February 2, 2005 - Phil Hodgen

Sarkisov v. United States: when are you a “grant recipient” under a tax treaty?

Here’s a recent case out of the U.S. Court of Claims. A Russian was hired by the University of Nevada to do research, and was present in the U.S. under a J-1 visa.

He claimed to be exempt from U.S. income tax under the U.S./Russia income tax treaty. The treaty says that if you are a Russian in the U.S. to do research or study, and you receive a grant, then the grant is not taxable in the U.S. (Article 18 of the Treaty, to be precise).

Mr. Sarkisov claimed the benefits of that provision. He lost.

The Court examined the facts and saw that the grants were paid to the University. The grants were not specifically to Mr. Sarkisov. He was not “doing research as a recipient of a grant.”

I occasionally deal with situations like this — nonresidents here in the U.S. for postgraduate study, for fellowships, etc. , with questions of whether their income is taxable in the U.S., whether they are residents, etc.

(The operative word is “occasionally,” because the taxes involved are pretty low. You don’t get wealthy on a fellowship or grant. It brings to mind the old joke: Q: Why are arguments among academics so bitter? A: Because the stakes are so low.)

Usually, as in the case of Mr. Sarkisov, the answer is not exactly what the person had hoped for; the U.S. can tax their income. No government likes to exempt money from taxation, so exceptions are narrowly drawn.

The full case appears after the jump.

Defendant.In the United States Court of Federal Claims

Filed: January 4, 2005

Robert Gorman, Albuquerque, New Mexico, for plaintiff.

Steven I. Frahm, Tax Division, United States Department of Justice, Washington, D.C., for defendant.

HODGES, Judge.

This is an action for recovery of federal income tax. Plaintiff claims that the Government violated the terms of the United States- Russian Federation Income Tax Treaty of 1992 by denying his request for an exemption from taxes. Mr. Sarkisov seeks refunds of federal income taxes for the tax years 1998 through 2000. The parties filed cross-motions for summary judgment. We grant defendant’s motion.

The United States and the Russian Federation entered into the United States-Russia Income Tax Treaty of 1992 “to develop and strengthen the economic, scientific, technical and cultural cooperation between both States, and. . . for the avoidance of double taxation and the prevention of fiscal evasion . . . .” Convention for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital, entered into force Dec. 16, 1993, U.S.-Russ., Tax Treaties (CCH), Vol. 3 at 39,807, 1993 WL 841567. Article 18 of the Treaty provides in part that

[a]n 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:

a) studying at a university . . . or

b) securing training required to qualify him to practice a profession . . . or

c) 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 . . . the grant, allowance, or other similar payments.

Id. at 39,815 (emphasis added).

Mr. Sarkisov’s claim for a tax refund depends on whether he was “doing research as a recipient of a grant” according to the meaning and application of that phrase as it appears in Article 18(c) of the Treaty quoted above. Plaintiff is a citizen of the Russian Federation who resided in the United States under a J-1 visa. The University of Nevada hired Mr. Sarkisov as an associate research professor to “conduct research in Physics (optics spectroscopy).” The record contains a form issued by the United States Information Agency, captioned “Certificate of Eligibility for Exchange Visitor (J-1) Status.” This form lists the University of Nevada at Reno as Mr. Sarkisov’s sponsor. The form shows that he receives no financial support from any United States Government agency or from organizations other than the sponsor.

The University of Nevada paid plaintiff a salary from which it routinely withheld federal income taxes. Plaintiff filed for a refund of the income taxes he paid, claiming that the money he received was covered by the Treaty as a grant for research pursuant to Article 18(c). The Internal Revenue Service denied Mr. Sarkisov’s claim for refund, and he filed suit in 2003. The parties filed cross-motions for summary judgment in July 2004.

This court has jurisdiction to interpret the Treaty at issue pursuant to Internal Revenue Code section 7422(f)(1). The Code provides that a tax refund suit based on a treaty “may be maintained against the United States” in this court. See 26 U.S.C. section 7422(f)(1). Section 7422(f)(1) of the Internal Revenue Code is an exception to the general rule that this court may not hear “any claim against the United States growing out of or dependent upon any treaty entered into with foreign nations.” 28 U.S.C. section 1502. Summary judgment is proper in this case because “the interpretation of a treaty . . . is a question of law. . . .” Nat’l Westminister Bank, PLC, v. United States, 58 Fed. Cl. 491, 496 (2003). The parties agree that no genuine issues of material fact are in dispute. See RCFC 56(c).

A court’s interpretation of a treaty must “begin with the language of the Treaty itself. The clear import of treaty language controls unless ‘application of the words of the treaty according to their obvious meaning effects a result inconsistent with the intent or expectations of its signatories.”‘ Sumitomo Shoji America, Inc. v. Avagliano et al., 457 U.S. 176, 180 (1982) (citing Maximov v. United States, 373 U.S. 49, 54 (1963)). See also Nat’l Westminister Bank, 58 Fed. Cl. at 496 (noting that in interpreting treaties, courts should “give effect to their purpose. “) (citing United States v. Stuart, 489 U.S. 353, 368 (1989)).

The terms of a treaty are given their ordinary meaning. See Xerox Corp. v. United States, 41 F.3d 647, 652 (Fed. Cir. 1995). Courts “may not read international treaties so broadly as to create unintended benefits or to reach parties not within the scope of a treaty’s language.” Int’l Bank for Reconstruction & Dev. v. District of Columbia, 171 F.3d 687, 691 (D.C. Cir. 1999).
The Court of Appeals for the Second Circuit explained the importance of discerning the parties’ intent by considering the language of the treaty as a whole, in context:

The basic aim of treaty interpretation is to ascertain the intent of the parties who have entered into agreement, in Order to construe the document in a manner consistent with that intent. And to give the specific words of a treaty a meaning consistent with the genuine share[d] expectations of the contracting parties, it is necessary to examine not only the language, but the entire context of the agreement.

