decided: June 11, 1982.
STEVEN AND FAITH FIELD, PETITIONERS-APPELLANTS,
COMMISSIONER OF INTERNAL REVENUE, DEFENDANT-APPELLEE.
Appeal from the United States Tax Court District Court for the Central District of Illinois. No. 10035-80 -- Richard C. Wilbur, Judge.
Before Stewart, Justice (Retired)*fn* , Pell, Circuit Judge, and Sprecher, Circuit Judge.*fn**
The sole issue presented in this appeal is whether stipends received by a physician enrolled in a graduate hospital residency program are excludable from gross income as a "fellowship grant" or "scholarship" within the meaning of § 117 of the Internal Revenue Code of 1954. The Tax Court held that the stipends at issue in this case were not excludable under § 117. While the question is one of first impression in this Circuit, the Courts of Appeals of several other Circuits have considered various aspects of the issue and have almost uniformly held that payments to medical residents do not qualify for the fellowship or scholarship exclusion contained in § 117. We agree with this majority position and affirm the judgment of the Tax Court.
During the tax years at issue, appellant Dr. Steven D. Field*fn1 served as a resident in the Graduate Clinical Training Program of the Department of Psychiatry of Evanston Hospital, McGaw Medical Center, in Evanston, Illinois.*fn2 The satisfactory completion of this psychiatric residency program was necessary to enable Dr. Field, who had previously received his M.D. degree from the University of Illinois Medical School, to gain the certification of the American Board of Psychiatry and Neurology.
Evanston Hospital's psychiatric residency program was divided into three distinct phases. During the first four-month period, Dr. Field was required to do a rotation in Internal Medicine. This period was devoted to the study of general medicine in the classroom, and to its practice in the hospital under the ultimate supervision of a more senior resident and an attending physician.
During its second phase, the program's focus shifted to the study and practice of psychiatry. Dr. Field attended formal lectures and participated in informal discussions with supervisors concerning both psychiatric theory and practice. At the same time, he devoted substantial time to in-patient care, performing a full gamut of medical and psychiatric services in the hospital, and he was assigned twenty-four hour emergency call duty six times each month.
During the final phase of the period at issue, Dr. Field continued to attend classes, but his clinical responsibilities shifted from in-patient care to out-patient service. Dr. Field's emergency responsibilities were reduced during this period to three twenty-four hour segments each month.
Dr. Field received semimonthly payments from Northwestern University. The amount of the stipend paid to Dr. Field was determined solely by his length of service in the program. Northwestern University deducted federal and state withholding taxes and FICA taxes from the gross stipend.
In addition to the stipend from Northwestern University, Dr. Field received numerous fringe benefits, including participation in the McGaw Medical Center House Staff Insurance Plan, professional liability insurance, disability insurance, paid sick leave, uniforms and laundry service. He was entitled to fourteen days of paid vacation during his first year in the program and twenty-one days of annual paid vacation thereafter.
Treating the stipend received from the hospital as a "scholarship" or "fellowship grant" within the meaning of § 117 of the Code, Dr. Field excluded these payments from the computation of gross income on his federal income tax returns for 1977 and 1978. The Commissioner assessed additional taxes for these years based on the determination that the stipends did not qualify for the § 117 exclusion. Following a hearing, the Tax Court upheld the assessed deficiencies, and Dr. Field brought this appeal.
Section 117(a)*fn3 of the Internal Revenue Code of 1954 provides that an individual may exclude from the computation of gross income "any amount received as a scholarship ... or as a fellowship grant." Although the terms "scholarship" and "fellowship grant" are not defined in the Code, the Treasury Regulations provide that a "fellowship grant generally means an amount paid to or allowed to, or for the benefit of, an individual to aid him in the pursuit of study or research." Treas.Reg. § 1.117-3(c) (1960). The Treasury Regulations provide, however, that any amount which "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" may not be excluded from gross income. Treas.Reg. § 1.117-4(c).*fn4
In Bingler v. Johnson, 394 U.S. 741, 89 S. Ct. 1439, 22 L. Ed. 2d 695 (1969), the Supreme Court sustained the validity of Treasury Regulation § 1.117-4(c) and elaborated further on the correct meaning of the terms "scholarships" and "fellowship grants." The Court described "scholarships" and "fellowship grants" as "relatively disinterested, "no strings' educational grants, with no requirement of any substantial quid pro quo from the recipients." Id. at 751, 89 S. Ct. at 1445.
