible for scheduling his patients for treatment and for taking them off therapy when indicated. Residents were also required to complete the death certificates of patients who had died and to notify the referring physician and nearest of kin in certain instances.
Every patient that petitioner saw was also seen by a staff psychiatrist; petitioner's work on each patient was also evaluated.
During the first 6 months of 1967, while petitioner was completing his second year of residency, petitioner voluntarily saw patients at the Center's outpatient clinic during the evening hours. The patients were generally college students who were considered "hard to get" but bright, verbal, and rewarding patients. Accordingly, the Center made an affirmative effort to encourage the student health services of local colleges and universities to refer appropriate cases to their outpatient clinic. Such patients were usually charged $ 8 per hour, and the Center permitted petitioner to keep the total of $ 956 in fees he collected during 1967. Subsequently, the Center's policy with regard to the fees changed. The residents 1971 U.S. Tax Ct. LEXIS 68">*88 complained that many of the patients they saw in the evenings could not or would not pay for their services. The Center was also concerned that receipt of such fees violated the restriction imposed by MIMH upon recipients of the trainee stipends. 1 In any event, during the remainder of 1967, the Center established a supervised evening clinic whereby each resident was required to see at least four patients per evening as part of his duties at the Center. If a resident saw more than the minimum of four patients, he would be further compensated by the Center for such extra work. 2
During 1967 petitioner also participated in activities of substantial educational value at the Center. Such activities included lectures, meetings with staff psychiatrists in supervisory sessions, attendance at 56 T.C. 1201">*1210 various types of therapy sessions, and travel to other hospitals in the Philadelphia area to attend lectures, to observe, and to receive additional training.
As a resident in psychiatry, petitioner received "training 1971 U.S. Tax Ct. LEXIS 68">*89 stipends" from funds awarded to the Center by NIMH as follows:
| Year | Amount |
| 1st year -- July 1, 1965, to June 30, 1966 | $ 3,600 |
| 2d year -- July 1, 1966, to June 30, 1967 | 4,200 |
| 3d year -- July 1, 1967, to June 30, 1968 | 5,000 |
In addition to the "training stipends," petitioner received supplementary payments from the Center in each of the 3 years of his residency. During the calendar year 1967, petitioner received the sum of $ 2,911.50 from the Center. The supplemental payments were made by the Center in order to remain competitive with other hospitals in the Philadelphia area in attracting residents. The Center would not have been able to attract residents at all if it had paid them only a sum equal to the amount of its supplemental payments. Until 1970 all of the residents participating in the Center's residency program received funds derived from NIMH grants. Subsequently, the Center accepted residents in excess of the number covered by its NIMH grant. However, the Center paid the additional residents the same aggregate amount paid to the residents who were covered by the NIMH grant.
Petitioner received two Treasury Department Forms W-2 from the Center for the calendar year 1967. One, reporting 1971 U.S. Tax Ct. LEXIS 68">*90 payment of $ 4,503.87 and income tax withheld of $ 36.25, purported to reflect amounts paid which were attributable to the NIMH grant. The second form, reporting payment of $ 2,911.50 and income tax withheld of $ 329.70, purported to reflect amounts paid which were attributable to the Center's own funds.
On his 1967 Federal income tax return petitioner claimed a deduction of $ 3,600 attributable to the "training stipend" he received during that year. In his statutory notice of deficiency, the Commissioner disallowed the claimed deduction.
OPINION
Section 117(a)31971 U.S. Tax Ct. LEXIS 68">*91 excludes from gross income any amount received "as a scholarship at an educational institution" or "as a fellowship grant." Section 117(b)(2) limits the amount of the 56 T.C. 1201">*1211 exclusion available to nondegree candidates "to an amount equal to $ 300 times the number of months for which the recipient received amounts under the scholarship or fellowship grant" during the taxable year. Although on his return petitioner claimed a $ 3,600 deduction attributable to the payments he received from the Center, he now claims that $ 3,600 should be excluded from his gross income under section 117.
