Leathers v. United States

• Decision Date: 20 December 1972
• Docket Number: No. 71-1647,71-1648.,71-1647
• Citation: 471 F.2d 856
• Parties: Dr. Hollis K. (III) and Patricia D. LEATHERS, Appellees, v. UNITED STATES of America Appellant. Dr. William F. and June B. BLANKENSHIP, Appellees, v. UNITED STATES of America, Appellant.
• Court: U.S. Court of Appeals — Eighth Circuit

471 F.2d 856 (1972)

Dr. Hollis K. (III) and Patricia D. LEATHERS, Appellees, v. UNITED STATES of America Appellant.

Dr. William F. and June B. BLANKENSHIP, Appellees, v. UNITED STATES of America, Appellant.

Nos. 71-1647, 71-1648.

United States Court of Appeals, Eighth Circuit.

Submitted May 12, 1972.

Decided December 20, 1972.

Carolyn R. Just, Atty., U.S. Dept. of Justice, Washington, D. C., for appellant.

Byron M. Eiseman, Little Rock, Ark., for appellees.

Before VOGEL, LAY and BRIGHT, Circuit Judges.

VOGEL, Circuit Judge.

These suits were initiated by Drs. Blankenship and Leathers, plaintiff-appellees herein,¹ for refunds of federal income taxes. The cases were consolidated prior to trial, involving as they did similar issues and facts. A jury trial was had, resulting in verdicts for plaintiffs-appellees. The government then filed motions for judgment notwithstanding the verdicts, or in the alternative for new trials. The District Court denied the motions and a memorandum opinion was filed.² We affirm.

Taxpayers were both licensed physicians who were, during the years 1968 and 1969, in the residency program at the University of Arkansas Medical Center (UAMC). Neither doctor was a candidate for a degree. Upon completion of their residency they would have been "board certified" so as to be able to take the qualifying examinations in their specialties. During 1969, Dr. Leathers was a resident in pathology and received $7,237.83 from the UAMC as a "stipend". In 1968, Dr. Blankenship was a resident in orthopedics and received $3,637.47 as "stipend" from the UAMC. In addition, he received $1,260.65 from the Veterans Administration. Of the amounts received, each taxpayer excluded $3,600 from his gross income,³ contending that such amounts were scholarship or fellowship grants as that term is defined in Section 117 of the Internal Revenue Code of 1954.⁴ Deficiencies resulting from this exclusion were assessed and paid, and timely-filed claims for refund were disallowed. Thereafter, the instant suits were filed in the District Court.

On appeal the government raises the following points:

(1) The District Court erred in refusing to grant the government\'s motions either for directed verdicts or for judgments notwithstanding the verdicts.

(2) The District Court erred in the giving of certain instructions.

(3) The District Court erred in submitting to the jury certain interrogatories.

(4) The District Court erred in excluding certain evidence.

We consider first appellant's contention that it was entitled to judgment in both cases as a matter of law. First, the question whether a payment may be excluded from income under 26 U.S.C.A. § 117 is a question of fact to be resolved by the finder of fact.

"Whether payments or allowances to an individual taxpayer were made to enable him to pursue studies and research primarily for the benefit of the grantor is basically a question of fact. Ussery v. United States, * * * 296 F.2d 582 pp. 586-587 5th Cir., 1961; Woddail v. Commissioner of Internal Revenue, 321 F.2d 721, 723-724 (10th Cir.1963). Cf. Commissioner of Internal Revenue v. Ide, 335 F.2d 852, 855 (3d Cir.1964); Stewart v. United States, 363 F.2d 355, 357 (6th Cir.1966)." Reiffen v. United States, 180 Ct.Cl. 296, 1967, 376 F.2d 883, 890.

In a case relied upon by the government, Quast v. United States, D.C.Minn., 1968, 293 F.Supp. 56, aff'd, 8 Cir., 1970, 428 F.2d 750, Judge Neville expressly considered this matter:

"Under the Regulations if the primary purpose was to further the education and training of the recipient, then the payment would have the characteristics of a fellowship. This was squarely a fact question and properly submitted to the jury." 293 F.Supp. at 62. (Emphasis supplied.)