Maximov v. United States, 299 F.2d 565, 568 (2d Cir. 1962), aff’d, 373 U.S. 49 (1963) (citations omitted).

The intent and the expectations of the parties to this Treaty are stated in its Preamble:

The United States of America and the Russian Federation, confirming their desire to develop and strengthen the economic, scientific, technical and cultural cooperation between both States, and desiring to conclude a convention for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital, have agreed on the following.

Convention for the Avoidance of Double Taxation, Dec. 16, 1993, U.S.- Russ Tax Treaties (CCH), Vol. 3 at 39,807, art. 18, 1993 WL 841567.

The University of Nevada received grants during 1998-2000 from several sources. These included the Navy, the Department of Energy, and Cornell University. None of the grants was directed to Mr. Sarkisov. The record does not show that funding was contingent upon the continued employment of Mr. Sarkisov by the University. Viewing Mr. Sarkisov as a grant recipient merely because his employer received grants to fund research in his area would amount to creating unintended benefits to parties outside the scope of the Treaty’s language. See Int’l Bank, 171 F.3d at 691.

The record is replete with references to plaintiff as an employee, but we did not seen him referred to as a grant recipient. Plaintiff’s employment may have been dependent on continued receipt of grants by the University, but his work did not depend on Mr. Sarkisov’s having been awarded grants or similar payments. Plaintiff’s employer was the University’s Board of Regents according to his pay stubs and his W-2 tax forms. The Comment section of a form in the record dated February 16, 1998, captioned University of Nevada, Reno, Terms of Employment for Part-Time or Temporary Faculty, shows that Mr. Sarkisov was a “New Hire.” A Payroll Action Form dated July 1, 2000 states in the Comment section, “Salary reflects 2001 fiscal year merit increase.”

Plaintiff points out that those forms and others are stamped CONTINGENT UPON CONTINUED FUNDING or CONTINGENT UPON FUNDING. He notes that grants are made to universities, not to individuals, in the “modem academic environment.” Plaintiff contends that Treasury Regulations concur in his view that the Treaty “encompasses all sources of income, including wages paid through the university and funded by research grants.” These arguments do not change the Treaty’s intent. The contingency notations appear to be efforts by the University to protect itself from potential shortages of funds available for research. These contractual reservations do not establish that plaintiff received grants rather than a salary. If grants typically are made to universities rather than to individuals now, that is a development for the Contracting States to address. Plaintiff does not report how or where Treasury Regulations support his view that the Treaty encompasses all sources of income. Treasury Department Technical Explanations state that a “grant” is not taxable “regardless of its source.” See Tax Treaties (CCH) Vol. 3 at 39,868, 39,884. This shows that the term “grant” carries a special meaning and it highlights the importance of applying the term properly. It does not show that all payments to a researcher, including a monthly salary, may be considered a grant for purposes of the Treaty. Plaintiff states that the purposes of the Treaty are met in the relationship that Mr. Sarkisov had with the University of Nevada, and that “defendant has previously conceded as much in Lyashenko v. United States, 41 Fed. Cl. 626) (1998).” That case signifies the type of financial arrangement that the Contracting States intended to cover as a “grant” in Article 18 of the Treaty.

The Chemistry Department of the University of Texas awarded Mr. Lyashenko a $ 22,000 Postdoctoral Research Fellowship. The IRS rejected his request for a refund pursuant to Article 18 of the Treaty because, it said, the University “characterized its payments to you as wages or compensation for personal services as an employee.” Lyashenko filed his 1997 tax return on January 3, 1998, and sued for a refund on February 20, 1998. About ten days after Lyashenko filed his Complaint, the IRS refunded the full amount of his claim for 1997. A short time later, defendant filed a motion to dismiss plaintiff’s case. Plaintiff’s claim for a refund was moot because the IRS had returned the money to which he was entitled. Mr. Lyashenko’s Complaint included a similar claim for 1998, but the court dismissed that count as premature. Thus, the case does not support plaintiff’s position here.

The University of Texas gave Lyashenko a Postdoctoral Research Fellowship. He was “doing research as a recipient of a grant . . . allowance, or other similar payment,” as provided by Article 18(c) of the Treaty. The University of Nevada did not award Mr. Sarkisov a fellowship or a grant. It paid him a salary. The University received grants from several sources and used those funds to support research that it sponsored.

Mr. Sarkisov was an employee of the University of Nevada who was in the United States to conduct research in the field of optics spectroscopy. His nationality and his research function are basic requirements for the Treaty’s coverage, but neither the terms of the Treaty nor its purposes qualify Mr. Sarkisov for tax exempt status as a grant recipient.

Plaintiff’s arguments require an interpretation of the Treaty that would allow him special tax status because a source of his salary might have been various grants to the University. Mr. Sarkisov’s salary may have been paid in part from grants made to the University of Nevada. His merit increase in salary during 2000 suggests that the University was pleased with the quality of his work. The record does not show that grants to the University were dependent upon Mr. Sarkisov’s continued employment as a researcher, however, or that they were conditioned upon his participation in the research. The facts of this case do not qualify plaintiff as the “recipient of a grant . . . allowance, or other similar payment” as required by Article 18(c).

Defendant’s motion for summary judgment is GRANTED. Plaintiff’s cross-motion for summary judgment is DENIED. The Clerk of Court will enter judgment for defendant. No costs.

Robert H. Hodges, Jr.

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