Section 1.117-4(c) of the regulations provides that certain payments are not to be considered scholarships or fellowship grants for purposes of the section 117 exclusion:
Sec. 1.117-4 Items not considered as scholarships or fellowship grants.
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 paragraph (a) of § 1.117-2, 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 1971 U.S. Tax Ct. LEXIS 68">*92 to enable him to pursue studies or research primarily for the benefit of the grantor.
However, amounts paid or allowed to, or on behalf of, an individual to enable him to pursue studies or research are considered to be amounts received as a scholarship or fellowship grant for the purpose of section 117 if the primary purpose of the studies or research is to further the education and training of the recipient in his individual capacity and the amount provided by the grantor for such purpose does not represent compensation or payment for the services described in subparagraph (1) of this paragraph. Neither 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 benefit to the grantor shall, of itself, be considered to destroy the essential character of such amount as a scholarship or fellowship grant.
The validity of the regulations was upheld by the Supreme Court in Bingler v. Johnson, 394 U.S. 741">394 U.S. 741. They are "designed, at least in part, to distinguish relatively disinterested payments made primarily for the purpose of furthering the education of the recipient from payments 1971 U.S. Tax Ct. LEXIS 68">*93 made primarily to reward or induce the recipient's performance of services for the benefit of the payor." Jerry S. Turem, 54 T.C. 1494">54 T.C. 1494, 54 T.C. 1494">1505; cf. Elmer L. Reese, Jr., 45 T.C. 407">45 T.C. 407, 45 T.C. 407">411, affirmed per curiam 373 F.2d 742 (C.A. 4).
The applicability of section 117 to payments received by resident physicians has already received judicial consideration on a number of occasions. With a few exceptions, courts considering this issue have consistently held such payments to be "compensation for past, present, or future employment services" or "payment for services which are subject to the direction or supervision of the grantor" and consequently not excludable from the recipient's gross income. See, e.g., Quast v.56 T.C. 1201">*1212 , 428 F.2d 750 (C.A. 8), affirming 293 F. Supp. 56">293 F. Supp. 56 (D. Minn.); Woddail v. Commissioner, 321 F.2d 721 (C.A. 10), affirming a Memorandum Opinion of this Court; Irwin S. Anderson, 54 T.C. 1547">54 T.C. 1547; Aloysius J. Proskey, 51 T.C. 918">51 T.C. 918; Ethel M. Bonn, 34 T.C. 64">34 T.C. 64; Wertzberger v. United States, 315 F. Supp. 34">315 F. Supp. 34 (W.D. Mo.), affirmed per curiam 441 F.2d 1166 (C.A. 8); Tobin v.United States, 71-1 U.S.T.C. par 9198, 27 A.F.T.R.2d (RIA) 71-791 (S.D. Tex.); Coggins v.United States, 70-2 1971 U.S. Tax Ct. LEXIS 68">*94 U.S.T.C par 9687, 26 A.F.T.R.2d (RIA) 70-5775 (N.D. Tex.); Kwass v.United States, 70-2 U.S.T.C. par 9615, 26 A.F.T.R.2d (RIA) 70-5554 (E.D. Mich.); Taylor v.United States, 68-2 U.S.T.C. par. 9488, 22 A.F.T.R.2d (RIA) 5246 (E.D. Ark.); Lingl v. Charles, 68-1 U.S.T.C. par. 9153, 21 A.F.T.R.2d (RIA) 410 (S.D.Ohio); 4 cf Michaels v.United States, 71-1 U.S.T.C. par. 9455, 27 A.F.T.R.2d (RIA) 71-1339 (E.D. Mich.). But see Pappas v.United States, 67-1 U.S.T.C. par. 9386, 19 A.F.T.R.2d (RIA) 1276 (E.D. Ark.); Wrobleski v. Bingler, 161 F. Supp. 901">161 F. Supp. 901 (W.D. Pa.).
We think that like treatment should be accorded to the payments petitioner received from the Center.
