1975 U.S. Tax Ct. LEXIS 203">*203 Decisions will be entered for the respondent.
Petitioners, residents in surgery, received payments from Wood Veterans Administration Hospital and Milwaukee County General Hospital during their residencies. Petitioners were also candidates for the degree of master of science in surgery granted by Marquette University Graduate School during this period. The payments represented compensation for present employment services that were subject to direction or supervision of the grantors. Held, the payments are not excludable scholarships or fellowship grants.
63 T.C. 454">*454 Respondent determined deficiencies in petitioners' income tax 1975 U.S. Tax Ct. LEXIS 203">*204 as follows:
Petitioners | Docket No. | Year | Amount |
Sheldon A. E. and Dorothy L. Rosenthal | 3257-73 | 1969 | $ 2,888.87 |
Jon R. and Linda Hillegas | 3258-73 | 1969 | 1,925.54 |
William R. and Juanita F. McGregor | 3298-73 | 1969 | 1,805.64 |
William R. and Juanita F. McGregor | 3894-73 | 1970 | 1,788.92 |
The cases were consolidated for trial. The issue is whether petitioners may exclude from their gross incomes as fellowship or scholarship grants under
FINDINGS OF FACT
Some facts were stipulated and are found accordingly.
Sheldon A. E. Rosenthal (hereinafter petitioner) and Dorothy L. Rosenthal, husband and wife, were legal residents of Encino, Calif., when their petition was filed. Jon R. Hillegas (hereinafter petitioner) and Linda Hillegas, husband and wife, were legal residents1975 U.S. Tax Ct. LEXIS 203">*205 of Phoenix, Ariz., when their petition was filed. 63 T.C. 454">*455 William R. McGregor (hereinafter petitioner) and Juanita F. McGregor, husband and wife, were legal residents of Wauwatosa, Wis., when their petition was filed. Petitioners filed joint income tax returns for the years in question with the district director of internal revenue in Milwaukee, Wis.
During 1969 and 1970, each petitioner was a physician licensed to practice medicine in Wisconsin. Each petitioner was also a general surgical resident participating in the Marquette Affiliated Surgical Residency Program (hereinafter MASRP) at Milwaukee County General Hospital (hereinafter Milwaukee Hospital) and Wood Veterans Administration Hospital (hereinafter Veterans Hospital).
MASRP was, during 1969 and 1970, a 4-year surgical training program operated by the Marquette University Graduate School (hereinafter Marquette), in affiliation with Marquette Medical School and six major hospitals in the Milwaukee, Wis., area. Petitioner Rosenthal was a second-year surgical resident in MASRP from January 1969 through June 1969, and a third-year surgical resident from July 1969 through December 1969. Petitioner Hillegas was a second-year1975 U.S. Tax Ct. LEXIS 203">*206 surgical resident from January 1969 through August 1969, and a third-year surgical resident from August 1969 through December 1969. Petitioner McGregor was a first-year surgical resident from January 1969 through June 1969, a second-year surgical resident from July 1969 through June 1970, and a third-year surgical resident from July 1970 through December 1970.
A MASRP appointment also enabled a resident to enter the master of science in surgery degree program of Marquette. Petitioner Rosenthal was a candidate for that degree from January 1, 1969, to May 31, 1969. Petitioner Hillegas was a candidate for that degree during all of 1969. Petitioner McGregor was a candidate for that degree during all of 1969 and 1970.
During 1969, petitioner Rosenthal received $ 2,122.64 from the County of Milwaukee and $ 6,283.81 from the United States Veterans Administration for participation in the surgical residency program at Milwaukee Hospital and Veterans Hospital, respectively.
During 1969, petitioner Hillegas received $ 6,259.35 from the County of Milwaukee and $ 2,027.70 from the United States Veterans Administration for participation in the surgical 63 T.C. 454">*456 residency program at Milwaukee1975 U.S. Tax Ct. LEXIS 203">*207 Hospital and Veterans Hospital, respectively.
During 1969, petitioner McGregor received $ 5,858.64 from the United States Veterans Administration for participation in the surgical residency program at Veterans Hospital. During 1970, petitioner McGregor received $ 5,527.20 from the County of Milwaukee and $ 1,103.97 from the United States Veterans Administration for participation in the surgical residency program at Milwaukee Hospital and Veterans Hospital, respectively.
During their general surgical residencies, petitioners were assigned to the affiliated hospitals under a standard rotation schedule. Both the rotation schedule and the residency program as a whole were controlled by the faculty of Marquette and the Marquette School of Medicine.
While on rotation at the affiliated hospitals, petitioners received payments from the particular hospital to which they were assigned at that time and were paid at a rate determined by that hospital. Petitioners and all MASRP residents received the same stipends, depending solely on level of progression through the residency program and the salary schedule of their then-assigned hospital. Individual need was accordingly not considered in1975 U.S. Tax Ct. LEXIS 203">*208 determining the amount of payments made to each resident. The annual rate of payments made by Milwaukee Hospital to all residents, including petitioners, during the years in question was as follows:
Level of Resident | ||||
Year | I | II | III | IV |
1969 | $ 7,254 | $ 7,854 | $ 8,454 | $ 9,074 |
1970 | 7,429 | 8,030 | 8,630 | 9,249 |
Comparable payments by Veterans Hospital were as follows:
Level of Resident | ||||
Year | I | II | III | IV |
1969 | $ 7,600 | $ 8,200 | $ 8,800 | $ 9,400 |
1970 | 8,130 | 8,555 | 8,980 | 9,529 |
Not all MASRP surgical residents were candidates for the master of science in surgery degree. However, no distinction in payments was made by participating hospitals between degree candidates and those who were not.
