Payments to visiting research scientist exempt under Russian treaty
The Tax Court found that a special provision of the U.S.-Russia treaty allowed a visiting researcher who was paid a “salary” to treat the payments as “similar” to an exempt grant.
The Tax Court ruled on Article 18 of the U.S.-Russia Income Tax Treaty. The court held payments made to a taxpayer who is a Russian citizen and research scientist could be excluded as “payments similar to ‘grant or allowance’ under the treaty’s special provision for students, trainees, and researchers.” The court examined the facts and circumstances to determine that the taxpayer’s payments were “similar” to grants or allowances for these purposes.
A Russian scientist comes to the U.S. to research matter in the universe
Vitaly Nikolaevich Baturin, a Russian citizen, was offered and accepted a position at Jefferson Science Associates (JSA) in November 2006. JSA researches the structure of matter in the universe by using a particle accelerator. Detectors record events and use the date to analyze and construct models. Mr. Baturin was offered the position at JSA with no application process; he was responsible for helping construct detectors in an accelerator upgrade.
Mr. Baturin’s original Exchange Visitor J-1 visa was for a term from January 1, 2007 to August 15, 2009. He began his research on May 16, 2007 and was later granted a three-year extension for another term ending on May 16, 2012. Mr. Baturin then filed for an H-1B Temporary Worker visa. He was offered another extension for another term ending May 16, 2015.
For tax years 2010 and 2011, Mr. Baturin received a Form W-2 reporting his income, and showing federal, social security, and Medicare taxes withheld. He claimed the income was exempt under the U.S.-Russia Income Tax Treaty, Article 18, section 1(b) and (c). He received a refund for 2010 after filing Form 1040-NR. He filed a Form 1040-NR for 2011 but did not receive a refund. The IRS determined an income tax deficiency of $11,088 and $11,141 for tax years 2010 and 2011 stating his income was not exempt from tax under the treaty.
Certain payments are exempt for J-1 researchers
Certain payments made to a J-1 researcher can be exempt under Article 18 of the U.S.-Russia Tax Treaty. Article 18(1) of the U.S.-Russia Treaty states:
An individual who is a resident of a Contracting State at the beginning of his visit to the other Contracting State and who is temporarily present in that other State for the primary purpose of:
- studying at a university or other accredited educational institution in that other State, or
- securing training required to qualify him to practice a profession or professional specialty, or
- studying or doing research as a recipient of a grant, allowance, or other similar payments from a governmental, religious, charitable, scientific, literary, or educational organization,
shall be exempt from tax by that other State with respect to payments from abroad for the purpose of his maintenance, education, study, research, or training, and with respect to the grant, allowance, or other similar payments. [emphasis added]
The treaty doesn’t apply the exemption to income which is for the private benefit of a specific person or persons. In other words, the research must be for the public interest. The court found that the petitioner’s research was undertaken in the public interest, and records supported this finding.
Mr. Baturin met the residency rules and the five-year period under the treaty. The Tax Court’s only question remaining was whether the payments were a “grant, allowance, or other similar payment[s].”
In deciding that the payments were similar payments to a grant or allowance, the court first looked to the language of the treaty. Because the treaty doesn’t define grants for this purpose, the court next looked to the IRC which also doesn’t define “grant” or “allowance.” Thus, the court was left to interpret the phrase in context, using the intent, purpose, or expectations of the treaty signatories to determine the proper interpretation.
The court noted that, broadly defined, a “grant” is an amount of money given for a specific purpose. In the Letter of Submittal that accompanies the treaty, Article 18 is described as intending to provide “[s]pecial relief” to “visiting students, trainees, and researchers.” Article 18 itself includes a broad exemption of payments made from abroad for a visitor’s maintenance, education, study, research, or training. Payments originating from the host country are exempted if they are made in exchange for research performed by the visitor.
The court further noted that the special relief in Article 18 is broader than the IRC exemption for scholarships and fellowship grants (§117). This section only allows an exemption for grants used for tuition and education-related expenses. Allowing only the IRC definition would not provide special relief as the treaty was intended to provide. The court also compared the U.S.-Russia Treaty to the earlier U.S.-U.S.S.R. Treaty, the U.S. Model Treaty, and the Organization for Economic Cooperation and Development (OECD) Model Treaty and found that great emphasis was placed on facilitating the exchange of scientific research and interpreted the meaning of “grant, allowance, or other similar payment” in this context.
Mr. Baturin argued that the funds he received could not have been redirected to another scientist to which the IRS provided no evidence to the contrary.
Conclusion: Mr. Baturin's payments were similar to a grant
The Tax Court distinguished two situations in which a visiting foreign taxpayer might receive a grant:
- A foreign taxpayer is a recipient of a grant and an institution is the conduit for the grant application, award, and payment.
- An institution is the recipient of the grant and uses those funds to employ a foreign taxpayer.
The court decided that the first situation would potentially be exempt under Article 18 of the U.S.-Russia Tax Treaty. A researcher’s salary doesn’t become a grant just because the employer received grants for research in that area of study. Conversely, a grant doesn’t become a salary merely because it’s reported on Form W-2.
In the Baturin case, lacking facts to the contrary, the court found that Mr. Baturin was the recipient of funds similar to a grant because he was singled out and invited by JSA to perform the research, his payments never increased as a salary usually would, and there was no evidence to show that JSA could rescind its promise to pay Mr. Baturin.
Other payments could be excluded if similar to this case
In Baturin, the Tax Court examined whether payments made to a visiting scientist had the characteristics that would allow them to be excluded under a special provision of the U.S.-Russia tax treaty. Although his employer treated the payments as wages, the court found that under the conditions in which the payments were made, they were indeed “similar” to an excludable grant. The decision in Baturin can be applied to other payments made to researchers and scientists from Russia but, as in this case, the facts and circumstances of the payments must be examined.
Originally published in the 01/22/20 edition of TAX in the News