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 ...