63 T.C. 454">*457 Either or both hospitals provided petitioners and other MASRP residents, without cost, with medical insurance, malpractice insurance, paid sick leave, paid annual vacation, a $ 25 annual uniform allowance, free meals when working extended hours, and, under certain circumstances, reimbursement for travel expenses incurred for medical conventions.
The Marquette School of Medicine faculty constituted a majority of the medical staff of Veterans Hospital1975 U.S. Tax Ct. LEXIS 203">*209 and all of the medical staff of the Milwaukee Hospital during 1969 and 1970. Patient care at both hospitals was done by teams of medical students, interns, and residents under the direction of attending physicians. Each team was responsible for a given number of patients, but ultimate medical responsibility for such patients lay with the attending physicians. Residents and other team members thus performed medical and surgical services under the supervision and control of attending physicians. Each team member participated in evaluation, care, and treatment of team patients, with increasing responsibility being assigned for each year of resident training. Residents, interns, and medical students were assigned night duty at the hospitals to care for team patients and provide emergency room surgical services. When assigned to a surgical service, surgical residents spent approximately every third night on call at the hospital. The attending physician for each team was not usually at the hospital with the team when it was on call at night.
Surgical residents worked 8 to 10 hours a day, Monday through Friday, and on Saturday, Sunday, and holiday mornings. Both hospitals estimated1975 U.S. Tax Ct. LEXIS 203">*210 that 75 percent of that time was spent in clinical patient care and that 25 percent was spent in formal classroom activities. Surgical teams made three rounds to check their patients each day, only some of which were accompanied by an attending physician. As general surgical residents, petitioners ordered prescriptions, wrote treatment orders for patient care, took patients' physicals and medical histories, ordered special reports (including consultations, X-rays, and clinical laboratory analyses), assessed and diagnosed patients (subject to review by the attending physician), reviewed intern and medical student diagnoses, secured autopsy consents, wrote progress notes, wrote transfer notes, dictated case summaries for discharge notes, signed death certificates, commenced the administration of intravenous fluids, inserted nasal gastric tubes, scheduled 63 T.C. 454">*458 operating room appointments, prepared patients for operations, performed operations, assisted in operations, completed operating room worksheets, dictated operative notes, changed dressings, removed sutures, and performed autopsies. As the Acting Chief of Surgery at Milwaukee Hospital during 1970 stated at trial, "[A surgical1975 U.S. Tax Ct. LEXIS 203">*211 resident] does those things that surgeons do."
During his 3 years of surgical residency, petitioner Rosenthal performed 233 operations as the responsible operating surgeon and 164 operations as the assisting surgeon. During his 4 years of general surgical residency, petitioner Hillegas performed 424 operations as the responsible operating surgeon and 574 operations as the assisting surgeon. During his 4 years of general surgical residency, petitioner McGregor performed 406 operations as responsible operating surgeon and 413 operations as the assisting surgeon. Many of these operations were performed during each petitioner's junior residency (first, second, or third year). Over 95 percent of general surgical procedures at Veterans Hospital and Milwaukee Hospital were performed by surgical residents, under resident physician supervision.
Classroom instructions required for the master of science in surgery degree were held Friday afternoons and Saturday mornings. All surgical residents, degree candidates or not, were expected to attend these conferences and lectures.
In the absence of a resident staff, Milwaukee Hospital could operate only if attending physicians greatly increased1975 U.S. Tax Ct. LEXIS 203">*212 their workload or if other physicians were hired to replace the residents. If residents were not available at Veterans Hospital, the hospital would need to employ additional physicians, because "residents render much valuable service in the medical and hospital care of veteran patients."
OPINION
The issue is whether petitioners are entitled to exclude certain payments from their gross incomes as scholarships or fellowship grants under
(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 [relating to the limitation provided in
(2) Any amount paid or allowed to, or on behalf of, an individual 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
In
On the basis of the evidence in this record, we find that the payments in question constituted compensation for present services that were subject to the direction or supervision of the grantors.
Petitioners rendered extensive and valuable services to Milwaukee Hospital and Veterans Hospital, the effect of which was clearly to provide the "substantial quid pro quo" which the Supreme Court described1975 U.S. Tax Ct. LEXIS 203">*215 in
Besides the nature and extent of services rendered, two other factors support the conclusion that the payments constituted 1975 U.S. Tax Ct. LEXIS 203">*216 compensation. First, payments were based on length of service, not individual need.
The purpose of the payments, therefore, was to provide compensation for services rendered.
Petitioners emphasize that MASRP, Milwaukee Hospital, and Veterans Hospital had a primary or at least significant purpose of training surgeons. Since the primary purpose of the payments was compensation, however, this argument is not persuasive.
Petitioners contend that
Petitioners also contend that
Petitioners also contend that
Finally, petitioners contend that their services were of limited usefulness to the hospitals because, for the years in question, they were generally only in the first or second years of the 4-year residency program. Although additional responsibilities were given to third- and fourth-year residents in MASRP, first- and second-year residents still performed substantial and valuable services for Milwaukee Hospital and Veterans Hospital. In
We hold that petitioners are not entitled1975 U.S. Tax Ct. LEXIS 203">*219 to exclude the payments in issue as scholarship or fellowship grants under
Decisions will be entered for the respondent.