As a resident in psychiatry, petitioner rendered services to the Center which were both extensive and valuable. Throughout 1967 he had general responsibilities for interviewing, examining, and evaluating 1971 U.S. Tax Ct. LEXIS 68">*95 patients to whom he was assigned. He instructed medical students assigned to the hospital. During the first half of 1967, he was on call at night every 10 to 14 days and, according to the Center's manual, on such occasions had "primary responsibility for the entire hospital." In addition the pamphlet issued to residents at the Center described still other duties which included scheduling and unscheduling electroshock therapy, completing death certificates for patients who have died, and notifying the referring physician and nearest of kin in certain instances. See Aloysius J. Proskey, 51 T.C. 918">51 T.C. 918, 51 T.C. 918">923-924.
Furthermore, in carrying out his duties, petitioner acted under the direct or indirect supervision of staff psychiatrists. Petitioner's work on individual patients was reviewed by members of the hospital staff. Moreover, residents were appointed on a yearly basis, and petitioner's overall work at the Center was thus at least potentially subject to review at such times. The hospital staff supervised petitioner's work in such manner that it was quite unlikely that his work would not have been of benefit to the Center. See Aloysius J. Proskey, 51 T.C. 918">51 T.C. 918, 51 T.C. 918">924; Jerry S. Turem, 54 T.C. 1494">54 T.C. 1494, 54 T.C. 1494">1505.
56 T.C. 1201">*1213 1971 U.S. Tax Ct. LEXIS 68">*96 The Center's payments to petitioner enabled the hospital to gain his services. When petitioner originally was interviewed for a residency at the Center, he was informed of the availability of the payments made to residents -- particularly those stemming from the NIMH grant. Cf. Wertzberger v. United States, 315 F. Supp. 34">315 F. Supp. at 36. We note also that the Center's pamphlet, "Residencies in Psychiatry," referred to the total annual payments made to residents as "Salaries and Employment Benefits" and drew no distinction between funds originating with NIMH and those which did not. The amount of the payments was established by the Center in order to be competitive with other hospitals in the Philadelphia area. Without the payments stemming from the NIMH grant, the Center would have been unable to attract any residents at all. Cf. Harvey P. Utech, 55 T.C. 434">55 T.C. 434, 55 T.C. 434">440. Indeed, subsequent to the year here in issue, it accepted some residents who were not covered by an NIMH grant and paid them the same aggregate amount paid to those residents who were covered by the grant. Cf. Lingl v. Charles, 68-1 U.S.T.C. at 86,181, 21 A.F.T.R.2d (RIA) at 413; Frank Thomas Bachmura, 32 T.C. 1117">32 T.C. 1117, 32 T.C. 1117">1126. The payments 1971 U.S. Tax Ct. LEXIS 68">*97 to petitioner were tied inextricably to his status as a resident at the Center. The Center selected him as a resident, and it appointed him as a trainee just 2 weeks after he began his residency. During the year in issue, and until 1970, all residents at the Center received funds stemming from the NIMH grant. Furthermore, the amount of the payments received by the Center's residents was not dependent upon need but only upon length of service as a resident at the Center. See Aloysius J. Proskey, 51 T.C. 918">51 T.C. 918, 51 T.C. 918">924; Wertzberger v. United States, 315 F. Supp. 34">315 F. Supp. at 36; Tobin v.United States, 71-1 U.S.T.C. at 85,832, 27 A.F.T.R.2d (RIA) at 71-792; see also Coggins v.United States, 70-2 U.S.T.C. at 84,756, 26 A.F.T.R.2d (RIA) at 70-5780:
In view of the fact that in this case the resident received an increase in pay with each year's experience, how can it be said that this increase in pay for a more experienced employee is within the ordinary understanding of scholarship or fellowship? Clearly the increase in pay is to compensate the doctor for his additional experience and greater value to the hospital.
