Background
Joanna Klubo-Gwiezdzinska (“Petitioner”) is a Polish citizen who earned her medical degree and Ph.D. from Nicolas Copernicus University in Poland. She is a highly respected medical professional who has spent most of her career focused on thyroid cancer.
The Petitioner is also a member of the Endocrine Society, the world’s oldest, largest, and most active organization devoted to research on hormones and the clinical practice of endocrinology. Among other things, the Endocrine Society aims to connect the world’s brightest young endocrinologists with unparalleled research positions at top institutions outside of their home countries through the International Endocrine Scholars Program (“IESP”). Through this program, the Petitioner was introduced to Leonard Wartofsky, Chairman of the Department of Medicine at Medstar Washington Hospital Center (“Hospital”) in Washington, D.C.
Facts & Circumstances
In February of 2009, Dr. Wartoksky offered the Petitioner a research position. The offer letter indicated that the training program would be effective for the period February 15, 2009 through February 14, 2010, with the option to renew for a second and third year. Additionally, the letter stipulated that as a Research Fellow, the Petitioner would receive a stipend and benefits. She accepted the position and obtained a J-1 Visa under the Exchange Visitor Program in March of 2009.
Upon her acceptance of the position, the Petitioner entered into a House Staff Agreement (“HSA”) with the Hospital. As a Research Fellow, the Petitioner worked at least 40 hours a week researching thyroid cancer. She also gave presentations on her research, and her findings appeared in various medical publications and journals.
In 2010 and 2011, the Petitioner successfully renewed her contract with the Hospital for two additional one-year periods. The Hospital sent the Petitioner a Form W-2, Wage And Tax Statement, reporting that she received “Wages, tips, other compensation” of $49,502 and $51,795 for the tax years 2010 and 2011; respectively.
For the years in question (2010 and 2011), the Petitioner filed a Form 1040NR-EZ, U.S. Income Tax Return For Certain Nonresident Aliens With No Dependents. Within these filings, she disclosed that she was a citizen and resident of Poland and claimed that her earned income was exempt from Federal income tax under the Convention For The Avoidance of Double Taxation And The Prevention of Fiscal Evasion With Respect To Taxes On Income, Pol.-U.S., October 8, 1974, 28 U.S.T. 891 (entered into force July 22, 1976) (“Convention”).
In March of 2015, the Petitioner received a notice of deficiency. The IRS determined that she received taxable income of $47,502 and $49,795 for tax years 2010 and 2011; respectively. As noted in T.C. Summary Opinion 2017-45, the IRS “allowed an exemption of $2,000 for each of the two years under Article 18 of the Convention. However, as previously noted, [the IRS] contends that [they] erred in that regard but has not asserted an increased deficiency for either year.”
Internal Revenue Code §871(b)
Under Internal Revenue Code (“IRC”) §871(b), a nonresident alien individual who is engaged in a trade or business in the U.S. is subject to U.S. income tax on the individual’s taxable income effectively connected with the conduct of that trade or business. Ordinarily, an individual who performs personal services within the U.S. at any time during the tax year is deemed to have conducted a “trade or business within the U.S.” under IRC §864(b). Consequently, a nonresident alien who receives compensation for the performance of personal services in the U.S. has income effectively connected with the conduct of a trade or business in the U.S. and therefore has gross income under the IRC.
However, under IRC §894(a), the IRC is “applied to any taxpayer with due regard to any treaty obligation of the U.S. that applies to that taxpayer”. Therefore, an applicable treaty agreement can alter an individual’s income tax liability under the IRC.
The U.S. – Poland Income Tax Treaty
In her petition to the U.S. Tax Court, the Petitioner contended that her income was exempt under Articles 17 and 18 of the U.S.- Poland Income Tax Treaty (“Treaty”)
As noted in T.C. Summary Opinion 2017-45, under Article 18 of the treaty, “an individual who is a resident of one of the Contracting States at the time he becomes temporarily present in the other Contracting State and who is temporarily present in that other Contracting State for the primary purpose of:…(iii) Studying or doing research as a recipient of a grant, allowance, or award from a governmental, religious, charitable, scientific, literary, or educational organization, shall be exempt from tax by that other Contracting State with respect to…the grant, allowance, or award…for a period not exceeding 5 tax years from the date of his arrival in that other Contracting State.”
