Rev. Rul. 87-40

1987-1 C.B. 372, 1987-21 I.R.B. 17.

JAPAN; VISITING SCIENTISTS; NATIONAL INSTITUTES OF HEALTH (NIH)

Published: May 26, 1987

United States-Japan Income Tax Convention

1973-1 C.B. 630

(Also income tax conventions between the United States and Belgium, China, Cyprus, Egypt, Finland, France, Iceland, Korea, Morocco, the Netherland, Norway, Pakistan, Philippines, Poland, Romania, and Trinidad and Tobago.)

  Japan; visiting scientists; National Institutes of Health (NIH). Payments made to visiting scientists and associates under the NIH Visiting Scientist and Visiting Associate programs are not exempt from federal tax under Article 20(1)(a) of the United States-Japan Income Tax Convention. Rev. Ruls. 80-36 and 80-98 amplified.

ISSUE

  Are residents of Japan who receive payments from the National Institutes of Health ('NIH') under its Visiting Associate Program and its Visiting Scientist Program eligible for any exemption from federal income taxation under Article 20(1)(a) of the United States-Japan Income Tax Convention (the 'Treaty'), 1973- 1 C.B. 630?

FACTS

  NIH maintains a Visiting Associate Program and a Visiting Scientist Program  (the 'Programs'), through which it invites distinguished and talented scientists from foreign countries (including Japan) to conduct health-related research at NIH for periods of up to four years. The Programs are intended to foster the international exchange of scientific information.

  NIH Manual Issuance 2300-320-2 (May 8, 1978) (the 'Manual') describes the contractual rights and obligations of Visiting Scientists and Visiting Associates. Section C(1) of the Manual provides that Visiting Scientists and Visiting Associates are required to perform services for NIH and will be treated as employees. Section C(4) provides that their level of compensation will be similar to that of Civil Service employees of NIH performing comparable services. Section C(5) provides that they generally participate in the Social Security system, and are eligible for leave and benefits similar to those available to Civil Service employees of NIH performing comparable services.

LAW AND ANALYSIS

  Section 894(a) of the Internal Revenue Code of 1986 provides that income of any kind, to the extent required by any treaty obligation of the United States, is not included in gross income and is exempt from taxation. Article 20(1)(a)(iii) of the Treaty 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 award from a governmental, religious, charitable, scientific, literary, or educational institution is exempt from United States tax on amounts described in Article 20(1)(b) for a period not exceeding five taxable years from the date of the individual's arrival in the United States. The amounts described in Article 20(1)(b) are: (i) gifts from abroad for the purpose of maintenance, education, study, research, or training; (ii) the grant, allowance, or award itself; and (iii) income from personal services performed in the United States in an aggregate amount not in excess of $2,000 for any taxable year.

  Rev. Rul. 80-30, 1980-1 C.B. 366, examined the difference between a Japanese citizen who performed research services for a United States foundation in what was 'essentially an employment relationship' and one who performed research at a foundation as the recipient of a largely unrestricted grant. The ruling holds that amounts paid to the former individual are compensation for services, not a 'grant, allowance, or award' under Article 20(1) of the Treaty, while amounts paid to the latter individual are a 'grant, allowance, or award' under that article.

  Rev. Rul. 80-98, 1980-1 C.B. 368, supplemented by Rev. Rul. 83-11, 1983-1 C.B. 367, applied the principles of Rev. Rul. 80-36 to amounts received by residents of Japan under another NIH program, the Visiting Fellows Program. Section B(1) of the Manual provides that Visiting Fellows will not perform

services for NIH and will not be treated as employees. They do not participate in the Social Security system and are not eligible for most benefits. There is no provision for stipend increases based on merit. The ruling holds that amounts paid under this program are exempt from federal income taxation as a 'grant, allowance, or award' described in Article 20(1)(a)(iii) of the Treaty and the corresponding articles of similar treaties.

  Under the principles of Rev. Rul. 80-36, amounts received by Visiting Associates and Scientists under the Programs are compensation for services in what is essentially an employment relationship. The payments are not a 'grant, allowance, or award' described in Article 20(1)(a)(iii), and recipients of such amounts are therefore ineligible for any treaty benefits described in Article 20(1)(b) of the Treaty.

HOLDING

  Residents of Japan who receive payments from NIH under its Visiting Scientist and Visiting Associate programs are not eligible for any exemption from federal income tax under Article 20(1)(a) of the Treaty. They are therefore subject to United States tax on all income, including all amounts received from NIH, to the extent otherwise taxable under the Code and the Treaty.

  Tax treaties with the following countries contain provisions that are identical with or substantially similar to Article 20 of the Japanese Treaty: Belgium (Article 21), China (Article 20), Cyprus (Article 21), Egypt (Article 23), Finland (Article 21), France (Article 18), Iceland (Article 22), Korea (Article 21), Morocco (Article 18) Netherlands (Article XVIII), Norway (Article 16), Pakistan (Article XIII), Philippines (Article 22), Poland (Article 18), Romania (Article 20), and Trinidad and Tobago (Article 19). Therefore, residents of these countries who receive payments from NIH under the Programs are not eligible for treaty exemptions as recipients of a grant, fellowship, or award. This revenue ruling does not address whether such persons are eligible for exemption under treaty provisions dealing with income received for teaching and research services.

EFFECT ON OTHER REVENUE RULINGS

  Rev. Rul. 80-36, 1980-1 C.B. 366, and Rev. Rul. 80-98, 1980-1 C.B. 368, are amplified.

Rev. Rul. 87-40, 1987-1 C.B. 372, 1987-21 I.R.B. 17