Moreover, the "Hospital Routine and Procedure" manual issued by the Center to its residents, set 1971 U.S. Tax Ct. LEXIS 68">*98 out highly specific duties, hours on duty, and procedures to ensure proper timing of holidays and vacations so that adequate hospital coverage could be maintained. Such provisions strongly suggest both the value of the residents to the Center and the employee-employer relationship between them. A major function of the Center was patient care, and, as a resident, petitioner made a valuable contribution to the performance of that function. Petitioner's contribution was by no means an "incidental benefit" to the grantor. His services were precisely what he was being paid for and were subject 56 T.C. 1201">*1214 to the Center's continual supervision. See Income Tax Regs., sec. 1.117-4(c). We conclude that the full amount of the payments received by petitioner from the Center in 1967 is includable in his gross income.
Petitioner has emphasized that the $ 3,600 here in issue is attributable to the NIMH grant to the Center, that petitioner did not perform services for the benefit of NIMH or under its supervision, and that the purpose of the NIMH program was to enable a greater number of persons to pursue careers in mental health disciplines and to improve the quality of mental health in the United States. 1971 U.S. Tax Ct. LEXIS 68">*99 Petitioner urges that NIMH is the "grantor" of the funds in issue and that it made disinterested payments primarily for the purpose of furthering petitioner's education. We disagree. We think that, under the circumstances herein, the Center, and not NIMH, must be considered the grantor of the payments. NIMH's own publication provided that "Trainee stipend grants are not awarded directly to individuals by the National Institute of Mental Health;" that such grants were made only to training institutions; that in order to benefit from the grants individual physicians were required to apply to the funded institutions; and that the institutions would select and pay the individuals they had chosen. Apart from establishing minimum educational and citizenship requirements, NIMH left selection of the recipient entirely to the Center. The Center's "program director," not NIMH, was responsible for the residents' duties at the Center. In light of all the additional evidence revealing the compensatory nature of the payments, we consider the foregoing circumstances to be highly significant. Although NIMH's grant to the Center may well have been disinterested and noncompensatory in nature, 1971 U.S. Tax Ct. LEXIS 68">*100 the Center's grant to petitioner was quite different. The payments were made in return for petitioner's income. 5 Cf. Bingler v. Johnson, 394 U.S. 741">394 U.S. 741, 394 U.S. 741">743, fn. 4; Jerry S. Turem, 54 T.C. 1494">54 T.C. 1494, 54 T.C. 1494">1505-1506; Marjorie E. Haley, 54 T.C. 642">54 T.C. 642, 54 T.C. 642">647; 61971 U.S. Tax Ct. LEXIS 68">*101 Rev. Rul. 71-346, 1971-2 C.B.
To be sure, petitioner's training at the Center may make a substantial contribution to the health and welfare of the general public. But 56 T.C. 1201">*1215 the existence of such a contribution is hardly inconsistent with our finding that the payments were made "primarily for the benefit of the grantor." See Jerry S. Turem, 54 T.C. 1494">54 T.C. 1494, 54 T.C. 1494">1506-1507. Similarly, it is not particularly significant that petitioner derived substantial educational benefits from his residency at the Center. See Aloysius J. Proskey, 51 T.C. 918">51 T.C. 925:
There can be no serious doubt that work as a resident physician provides highly valuable training, particularly in preparing for specialties in the various fields of medicine. Yet virtually all work as an apprentice, whether in medicine or law, carpentry or masonry, provides valuable training. Nothing in section 117 requires that an amount paid as compensation 1971 U.S. Tax Ct. LEXIS 68">*102 for services rendered be treated as a nontaxable fellowship grant, merely because the recipient is learning a trade, business, or profession. Whatever training petitioner received during the years of his residency -- and we do not deny that it was substantial -- was merely "incidental to and for the purpose of facilitating the raison d'etre of the Hospital, namely, the care of its patients." Ethel M. Bonn, 34 T.C. 64">34 T.C. 64, 34 T.C. 64">73 (1960); Woddail v. Commissioner, supra.* * *
At the trial herein, the medical director of the Center testified that the Center "probably could operate [without residents] without increasing its staff" by having its staff members care for patients during periods previously spent teaching residents. We do not find that testimony convincing. The services performed by residents at the Center were extensive. Even if the hospital could "operate" without residents, we think it quite doubtful that the Center could continue to care for as many patients and as effectively as it could with their help. Cf. Ethel M. Bonn, 34 T.C. 64">34 T.C. 64, 34 T.C. 64">71. 7 More fundamentally, even if the Center could do without residents, it did not do without them; it used their services, and it paid for 1971 U.S. Tax Ct. LEXIS 68">*103 them. Many employees may be dispensable in the sense that their employers could "operate" without them. But such dispensability hardly renders their salaries noncompensatory.