Additionally, Article 17 of the Treaty provides, in relevant part: “1) Where a resident of one of the Contracting States is invited by the Government of the other Contracting State…or by a university or other recognized educational institution in that other Contracting State, to come to that other Contracting State for a period not expected to exceed 2 years for the purpose of teaching or engaging in research, or both, at a university or other recognized educational institution and such resident comes to that other Contracting State primarily for such purpose, his income from personal services for teaching or research at such university or educational institution shall be exempt from tax by that other Contracting State for a period not exceeding two years from the date of his arrival in that other Contracting State.”
Tax Court Ruling
The Tax Court agreed with the IRS determining that the Petitioner failed to substantiate that the payments received from the Hospital were exempt from taxation for the reasons outlined below:
- the payments were not a grant, allowance, or award; and
- the hospital was not a recognized educational institution.
Not A Grant, Allowance or Award
On its 2011 Form 990, Return of Organization Exempt from Income Tax, the Hospital reported that it gave no monetary grants or other assistance to individuals. Although the Petitioner contended that as a Research Fellow, she was not providing services to the Hospital, the Tax Court believed that her arrangement was that of an “employment relationship” based on the following facts:
- Through the arrangement, the Petitioner was paid a bi-weekly salary;
- She received various other benefits such as paid time off, liability insurance, health and disability insurance; and
- She was an active participant in the organization’s retirement plan.
Therefore, the court determined that she did not satisfy the requirements as outlined in Article 18 of the Treaty.
Not A Recognized Education Institution
According to the Hospital’s 2011 Form 990, Schedule A, Public Charity Status and Public Support, the Hospital is “a hospital or a cooperative hospital service organization” described under IRC §170(b)(1)(A)(iii) rather than “a school” described under IRC §170(b)(1)(A)(ii).
The Tax Court noted that the phrase “recognized educational institution” is not defined in the Treaty. However, in the instance of an undefined term, paragraph 2 of Article 3 of the Treaty entitled General Definitions provides that any term used in the Treaty and not defined in the Treaty will, unless the context otherwise requires, have the meaning which it has under the laws of the Contracting State whose tax is being determined.
The Tax Court then looked to IRC §170(b)(1)(A)(ii) which defines “educational organization” as an organization “which normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on.” The court noted that Reg. §1.170A-9(c)(1) provides that an “educational organization does not include organizations engaged in both educational and noneducational activities unless the latter are merely incidental to the educational activities.”
The Petitioner contended that because the Hospital was a teaching hospital, it therefore was a “recognized educational institution.” The Tax Court disagreed and stated that “while [the hospital] had medical education programs and styled itself an academic medical center, the available evidence pointed to the fact that, for [the hospital], patient care was not ‘merely incidental to the educational activities.’”
Further, the Tax Court referenced the Hospital’s Form 990 and its mission statement which indicated that patient care is the predominant purpose and activity of the hospital.
Conclusion
Ultimately, the Tax Court concluded that the Treaty did not substantially shield the Petitioner from U.S. taxation for the income earned from the Hospital in 2010 and 2011.
Fellowship agreements, similar to the one noted in T.C. Summary Opinion 2017-45, are often used by healthcare systems in an effort to attract domestic and foreign physicians into the healthcare industry’s competitive environment. It is important for these individuals and hospitals alike to fully understand the proper tax treatments of amounts paid to their Fellows. It is also imperative that foreign individuals and their sponsoring hospitals be aware of the various treaties between the U.S. and foreign countries that effect the tax treatment of those payments.
Authors: Hayley Shulman, CPA | [email protected] and Eric Cooper | [email protected]
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