Rev. Rul. 80-36

1980-1 C.B. 366, 1980-6 I.R.B. 11.

                       Internal Revenue Service
                                 Revenue Ruling

              JAPANESE CITIZEN PERFORMING MEDICAL RESEARCH IN U.S.

                          Published: February 11, 1980

United States-Japan Income Tax Convention, 1973-1 C.B. 630

(Also Part I, Sections 117, 894; 1.117-4, 1.894-1.)

  Japanese citizen performing medical research in U.S. Examples are set forth in which amounts paid to a citizen of Japan for performing research at a heart research foundation in the U.S. are either compensation for services rendered or payments made under a "grant, allowance or award" within the meaning of Article 20(1) of the U.S.-Japan Income Tax Convention; Rev. Rul. 76-567 superseded.

ISSUE

  Are amounts paid to a citizen of Japan for performing research at a heart research foundation in the United States compensation for services rendered or payments made under a 'grant, allowance, or award' within the meaning of Article 20(1) of the United States-Japan Income Tax Convention (Convention), TIAS 7365, 1973-1 C.B. 630?

FACTS

  Situation 1.--A is a citizen of Japan who is a specialist in cardiology from a Japanese university.  A was a resident of Japan when A arrived in the United States on June 1, 1977 to begin research work at X, a tax-exempt foundation. X's primary function is heart research and its staff, including A, is primarily engaged in heart research.  The foundation is funded by public contributions and a grant from a charitable organization, Y.  The grant was provided to finance a specific research project, including payments to skilled specialists such as A. It is expected that the project will continue after A's return to Japan.

  A, who replaced another specialist in cardiology, will remain in the United States for 2 years and then return to Japan. A, in turn, will then be replaced by another specialist in cardiology who will continue to work on the project. X will publish the results of the research upon its completion.

  The research project is directed by a physician employed by X, who supervises A's work.  While doing research at X, A is paid $15,000 per year by X.

  Situation 2.--B is also a citizen of Japan who is a research specialist in cardiology from a Japanese university.  B was a resident of Japan when B arrived in the United States on June 1, 1977 to do research at X. However, B had applied for a research grant from Y several months before coming to the United States.  B was awarded the grant to do research on a project that B had chosen.  The research was to be done at X because of X's facilities.  Neither X nor Y have any right to the product of B's research.

  B carries out the research project in accordance with a plan submitted with the grant application, but B is not supervised by any employee of X or Y, and B directs the project.  The grant is for a period of 2 years and B receives $15,000 per year from Y, plus a smaller sum for equipment, as well as the use of X's facilities.  At the end of the 2 years, B is entitled, but not required, to publish the results of the research.  B will also return to Japan at that time.

LAW AND ANALYSIS

  Section 1.117-4(c)(2) of the Income Tax Regulations provides that amounts paid to an individual to enable that person to pursue studies or research primarily for the benefit of the grantor are not scholarship or fellowship grants.

  Section 894(a) of the Internal Revenue Code provides that income of any kind, to the extent required by any treaty obligation of the United States, shall not be included in gross income and shall be exempt from taxation under this subtitle.

  Article 20(1)(a)(iii) of the Convention provides that an individual who is a resident of Japan at the beginning of a visit to the United States and who is temporarily present in the United States for the primary purpose of studying or doing research as a recipient of a grant, allowance, or an award from a governmental, religious, charitable, scientific, literary, or educational organization shall be exempt from Federal income tax with respect to the amounts described in Article 20(1)(b) for a period not exceeding 5 taxable years from the date of the individual's arrival in the United States.

  Article 20(1)(b) of the Convention provides that pursuant to Article 20(1)(a) the following amounts shall be exempt from Federal income tax:  (i) gifts from abroad for the purpose of maintenance, education, study, research, or training; (ii) the grant, allowance, or award; and (iii) income for personal services performed in the United States in an aggregate amount not in excess of 2,000 United States dollars for any taxable year.

  In Rev. Rul. 76-567, 1976-2 C.B. 491, the taxpayer, a citizen and resident of Japan, received funds from a charitable

organization paid in connection with the taxpayer's research work at an institute located in the United States.  The ruling concludes that the amount paid to the taxpayer for the research work is a grant, allowance, or award from a charitable organization within the meaning of Article 20(1)(a)(iii) of the Convention and, thus, is exempt from Federal income tax.  However, the ruling does not distinguish between an amount paid under a grant for research and an amount paid as compensation for services rendered in performing research.  Although Rev. Rul. 76-567 does not specifically so state, the amounts paid were not for services rendered to the institute.

  The term 'grant' is not defined in the Convention, but the phrase 'fellowship grant' is defined in regulations under section 117 of the Code. Under Article II(3) of the Convention, any term not defined in the Convention shall have the meaning it has under applicable United States law.  Section 117(a) provides in part that in the case of an individual gross income does not include any amount received as a fellowship grant.  Section 1.117-3(c) of the regulations provides in part that a 'fellowship grant' generally means an amount paid or allowed to an individual to aid that person in the pursuit of study or research.  Section 1.117-4(c) provides that payments shall not be considered a fellowship grant if they represent compensation for services, if they represent payment for services that are subject to the direction or supervision of the grantor, or are paid to the individual to enable that person to pursue research primarily for the benefit of the grantor.

  The phrase 'studying or doing research' in Article 20(1)(a)(iii) of the Convention indicates that the intent of the provision, with respect to persons doing research, does not extend to professional researchers receiving compensation for performing research services.  This is further indicated by the fact the exemption is limited to persons receiving a 'grant, allowance or an award.'  The use of such terms suggests that ordinary compensation for services rendered is not within the intent of the exemption.  In fact, Article 20(1)(b) grants a separate but limited exemption for income for personal services.  Thus, the term 'grant' has a meaning similar to that of 'fellowship grant' as used in section 117 of the Code and defined in section 1.117-4(c) of the regulations.

  In Situation 1, A is performing valuable research services under the supervision of the grantor that are primarily for the benefit of the grantor of the payments, X.  They knowledge A is getting is merely an incidental benefit from what is essentially an employment relationship.  Rev. Rul. 69-425, 1969-2 C.B. 16.

  In Situation 2, B is being paid an amount of aid B in the pursuit of a specific research goal.  B's work is not subject to direction or supervision by any other person, and B is entitled, but not required to publish the results of the research.  No other person has any right to the product of B's research.

HOLDINGS

  1. Amounts paid to A for performing research at X are compensation for services rendered and are not payments made under a 'grant, allowance, or award' within the meaning of Article 20(1) of the Convention.

  2. Amounts paid to B for performing research at X are payments made under a  'grant, allowance, or award' within the meaning of Article 20(1) of the Convention.

EFFECT ON OTHER REVENUE RULINGS

  Rev. Rul. 76-567 is superseded.

Rev. Rul. 80-36, 1980-1 C.B. 366, 1980-6 I.R.B. 11.