Petitioner relies upon Wrobleski v. Bingler, 161 F. Supp. 901">161 F. Supp. 901 (W.D. Pa.), and Pappas v.United States, 67-1 U.S.T.C. par. 9386, 19 A.F.T.R.2d (RIA) 1276 (E.D. Ark.). Both cases are distinguishable from the facts presented herein. In Wrobleski, the District Court found that the Western State Psychiatric Institute & Clinic, was primarily an institution for teaching and research. That is not the case here. In Pappas a jury found that payments made by the University of Arkansas Medical Center were made primarily for the purpose of furthering the taxpayer's education and training. We have made no such finding here. 8
Decision will be entered for the respondent.
Footnotes
1. Specialty areas beyond third year residency such as child psychiatry, research training, etc.↩
1. Jewish personnel are given days off as follows:
Rosh Hashanah 1 day Yom Kippur 1 day Otherwise either Good Friday or Easter Monday is given as the Easter Holiday.↩
1. See p. 1205, supra↩.
2. It is far from clear that the procedure adopted by the Center complied with the NIMH restriction on the receipt of fees for the rendering of professional services.↩
3. 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;↩
4. See also Emerson Emory, T.C. Memo. 1971-191; Edward A. Ballerini, 29 T.C.M. 1595, P-H Memo. 70-1745; Janis Dimants, Jr., 29 T.C.M. 1138, P-H Memo. 70-1244; Marvin Flicker, 29, T.C.M. 1115, P-H Memo. 70-1218; Austin M. Katz, 29 T.C.M. 511, P-H Memo. 70-566; Oscar A. Arnaud, 27 T.C.M. 1541, P-H Memo. 68-1680; cf. Jonathan M. Kagan, 28 T.C.M. 617↩, P-H Memo. 69-661.
5. The statement of NIMH that the stipends "are not considered to be salary for services" was apparently made for purposes of determining the eligibility of trainees for fringe benefits and not for Federal income tax purposes. In any case, such a statement is certainly not determinative herein.↩
6. In Haley, the Court stated (p. 647):
"The petitioner also attempts to support an exclusion for 75 percent of her educational grant under the theory that the grantor was the United States, not the State of Oregon. Her argument is that, as she had no employment relationship with the Federal Government, the grant, to the extent funded by Federal moneys under a 75 percent matching program, could not be in consideration of her 'past, present, or future services' to the Federal Government. Petitioner's argument must fail as her agreement was not with the Federal Government and as she did not receive funds from the Department of Health, Education, and Welfare or any other Federal Agency. The Federal government was not the grantor. Cf. Norman R. Williamsen, Jr., 32 T.C. 154">32 T.C. 154 (1950). The grantor of the funds was the State Commission, and the funds were distributed from the general funds of the State of Oregon."
See also Emerson Emory, T.C. Memo. 1971-191↩.
7. It is far from clear to us that the Center would continue to be as attractive to staff physicians if it ceased to be a teaching hospital. Cf. Marvin Flicker, 29 T.C.M. 1115↩, 1125, P-H Memo. 70-1218, 70-1230.
8. Cf. Janis Dimants, Jr., 29 T.C.M. 1138↩, 1143, P-H Memo. 70-1244, 70-1249.