The standards for review are well settled and not in dispute here. This as an appellate court will not reverse a jury's determination of a fact question where such determination is supported by substantial evidence, nor will we substitute our judgment for that of the finder of the facts, whether it be judge or jury. As the late Judge John Sanborn said in another tax case, "It is only when the evidence is all one way or so overwhelmingly one way as to leave no doubt as to what the fact is, that the issue becomes one of law. Gunning v. Cooley, 281 U.S. 90, 94, 50 S.Ct. 231, 74 L.Ed. 720; Tyson v. Commissioner, 8 Cir., 146 F.2d 50, 54. Cf. Lacy v. United States, 7 Cir., 207 F.2d 352, 354." Weiss v. Commissioner, 8 Cir., 1955, 221 F.2d 152, 155-156. See, Woddail v. Commissioner, 10 Cir., 1963, 321 F.2d 721, 724 (dealing with 26 U.S.C.A. § 117). See, also, G. W. Van Keppel Co. v. Commissioner, 8 Cir., 1961, 296 F.2d 767, 771; Rubber Research, Inc. v. Commissioner, 8 Cir., 1970, 422 F.2d 1402, 1405; Idol v. Commissioner, 8 Cir., 1963, 319 F.2d 647. See generally, Commercial Union Assurance Co. v. Berry, 8 Cir., 1966, 359 F.2d 510, 516.

In the instant case, we must analyze the factors present as against the statute (26 U.S.C.A. § 117), the regulations issued pursuant to the statute⁵ and existing case law.

The constitutional validity of the Regulation § 1.117-4(c) was upheld by the Supreme Court in Bingler v. Johnson, 1969, 394 U.S. 741, 89 S.Ct. 1439, 22 L.Ed.2d 695, a case much relied upon by the appellant. There the taxpayers were employees of the Westinghouse Electric Corporation. They desired to take advantage of a company-sponsored educational leave program. During the time they were on the educational leave program, they received compensation from Westinghouse based in part on a percentage of their base salary. They retained seniority status and all employee benefits such as insurance and stock option privileges. They were obligated, among other things, to return to Westinghouse for a period of at least two years after completing the program. A jury in the District Court found that the amounts paid the taxpayers were taxable "compensation" rather than excludable "scholarships". The Court of Appeals for the Third Circuit, in Johnson v. Bingler, 396 F.2d 258, 263, reversed, holding that the issue should not have been submitted to the jury, there being involved "* * * a question solely of statutory construction, requiring only judicial exegesis." 396 F.2d at 263. The Supreme Court, in reversing the Court of Appeals, said, at page 755 of 394 U.S., at page 1447 of 89 S.Ct., at page 707 of 22 L.Ed.2d:

"Under that provision, Treasury Regulation § 1.117-4(c) as set out in the trial court\'s instructions, the jury here properly found that the amounts received by the respondents were taxable `compensation\' rather than excludable `scholarships.\' The employer-employee relationship involved is immediately suggestive, of course, as is the close relation between the respondents\' prior salaries and the amount of their `stipends.\' In addition, employee benefits were continued. Topics were required to relate at least generally to the work of the Bettis Laboratory. Periodic work reports were to be submitted. And, most importantly, Westinghouse unquestionably extracted a quid pro quo. The respondents not only were required to hold positions with Westinghouse throughout the `work-study\' phase of the program, but also were obligated to return to Westinghouse\'s employ for a substantial period of time after completion of their leave. The thrust of the provision dealing with compensation is that bargained-for payments, given only as a `quo\' in return for the quid of services rendered—whether past, present, or future—should not be excludable from income as `scholarship\' funds. That provision clearly covers this case." (Emphasis supplied.)

As will appear more in detail later, the facts in Bingler are clearly distinguishable from the facts in the instant case. Additionally, in reversing the Court of Appeals, the Supreme Court was sustaining the right of the jury to make the determination of whether the payments were "compensation" and therefore taxable or were "scholarships" and accordingly deductible. The Supreme Court held that under the facts in Bingler "* * * the jury here properly found that the amounts * * * were taxable `compensation'."

To recapitulate, the facts which existed in Bingler and which, according to the Supreme Court, justified the jury in "properly" finding that the amounts received were compensation instead of scholarships, are non-existent herein: There was prior employer-employee relationship. There was close relationship between respondents' prior salaries and the amount of their "stipends". There was continuation of employee benefits. Topics of study were required to relate at least generally to the work of the Bettis Laboratory. Periodic work reports were required. Taxpayers were required to hold positions with Westinghouse throughout the work-study phase of the program. Taxpayers were obligated to return to the employ of Westinghouse. All of the foregoing factors were present in Bingler and thereby, as the Supreme Court put it, "* * * most importantly, Westinghouse unquestionably extracted a quid pro quo." The jury found that lacking in the instant case, and we believe they were entitled to so find.

The problem of whether or not stipend payments received by a resident constitute taxable income has been considered in numerous other cases. Various factors have been utilized by the fact-finders, both judge and jury, to aid in determining whether or not such payments are excludable fellowships or includable compensation. Some cases have hinged upon the existence or absence of a requirement to stay with the employer after completion of the residency training.⁶ Others have carefully scrutinized the degree of supervision over residents and the extent of services performed by residents,⁷ whether the hospital in question was primarily engaged in teaching or patient care,⁸ whether the hospital could perform the same services without the residents.⁹ Finally, such diverse factors as the classification of an employee...