*14 Decision will be entered for petitioner.
P applied for, and was awarded, a post-doctoral fellowship grant from Columbia University, which allowed him to pursue independent research. The terms of the fellowship did not require P to perform any services, and they did not otherwise contain a quid pro quo. Held, the fellowship grant is not income derived by P from a trade or business, and he is not subject to self-employment income tax on that amount.
*395 Dawson, Judge: This case was assigned to Special Trial Judge Carleton D. Powell pursuant to section 7443A(b)(3) and Rules 180, 181, and 182. 1 The Court agrees with and adopts the opinion of the Special Trial Judge set forth below.
*15 OPINION OF THE SPECIAL TRIAL JUDGE
Powell, Special Trial Judge: By notice of deficiency, respondent determined a deficiency in petitioner's Federal income tax and an addition to tax under section 6662(a) in the amounts of $ 1,790 and $ 358, respectively, for taxable year 1989.
After a concession by respondent, 2 the only issue for decision is whether amounts received by petitioner in 1989 pursuant to an academic fellowship are subject to tax on self-employment income.
FINDINGS OF FACT
Some of the facts are stipulated and are so found. Petitioner resided in New York, New York, at the time the petition was filed in this case.
Petitioner holds a bachelor of arts degree in geology and geophysics from Harvard University and a Ph.D. from the University of Cambridge in England. During his doctoral studies in early 1988, he applied for, and was subsequently awarded, a 1-year Lamont Post-Doctoral Research Fellowship (the*16 fellowship) from Columbia University. Petitioner's term as a fellow began in July of 1989 and continued through June of 1990. Under the fellowship he received $ 27,500, half of which was disbursed to him in 1989.
The fellowship is a privately funded competitive award; the fellows are selected based on their applications submitted to Columbia University. The fellowship provides funds and office space to individuals to allow them to conduct independent scientific research. The research is conducted at the Lamont-Doherty Geological Observatory. Part of the value of the fellowship is the informal discourse and the exchange of ideas with members of the professional staff at that facility and with other fellows concerning their research. The fellows *396 choose their own subjects and determine how best to conduct their research; they do not, however, earn a degree or credit leading to a degree for their endeavors. They have no teaching or other responsibilities, and Columbia University has no legal right to, or interest in, the fruit of the recipients' labors. The fellows are not required to observe office hours, and they are not required to report to a supervisor. 3
*17 Petitioner selected as his research subject the physics and geochemical consequences of the migration of magma from the deep earth to the earth's surface. He pursued this topic throughout the term of the fellowship, and subsequently published his findings in scientific journals, for which he received no compensation.
Petitioner received a Form 1099-MISC from Columbia University, indicating $ 13,750.02 in "nonemployee compensation" for 1989, which petitioner reported on his Form 1040A in the "Wages, salaries, tips, etc." column. Petitioner paid income taxes on this income. Respondent determined, however, that petitioner was also liable for tax on self-employment income with respect to the amounts received under the fellowship.
OPINION
Petitioner's research project at Columbia University*18 involved the examination of molten rock that issues from volcanic eruptions as lava to infer the geological activity occurring 100 miles beneath the earth's crust. Our task, however, proceeds in reverse order. We must dig into the lower strata of the history of the Federal tax system to unearth the Rosetta stone that will decipher issues of fellowship grants in terms of the current self-employment income tax. In doing so we begin by examining the genesis of the exemption from *397 gross income for scholarships and fellowship grants, and follow the statutory metamorphosis of that exemption.
The arguments advanced by the parties focused primarily on whether petitioner's scholastic activities constitute a trade or business. However, given the history of the tax treatment of scholarships and fellowship grants, we think this focus obscures the main issue. It seems more meaningful to focus on the source from which the fellowship grant is derived. The Tax Court reads the term "to derive" in its ordinary sense, as meaning "to take or receive from a specified source. Income which derives from self-employment is income which originates from it, which flows from that source". *19
1. Scholarships and Fellowship Grants Prior to 1954
Prior to the enactment of the Internal Revenue Code of 1954, ch. 736, 68A Stat. 3 (1954 Code), the tax treatment of scholarships, fellowship grants, prizes, and awards depended on whether the particular transfer was classified as a gift. See S. Rept. 1622, 83d Cong., 2d Sess. 13, 17 (1954). If a gift, the amount was excluded from gross income under section 22(b)(3) of the 1939 Code and its antecedents, the predecessors of section 102(a). 4 See Sneed, Configurations of Gross Income 131-142, 161-169 (1967).
*20 In determining whether scholarships and fellowship grants were excludable as gifts, the Commissioner and the courts essentially focused on whether services were required of the recipient. The Commissioner initially took the position that any type of activity performed by the recipient removed it from the gift exclusion.