Since the Supreme Court's decision in Bingler and the announcement therein of the "substantial quid pro quo " test, the numerous courts that have considered various aspects of this issue have almost uniformly held that payments made to medical residents do not qualify for the § 117 exclusion. See, e.g., Cooney v. United States, 630 F.2d 438 (6th Cir. 1980); Burstein v. United States, 224 Ct. Cl. 1, 622 F.2d 529 (Ct.Cl.1980); Meek v. United States, 608 F.2d 368 (9th Cir. 1979); Parr v. United States, 469 F.2d 1156 (5th Cir. 1972); Hembree v. United States, 464 F.2d 1262 (4th Cir. 1972); Wertzberger v. United States, 441 F.2d 1166 (8th Cir. 1971), aff'g, 315 F. Supp. 34 (W.D.Mo.1970); Quast v. United States, 428 F.2d 750 (8th Cir. 1970), aff'g 293 F. Supp. 56 (D.C.Minn.1968); Tobin v. United States, 323 F. Supp. 239 (S.D.Tex.1970); Kwass v. United States, 319 F. Supp. 186 (E.D.Mich.1970); Adams v. Commissioner, 71 T.C. 477 (1978); see also Medical Resident and Section 117-Time for a Closer Examination, 25 St. Louis U.L.J. 117, 118 & n.3 (1981); but cf. Leathers v. United States, 471 F.2d 856 (8th Cir. 1972), cert. denied, 412 U.S. 932, 93 S. Ct. 2754, 37 L. Ed. 2d 161 (1973) (refusing to reverse jury verdict in favor of resident). In applying the Bingler test and in refusing to extend the § 117 exclusion to payments made to medical residents, these courts have primarily focused on such factors as the nature of the services performed by the resident, and the compensation and fringe benefit arrangements between the hospital and the resident.
Analyzing the facts of the current case in light of Bingler and its progeny, we conclude that the Tax Court was correct in holding that the payments from Evanston Hospital to Dr. Field were not a "scholarship" or "fellowship grant" within the meaning of § 117. Evanston Hospital required a substantial quid pro quo from Dr. Field in exchange for the stipends. In the initial phase of the residency, Dr. Field interviewed incoming patients, performed physical examinations, recorded patient histories, and diagnosed medical problems. As the program progressed, Dr. Field shouldered significant responsibility for the care of patients first in the hospital and later in the out-patient clinic. He led group therapy sessions, consulted with other doctors on patient treatment and participated in ward meetings. Additionally, Dr. Field was assigned substantial and burdensome emergency call duty.
The residency program's compensation and fringe benefit arrangements are further indicia of the existence of an employer-employee relationship between Evanston Hospital and Dr. Field. The amount of the yearly stipend paid to Dr. Field and to each of the other residents was determined, not by individual financial need, but solely by the resident's length of service. See Adams v. Commissioner, 71 T.C. 477, 487 (1978); Rosenthal v. Commissioner, 63 T.C. 454, 460 (1975); Dietz v. Commissioner, 62 T.C. 578, 586 (1974); Proskey v. Commissioner, 51 T.C. 918, 924 (1969). The hospital withheld taxes from the stipend paid to Dr. Field in the same manner as it withheld taxes from all salaried employees. See Parr v. United States, 469 F.2d 1156, 1158 & n.5 (5th Cir. 1972); Adams v. Commissioner, supra, at 487. In addition, the hospital provided Dr. Field with the full panoply of fringe benefits accorded to employees on the hospital staff, including insurance coverage, paid sick leave and vacation time, and laundered uniforms. See Burstein v. United States, 224 Ct. Cl. 1, 622 F.2d 529, 538 (Ct.Cl.1980); Parr v. United States, supra, at 1158 n.5; Adams v. Commissioner, supra, at 487; Rosenthal v. Commissioner, supra, at 460.
Both in their brief and at oral argument, Dr. Field's counsel argued strenuously that the residency program was intended to provide, and did in fact furnish, invaluable educational training. No one disputes this proposition. As the Tax Court noted in Proskey v. Commissioner, supra, at 925, however, the educational benefits derived by a physician from a hospital's residency program cannot alter the analysis of the taxability of stipends which, along with these nonmonetary benefits, compensate the resident for services rendered to the hospital:
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 for services rendered be treated as a nontaxable fellowship grant, merely because the recipient is learning a trade, business, or profession.
Id.; see also Burstein v. United States, supra, at 535.
Dr. Field's counsel also argued that, in light of testimony by the Director of the Education Program for Psychiatric Residents to the effect that Evanston Hospital could function without residents, the residents did not provide substantial services to the hospital. In rejecting an identical claim, the Tax Court in Fisher v. Commissioner, 56 T.C. 1201 (1971), insightfully explained: "Even if the Center could do without residents, it did not do without them; it used their services and it paid for them. Many employees may be dispensable in the sense that their employers could "operate' without them. But such dispensability hardly renders their salaries noncompensatory." Id. at 1215; see Burstein v. United States, supra, at 536. Similarly, the mere fact that, in the present case, Evanston Hospital could function without Dr. Field in no way casts doubt on our conclusion that Dr. Field provided substantial, valuable services to the hospital in exchange for the stipends and that such stipends, therefore, constituted neither a "scholarship" nor a "fellowship grant" within the meaning of § 117.*fn5
For these reasons, the judgment of the Tax Court is affirmed.