Payments to Foreign Student Studying in U.S. Subject to Tax
We get quite a few questions from students who are in the U.S. on student visas as to whether their research awards are taxable in the U.S.
The answer depends in large part on the terms of the applicable tax treaty and whether the awards are compensation for services or pure grants. The recent Dovzhenok v. Commissioner, T.C. Summary Opinion 2017-86, addresses these rules in the context of the U.S.-Russia Tax Treaty.
The Facts and Procedural History are as Follows
Dovzhenok is a Russian citizen. He came to the U.S. in 2006 under an F-1 student visa to pursue a graduate degree in mathematics at Indiana University-Purdue University Indianapolis (“IUPUI”).
Dovzhenok received $18,917 and $19,708 of income from IUPUI for 2009 and 2010, respectively. The income was paid for a research assistant position. The award letters from the department director indicated that this financial support was provided by a grant received by two professors, both of whom were named in the award letters provided to Dovzhenok.
Dovzhenok filed a Form 1040NR-EZ, U.S. Income Tax Return for Certain Nonresident Aliens With No Dependents, for 2009 and 2010. The forms reported the total payments received from IUPUI as “wages, salaries, tips, etc.” and noted that the amounts were exempt from U.S. taxation under the U.S.-Russia tax treaty.
Dovzhenok also filed a Form 8843, Statement for Exempt Individuals and Individuals With a Medical Condition, on which he reported that he was a student and had attended IUPUI during the year. The IRS refunded the amounts IUPUI withheld from the payments Dovzhenok received from IUPUI and then determined that erred in refunding the payments.
The issue for the court was whether the payments Dovzhenok received from IUPUI were not subject to tax in the U.S. per the U.S.-Russia Tax Treaty.
The U.S.-Russia Tax Treaty
Section 894(a) provides the general rule that tax treaties trump the rules in the Code.
Section 18 of the U.S.-Russia tax treaty says that the following income is not taxable in the U.S.:
An individual who is a resident of a Contracting State (i.e., Russia) at the beginning of his visit to the other Contracting State (i.e., U.S.) and who is temporarily present in that other State (i.e., the U.S.) for the primary purpose of:
a) studying at a university or other accredited education institution in that other State (i.e., the U.S.), or
b) securing training required to qualify him to practice a profession or professional specialty, 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 (i.e., the U.S.) 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.
Are Payments Compensation for Services or Grants?
Dovzhenok argued that the payments he received from IUPUI were exempt from tax in the U.S. as they were a “grant, allowance, or other similar payments.”
The court did not define or disntinguish what types of payments are grants, allowances. or other similar payemtns. Instead, the court concluded that the payments were compensation for services. The award letters support this interpretation as they do require that Dovzhenok provide some services to the school.
With this view, a student who provides any services causes the entire stipend to be treated as taxable compensation. This may even include providing de minimis services.
As the court noted, the primary proof of whether payments to a student are compensation for services or a grant is best evidenced by the langauge used in the award letters.
The court here noted that Dovzhenok did not have a grant letter. The court did not address the fact that Dovzhenok’s award letters specifically mention that the awards were funded by grants received by two professors. It does not appear that Dovzhenok argued that the court should look to the origin of the funds to determine whether they were grants. If the court could consider this language, then the award letters Dovzhenok provided to the court could have been sufficient evidence of the grants. Would this be sufficient to show that at least some amount of the payments were not copensation for services? Perhaps.
The take away from this case is that award letters issued to research assistants should be carefully worded to ensure that the award is described as a grant or at least traceable to a grant and, if possible, the award letter might specify that financial support is not dependent on the student providing services. Instead of tying financial support to providing services in the award letter, services might be required as a condition of continued admission–not continued financial support–in the school’s student handbook.