On the other hand, in Stone, this Court held that a fellowship grant from the Guggenheim Foundation was an excludable gift. The Commissioner argued that the funds were provided to the taxpayer "on the basis*21 of the petitioner's qualifications to do the work required by his project, which project was approved by the foundation with the expectation of results consistent with the petitioner's qualifications".
the purpose of the foundation is to promote the advancement of knowledge and to add to the literary and scientific power of the country and that the fulfilment [sic] of this purpose depends upon the selection of projects from which results can be expected, and hence it is not unreasonable to conclude that the foundation adopts as its own the projects proposed by the fellows it selects. [Id.]
This Court rejected those theories, finding instead that the foundation intended to make a gift, by stating:
The foundation does not accomplish its purposes by employing scholars or scientists to carry out projects. Its method is to make gifts to persons whose past achievements and present abilities, as shown by the foundation's investigation, merit financial assistance to enable them to carry *22 out their own projects of creative work or self-improvement. [Id.]
This Court noted that "In providing funds to qualified persons to carry out their own projects of creative work or self-advancement the foundation is carrying out the desires of its founders to give others educational opportunities".
This Court also rejected the notion that the grant constituted compensation for research services, stating:
The petitioner was not "offering the results of his professional skill to win prize money," * * *. * * * Nor was the foundation offering a prize in the sense of other prize cases * * *.
*399 The fellowship award was not paid pursuant to a contract and was not a payment for services. It was a gift excludible under * * * [the predecessor of section 102(a)].
[
2. Scholarships and Fellowship Grants Between 1954 and 1986
The 1954 Code included provisions that specifically addressed scholarships and fellowship grants as well as the related problem of prizes and*23 awards. 5
*24 Congress did not define the term "scholarship" or "fellowship grant". The regulations and case law filled the gap.
Fellowship grants. A fellowship grant generally means an amount paid or allowed to, or for the benefit of, an individual to aid him in the pursuit of study or research. * * *
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 * * * fellowship grant * * * 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 * * *
*400 Not all funds received by a scholar constituted a scholarship or fellowship grant for purposes of
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*26 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.
This Court construed
[T]he legislative history shows that the House intended that there first be a scholarship or fellowship grant and then decreed that if part-time services were involved, the portion of the grant allocable thereto was nevertheless to be includable in gross income. All that the Senate did by adding the * * * [exception to the limitation] was to deal with the situation where a dual condition existed -- i.e., the part-time services were required to *401 obtain the degree and were also a prerequisite to receiving the scholarship. In such a case, the Senate amendment decreed that part-time services were not to be considered as being a condition of the scholarship so as to fall *27 within the limitation imposed by the first sentence of
The regulations further limited the exclusion under
One may justifiably suppose that the Congress that taxed funds received by "part-time" teaching assistants, presumably on the ground that the amounts received by such persons really represented compensation for services performed, would also deem proper a definition of "scholarship" under which comparable sorts of compensation * * * are likewise taxable." [Fn. refs. omitted.]
The term "scholarship" or "fellowship grant" did not include any amount provided by an individual to aid a relative, friend, or other individual in pursuing his studies or research where the grantor was motivated by family or philanthropic considerations. *28
The conceptual changes wrought by the 1954 Code regarding the treatment of scholarships and fellowship grants were clearly not revolutionary.
3. Scholarships and Fellowship Grants After 1986
Section 123 of the Tax Reform Act of 1986 (TRA 1986), Pub. L. 99-514, 100 Stat. 2085, 2112, modified the gross income treatment of scholarships and fellowship grants with amendments to
Amended
*31 The modifications of TRA 1986 shifted the focus of the gross income exclusion of scholarships and fellowship grants from the nature of the grant (i.e., whether the compensation was *403 for services) to the use of the funds (whether used for personal purposes). H. Rept. 99-426 (1985), 1986-3 C.B. (Vol. 2) 1, 100, explains:
The committee believes that the exclusion for scholarships should be targeted specifically for the purpose of educational benefits, and should not encompass other items which would otherwise constitute nondeductible personal expenses. Similarly, the committee believes that, in the case of grants to nondegree candidates for travel, research, etc., that would be deductible as ordinary and necessary business expenses, an exclusion for such expenses is not needed, and the exclusion is not appropriate if the expenses would not be deductible. * * *
Congress, therefore, clearly understood that, while certain scholastic activities may constitute a trade or business, that conclusion did not necessarily follow, and the modifications in the tax treatment of scholarships and fellowship grants did not necessarily mean that amounts*32 paid from a grant were derived from a trade or business.
