Mizell v. U.S.
| Decision Date | 29 October 1981 |
| Docket Number | No. 80-2079,80-2079 |
| Citation | 663 F.2d 772 |
| Parties | 81-2 USTC P 9751, 1 Ed. Law Rep. 518 Myron W. MIZELL; Karen L. Mizell; Jerry D. Kennett; Leah B. Kennett; Zbigniew T. Lorenc; James Duane Nanson; Robert S. Hoffman; Charles D. Gregorius; Carolyn M. Gregorius; John T. Grandone; Gloria J. Grandone; Peter A. MacKercher, II; William N. Baskin; Lewis C. Vollmar, Jr.; Howard J. Aylward, Jr.; Dorothy E. Aylward; Curtis C. Blatz; Kathryn M. Blatz; David R. Nichols; Betty J. Nichols; William T. Tatum; Marilyn O. Tatum; and Robert M. Ross, Appellees, v. UNITED STATES of America, Appellant. |
| Court | U.S. Court of Appeals — Eighth Circuit |
M. Carr Ferguson, Asst. Atty. Gen., Michael L. Paup, Ann Belanger Durney, Jo-Ann Horn, Attys., Tax Div., Dept. of Justice, Washington, D.C., for appellees.
Craig A. Van Matre, P.C., Columbia, Mo., for the U. S.; Ronald S. Reed, Jr., U. S. Atty., Kansas City, Mo., of counsel.
Before LAY, Chief Judge, and HEANEY and ROSS, Circuit Judges.
This is an appeal by the government from judgments entered on a jury verdict rendered in the United States District Court for the Western District of Missouri. The taxpayers served in residency programs in the departments of medicine, anesthesiology, or dermatology at the University of Missouri-Columbia Medical Center in order to attain the necessary training and prerequisites for board certification in the various areas of specialization. Taxpayers excluded portions of "stipend" payments received from the university from their federal income tax computations of gross income for the taxable years of 1972, 1973, and 1974. The Internal Revenue Service asserted that the excluded stipend payments were not excludable "scholarships" or "fellowships" within the meaning of I.R.C. § 117, and assessed additional taxes, which were paid by the plaintiffs. Upon subsequent denial by the Internal Revenue Service of their claims for refunds, the plaintiffs initiated separate actions in the district court seeking refunds of the federal income taxes paid on the income allegedly excludable pursuant to I.R.C. § 117. The actions were consolidated for trial, and, after denial of the United States' motion for a directed verdict, the jury found that the stipends were scholarships or fellowships and not taxable compensation. 1 The Government appeals on the sole issue of insufficiency or insubstantiality of the evidence to support the jury verdict.
Section 117.
Section 117 of the Internal Revenue Code of 1954 provides in pertinent part Scholarships and fellowship grants.
which are incident to such scholarship or to a fellowship grant, but only to the extent that the amount is so expended by the recipient.
I.R.C. § 117(a). 2 Therefore, the threshold determination is whether the payments in question are scholarships or fellowships, see Bingler v. Johnson, 394 U.S. 741, 749, 89 S.Ct. 1439, 1444, 22 L.Ed.2d 695 (1969); and such a factual determination includes analysis of the facts in light of not only the statute, but also the applicable regulations and existing case law. See Rockswold v. United States, 620 F.2d 166, 168-69 (8th Cir. 1980). The Internal Revenue Service regulations provide some definitional guidelines; 3 and, once characterized as "scholarships" or "fellowships," payments are subject to a further limitation that the amounts paid do not represent compensation for past, present, or future employment services. 4 In addition to these restrictions, the regulations provide:
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 benefits to the grantor shall, of itself, be considered to destroy the essential character of such amount as a scholarship or fellowship grant.
Treas.Reg. § 1.117-4(c) (emphasis added).
The Supreme Court has previously upheld the validity of these regulations, stating:
(T)he definitions supplied by the Regulation clearly are prima facie proper, comporting as they do with the ordinary understanding of "scholarships" and "fellowships" as relatively disinterested, "no-strings" educational grants, with no requirement of any substantial quid pro quo from the recipients.
Bingler v. Johnson, 394 U.S. 741, 751, 89 S.Ct. 1439, 1445, 22 L.Ed.2d 695 (1969).
Although there is a plethora of similar cases involving residents in degree and nondegree granting programs who have attempted unsuccessfully to apply the section 117 exclusion to a portion of their stipends, 5 it is well settled in this circuit, as well as others, that the ultimate question of whether a payment is an excludable scholarship or fellowship within the meaning of section 117 is, nevertheless, a question of fact. As this court acknowledged in Leathers v. United States, 471 F.2d 856, 858 (8th Cir. 1972), cert. denied, 412 U.S. 932, 93 S.Ct. 2754, 37 L.Ed.2d 161 (1973):
(T)he 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.
Reiffen v. United States, 180 Ct.Cl. 296, 376 F.2d 883, 890 (1967).
This court will not reverse the jury's determination of a factual question where the verdict is supported by substantial evidence; nor will an appellate court substitute its judgment for that of the jury or judge sitting as fact-finder. Leathers v. United States, supra, at 858.
The United States contends, in essence, that, in light of the overwhelming number of factually similar cases which have held against the taxpayers on the section 117 exclusion issue, reasonable minds cannot hold to the contrary in this case. We do not agree. Although significant evidence to support the Government's argument that the stipends were in the nature of compensation, or were quid for the quo of services, admittedly exists, the jury's verdict must be upheld unless reasonable minds, viewing the evidence in the light most favorable to the prevailing party, could only have found otherwise than fact-finder. See McIntyre v. Everest & Jennings, Inc., 575 F.2d 155, 158 (8th Cir.), cert. denied, 439 U.S. 864, 99 S.Ct. 187, 58 L.Ed.2d 173 (1978).
It is undisputed that the objective of the residency program was to obtain increased competence, ability, and training in the various specialized areas of medicine. There exists substantial evidence which shows that the purpose behind the assigned tasks of patient care and teaching was the educational benefit derived from clinical exposure and from articulating concepts and defending positions to medical students or fellow colleagues. It is also undisputed that, unless a physician participated in a residency program, he could not meet the requirements for board certification as a specialist. In addition, oral and written examinations were administered throughout the course of the residency program.
In evaluating the issue before us, we must go further and view the factual support as to the primary purpose of the payments to the taxpayers. There exists substantial evidence that the residency stipend received by a student at the university was designed to defray his living expenses during the year he conducts his training. Originally, a "resident" was required to live in the hospital during his training. The stipend allows the resident to live outside the hospital and still remain free for the 24-hour call duty necessary for experience and training. The amount of the stipend was calculated by the university on the amount necessary for a resident to exist in a reasonably normal fashion in the community. It was not in any way conditioned upon job performance or the number of patients treated. The university's bookkeeping practices and the withholding of federal taxes from the stipends were not indicative of the true nature of the payments, for the same treatment was applied to clearly excludable payments to purely academic researchers. The university's articulated reason for such treatment was to extricate itself from any future federal income tax disputes, such as in the instant case.
In addition to the above evidence, the record shows that all patients in the medical center were seen by both residents and an attending staff physician, but professional fees and laboratory fees were not assessed for work performed by a resident. The hospital charged only for the attending physician's services and laboratory or radiological services performed by hospital staff. Residents who were seeing patients were always...
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