4. Scholarships, Fellowship Grants, Employment Taxes, and Tax on Self-Employment Income
Chapter 21, commonly referred to as the Federal Insurance Contributions Act (FICA) (secs. 3101-3128), and chapter 23, commonly known as the Federal Unemployment Tax Act (FUTA) (secs. 3301-3311), impose certain taxes on employers and employees based on wages paid to employees. For self-employed individuals, roughly corresponding taxes are imposed on self-employment income derived from carrying on a trade or business. Ch. 2 (secs. 1401-1403); see
*33 Generally, prior to the 1986 amendments, where amounts received from the pursuit of scholastic activities fell without *404 the exemption for scholarships and fellowship grants because of services rendered by the recipient, the recipient was considered an employee and employment taxes were imposed under sections 3301-3311. See
Self-employment income, however, is not necessarily the flip side of wages. Although there have been no cases dealing with tax on self-employment income with respect to scholarships and fellowship grants, the Commissioner has issued several rulings in the area. In
On the other hand, in
[Scholarships and fellowship grants] do not constitute income from a trade or business and, hence, are not to be included in the recipient's net earnings from self-employment for purposes of the Self-Employment Contributions Act. The terms "fellowship grant" and "trade or business" are inconsistent and mutually exclusive. Amounts received under a fellowship grant which qualifies as such under
Accordingly, even though part of a
[
We think that the pronouncement in
In dealing with post-1986 scholarships and fellowship grants, the Commissioner has recognized that portions of a scholarship or fellowship grant are not considered to be "wages" for FICA and FUTA purposes, even though they may be otherwise taxable, unless
The*38 facts indicate that the grant at issue, although not excludable from gross income as a "qualified scholarship", is *406 a scholarship or fellowship grant as defined by the case law and regulations interpreting
Based on the foregoing, and consistent with the Commissioner's published interpretations on the subject, we believe that the fellowship grant in this case is not subject to tax on self-employment income unless it would be includable in gross income under
To reflect the foregoing,
Decision will be entered for petitioner.
Footnotes
1. Unless otherwise indicated, section and chapter references are to the Internal Revenue Code in effect for the year in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.↩
2. Respondent stipulated that petitioner is not liable for the addition to tax under sec. 6662(a).↩
3. The parties have stipulated that petitioner is not an employee of Columbia University, and the facts appear to support this conclusion.↩
4. Sec. 102(a) provides that "Gross income does not include the value of property acquired by gift, bequest, devise, or inheritance."↩
5. Sec. 74(a) of the 1954 Code mandated the inclusion in gross income of amounts received as prizes and awards, including scholarships and fellowship grants not otherwise excluded under
sec. 117 .Cass v. Commissioner, 86 T.C. 1275">86 T.C. 1275 , 1279-1280 (1986);sec. 1.74-1(a)(1), Income Tax Regs. The regulations indicate that "The exclusion from gross income of an amount which is a scholarship or fellowship grant is controlled solely bysection 117 "; thus, scholars and fellows could not avail themselves of the exclusions under sec. 74(b) or 102(a).Cass v. Commissioner, supra at 1280-1281 ;sec. 1.117-1(a), Income Tax Regs.↩ 6. The proposed regulations enlarge on
sec. 1.117-4(c), Income Tax Regs. , to reflect the expanded scope of amendedsec. 117(c) .Sec. 1.117-6(d), Proposed Income Tax Regs. ,53 Fed. Reg. 21692 (June 9, 1988). Generally, the proposed regulations contemplate that any↩ quid pro quo will mandate the inclusion of an allocable portion of a scholarship or fellowship grant, regardless of whether it otherwise constitutes a "qualified scholarship".7. The question in
Central Ill. Pub. Serv. Co. v. United States, 435 U.S. 21">435 U.S. 21 (1978), was whether certain amounts received by employees were "wages" subject to income-tax withholding within the meaning of secs. 3401-3403. The definition of "wages" for FICA, FUTA, and withholding generally is the same.Rowan Cos. v. United States, 452 U.S. 247">452 U.S. 247 , 263↩ (1981).8. In this regard, we also note that the Commissioner currently treats scholarship and fellowship grants for purposes other than determining the inclusion in gross income the same as before the 1986 amendments. Following TRA 1986, the Internal Revenue Service announced that, for purposes of the private foundation self-dealing and taxable expenditure rules of secs. 4941 and 4945, the phrase "scholarships and fellowship grants which are subject to the provisions of
section 117(a) ", as used in former secs. 4941(d)(2)(G)(ii) and 4945(g)(1), would be interpreted as ifsec. 117 had not been amended. "There is no indication in the legislative history * * * [of the amendment tosec. 117 ] that Congress intended to limit foundation grants to amounts excludable undersection 117 , as amended by the Act."Notice 87-31 ,1 C.B. 475">1987-1 C.B. 475↩ , 477. Congress subsequently amended secs. 4941(d)(2)(G)(ii) and 4945(g)(1) to align them with the Internal Revenue Service's interpretation.9. The ruling is consonant with
Rev. Rul. 55-258, 1 C.B. 433">1955-1 C.B. 433↩ , which held that an individual's sec. 74(a) prize income is not subject to tax on self-employment income despite the recipient's regular and continuous involvement in entering contests.